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Banks Face a Barrage Over Naira's Exchange Rates (Posted 27th May, 2001) Tell your friends about this page! Email it to them.

It has been more than a month since the foreign exchange market was jolted and the Naira exchange rate thrown into a dramatic decline. But for the much-pilloried banking sector the bad spell is not over yet. That signal was given about a week ago by no less a person than Vice president Abubakar Atiku. The Vice President who was commissioning a new bank, Reliance bank, in Lagos, Friday May 11, appeared to have come with a loaded gun with which he literally blasted the country's banks. But last week no banker spoken to was willing to stick out his neck to counter the Vice President. Consensus though was that there was little justification for Atiku's charges. Dayo Sonaike, the executive secretary of The Money Market Association, the group of bank treasurers, however rose in stout defense of the banks . Said he: "the onus of proof is with the Vice President. If he says they have hard evidence (on banks round tripping foreign exchange) he should make it public". He added a caveat: "but he should not blackmail everybody". Sonaike however regards the Vice president's statement as mere politics. Other bankers who spoke with the magazine said that they would not lose any sleep over Atiku's comments.

Undoubtedly, Atiku had raised dust in the industry by his scathing remarks - the second in the past four weeks. Said Atiku: "As per the naira exchange rate, there is evidence that this thing (the sharp drop in the value of the naira) is being caused by commercial banks". Betraying some anger, the usually taciturn Atiku added: "we have evidence, hard evidence of round tripping of foreign exchange by some banks or their proxies". The vice president attributed these ugly practices by the banks to their desire to make fantastic profits overnight by these "greedy banks".

Shooting from both hips, the vice president sternly warned that government would "no longer tolerate the current foreign exchange racketeering by the banks or any other financial institution". Atiku then dropped the hammer that was supposed to send the banks, especially those with their hands in murky deals running for cover. "Government is ready to cancel the licenses of such banks", Atiku declared. Said one banker with a touch of derision: "Banks have become the whipping boy of everybody. Why don't they find those who are 'round tripping' garri. But are banks totally innocent of the charges laid against them by the vice president? And are they solely responsible for the Naira's sorry state? The answer in both case is a definite, no. There is no doubt that the unscrupulous ones among the banks have exploited their vantage position of being financial intermediaries and their formidable financial strength to play the market and reap illegal, but quite bountiful profits. If this is so, then also government and the CBN, the official watchdog of the banks must share in the blame. An indictment of these banks is also an admittance of failure by the regulatory authorities particularly, the CBN.

According to Sonaike, we have said repeatedly in the past, "expose those who are engaged in illegal activities and sanction them". So far, the authorities are yet to bring any culprit to book.

Quiet Before the Storm

Ironically, it was the return of 25 banks which the CBN had earlier suspended from the official Interbank foreign exchange market early last month that precipitated the latest crisis on the forex market and set the authorities against the banks. On Tuesday, April 10, those banks, fresh from their two-week suspension demanded a staggering $150 million. This is more than triple the $47 million asked for weekly by the banks before the suspension. The well-known result was the equally precipitate drop in the value of the Naira which plunged by about 8 per cent on the market, and by a margin on the 'black' or parallel market. Are the banks truly guilty or is the government calling the dog, in this case, the banks, a bad name in order to hang them? Hard questions but there seem to be no easy answers.

Another banker who declined to be named says: "it is the guys who are stealing money (public funds) that are causing the problem, it is not the banks". He claims these people go to the black market to change their loot to hard currencies which they take abroad". And they are ready to buy at any price, even N200 to the US dollar" he adds. Recently, the government was embarrassed by the huge amount of money Nigerians carry in traveler's cheque, which they exchanged across the counter in, banks abroad, which caused quite a stir.

Solutions, Solutions, Solutions

What the situation calls for, observers say, are pragmatic solutions from the authorities, rather than the present name calling and fault finding exercise that the government appears to be engaged in.

According to another banker, Alex Nwuba, managing director of Gemcard systems the government and the CBN were yet to tighten the financial system. On the other hand, he says, they may have tightened the money market somewhat. He believes the CBN has to raise the level of its surveillance of the forex market and also ask for more documentation for forex application. He also believes government should force importers to use the official forex market and try to stamp out the parallel or 'black' market.

Whereas these measures appear plausible, other commentators have argued that more stringent documentation would impede trade and raise further, the already high cost of doing business in the country. The disadvantages of such measures, they say would also have to be weighed vis-à-vis the merits of the CBN being able to effectively evaluate the use of forex. And the ability to appropriately sanction the frivolous use of same, particularly by importers of all sorts of consumer goods, many of which are produced locally or are unnecessary luxuries.

CBN's mop up of the money market through among others the introduction of CBN certificates (a form of treasury bill) and raising of both the Minimum Rediscount rate, MRR, and minimum Cash Reserve ratio CRR, have recently reduced the banks liquidity sending rates higher on the interbank money market. A week ago the CBN had also thrown out two banks from the clearing house for two days because their reserves at the apex bank had fallen below the required minimum. But some big banks such as First bank and Union Bank were said to have lobbied the CBN to soften a bit on these smaller banks. Their position is that anything that affects these smaller banks will reverberate round the industry, since, of course, the big banks are the biggest lenders to other banks. The argument is that, for instance, First bank, may lend a N100 million to Zenith bank, then Zenith may, in turn, lend to a smaller bank (in terms of reserves) such as Trade bank or Intercity Bank. Thus, anything that affects Intercity will invariably touch Zenith and, then First bank.

Effects of a Weakened Naira

The effect of the higher exchange rate has however spiraled into other areas of the economy with inflation rate raising significantly to about 17 per cent last month, according to the federal office of statistics. Apart from raising the cost of living of the average Nigerian, the Obasanjo administration would also have failed one of the International Monetary Fund, IMF condition for a long-term Agreement, this is that of keeping the inflation rate at the low single digit of below five per cent. Yet growth in Gross Domestic Product, GDP has been slow. This may have accentuated Atiku's angst against the banking sector.

Continued Restoration of Confidence in the Economy

The Vice President was however pleased with the opening of Reliance bank, which has an 80 per cent foreign ownership. Atiku sees the investment of these foreigners including Sunil Vaswani, the bank's chairman, as an indication of the success of the current administration in restoring confidence in the economy. On his part, Vaswani, a Indian born British citizen said that the bank will address the past misfortunes of the industry, describing it as "the result of efforts of assisting the inflow of foreign investment" into Nigeria. He said that the bank through its heavy investment in technology and strong foreign affiliation, would provide services comparable to none in the industry At least Atiku had a little to cheer about even if little.

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