How our banks lead manufacturers to the slaughter slab

By Martin Ike-Muonso

Official statistics from the Manufacturers Association of Nigeria, the Central bank of Nigeria, small and medium enterprises agency of Nigeria and a host of other reliable sources have shown that no fewer than four hundred medium scale – mostly manufacturing – companies die each year. Again, based on the dependency ratio of about one medium scale organisation to approximately three hundred micro companies, the annual organisational morbidity scale comes to about one hundred and twenty thousand companies. While we can easily attribute these deaths to the challenges of infrastructure such as electricity and roads, there is an even greater demon – the main culprit in access to finance question. Many more firms appear to pass away on accounts of their credit relationship with banks than all the other factors put together. It is the typical case of the doctor killing its patient.

Banks generally present their terms of credits to the client at the inception of a transaction. That notwithstanding, the banks still have more information regarding the lending side of that transaction than the client does have. The banks are or can potentially be privy to many other hidden risks in the deal than the client. If perhaps the client has the opportunity of being represented by someone equally knowledgeable in financial services transactions that may significantly narrow the chances of the destructive consequences that weigh against the client. But that is usually not typical. Above all, the bank knows that in the case of any unforeseen consequences that may occur to both parties that the central bank would not allow it (the bank) to fail. In effect, therefore, even when both parties have equal risk exposures, the bank has the additional advantage of being protected by the bankers’ bank. This moral hazard problem (or is it advantage?) has provided the licence that Nigeria banks possess and which enables them to expose many non-bank companies to transactions that have eventually lead to their demise.

For instance, the bank more than the client usually knows that there could perhaps be a policy or rate change in the life of the transaction that could affect it. In many instances, such shocks will require the client being more exposed than he initially thought he was. Entrepreneurs that cannot sail in the face of such undisclosed shocks may buckle. Similarly, more than the client, it is the bank that knows that even though the latter requested for say equipment financing that the absence of additional cash will stifle the client’s intention. Such loans are nevertheless processed and provided the client who later discovers that he needs to run back to the bank for additional financial support which may never come. They suffer cash asphyxiation, and many often die in the process. Unarguably, many business operators have very little financial knowledge and skills. That gullibility is usually taken advantage of by young bank staff who are under pressure to bring transactions to the bank. And to the superiors, what seemed to matter most is that their team are performing. Little attention is paid to the mismatch between the highly promising performances of the banks, and the bad performances of their non-financial sector customers.

One would have expected the performance of the financial services sector to substantiality correlate with the performance of the non-bank segments. But it is, on the contrary, puzzling that as many firms are dying and many more in critical performance conditions, the banking industry keeps reporting ever-increasing brilliant profitable performance. The argument for this as always being that there is regular demand for banking services regardless of whether the economic circumstances are favourable or otherwise. As accurate as this may be, the trend of performance of the bank, most of the time, however, do not reflect the massive dips in the profitability accomplishments of the non-bank sectors. The reason again goes back to the fact that our banks appear not to be genuinely interested in the success of the non-bank industries.

A unique albeit commonplace challenge that manufacturers in Nigeria face in dealing with banks is the insincerity that attends to the transactions. Imagine a typical situation, where the manufacturer had approached a bank for assistance in procuring equipment. The manufacturer based on his limited financial knowledge, therefore, prepares a cash flow statement to show how the machine will generate additional value to repay the loan. Although the cash flow is good and seemingly realistic, it failed to provide sufficient slack to cover for other unintended spending associated with the equipment purchase, installation and full deployment for use. The loan seeker also left out those in order not to be seen as padding the request for some extra cash. A good credit analyst, however, knows that without adequate additional money, even the best of this equipment will never yield the expected output and the associated anticipated income. That, however, is not the case. Most of our analyst in the bank is satisfied with granting the loan as is and without consideration of those extra critical cash availability as long as there are sufficient lien-worthy assets to cover the facility. And therefore, many manufacturers face the nightmare of getting stuck with repaying the credit, a set of machine that albeit new are otiose and produce nothing, mounting interest payments on borrowed money and so on.

Manufacturers and virtually all entrepreneurs should find friendship with the banks. At least that is the minimum expectation. Noted, but it is the role of the banks more than that of the entrepreneurs to cultivate that relationship. It is a moral duty to the banks to point out potential landmines that borrowers may encounter to the latter in any transaction opportunity. By profession, they are on average, much better trained in understanding the consequences of credits in comparison with the average customer who walked in seeking financial help. Their duty should, therefore, include sound customer education to reduce avoidable business failures that occur on account of them. It is unfortunate that while banks are busy chasing after their funds trapped in some of their failed debtor clients, they do not realise how much role they played in making such organisations fail or achieving less than the results desired.

In any case, they do not need to bother because the government protects them. While Manufacturing firms are permitted by the government to die in their thousands, the government frowns and even wails when a single bank experiences difficulty. Government’s excuse is always the protection of depositors money. They do not think about and indeed discourage the tons of investors in manufacturing or non-banking business. They pay little attention to the procession of employees and thousands of micro businesses that are umbilically dependent on these concerns. That also partially explains why and how the sustained high levels of government borrowing appear to be a deliberate policy action to favour the banks while at the same time creating an interest rate regime that kills other businesses. The role of access to finance in entrepreneurial development is well established and known to our policymakers. Therefore, partial albeit commendable efforts by the government to shore-up all the fortunes of the non-bank sector without adequately considering access to finance may not be comprehensive enough.

A sad trend that is emerging on the back of all of these is the covert takeover of Nigeria manufacturing companies by Indian and the Chinese investors. Let me quickly remark that there is absolutely nothing wrong in having Chinese and Indian investments in the Nigerian manufacturing sector. On the contrary, it is a desirable trend given the enormous technological, output and employment opportunities that we can gain from that. What is reprehensible, however, is the underlying purpose and undercut collusions between the banks and these ‘by-the-night’ company acquirers. What happens is that when these Nigerian banks successfully lead these companies to the slaughter slab, they desperately turn back to look for Indian and Chinese investors who are looking for value-depleted and cheap companies to acquire. These investors can make these acquisitions with the support of their home country banks, but our banks are aiding the cannibalisation of ours and offering them at peanut values to these hawks.

To the Nigerian bankers, this is justifiable because they can recover depositors money lent to the company. While these can stand as sound justification, they fail the tests of fairness. First, many of these companies failed in the first place because they did not receive adequate professional advice and guidance from their Nigerian bank lenders. Had the banks in many instances not taken advantage of the financial gullibility of some of these manufacturers, they would not have found themselves in such situations at all. Secondly, many of these banks are not interested in recovering these dying companies; their erstwhile darling customers from poor performance conditions that they suddenly got pushed into. Some of these companies only require a little addition of working capital to bounce back to life and saved from the Indian/Chinese hawks lurking at the corner for their bank creditors to offer them for sale. They never get that.

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Professor Ike-Muonso is the Africa Regional Coordinator of Baywood Foundation as well as the Chief Transformation Officer of GTI Capital Group