Post by Trade Coach on Mar 27, 2017 22:50:35 GMT 1
NIGERIAN BANKS NEED TO RETHINK ON THEIR TRANS-BORDER ACTIVITIES
Nigerian trans-border businesses in the banking sector of the economy have struggled to sustain their offshore operations, the foreign cross-border business in Africa’s largest economy have better fortunes.
Christine Lagarde, the managing director of the international monetary fund, recently told a gathering of African central bankers in Mauritius that the expansion of cross-border business posed a threat to the continent’s financial stability. ‘’Ten African banks now have a presence in at least 10 countries on the continent, and one is present in more than 30 countries,’’ she said. The IMF chief urged the bankers, therefore, to adopt enhanced oversight strategies to handle the challenges and potential vulnerabilities created by the cross-border expansion of the banks.
Lagard’s recommendation is based on the understanding that during an economic crisis, cross-border banks could transmit contagion from their home countries to host countries and vice versa. This was the case during the last global financial crisis. When swatches of subprime mortgage-backed securities became worthless following the crash of the US housing market in 2007, the contagion spread around the world, transmitted by cross-border financial institutions – banks, insurance companies, hedge funds, etc – from United States to countries in Europe, Asia, and across the major emerging markets.
Then Africa was largely shielded from the financial meltdown, until the recession that trailed global demand for commodities, forcing the prices of oil and other African primary exports to fall. Given the expansion of cross-border banking in Africa, It is believed that the continent’s commodity exporters may also become susceptible to contagions and transmit same to sister countries. The recent slump in global commodity prices and the attendant crises of slower GDP growth rates and currency depreciations unleashed on most African economies have only exacerbated those concerns
The fillip for the cross-border expansion of Nigerian banks was the 2004 banking sector capital reform of central bank of Nigeria infrastructure development, differing accounting and reporting standards, national secrecy laws and constraints on information flow amongst issues. But CBN has been responding to these challenges. It has signed a good number of joint-supervisory agreements with the central banks of a number of African countries.
It is noteworthy that following the banking consolidation in 2004, Nigerian banks chose to channel a significant portion of their liquidity surfeit to the expansion of cross-border operations across Sub-Saharan Africa. This implies that the banks considered the Nigerian economy to be limited in terms of investing their capital and maximizing profit. This is true to the extent that the banks concentrated on a narrow pipeline of trade finance, in which petroleum product importation was dominant. Risk appetites for SMSs, agriculture, technology, manufacturing and healthcare financing were weak among the local banks. A number of factors – including high cost of raising financing, absence of credit information infrastructure and poorly organized business fostered the vicious cycle in which the banks avoided financing for these growth sectors which continued to look up investment opportunities.