Carry to Maturity Disguises Bank loan Impairment
Hold-to-maturity Accounting Conceal Bank's Loan Impairment Kingsley Ughe
With the near completion of the latest Central Bank of Nigeria's bank " pressure testsвЂќ, the sharp rise in earnings in the banks within the last quarter of 2012, and the growth in Nigerian Stock Exchange All-Share Index, there lingers the temptations to luxuriate and relapse into sleepiness yet again, inside the idle perception that the Nigerian banking industry is obviously out of the timber and away of turmoil. Defining and putting a closure on the recession when developed in this way is not going to amount to a misinterpretation from the core issues involved nevertheless a charmed and isolated illusion. For what many have already been regarding as being a single credit crisis is in reality the story of a cal king, closely related but several crises, each with its own pace, timeframe, and require on banks to rediscover operational self-discipline in a harsh economic and regulatory environment. Burying the Credit Crisis In A Low Grave
The banking turmoil that almost brought the Nigerian overall economy to its knees, centred on the aggregate percentage of non-performing financial loans (NPLs) of banks that stood in an alarming 49. 87 percent. Almost all the banks were chronic credit seekers at the Broadened Discount Windowpane (EDW) with the CBN, the depressing indicator that they had little cash on hand.
In actual fact, the very last credit problems started around Year 2k and became substantially worrisome by 2003 and 2004. In 2004, the banking sector of Nigeria consisted of fifth there’s 89 banks. The industry was fragmented into relatively small , and weakly capitalised banks with most financial institutions having paid up capital of $10,50 million or less. The very best capitalised financial institution had capital of $240 million, compared to South Africa where the least capitalised bank acquired capital of $636 million at the time. Recapitalisation of the banking companies and consolidation of the sector under Prof. Charles Soludo (then CBN Governor) in 2004 despite, impaired credit rating portfolio eventually resulted in the demise of Oceanic Traditional bank, Afribank, Finbank, Intercontinental Lender, and acquisition of Union Lender.
The current CBN Governor, Sanusi Lamido Sanusi, had to enact arguably the most far-reaching reconstructs and financial intervention in Nigeria to contain the financial crisis. The intent of his regulating reforms is always to improve corporate and business governance of Nigerian financial institutions by avoiding the " sit-tight syndromeвЂќ whereby lender executives with limitless period of business office manage the banks since personal businesses as opposed to widely held organizations accountable to shareholders, depositors, and federal government regulators. Overall, the reform programme presented by Sanusi rests on several legs: improving the quality of banking companies, establishing economical stability, allowing healthy monetary sector advancement, and ensuring the economical section plays a role in the real economy.
If the measure of stability in the economic scenery of Nigeria is everything to go by, one must acknowledge that the reconstructs have worked, approved the need for realignment and re-examination here and there. The stable prospect of the financial institutions is in part due to the clarity provided by the strain test workout and the ongoing commitment on the part of government to never allow a large-scale lender failure again. Hold-to-maturity Accounting; A Shadowy Ghost
On the other hand there is one other crisis looming. The other crisis is actually a commercial bank lending crisis. The solved episode of credit rating portfolio disability of the financial institutions involved poor residential loans, but to a larger extent, it also involved a broader assortment of lending in the oil and gas sector, including industrial real-estate loans, state government loans, auto loans, and leveraged/high-yield loans, all of which are actually going bad because of the post occurences the the latest economic downturn. The complexity with this crisis is due to the nature of these types of loans. The majority of these loans are controlled by hold-to-maturity accounting, which, contrary to fair-market accounting, typically does not recognize...