Remi Ogunmefun
28 September 2008
opinion
Lagos — The shock from the financial crisis in the United States is unprecedented since the 1930s depression years. Many of us had always admired this country. In it we saw a financial system that has positively impacted on the lives of its people and reduced their level of poverty. The recent event which has affected the global financial market is therefore revealing. It would be good if we can then draw some lessons from this development.
What really happened in America is the propensity of citizens to live above their means. The nation and its people spend more than they earn. The financial crisis in America started with the collapse of the housing market and the high default experienced on sub prime mortgages. Sub prime lending is the practice of giving loans to borrowers who do not qualify for the credit. They get these loans even though they are not qualified, due to their income level or down payment required or as a result of their credit history. Sub prime mortgages was as high as USD1.3 trillion in March 2007 in the United States and about 25% of it were reported to be delinquent by June 2008. Report indicates that about 9.5% of all mortgage loans were delinquent. Due to the broad distribution of these risks we understand many investors, corporations, commercial and Investment banks, lenders; real estate investment firms were all affected when borrowers started defaulting. In addition housing prices were declining daily and affecting the stock market. Apart from the sub prime lending, some other contributory factors were poor judgment by lenders, speculations in the financial market, high personal and corporate debt, financial innovations that concealed bad risks and absence of a regulation.
Many of these borrowers in America found it difficult to refinance their mortgages. Not a few walked away from their mortgages and stopped payment altogether. Many loan applications were found to have misrepresented and fraud was discovered in some cases. Speculations were reported to be responsible for some of these problems and record shows that 40% of the homes purchased were not for primary residences but for investment purposes.
The most contributory damage is from financial institutions. They were lending to sub prime borrowers in droves. They were granting what is generally known as Ninja loan and lending generally became lax. Many of these financial Institutions were passing off their loans and each link in the mortgage chain was collecting profit. Mortgage brokers cared less whether the borrowers could pay. The effect of all these on the stock market was devastating. By August 2007 the stock market in America was in turmoil. There was panic in financial markets and investors as reported were taking their money out of risky mortgage bonds. When this problem started in America many thought it was domestic. To the chagrin of many, the problem had spread to other parts of the world. A big financial Institution, North Rock of the United Kingdom collapsed. China is also in a dilemma. Report indicates that USD 9.7 billion of America sub prime debt is currently on the books of the Bank of China. US sub prime mortgages were also held by Korean Financial markets and other parts of the world. Loses from US sub prime loans is estimated by IMF to be USD945 Billion.
It has also been reported by FBI that delinquent borrowers are turning to arson to claim insurance pay out. Tenants are being forced from their apartments by foreclosures. It has been observed that jobs in the financial sectors have reduced substantially.
The picture in America and some parts of the world appears gloomy. Because of the impact of the America economy on the world economy it would be foolish of us in Nigeria to pretend that we are isolated or unaffected by this global development. The issue is therefore beyond the recent action of the Central Bank of Nigeria targeting increase in the liquidity of our financial system. The problem of the Nigeria financial market goes beyond current actions. It requires a deeper prescription to withstand the current global assault. We must start to be self reliant because in the interim Western financial support will dry up. Financial aid will no longer be available, external loans will be difficult to come by. Most of the assistance we usually get from the West will disappear due to the lack of fund to back up these programs.
What we need to do is to start encouraging our Banks to start building on new capital. A well funded Bank is in a better portion to loan at favourable rates and rely less on borrowed fund. Our banks currently appear to be profit driven. I have agued that a Banking Institution exists on public charter and so is different from any other company registered by the Corporate Affairs Commission. It exists because it is authorized by the Government and by implication the people of Nigeria to carry on banking business within the community. As such, it ought not to be profit driven. Where an Institution that existed on public charter is programmed to be profit driven, what we get are sharp practices, decisions that are inimical to public good and actions that are driven by greed and poor patriotism. Many have asked me why we cannot have a special tax programme for our banking institutions. This may force them to seek other alternatives for their shareholders rather than the current trend of profit at all cost.
Experiences have shown that uncontrolled motivation for profit, leads many financial institutions into questionable and undeserving business transactions. Banks and other financial institutions must start reducing their dividend payout to increase liquidity. Nigerian investors should be programmed to appreciate capital appreciation rather than dividend pay out. Many Banks today carry securities and collaterals that are not easy to convert to cash. I have seen assets held that could not be sold for years. I even suspect that many of the securities held to support credits granted by Nigerian Banks may fall under this category. We need to make sound credit decisions. There are millions of properties held as securities by US banks today for which buyers can not be found. This is the major cause of their current financial crisis. In Nigeria , we must learn from this development. We need to urgently have an independent financial institutions supervisory board governed by its own laws, board and management supporting government, investors, financial institutions and the law enforcement agencies. This institution will be structured to supervise, examine, audit and monitor all financial institutions in Nigeria while we reposition the Central Bank to perform its core larger functions. This supervisory board can still report to the Governor of Central Bank if need be but the fact that it is an independent Board with clearly defined functions will go a long way in giving us a sound and true financial system that we can all believe in. The current situation where the Banking supervisor is also supervising herself calls for concern of all the people of Nigeria . We also need to urgently strengthen our regulatory framework. We must start looking critically at our lending practice, educate borrowers and lenders, develop new tax policies for our financial institution etc. We must strengthen the role of our law enforcement agencies in preventing and blocking off sharp and unlawful practices from our financial institutions.
Finally, the media has a part to play. We must remain watch dogs and not praise singers. Everyone has a part to play, the government, media, the citizens of our beloved country let all hands be on deck to ensure that our financial system knows no wreckage.
Be the first to Write a Comment!
Copyright © 2008 This Day. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.
AllAfrica aggregates and indexes content from over 125 African news organizations, plus more than 200 other sources, who are responsible for their own reporting and views. Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica.
