Why Nigerian banks must rethink their business strategies?
“The financial system is more than just institutions that facilitate payments and extend credit. It encompasses all functions that direct real resources to ultimate users… It is the central nervous system of a market economy.”
— Sanusi Lamido Sanusi
The above quote from the Governor of the Central Bank of Nigeria in explaining the banking reform and its impact on the Nigerian economy, illustrates explicitly why the financial system is key to the economy and its smooth working is a concern to all.
A major component of the financial system is the banking system. The way our banks operate today is not aligned with the economic growth prospects of the Nigerian economy. Banks are service institutions, and as such, they should aim to help build their customers businesses so they will have businesses to service.
Recent developments in our banks seem to consist only of collecting deposits mainly from government institutions and buying government treasury bills with them to earn large margins. This seems to be their only goal. Creating credit that builds businesses is no longer a part of banking business for many of our banks today. Where they give credit at all, they price it so badly that the loan is destined not to perform. They charge an annual interest sometimes approaching up to 30 per cent and then add legal fees, arrangement fees, management fees, etc. These upfront fees can add an additional three to five per cent of the facility. This is usually deducted up front and when annualised on its own, can come up to anywhere from 36 per cent to 50 per cent. If you add this to the annual interest charge of 30 per cent, you can see why a large proportion of credits in Nigerian banks do not perform. They are designed to fail from day one. No matter what the business is, this kind of facility pricing is bad and any profit predicated on this structure is unsustainable.
This is a great pity, because banks do not exist for profit alone. They have a role to play to help develop the economy. You would think that self preservation would make this abundantly clear. No one is saying that they should not aim to be profitable, the argument here is how you make profits is just as important as making profit itself. Any institution that exists only to make profits alone is doomed. Profit should be a major path to growth, other things must also be thrown into the mix if they are to nurture and grow the businesses that keep them alive.
As the famous Standard Chartered Bank advertisement says, “It is not everything that counts, that can be counted”. For instance, a utility company that serves the public, may want to make all the profits it can because of the “must use” status of its offering. This will not be possible because its purpose is more than just making profits. This is why they are usually regulated to ensure that the public gets good service while the consumers pay enough to cover cost and provide for a reasonable profit. Apart from profits, the longevity of the utility company attracts investors in this kind of company as they are looking for stable and consistent earnings growth. They must continually expand their services to cover more and more consumers to bring down its unit cost of production. Its goal is not to make the highest profits by charging the highest prices to the small group it serves now, but to increasingly widen its customer base and spread its operating cost over a larger base that will let it lower the unit cost of its output. If it fails to do this, its long term success will be threatened.
Our banks will need to look at the utility company model that relies on a larger consumer base to meet its mandate and still makes a profit by achieving efficiency, as the cost of production is spread to a larger group of consumers. The smaller the cost of service per customer, the better it will have prospects in making larger and more sustainable profits. Note here that, the profits come from spreading production costs over an increasingly larger consumer base and not raising prices over a limited pool of customers.
The current model for our banking industry is an unsustainable strategy that is unsupportive of growth; this in turn threatens their own future as service businesses. Banks should aim to be of service at the most cost effective to the users of their services. The current model where their only goal seems to be, to make the most profits as much as possible even when it means squeezing the customer in the most Machiavellian way, will not be in their interest.
How can banks justify charging quarterly management fees for loans they give out to their customers? Or the unjustified charge for internet banking that does not involve the bank doing anything. This means that in addition to the normal interest charges, the borrower must also pay recurring fees that have nothing to do with the loan. These unfair charges that create an additional burden for the borrower is a sure way not to get their money back. They also charge N100 for any cheque written on your current account. One wonders how they want you to take out the money you deposited with them. They charge you COT, internet charges, and cash cheque charges, all on a current account that you operate with the bank. You lose money by paying charges even when you have not taken a loan or used any of their facilities.
This is not good for the customer and the bank in the long run. This current strategy to make money at all cost is not the right strategy. Banks frequently charge a series of fees that are blatantly unfair to their customers in addition to the very high interest rates that again is unjustified.
Unfortunately, the CBN does not seem to have any say in this. One wonders what banks did to make money in the many years before our whizkid bankers took over these last few years.
Banks frequently quote their higher cost of operation which they attribute to poor infrastructure, as the reason for charging high interest rates. A closer look at this reasoning shows that they are not cogent, because the customers they squeeze also operate in the same environment. This bad strategy in the name of making large profits is misplaced, because the charges coupled with higher interest rates do not assist the growth of the customer’s business. It is therefore myopic, since the only way our banking industry can grow consistently and sustainably is to ensure growth of its customers.
This growth also translates to growth for the bank. If banks continue to operate in such a myopic fashion, they will soon find out that there will be no business to serve. As their stagnated business customers die one by one.
– Ogiemwonyi is CEO of Partnership Investment Company Plc, Ikoyi, Lagos. He wrote via [email protected]