In addressing the challenge of how to sustainably finance growth and development, every Nigerian leader ought to revisit the question of the cost of funds. With a crawling growth rate of national output at about 2% relative to a 3%+ annual population growth, prioritising the considerable reduction in the cost of funds in the decision equation for national development has become very imperative. Every good entrepreneur pays a great deal of attention to the price of the financial resources deployed in the production of goods and services. This well-deserved attention is because of its criticality in the overall quality and price-competitiveness model of the firm. Unfortunately, for several decades, the cost of funds in Nigeria has been excruciatingly high with damaging consequences on the competitiveness of businesses. The many cases of companies such as Dunlop, that laid-off its staff, folded up its activities in Nigeria and relocated to Ghana are cases in mind. Official records also show that approximately 300 medium scale enterprises fail each year in Nigeria on accounts of the high cost of doing business. A vital component of this cost is the high-interest rate. Therefore, the lower the price of funds, the better the prospects of the country in output generation, employment creation and highly improved government revenue conditions.
There are three theoretical perspectives from which to discuss the cost of funds question. They are through the windows of the bank, the industry, and the macroeconomy. While this traditional approach excellently characterises the makeup of the cost of funds, it nevertheless benignly hoods the sources of the problem and their solution. It is, however, more comforting to see how deeply implicated the government and the central bank are in all of this and why they should take the lead in resolving the challenge. There are necessarily five core taxonomies of drivers of the high cost of funds in Nigeria namely the banks operating costs, inflation, public sector borrowing, macroeconomic uncertainties, and the challenge of efficient resource allocation by the banks.
Banking business faces cost minimisation challenges like any other business enterprise, albeit the ‘moral hazard’ opportunity that it enjoys from the government. By the fact of the latter, it is challenged in a limited sense, by the inadequacies of economic infrastructure particularly electricity and security. All bank branches, regardless of whether they make profits or not continuously run on power generating sets as well as maintain a reasonable army of police officers and police vehicles. It is therefore easy to imagine how much a reduction in costs is possible if these infrastructures are in place as a result of governments efforts. Added to these are other expenses arising from the mandatory reserve requirements and liquidity ratios. Even though most banks in Nigeria today are big, these discretionarily fixed benchmarks not only directly affect the supply of loanable funds but also create additional costs required to manage idle assets in the banks. Accordingly, the discretion of the CBN in this regard contributes to the ballooning of the costs of funds. Other ingredients of these costs such as the varieties of taxes imposed on the banks and their branches by all three tiers of government equally inflate the prices of funds available to the investment sector. In different ways and forms, they make up the operating costs faced by the profit maximising bank. But to cap it all, the banks also in reacting to the challenges of the environment of business, inflation, uncertainties as well as other parameters that fix margins that enable them to survive. Let us start with the problem of inflation.
By depleting the real value of money, inflation enlarges the amount of money required to purchase what was obtained previously with the same amount of money. Such persistently rising prices have been running in double digits in our case with implications for also likewise bloating the cost of funds. The question that we have consistently failed to answer is about the source of this menace. Fundamental immutable truths of inflation are of too much money chasing after few goods. This too much money is always the creation of the central bank of Nigeria and often in response to the profligacy of the executive arms of government. Since 1960 we have held on to the traditions of budget deficits and supplementary budgets even when the original budgets have never appropriated as designed. That puts pressure on the central bank of Nigeria to look for more money. Most of these monies often end up primarily to assuage the luxurious consumption patterns of the elites. They end up as consumption subsidies. They end up in all manners of frivolities and abandoned projects except in the activation of production. And because such monies are rarely decidedly meant to trigger increased levels of output, they end up growing much faster. And so, rather than blame the rain and weak agricultural outputs due to the attack farmers by Boko Haram insurgents, we should turn to our governments. Therefore, inflation will naturally substantially drop when our budgets are designed more to finance increased productivity rather than the expenditures of civil servants and politicians.
Similarly, unless the government ensures that the same foreign exchange rate is applicable across the board and without preferences accorded any segment of the system in the allocation of foreign currencies, inflation may find it difficult to climb down from the high mountain where it currently resides. Over the years, those in the corridors of power in connivance with the CBN have manipulated the exchange rates and the allocation of foreign exchange to pursue their agenda. In any case, once the government owns up and accepts responsibility for unnecessarily inflating the system, and change its ways, smaller amounts of money will chase after more goods, and the prices of funds for investments may fall further.
This administration has also demonstrated an extraordinary and excessive penchant for borrowing. Unfortunately, such unbridled borrowing produces disastrous effects like the inflationary consequences of fiscal deficits financing already described above. But in addition to that is the crowding-out effects of such actions. So rather than banks committing the loanable funds to the productive sectors of the economy which face enormous risks and uncertainties, they prefer to invest them in government treasury bills and bonds, which is virtually default-free. The reduced supply of loanable funds invariably leads to higher interest rates. This behaviour has been a trend since the inception of this administration and holds grave consequences for the economic successes of future generations. But our government rather than unnecessarily inflating the cost of funds through this process can easily harness the several alternative funding sources that are available through the conversion of the approximately N4 trillion naira worth of its idle resources. Several examples abound. Outright sale and commercialisation of trillion naira worth of abandoned government assets. The of several holdings of governments that can be best managed for profit by private entrepreneurs. All this and many more present alternative options that can save the crowding-out effects on the cost of funding orchestrated by governments endless appetite.
There is no denying the fact about heightened uncertainty facing economic agents in Nigeria. We are not sure about what tomorrow will bring. The consequences are manifest in the slowing down of demand for goods and services as well as in the overall poor national output performance. Similarly, investors and producers of products and services are reluctant to take more and some kinds of risks. There is also a slowing down of capital inflows; on the contrary, there are bouts of flights of investible funds. Entrepreneurial interests, on the other hand seem to be more on speculative activities rather than on real economic production. In sum, therefore, more money becomes available relative to either stagnant or shrinking quantity of goods produced. Banks are forced to live with and pay for the cost of managing loanable funds that are not demanded by the investing community. As already explained, all these again fuel the continued ballooning of the cost of funds. But who is responsible for this heightening macroeconomic uncertainty level? The government. The central bank of Nigeria. And only both culprits can help in resolving this challenge.
There is also the issue of the absence of a robust Nigerian capital market which ordinarily should serve as a good alternative for funds sourcing outside of the transitional deposit banking system. A substantial part of the loan-demand pressure on the commercial banking system is from businesses that are seeking funds that are ordinarily source-able from the Nigerian capital market. Unfortunately, the existing equities and long-term debts market is not robust enough to competitively divert a substantial part of the pressure for loanable funds commercial banks. The Nigerian government and the capital market regulators must mainstream and capacitate the capital market to play its role effectively in fund provision. It is essential to know that until the capital market plays as strongly as the money deposits banks in solving the challenges faced by those seeking financing for their business operations, the commercial banks will continue to have a field day in allocating robust margins on each naira borrowed from them.
On a final note, dealing successfully with the challenge of the high cost of funds may as well depend on the strength of will of the managers of our economy. The government has substantial influence in the creation of the unwarranted high cost of funds. It is also clear that the same government can take decisive steps to correct that situation. Thinking and acting as an entrepreneur, in this case, demands urgent measures in the right direction. The consequences of the delay are too costly.
Frontpage February 20, 2019