AbouttheAuthor
LeoOnyiriuba’sbooksinclude“AnalyzingandManagingRisksinBank Lending”(2004),“DriveandTasksinBankMarketing”(2008),“Dictionary andLanguageofBanking”(2010),“CreditRisk:TamingaHotbedofReckless Banking”(2013),and“BankingProcessingRisksandControl”(2014). Formerlyauniversitylecturer,herunsafinancialconsultancyinLagos, Nigeria,thathelpsclientssucceedintheirbusiness,financial,andbanking endeavors.
Preface
Motivationtowritethisbookcamefrommyexperienceasabankerfrom1991to 2003,duringwhichIrosetothepositionsofdivisionaldirector(corporate banking)andmember(executivemanagement).Iobserved,studied,appreciated, andpluggedloopholesinlendingpracticesanddecisions.Ialsosawfirsthandthe agonyassociatedwithbankfailure,muchofwhichcouldhavebeenavertedwith soundcreditpolicy,institutionalizedlendingculture,andresponsiblemanagementoftheriskassetsportfolio.Theproblemwasreallyoverwhelming.I thoughtofwritingabookthatwouldchronicletheeventsleadingtoparticular bankfailuresandthelessonstheyheldforstakeholdersinbanking.Thoughthat madesense,onsecondthought,Iwasloathtowriteabookwithaheavyheart. YetIhadanoverwhelmingurge whichIcouldnolongerresist towritethe book.Thedearthoftextbooksthatsolelydocumentedtheintricaciesofthistopic boostedmyzealforthebook.Thefactthatseminars,workshops,conferences, andothersuchin-houseandadhoctrainingarrangementsthatbanksuseas fallbacksimpartedonlyfleetingknowledgeaddedtotheboost.SoImustered confidenceandstartedwritingtofilltheobservedgap.Ironically,Itinkeredwith theoriginalconceptofthebookwhenIeventuallymadeupmymindtowrite. Thisbook,whichaddressesthornyissuesinbanklendingandcreditriskcontrol, istheeventualoutcomeofthetinkering.
Twoofmypopularbestsellersmadetheprecursorsofthisbook.In2004,I publishedthefirstofthetwobooksentitled AnalyzingandManagingRisksof BankLending.Thesuccessofthis17-chapterbookwasoverwhelming.Itwas reprintedin2005and2006beforeits30-chaptersecondeditionwaspublishedin 2008 withareprintin2009.Theresoundingmarketacceptanceofthesecond editionwasremarkable.ThenIwasconvincedthatthemarketneededmorethan abroadbrushbookonthesubject.SoIdecidedtowriteacompaniontoit.The companion CreditRisk:TamingaHotbedofRecklessBanking published concurrentlywiththethirdeditionofthefirstbookin2013wasnolesswell receivedbythemarket.
However,therewasacompellingneed soonafterthecompanionwas published tomergethetwobooks.Thatneedwasforanentirelynewbookthat wouldcombinethecontentsoftheaforesaidprecursorsintoonestrong, unparalleled,revisedvolume coveringemergingmarketsinAfrica,Asia, EasternEurope,andLatinAmerica.Theideacametofruitionwiththepublishingof EmergingMarketBankLendingandCreditRiskControl.Iimagine
thatbankers,practitioners,analysts,academics,andstudentsaroundtheworld whohavereadandusedthetwobookswillsorelymissthem.Iadvisethemnotto mournthebooks’passing.Thenewbookthatsupplantsthem, EmergingMarket BankLendingandCreditRiskControl,issuperiorandoffersobviousgainsas reflectedinthispreface.
OVERVIEWOFTHEBOOK
BanklendingandcreditriskcontrolcanbelikenedtotheAmerican-type presidentialsystemofgovernment,onepoweredbystrongdemocraticvalues.In apresidentialdemocracy,powerissharedamongthreetiersofgovernment andprotectedbyclearlydefinedseparationprinciples.Thethreetiersof government executive,legislative,andjudicial functionindependentlybut underachecks-and-balancesarrangement.Similarly,thecruxofbanklending isusuallythree-pronged.ThisisdepictedasthethreePillarsofcreditrisk management creditanalysis(Pillar1);creditpolicyandcontrol alsoreferred toascreditadministrationorcreditcompliance(Pillar2);andloanworkout, remediation,andrecovery(Pillar3).
IsummarizethepurposesofthePillarsasfollows:
Creditanalysis institutionalizesprocessesforassessinglendingriskand structuringacreditfacility.Thisimpliesthatcreditriskmustbeproperlyidentified,appraised,andeffectivelymitigated.Thismethodologicalframework,and theanalyticalfunctionsitembodies,pavesthewayforefficientstructuringofa creditfacility.
Creditadministration ensuresthatthelendingportfolioisofhighquality, profitable,andeffectivelymanaged.ThisPillarsubsumesissuesinvolvedin enforcingcreditcontrolandcompliance.Regularportfolioreview,loanloss provisions,andinternalcreditratingsaresomeofthecriticalassignments impliedincreditadministrationfunctions.
