Sunday, 1st March 2015

“A chat lesson with Elvis from Nigeria”

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Binayak BasnyatI was in a conversation on Facebook with a friend of mine from Nigeria, who is in the last semester of his MA programme in Diplomacy and International Studies.

We were discussing the spread of Ebola across Africa and the lack of financing and investment injected into medical research in the continent thereof.

A while later, he told me that he was working on a thesis influenced by the Nigerian financial reforms that made Nigeria the biggest economy in Africa, ranked 26th in the world in terms of GDP.

I couldn’t really imagine Nepal topping any 'economy lists' of our continent, particularly in the near future, but I still asked Elvis E Obaro-Akparo if he could give me examples of some of the financial reforms his country made, hoping they would be a good early morning lesson.

I wondered if a major financial reform or a more constructive financial system was the missing ingredient for Nepal that would not just start up economic growth but also stir up its overall development.

However keeping in mind that our country is still in the midst of political polarisation, enforcing major reforms would be a very difficult task in the absence of political reconciliation.

What I read was not something that unknown. Everyone is aware that economic growth and development are interrelated; however, the development of Nigeria triggered by financial reforms, the kind Elvis was boasting about, reminded me that financial circumstances and times keep changing and so we face with newer challenges in the politics of economy every day.

To be honest, I had to 'Google' some of the examples given by Elvis.

I had very little idea about how certain economic tools, like ‘financial consolidation’ and ‘banking recapitalization’, make major direct and indirect contribution to overall development.

In his message, Elvis said, ‘Nigeria had a lot of resources but the financial system instituted to exploit those potential was flawed.’ This sounded almost similar to the background of Nepal’s economic challenges that I could relate to as well.

The consolidation adjustment details that followed in the message were quite tricky but interesting.

The borrowing limit in Nigeria was 35 percent of a firm's total shareholders’ equity and total shareholders’ equity was only N2 billion dollars ($13 Million) before the reforms. Afterwards it went up to N25 billion ($154 Million).

So, in Nigeria, lending and borrowing ability was empowered which helped funding of bigger projects in sectors such as natural resources, communications, medicine, transport, education, and others.  Access to larger investment further helped bring down the unemployment rate and poverty.

Also during the reform, the number of Nigerian banks came down from 89 to 25! My friend referred to the 25 as ‘superbanks’. And superbanks they were.

Lending and borrowing limits were raised greatly from $4 million to more than $49 million without having to print more money or wait for booms.  

Elvis’s message also read that ‘the recapitalisation included certain aggressive tools like withdrawing of a large percentage of public sector funds from banks which forced banks to be more creative in finding alternative sources of deposits.'

'The aggressive reform eventually brought good results as the existing money in the market was managed more efficient.’

I thought that our conversation would be more interesting if I could compare Nigeria's examples with what was happening in Nepal.

And because I am not an expert, and have little experience in the financial sector, I thought I would ask someone with several years of financial and banking experience in Nepal.

Soon, I started another Facebook conversation with my brother -in-law.

After asking him a few questions, I found out that minimum shareholders' equity also referred to as ‘paid-up capital’ for firms like commercial banks was recently raised to NRs 2 billion and borrowing limit or ‘single obligor limit’ is about 25 percent of a firm's paid-up capital.

And also for those like me who didn’t know, we now have 31 commercial banks, down from the 32 before the equity-limit raise.

So though Nepal is a smaller nation than Nigeria, it has more commercial banks, while the borrowing limit in Nepal is only $6 million compared to the $49 million in Nigeria. This affects investment empowerment in our financial system.

If we look at more examples around the world, we realize that the most developing countries like the BRICS (Brazil, Russia, India, China and South Africa) have a history of successful economic reforms and systematic financial management mechanisms.

Brazil introduced the 'Plano Real' in 1994 which strengthened exchange rates and created new diverse economic opportunities in the country.

Russia and India underwent major economic reforms in the 1990’s.

India was initially afraid of opening up to multinational competition, but later produced major multinational Indian companies after the1991 reform.  

In South Africa, reforms have improved the functioning of the labor market through supportive microeconomic and macroeconomic monetary policies.

Bangladesh also came up with financial tool management ideas to create ‘a bank for the poor.’ The idea later won its author Muhammad Yunus the Noble Peace Prize and Grameen Bank reestablished the importance of financial management for development, especially in least developed countries (LDCs).

Through Yunus’s initiative, financial services like credit, savings, money transfer, and insurance was accessible to more people in Bangladesh, especially the majority lower and middle income groups. Before this, like in Nepal, they had very little or no knowledge about finance and development.

So when I turned my attention to Nepal again, I logged on to the Nepali central bank's website and checked Nepal’s annual growth rates.

I saw and was re-reminded that the Nepali financial system and economic conditions started declining after the start of the insurgency in 1997, and the political economic conditions have not recovered ever since.

Though many bank and finance institution executives may have enough knowledge about the mechanism that will restore growth, the inability to score results still looms.

Nepal’s highest GDP growth was 8.6 % in 1994; 20 yrs later in January 2014 we registered only 3.6% growth.

By the end of the morning conversations I had on Facebook with my friend from Nigeria and my brother-in-law in Nepal, and after some curious Google searches, I had recollected two very important messages. First, it is extremely important to keep the national financial system functioning efficiently and its value updated with the ever changing global financial standards. And secondly, development, especially in LDCs like Nepal is possible only within a systematically managed effective financial system.

And as I had hoped when I asked Elvis the first question about the growth winning reform examples, I did manage to learn some important lessons early that morning.



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