Q & A session captured May 30 2012 at the Zenith Bank sponsored Finance Correspondent Association of Nigeria (FICAN) bi-monthly forum in Lagos Nigeria.

In this session, Mazi Okechukwu Unegbu, Former Managing Director (MD) of defunct Citizen International Bank Chief Executive Officer (CEO) of Maxifund Investments and Securities Limited, spoke on the topic: “Banks’ Financial Performance in 2011 and Q1 2012: Implication for the Capital Market.” Excerpts.

Timing and focus of the Capital Market Public Hearing

I do not agree that the timing of the Public Hearing was wrong, if you realise at a time, most of us were saying let the Government intervene in the Market; not by giving money, but by changing the structures. For instance SEC is set up by law, the structures in that place is not correct, there is lack of proper coordination between the Capital Market Regulator and the place that provides the platform, the Nigerian Stock Exchange. The NSE is a Self Regulatory Organisation (SRO) providing the platform that enables Market to be conducted and it’s licensed and regulated by SEC, we are calling for proper restructuring of what is happening and you can see that call coming out very vital during the Public Hearing.

Some of the issues raised were right; it was only spoilt with what I will call the inexperience of Law Makers.

The Capital Market Committee and the role of SEC

The Regulator on their part made a mistake by going to raise the wrong issues. The Regulator would have taken its time, you don’t do things with a preconceived idea to find somebody guilty; that was where the problem arose and diverted attention to some of the issues that came up that are not supposed to be there. There have to be a rethought in Financial Regulation; this should not be based on impunity; but hard facts.

Don’t you think we need to put some measures in the CBN such that its Governor would not meddle into political affairs?

All we need to do is set up strong Institutions; if you go there tomorrow, what you see on ground will determine how you are going to run, if the Institution is the one that is strong; then you keep it up. For instance if you look at the US Federal Reserve, the man there now is still following what was laid on ground before. In our system, I talked about Financial Friction; all we need to do is to form strong Institutions. Let us look at the US-UK Model, the Eurozone Model.

We don’t know what model we are following here. We need to look at what the situation is, as far as this is concerned, conservatism is the essence of regulation; both for the Capital Market and the Money Market. So, it is important that whoever is at the head of that Institution should first and foremost study the Institution before he starts talking; that’s the reason most of the MDs that I know, those of them that was sent to rescue the Banks immediately began to make comments of what they are going to do to revamp the Banks. In my opinion, that is not good enough; because they are yet to study the Institution to know where to begin their work. You must first of all know your environment, get it working fine, set out proper role, and know the people you are working with before you start commenting.

Thus, conservatism is a very important aspect of our business; we must go back to basics. We have set a wrong value system, look at the level of fraud that is going on in the Banking Sector and in the Market, a Stockbroker sells investors stocks unauthorised and nothing happens, you go to the Regulator and they take some money from you and you come back and continue the damage. It doesn’t make sense because we have lost our value system. That’s why I am saying that we need some form of conservatism and proper value system, how do we do it? Go back to the basics.

On demutualisation

Remember that the Nigerian Stock Exchange is an Institution limited by guarantee; set up with members and the members are Stockbroking Houses, because they contribute something; but remember that there are other members, honourary members who formed it; like Akintola Williams and Ojukwu. This was set up as a Company limited by guarantee. Now with this, it was being thrown open to both members and the others. People wanted to takeover; because a lot of money is being made and to be made. Go and read section 26 of CAMA, it will make it difficulty to demutualise the NSE. But if the Nigerian Stock Exchange will be demutualised, due process should be followed. And if we don’t do it, most of us will lose our investments; if care is not taken. If the NSE is demutualised, they will have a Board and a Managing Director. The way it is now, they are being monitored. All of us here can come together and set up an alternative Exchange in case of eventuality. SEC and CBN should come together and encourage people to set up other Exchanges or Capital Trade Points. Then SEC should build up its regulatory functions. For us to demutualise, there is a need for due process.

Your thoughts on what would have been done under AMCON with the Margin Loans and other Loans related to Capital Market transactions and friction between the Banking and Stock Market in the area of Securitisation

Securitisation has two aspects, one in Banks, they often have a portfolio of lending and borrowings they have made. A Bank can decide to offload part of that; securitise that by getting another institution to buy into it, what will they do? They have arrays of portfolio they give to you at a discount. And when they give it to you, and you wait at the end to collect a fee. In the Capital Market, this is what is called interaction or friction between the Regulators of the Capital and Money Market. It is a complementary arrangement whereby if the Bank has properly taken care in managing its lending; it would on the other hand strengthen the Capital Market in terms of giving funds to certain individuals. For instance, if a Company raises Bond of N50 billion from a Bank, and if the share of the Company in the Market is perfect and information driven, the prices of the Company shares will be reflected in the Market. If this happens, the financial securitisation will be such as to make comparability between what the Bankers in terms of the stability of that Company and what the investors have done in having confidence in the shares of the Company. That’s the securitisation between the Banking system and the Capital Market; which is the different from the securitisation a Bank does by selling out its assets in order to refinance itself to get money.

On Foreign Direct Investment in the Nigerian Capital Market were we have more foreign investors’ than local, with this, are we not waiting for a doomsday for the NCM to collapse once again?