Loanrecovery seeks,regularizes,andadoptsmeasurestoensurethatabank alwayshasefficientprocessesforloanworkouts,remediationofnonperforming loans,andtherecoveryofclassifiedorlostriskassets.Eachofthesefunctions inPillar3helpstoimprovethequalityofandreturnsonthecreditportfolio.
Theapproachtoandmethodologyfordealingwithissuesimpliedinthe Pillarshavewitnesseddramaticchangesovertime.Yet,thegoalofcreditrisk controlremainsimmutable.ThegoalinquestionisaddressedandlargelyfulfilledinthecontentofandexpatiationonPillar1.
Aneffectiveprocessinthepursuitofriskidentification,riskanalysis,andrisk mitigation allofwhichPillar1subsumes holdsthekeytosuccessfullending. Strivingtoperfecttheselendingcriteriahasbeen,andwillcontinuetobe,the superstructureonwhichcreditriskmanagementhinges.Onereasonisthatit definesamethodologythathasbecomecommonplace.Anotherreasonisthatit buildsonthehallowedlendingprinciplescommonlyreferredtoasthefiveCs. Thethirdreasonisthattheso-calledfiveCsoflendingalsounderliecreditrisk managementinpracticalterms.AfourthreasonisthatPillars2and3aresimply
Preface xxiii
postmortemsonPillar1.Besides,Pillar1informsactionslendingofficerstakein pursuitofPillars2and3.Yetinordertobuildaqualitylendingportfolio,the threePillarsshouldfunctioninindependentcapacitieswithinthedictatesof checks-and-balancesrules.
However,workingrelationshipsamongthePillarsarescarcelywellorderedin banksinemergingeconomies,thusleavingroomforavoidablelapses.Indrawing theanalogybetweenapresidentialdemocracyandcreditriskcontrolinbanking,I makeacasefortheinstitutionalizationofoversightoflendingasameansof attainingqualityportfoliosinemergingeconomies.
DEFININGTHEPROBLEM
Itisbadenoughthatregulatorstry butalltonoavail totametheexcessive riskappetitesofbanks.Itisworsethatrecklesslendingpersistsinbanksand keepsthefinancialsystemontheedgeofaprecipice.Sadly,globalfinancial crisesinrecenthistoryoriginatedininefficientlendingandfailedriskmanagement.Moreworryingyetisthatthisquirkhasbecomearecurringphenomenon.Mostdisturbingisthattheproblemisunlikelytogivewaywithouta seriousoverhaulofthemethodologyforriskmanagement.Ironically,thepursuit ofthisgoal afoolproofcreditriskmanagementmethodology hasbeenan absolutenightmareforbankmanagementandregulators.Today,manyseecredit riskasahotbedofrecklessbanking.Morethaneverbefore,theattentionof bankingandfinanceexpertsaroundtheworldisnowfocusedoncreditrisk.The BaselCommitteehasledthiscausewithBaselI(1988),BaselII(2004),and BaselIII(2010).WhileBaselIdealtexclusivelywithcreditrisk tounderscore itsimportance BaselIIandBaselIIIadvancedthecauseevenastheyalso focusedonmarket,operational,andliquidityrisks.Regrettably,crisesinthe globalfinancialsystemhaveneverbeenwellordered.
Thefinancialcrisesofthe1970sand1980swerenotanticipated,aswasalso thecaseforthoseofthe1990s.Theycaughtregulatorsandbankmanagement completelyunawares.SomeoftheemergingmarketsandregionsthatexperiencedcrisesincludedLatinAmerica(1980s),Mexico(1994 1995),andAsia (1997 1998).Ineachcase,thecrisisleftbitterlessonsofexperienceforgovernment,economists,andfinancialexperts,especiallybankmanagements.The bankingsystemsintheemergingmarketsofAfrica,Europe,andtheMiddleEast havesufferedsimilarfatesatonetimeortheother.Inmostcases,thecrises becameacontagionandhadpracticalandcompellinglessons.Butforthelarge stockofnonperformingriskassetswithinthesebankingsystemportfolios,the tempoofthecrisesandmagnitudeofnationaleconomiclossesincurredbythe countrieswouldhavebeenmanageable.Unfortunately,anunmanageablevolumeofnonperformingriskassetstendstocauseliquiditypressureforbanksand makethemvulnerabletosuchsystemiccrises.Thefinancialcrisisof2007 2009 wasthemostembarrassingandlingeredonfortoolong.Themainculprit wheneverfinancialcrisisrockedtheindustry,especiallyinthe2007 2009 case,wasusuallycreditrisk.Oneachoccasionofcrisis,regulatorsfoundways
torationalizeaflawedsupervisoryframeworkinthewakeofacrisis,while bankmanagementprevaricatedrecklesslending.
