Nigerian banks and unemployment Featured

Monday, 21 November 2016 00:00 Written by  Published in Finance Read 347 times
Central Bank of Nigeria Central Bank of Nigeria

Lukman Adedoyin explains why banks in Nigeria must retrench and government must halt the trend


Banks in recent times have had to lay off thousands of their workers as they grapple with the ever increasing cost of operations. Two of the biggest commercial banks in Nigeria had earlier in the year sacked 2,400 of their staff, despite the spate of unemployment in the country.

The Managing Director, Financial Derivatives Company Limited (FDC), Mr. Bismarck Rewane, had predicted that amid a worsening business environment, Deposit Money Banks (DMBs) may, “commence massive staff retrenchment in second quarter (Q2) of 2016”.

Massive retrenchment is not uncommon in developed economy. It was reported recently that HSBC, Europe’s largest bank, wants to shed up to 25,000 jobs globally. Why? The bank is seeking cost reduction of about US$5 billion a year and the cuts are supposed to revive the bank’s fortunes by enabling it to pay higher dividends to investors. This shows that in the face of increasing cost, banks are left with the last option of reducing their spending through reduction of staff strength. It happens everywhere and not just specific to Nigeria.

How did we get here?

The last administration could have saved a lot during the period of global increase in oil prices. If our foreign reserve had been stronger, the pressure on Naira won't be this much. The Central Bank of Nigeria (CBN) in its Financial Stability Report for December 2014 had noted that sustained low oil prices could trigger an increase in Nonperforming Loans, especially as the exposure to the oil and gas sector accounted for 25.70% or N3.24 trillion of the total credits of N12.63 trillion as at the end of December, 2014.

The global drop in oil price is one of the reasons the profit margin of banks is threatened. Added to this is the fact that our foreign exchange is not smiling, plus the strict monetary policy in place to check the further collapse of Naira. The challenge with sourcing foreign exchange, which is a main component of banking business, has resulted in the reduction of the volume of transactions with banks. This eventually has reduced the revenue of most banks.

With global oil prices still at low levels and the ongoing onslaught in the Niger Delta, oil investment is not looking secure in Nigeria. The country’s economy is crumbling as the militants are adamant on destroying all oil installations in their region. It is only normal that banks will look to make their workforce smaller so that they can keep delivering returns to their shareholders.

Indeed, in a statement issued recently, Fitch Ratings noted that Nigerian banks’ non-performing loans have been rising over the past 12 months. Similarly, banks that have borrowed foreign denominated currencies would also be forced to restructure their debts as the naira is being expected to be devalued by a minimum of 22 per cent (i. e. lenders would have to put in extra efforts to generate enough cash to repay their debts).

Furthermore, analysts point out that banks are still recovering from the full implementation of the Treasury Single Account (TSA) which enshrined that public sector deposits are away from different commercial banks. This fund is often a source of funds that banks give out to lenders.

Another reason banks are facing difficulties in meeting their profit targets or experiencing declining profit is the cost of power (renewable energy). The cost of power for most banks constitutes about 25% of their operational cost. Most of these are incurred through the purchase of fuel due to unavailability of regular power supply. If power had been stable, this huge amount will be used by the banks to boost their profit. But the situation seems to be worsening by the day.

Government's reaction

In response to the retrenchment by one of the banks, minister of Labour and Productivity, Chris Ngige issued a fresh warning to employers in the financial sector, especially banks, saying he will not hesitate to withdraw the operating license of any bank or telecommunications company that ignores its directive to stop sacking workers en masse.

“This decision is … predicated on the fact that the continued retrenchment and redundancy by the banks and other financial institutions are jeopardising the outcome of the conciliatory and mediatory processes being undertaken by the Ministry of Labour and Employment”, the minister said.

As much as the government is responsible for the management of unemployment ratio in the country, it is not appropriate for government to infringe on the fundamental rights of banks and business owners. The government won't pay them when they go bankrupt. Rather they are likely to face sanctions if they refuse to pay their staff. Rather than issue orders, the government needs to do a lot of work to improve infrastructure (particularly power). 

What must be done?

Federal government, through the ministries of Labour and Employment, Finance, Budgets and National Planning, can stimulate the economy with several forms of fiscal tools, depending on where the pressure is most significant. The focus can be on getting trade partners, business incentives, consumer centric policy, federal spending cuts, or a combination of all, as discussed below.

o   Increase government spending to absorb supply in the face of falling demand by taking on direct or indirect projects to employ people. Infrastructure projects are one of such examples. Hire more people directly, even in non-essential public services. The continued production activities will benefit people by giving them wages, interest, rent, and profits. In the end, people's income and purchasing power would increase.

o   Provide tax relief to lower income groups, considering the fact that most of tax savings of lower income groups gets spent. While upper middle group is likely to save more in times of recession. By cutting the tax, government will increase disposable income. With such a measure, people are able to spend more in the markets and hence, bring about sustainable development of the economy.

o   Setting up trade partnership. Working with our trade partners to take more exports to them. So that our manufacturing and production will increase, resulting in increased employment and an infusion of cash into businesses and at consumer level to increase investment. Also, increasing our imports could reduce prices on some products because of increased supply.

o   Provide tax relief to producers and hiring companies so they can hire more. Reducing taxes or creating tax credits for businesses would provide an incentive for them to continue or increase their production and investment, hopefully resulting in increased employment and an increase in the amount of money in the economy.

o   Reducing taxes or creating tax credits for consumers would provide more money for the consumers and incentive for them to spend more, thus fortifying the economy and providing business with an incentive to continue production at current levels or increase production.

o   Reduce burdensome regulation to increase investment opportunities and providing tax benefits to capital investments.

o   Cutting federal spending and reducing our deficit increases the confidence of our allies and trade partners as well as help stabilize the value of the Naira in the money market. This could result in more favorable terms for trade and/or loans that the government may be seeking.

o   Providing market exchanges or support for faster movement of goods and increase in trade

o   Imposition of tariffs on imports to increase consumption of local goods

o   Introduction of price controls to prevent hoarding and price exploitation

o   Provision of tax relief / benefits to job seekers

The banks.....

The banks should also know that it is their duty to create more opportunities for more jobs to be created. Meanwhile, the consequential effective of the mass retrenchment is not socially viable. Thus, other options should be explored until the government is able to put in place substantial efforts towards sustainability of business in the country. Also banks should propose investment partnership with the government to solve some of these infrastructural deficiencies by providing counterpart funding that are facilitated by their international allies. By so doing, they will also increase their investment and profit frontiers.

The good news.....

Economic analyst, Mr. Bismarck Rewane predicted that "2016 will be the year of the enthronement of the consumers in Nigeria. Improved access to market information, declining disposable income and industry fragmentation will increase consumers’ options and choice".

He also said that "economic recovery will commence in the third quarter and will be sustainable. However, there will be price volatility, increasing inflation and major adjustments in the first half of the year. In other words, small pain before huge gain.

So before you cast aspersions on the present or the past government, think of the better days ahead.

Last modified on Monday, 21 November 2016 06:05

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