Nigeria’s Billionaire Debtors and the Economy

Filed under: Business |
nigerian cebtral bankers photo

Nigeria’s Central Bank

AFRICANGLOBE – Access to credit, or a lack thereof, by consumers and businesses in capitalist and mixed financial systems usually serves as a major predictor of the strength of an economy. With the economic cycle of a country usually being steered by its credit trends, the September 17th, 2012 directive issued by the Central Bank of Nigeria (CBN) that prohibits the banks under its purview from providing additional loans to 419 of the countries’ highest debtors has left analysts speculating about the effects that the directive will have on Africa’s second largest economy.

In addition to the prohibition against granting the individuals listed in the directive any additional loans, in an effort to ensure discipline and trust in the financial sector, the CBN further instructed that any bank that violates the September 17th directive and provides loans to any of the blacklisted individuals, will be responsible for the immediate repayment of 100 percent of the total principal and interest loaned to the debtor, as well as any discretionary fines imposed on it by the country’s apex bank.

Analysts are divided about the implications that the CBN directive will have on Nigeria’s already unpredictable economy. This is compounded by the fact that a majority of the individuals on the list are shareholders and executives in 113 of the largest businesses in Nigeria, which include the country’s only airline operators Arik Air – owned by Arumemi-Ikhide, who owes over $542 million and; Aero Contractors Company, which is owned by the Michael Ibru family and is over $206 million in debt. Other concerned businesses and individuals include Zenon Petroleum, which is privately owned by Nigerian oil magnate, Femi Otedola, who owes over $1.2 billion and; Dansa foods, which owes over $94.35 million and is managed by Abdul and Sani Dangote, the brothers of Africa’s richest man, Aliko Dangote.

According to reports published in the Nigerian dailies, many of the debtors believe that the CBN directive will adversely affect their businesses if left in place, and may inadvertently do more harm than good to Nigeria’s economy because the businesses in question not only provide some of the most essential services in Nigeria to Nigerians, but are also major employers of labor. However, other analysts counter the aforementioned assertion by stating that enforcing basic fiscal responsibility guidelines, such as mandating that debtors repay or refinance their loans, the Nigerian Central Bank is demonstrating to outside investors that the country is taking relevant steps into becoming a major player in the world’s economy, by internally regulating its financial sector – even if it means being at odds with some of the country’s powerful oligarchs.

A Friday, October 5th editorial piece in Leadership Nigeria, mentions that many of the debtors are already seeking court injunctions against the CBN mandate. Nevertheless, it has become increasingly clear that if Nigeria wants to avoid a credit meltdown – which almost occurred between 2008 and 2009 due to many of the same 113 corporations and 419 individuals defaulting on their debts to various financial institutions that had to be liquidated or taken over by the CBN and its constituents banks  – the culture of operating in ‘bad faith’ between banks and creditors needs to be curbed. This is because with each acquired or liquidated bank that failed back in 2008/2009, millions of  “lesser” shareholders and customers, were left to bear the brunt of the excesses of the few but wealthy loan defaulters – which led to a lack of trust in Nigeria’s banking system.

In addition to the aforementioned, with Nigeria’s ongoing privatization scheme still in place, many commentators have also began to speculate about how the credit ban will affect the sale of Nigeria’s power generating and distributing companies, as many of the individuals on the CBN’s credit blacklist, have or are being awarded bids by Nigeria’s National Council on Privatisation (NCP) for the sale of the various branches that make up the Power Holding Company of Nigeria (PHCN) – which provides power to a vast majority of Nigeria’s homes and businesses.

Although many believe that the policies that the CBN is imposing on the Nigerian financial sector might be bad for the Nigerian economy as it restricts the growth of already-existing businesses – by depriving those in debt in excess of 5 billion naira ($32 million)  of credit – and the creation of new ones – by imposing stringent regulations on credit-seekers –,the financial implications of Nigeria’s billionaire debtors goes beyond the 113 blacklisted companies. This is because when a bank fails, its customers’ funds are only insured up until to a certain extent. Consequently, if the practice of a few wealthy investors who secure loans from multiple banks using the same collateral continues, banks will eventually over-extend their credit lines, which may eventually lead to the breakdown of the Nigerian financial system, a mistrust of the banking sector by everyday Nigerians and outside investors, and eventually the inflation of the country’s currency, the Naira.

In this regard, for the Nigerian financial sector to continue to thrive, the Central Bank in conjunction with the legislature must begin to devise ways to ensure that banks have access to a central database which has the credit history of loan-seekers. In addition to this, potential credit-seekers must meet specific requirements before they are granted loans by financial institutions, and stiff penalties – and/or jail terms – must be placed on falsifying such requirements, or being complicit in the falsification of such requirements. By doing this, the banking sector will be able to ensure that it does not find itself in a virtual ‘credit crunch’ in the near future, and a new-found trust in the banking system will be established.

 

By; Olu W. Onemola