Is it a Crime to Owe? (III)

The last 10 years of Nigeria’s democratic experiment has produced mixed results. On the one hand, the inability to conduct free and fair elections, provide improved healthcare services and education, and curb the menace of corruption, took a back seat making the country worse off than it was in a decade or two ago. The government’s inability to effectively provide targeted, timely funding for infrastructure

 further ensured that physical development remained stunted turning the citizenry and companies into self-funded mini-governments that have to provide electricity, water and in some instances feeder roads for themselves.
On the other hand, skyrocketing oil prices, disposal of government assets through the monetisation and privatisation programmes, banking consolidation, deeper ICT penetration, and increased government patronage and cronyism, led to explosive asset growths and the emergence of a new moneyed class. New businesses sprang up, foreign reserves grew, the banks expanded exponentially like hydra-headed monsters, Nigeria boasted the fastest growing telecoms market on the continent, jobs were created in key economic segments, and individual ambitions became boundless. On the economic front, Nigeria exhibited all the classic signs of a country on a prosperous roll. Essentially, it enjoyed a boom period, the consequences of which were complacency, carelessness and greed.
Characteristically, the banking sector which had experienced a renaissance through consolidation was one of the first to exhibit unabashed exuberance. New balance sheet growths, encouraged by the former governor of the Central Bank of Nigeria (CBN), Chukwuma Soludo, who by dangling the prospects of managing the country’s foreign reserves, resulted in further growth and expansion. Competition among the banks to be the biggest, using divergent parameters became the norm. And as the banks grew, so did their loan portfolios. Four major classes of debtors started to emerge post-consolidation. A lot of these debtors today have defaulted on the loans obtained from the banks, are being hounded by the Economic and Financial Crimes Commission (EFCC) and have been barred from international travel until their loans are fully repaid.
The first class which comprises debtors/loan defaulters are those that took loans from banks to invest in equities. Hitherto, the stock market was shielded from marauding bankers until they decided to turn it into their new play ground. Ignoring a directive by the CBN barring bank executives from borrowing money to invest in bank shares, the banks resorted to back-to-back funding among themselves so that core stakeholder groups, individuals and owner-managers continued to retain their interests in the banks with every successive capital raising exercise. As the competition became cut-throat, the banks developed an unhealthy interest in their share prices. They opened up new channels to create wealth by lending money to bank customers, stock broking firms and their security subsidiaries to invest in their (bank) shares.
To be fair, lending to bank customers to invest in shares is permissible, and has made many people and companies very rich people the world over. However, banks with an understanding of the inherent market risk of margin lending know how to invest in stock markets, ensuring that the risk-weighted assets of their loan portfolios are not skewed heavily in one asset class (in this case, margin loans) in the unlikely event of a market downturn. But Nigerian banks had other sinister motives. They threw caution to the wind, creating a new class of borrowers that would help them play the market, manipulate their share prices and watch them shoot through the roof.
Thousands, possibly millions of innocent Nigerians got caught up in the scam that was being perpetuated by the banks and the co-conspiring stock brokers and subsidiaries. Little did they know that the loans offered by the banks to invest in equities were smoke screens, as even bigger amounts, running into billions of naira, were being channeled to stock brokers and the banks’ subsidiaries to push up the value of their shares until the asset bubble they had created burst. In sheer horror, they watched the value of their investments slide and slide to new lows – well below the prices at which the shares were offered to the public. The share certificates they had used to collaterise the loans were no longer worth the value of the paper on which they were written (permit the hyperbole).
With share prices plummeting, retail investors, stock brokers and bank subsidiaries were unable to repay the margin loans. The situation was even worse for innocent retail investors who were made to wait for months by complicit bank registrars before being sent their share certificates. With time, the loans had to be written down as non-performing loans by the banks against their profits.
In my view, if the EFCC has to pursue anyone here it should be the banks and their executives and not the borrowers, because the banks lent money with the primary intent to engage in insider trading in order to influence their share prices. Retail lenders, stock brokers and bank subsidiaries, on the other hand, cannot be found culpable for taking margin loans and defaulting on their loan obligations to the banks after the stock market collapsed. However, where it is established that a stock broker/subsidiary obtained a loan and used it for insider trading, then it can be found criminally culpable under the Investment and Securities Act.
