THE major issue in abuse of access to Bank facility is using the monies for activity other than what was agreed to, and not showing enough prudence and diligence in pursuit of the object of the facility, a moral hazard. This often happens because the lender does not have perfect information on the motives and actions of the borrower; the challenge of information asymmetry.
The perennial challenge of decision making in economic intercourse, because of information asymmetries which result in either “Adverse Selection”, when a used car salesman removes one zero and tells you the car has done ten thousand kilometres whereas it had clocked up one hundred thousand, and ‘Moral Hazard’, when you tell the banker you need the loan to buy Yam seedlings whereas the intention is to marry new wives with the money, will always be there. The question is how do we sanction those in error.
The system has a duty to build to checkmate moral hazard. The trouble with the way we are going about it is that we are giving the impression risk is a moral hazard. That can be destructive of innovation and entrepreneurship. When honest borrowers are terrified you will increasingly find that only the crooks come to play. The credit Bureau system and the courts should be appropriate if used well. People are quick to say our courts don’t work so why do we not work with relevant authorities to make them work.
Special credit courts with Judges well trained on the financial and economic systems could focus on quick dispensation of justice. To mock one of the most important pillars of modern democratic order, the judiciary, does not serve the system well. In a sense, that is what we do with the extra legal process.
The ghost of Bridge banks which have no basis in law and which have been used to violate the property rights of many remains an open sore that only truth can heal. Another kind of asymmetry that increases risk in the financial and economic order is power asymmetry.
This is especially so at a time of impunity when property rights are routinely compromised. When someone who has political power in their favour can get away easily with riding roughshod over the rights of another. It is this which leads many investment advisors to counsel foreign investor-prospects to generally avoid regulated sectors of the Nigerian economy because regulatory risk, a function of power asymmetry, can pose severe risk to enterprise. My own experience alone provides ample illustration.
From Oil and Gas, Banking, Power and regulated media, the failure of regulated sectors to be level playing ground prove with no doubt the point of my 1998 book; Managing Uncertainty- Competition and Strategy in Emerging Economies. Even the way waivers distort markets tells same story.
In Banking, from the forced consolidation of the Soludo era, to the Sanusi Stress tests, all you need do is ask for an independent international forensic evaluation and eyes will pop out of sockets. But in a country where you can be judge, jury and choir master of public opinion cheerleading, justice is left only to God’s Court.
Yet a savvy foreign advisory community, beyond sounding off in politically correct tunes, know the truth, as I learnt listening to a South African born PWC partner at Wharton a few years ago. Who takes the blame for an investment that was okay until regulator action forced it south?
The borrower who acted diligently or the regulator who wanted to use power to reallocate instruments of wealth creation to those they favour, thus compromising investments diligently made and in which no moral hazard was evident? For five years I have ploughed almost all I have earned to service a loan made for investment well made but compromised by willful regulator abuse. Top that with one I have brought up before, an investment that has been frustrated in a land lease, with no cogent reason, except the unspoken one of the Lease being approved by a predecessor Governor from a different political party and with whom there had been much acrimony.
It was a case that led a well-known former Attorney General to say to me: If they can do this to you, with your voice, imagine what they do to those who do not have a voice. It is such comments that determine comfort with investment which drive growth. The Linkserve story and several other startups which appear in another one of my books; Business Angel as a Missionary show why the economic potential is not realized in our country, leaving so many so poor and vulnerable. The matter of pressurizing those who abuse Bank access is an important one and should be part of our institution building agenda.
Surely we can learn much from experience elsewhere and the state of thought on the matter which have been elegantly synthesized by Raghuram G. Rajan and Luigi Zingales in the their book Saving Capitalism from the Capitalists. We will do well to avoid solutions that do more harm to the patient than the disease. We already have as example not so salutary, the case of the military. The uninitiated may not know this but part of the challenge of the military in fighting Boko Haram is that soldiers are not in training with arms.
They seldom had access to arms. I discovered this during the wars in Sierra Leone and Liberia when I learnt this point made by Alex Barde as he was pulled out after serving as Chief of Defence Staff. What Barde did not mention, which I learnt years back, was that the fear of coups led the leadership of the military to keep guns away from soldiers. When our troops arrived Liberia their guns came separately and some could not operate the equipment while some equipment jammed for lack of use. We lost many soldiers from that.
Today we are seeing the effect when we most need it in the North East. Same could happen 10 years from now with entrepreneurs not trusting banks and so refusing to venture. I am glad the Chambers of Commerce have been forceful in rejecting this political banking method and sorry that many bankers cannot see the consequence. • Concluded • Utomi, political Economist, and professor of Entrepreneurship is founder of the Centre for Values in Leadership.