I agree that the Market is made up of 80% of Foreign Holders, but I keep saying this, we have this problem of everything going wrong. They don’t bring the best into this system, I can tell you that the Nigerian Market you are seeing today have more Retails investors than the ones that are big. The ones that are big are using the Press to make themselves big without substance. This can be so because considering some of the issues that rose from the Public Hearing and from something that happened past in the Stock Exchange. We should be encouraging local investors to come unto the Market, because if you are strong internally, no external enemy can defeat you. And if we make our investment climate very strong and profitable, people from outside who really want to develop; not just bringing in the money.

I can tell you, part of the problem we had was that coming from the 2008 meltdown; most foreign investors dumped their shares, made whatever money they want and went away. So, the small retail investors and the Market had a problem, we are not saying that they shouldn’t come; but that we should develop our Market first, make it strong and encourage the local Market, we are rather encouraging foreign investors rather than the local ones, why should that happen? My people say that the firewood that is around your backyard is the one that can cook your food, why not let us build our system with what we have? Rather than depending on foreigners to build it for us, no foreigner can do what you and I can do, once there is any duplicating thing, they will run away; but you and I will remain here to salvage it.

With the insecurity that is on now, they can’t come; but you and I will remain. That’s why I am saying let us build our own strong Institutions so that foreigners will be attracted to come here.  

Your opinion on the financial system and Capital Market Regulation in Nigeria, are they over regulated or under-regulated and impact of the Public Hearing

On regulation, we are either over-regulating or under-regulating; we have adequate regulation; but the problem we have is enforcement, it’s very poor. Enforcement of our rules and regulations is bad; we should find a way of enforcing rules in the Market. There are so many rules in our Market that we are even confused, but the question is who enforces those rules? Do we have the necessary and adequate capacity to enforce the rules? Well the Public Hearing to me, if it doesn’t come now when will it come? Let it come; so that an impact will follow. However, we pray that after it, we should have a better Market.  

On CBN autonomy

The autonomy is very important in terms of crisis, let me give you an example, I remember I was in banking when the CBN reports to the Ministry of Finance and the Presidency. I was then given a mandate in First Bank to set up FBN Merchant Bank; myself and four other people and that was when Atedo Peterside was also going for his own Bank as a Merchant Bank then; and each time we go, Ministry of Finance was then in Ikoyi, and the other arms have moved to Abuja, we had a very terrible experience, because in the Ministry of Finance, it will take you six months to move a file, to get a license then was difficult, so the files would not move, until you bribe.

Bribery was not like today and you dare not come to tell your MD that they are requesting for bribe, at that time things were still good but it took time, so when they removed the CBN from the stranglehold of the Ministry of Finance, we all applauded that. It now goes through the Presidency; we have the instrument and policy autonomy. Usually they granted them smoothly; which made it easy for them to relate with Banks and ensure a prompt dealing. Before that time; you have to go through the Ministry of Finance; before you can float a Bank, do you want us to continue with that?

Secondly, when you talk about autonomy, I told you why the autonomy issue is coming. It’s because there is one strong individual; holding forth in a very weak and disorderly structured Institution. So why not let us ask that it should be restructured to take care of the imbalances in the structures; the lack of foresight in regulation. If we can do that, then whoever goes there will perform well. Let me give you an example, in First Bank; that is why the Bank is still steady, but as at then, no matter where you come from, there is a system that has been set in place, that there is this bottom-up approach to decision, and once the middle says that they agree with the bottom; that this thing is not right to do, no Managing Director can change it, that’s the system, a strong Institution, before the CBN talks about tenure of the MD, there is already a system in First Bank that says you cannot stay more than two tenure, you have to leave. And another person is being groomed to takeover, that has been the system in First Bank and it’s been working for them perfectly, so don’t you like such system? For me, we should not disturb the autonomy of the Central Bank, which will be driving us back to the 80’s when these bottlenecks were there.

Why advocating for more Exchanges?

I did say that the danger of demutualising is converting a mutual institution to the one owned by private businesses. It’s not a parallel Exchange, let them compete amongst themselves; competition is the beauty of business. So that you can have services, when we advocated for this, the former Stock Exchange authority kicked against it; and some of us were punished for advocating this. I remember I became a member of the Abuja Commodity & Exchange Commission, and I am still a member. The reason is that it’s dangerous to have one monopoly; because that monopoly holds all the power, take it or leave it.

Secondly, if you now say that you want to demutualise that particular monopoly, without other competing organisations, you are building a problem, and I say supposing something happens; like some Banks failed; supposing these Banks that failed and there is no NDIC to pay you the liquidation money and there is no other Bank you can go to, what will happen? The system will grind to a halt. So, some us called for more Exchanges; so that if we demutualise the current Nigerian Stock Exchange and something goes wrong with it, there will be an alternative through where you can refinance your stock; assuming you have the share of First Bank and they demutualise the Nigerian Stock Exchange, and because of the greed of Capitalism or the Directors, staffers and other things, there is a problem, what will happen? Also, because it has to compete with other Exchanges outside Nigeria and something happens to it, and you have First Bank shares to sell and there is no platform for you to do that, then you are in trouble when you have financial difficulties; even when you have something to bring you money, what will happen?

Also, if that thing happens, and you are likely to raise money, but in this case, you cannot raise money because that Exchange is sick. So, you face problem of illiquidity and that of not been able to raise developmental Capital from the Market; but if there are alternatives, you can take your shares to another Exchange to raise money. That’s what we are saying; if we want to demutualise; there is a danger to do so if there are no alternative competing Exchanges; we may have more problems if there is an eventual collapse of that one Exchange

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