Another class of debtors/defaulters that emerged in the last couple of years are operators in the downstream segment of the oil and gas sector, better known as oil marketers. Malfunctioning oil refineries, a growing dependence on imported petroleum products, lack of political will to remove government-imposed subsidies on petroleum products, and the gradual withdrawal by the international oil companies from product marketing saw the emergence of a new breed of local oil marketers that were allowed to import alongside NNPC. Name them: Oando, Global Energy, Capital Oil, Zenon, Aquitaine Oil & Gas, Sahara Energy, Conoil, AP, Rahmanniya Oil & Gas, MRS/Chevron-Texaco provided the lifeline needed to keep petrol queues at bay.
Buoyed by high oil prices and unprecedented profits, they expanded rapidly constructing oil depots all over Apapa that put NNPC to shame. They became the darlings of the banks and were pursued relentlessly. The oil firms were offered mouth-watering facilities in exchange for the steady revenue stream that oil companies made from the daily sales of petroleum products. At the outset, the relationship was good and mutually rewarding. Everyone smiled home to the bank.
Then without warning the global economy was plunged into recession; oil prices came crashing down; worse still, with oil revenues shrinking, the CBN was forced to devalue the naira. This meant that local oil firms that had hedged against forward sales in the international market saw their margins wiped out, while new imports cost 20 per cent more. Lower oil revenues also meant that the Federal Government through the Petroleum Products Pricing Regulatory Agency (PPPRA) fell further and further behind in paying the subsidy claims owed oil marketers. The overall impact of lower crude oil prices, the devaluation of the naira and the non-settlement of subsidy claims made it next to impossible for the oil firms to repay their loans to the banks.
But this does not in any way suggest that the oil companies do not have a share of the blame for the debacle in which they find themselves today. Like all companies involved in the fast moving consumer goods market, their products are sold daily which guarantees daily monetary proceeds from their depots and fuel outlets/stations. As responsible corporate citizens they should have ensured that a certain portion of their proceeds are used to service the loans obtained from the banks. Heaping the blame on the PPPRA for not meeting its obligations on subsidy claims is diversionary and plainly silly.
Yet, this class of debtors on the face of it cannot be held liable for breaking any laws other than breach of contract. Granted that they have acted very irresponsibly, but like I wrote last week if the perceived crime is that they had diverted the loans for personal consumption, then the burden of proof is on the accuser to establish the allegation beyond reasonable doubt. However, if the companies like some sections of the public believe submitted fake title documents in the course of securing the loans, then such companies acted with criminal intent to defraud and can be held criminally liable.
A third class of loan defaulters that I personally find most interesting are the bank executives and board members that engaged in insider lending. This class of debtors is the easiest to deal with because technically, both the lender and borrower are one and the same, even where a proxy is used to obtain the loan. Since Section 17(1) of the Banks and Other Financial Institutions Act states, inter alia, that “No manager or any other officer of a bank shall – (a) in any manner whatsoever, whether directly or indirectly have personal interest in any advance, loan or credit facility, and if he has any such personal interest, he shall declare the nature of his interest to the bank.”
Whereas subsection 2 states that: “Any manager or officer who contravenes or fails to comply with any of the provisions of subsection (1) of this section is guilty of an offence under this section and liable on conviction to a fine of N100,000.00 or to imprisonment for a term of 3 years; and in addition, any gains or benefits, accruing to any person convicted under this section by such contravention, shall be forfeited to the Federal Government, and the gains or benefit shall vest accordingly in that Government.” I need not dwell too much on this class of loan defaulters pertaining to bank executives because the applicable law is quite straight forward and establishes criminal culpability with absolute clarity.
The final class of loans defaulters, which I strongly believe should never be criminalised are made up of genuine businesses. Often enough businesses, especially government contractors, are forced to contend with delays in payment by state and federal governments, shrinking markets, inconsistent government policies and economic downturns that throw their business models up in the air. These factors often render them incapable of meeting their loan repayments. It was therefore foolhardy to lump such defaulters as criminals or economic saboteurs.
What the CBN as an organ of government and member of the Economic Management Team ought to have done was to apply pressure on government to pay contractors where applicable, and get the banks to use the necessary legal channels to recover their loans. As stated in the second part of this article, the CBN should not be seen to trigger events that stifle economic growth that can lead to job losses. Its primary role, which in my opinion is more critical than its oversight function of the banking sector, is the employment of monetary tools for macroeconomic management and engenders growth.