Belly Flattening Exercises

In the context of current reforms taking place in the Nigerian banking sector, a number of publications have been published in the hope of finding a solution to the numerous challenges that the sector is facing. I remember vividly an article that was published this year, I attempted to make clear the potential economic and financial effects of the bail out money injected by Central Bank of Nigeria. My argument was that the bail out could result in the situation of excessive liquidity in the banking industry and in the economy as a whole.

My argument was based by the reality that the infusion of bailout money wasn’t backed up by actual economic activity, and therefore in terms of economics is of no worth. The result of the funds for intervention is increasing the quantity of money that circulates with a significant increase in confidence of depositors. More effort is required to allow the reform to be effective in having an global impact. My personal view is that strategies as well as mechanisms had to be devised to ensure that the funds for intervention will have a positive effect on economy and industry.

The latest data that has been leaking out from the financial system is apparent we are in a situation where banks are flooded with liquidity, yet the lending community is suffering from a severe credit problems. The principal purpose behind banking institutions to provide financial services for which they exist has been eliminated. The argument is that many bank managers are becoming cautious and prefer to invest in secure short-term financial instruments, rather than loaning money to the borrowers. Conditions for lending to customers are so strict that it’s nearly impossible to secure an loan from banks. In the end, banks have excessive liquidity at closing of business on a weekly, daily as well as a monthly.

However, the drawback of the above scenario is because too focus has been paid on the liquidity aspect of banking, it will have a negative impact on the profitability aspect. As time passes it is likely that many Nigerian banks will see a decline in profits. It will be apparent at the zonal, branch as well as regional level of operations in banking. The general metrics used to assess performance might show poor results despite the efforts performed by employees of employees of an office or branch.

The recent decline in interest rates means that bankers must search for more innovative and creative methods to make ends meet. Banks must avoid money that is considered to be costly and therefore not attractive in the current climate. However it is the Central Bank of Nigeria has an obligation to encourage banking lending to the actual areas of the economy. Although the reforms implemented by the CBN were successful in maintaining depositor’s trust in financial institutions, they have also failed in reducing bankers’ trust in lending. Bankers generally feel more secure conserving the money they have instead of lending them out to companies.

That’s where the difficulty is in the hands of regulators. Perhaps a loan guarantee scheme could be required in priority sectors in addition to other options.

Bank managers should be aware that profitability and liquidity operate together. The more liquidity you hold the less profit you can earn Cross Crunches. Therefore, a sound financial management is always seeking the balance between profitability and liquidity. The problem that all business leaders confront is that both liquidity and profitability are desired. However, the higher the amount of one you are looking for get, the lesser of the other.

For the executives of banks in the Nigerian banking sector It is now time to pay close attention to the profitability of their business as the long-term viability of any business venture is dependent on this. Businesses’ models should be evaluated carefully in context of the present conditions and, if remedial action is needed, decisions must be taken accordingly.