Thepublictendstodistrustregulatorsandbankmanagementswhen authoritiesmakehollowexcusesforavoidablecrisis.Besides,failuretoanticipatecrisesimpingesonthesoundnessofthefinancialsystem.Often,aswouldbe expectedunderthecircumstances,apostmortemoneachcrisistriggeredsome regulatoryresponse.BaselIaddressedfindingsfromthepostmortemofthe 1970sand1980scrises.Thepostmortemofthe1990scrisesinformedenactment ofBaselII.Inthemannerofitspredecessors,BaselIIIoriginatedinthe2007to 2009financialcrisis.Now,hopesarehighthatBaselAccordswouldaddress observedloopholesinthesupervisionofglobalbanks.Yetweshouldnotaccept thisoptimismuncriticallyorasagiven.SuccessoftheAccordsdependsonthe ingenuitythatregulatorsbringtobankingsupervision.Whatisneededforthe futureisamoreandcontinuingproactiveapproachtocreditrisk.Withsucha disposition,theauthoritiesandbankmanagementwouldcatchontocreditrisk andbeabletoforestallglobalfinancialcrises.Itwouldalsohelptotemper financialcriseswhentheycannotbeavoided.
REINVENTINGCREDITRISKCONTROL
Theneedtoreinventcreditriskcontrolinemergingeconomiesderivesfrom observedflaws,highlightedthroughoutthisbook,thatnegateinternationalbest practices.Butitisalsofoundedontheneedtostrengthenthecreditprocess, institutionalizetheriskcontrolculture,andimprovetheconductofbanklending inemergingeconomies.Theserequirecompleteoverhaulofthecurrentmethodologyforcreditriskcontrol.Acriticalissueishowbesttodevolvecredit authorityandresponsibilitytolendingofficersandtoenforceaccountabilityfor recklesslending.Implicitinthisissueisthefactthattheinternalcreditprocess remainsameltingpot.Throughoutthebook,Idevelopananalyticalframework thatexplainsthefoundationoftheproblemandhowtoreinventthecreditprocess.Irelatetheproblemtoflawedriskcontrolandhighlightlessonsandfindings thatimpingeonthelendingfunction.
STRUCTUREOFTHEBOOK
Thisbookisapracticaltextformanagingbanklendingandcreditriskin emergingeconomies.Itisenrichedwith casestudiesandanalyses,aswellas empiricalexamplesandillustrations.Itequipsbankers,depositinsurers, analysts,academics,andstudentswithanunderstandingoftheworkingsand outcomesofriskmanagementinbank lending.Thebookprofilescontemporarycreditriskcrises.Thesedefinetheproblemthattakescenterstageinthe book.Diagnosingcreditriskasthecankeroffinancialcrisisinthebanking system,itchallengesmanagementofcreditriskinbanksinemergingeconomies.Usingtheframeworkofvolatilema rkets,itdiscussestheoreticaland practicalfoundationsoftheproblemwithimplicationsforbankmanagement.
Thenitintroducesthewaysthatriskaffectscreditanalysisanddecisions.In doingso,itdiscusseshowcreditriskshouldbecorrectlyanticipated,andits impactmitigated,withinaframeworkof soundcreditcultureandprocessesin linewiththeBaselAccords.Thebooki sdividedintofourparts,comprising 10sectionsand38chapters.Eachchapterfeaturesanoverviewthatintroduces thesubjectofthechapter,itslearningfocus,anditsoutcomes.Chapters includereviewquestions.
TARGETAUDIENCE
Thebooktargetsbankers,depositinsurers,analysts,academics,andstudents in orinterestedin bankinginemergingeconomies.Itsolvesfivecritical problemsforthetargetaudience.Theproblemsrelateto:
l Howtoattaindesiredassetandportfolioqualitythroughefficientlending andcreditriskmanagementinhigh-risk-proneemergingeconomies
l Acravingforasimplestructure,devoidofcomplexmodels,forcreating, assessing,andmanagingcreditandportfoliorisksinemergingeconomies
l Thedearthofpracticalbooksthatspecificallyguidebankersthroughthe analysisandmanagementofthepeculiarcreditrisksofcounterpartiesin emergingeconomies
l Confusingcreditriskincidence,dynamics,andmanagementrequirements thatimpactanddetermineportfolioqualityandreturnsinemergingeconomies
l TechnicalityofBaselAccordsandtherigorsoftheirpracticalapplications inrisk-basedsupervisionofdepositmoneybanks(DMBs)inemerging economies.
CRITICALFUNCTIONS
Thisbookfulfillsnumerousneedsforitstargetaudience.Itsmainfunctionscan besummarizedinunderstandingthatit:
l Furnishesastructureforcreating,assessing,andmanagingbanklending andcreditportfoliorisks,withaviewtooptimizingriskassetsqualityand portfolioreturnsinemergingeconomies
l DistillstheBaselAccordsintoanontechnicalguidetomanagingcredit riskandbuildingriskassetsquality,andindoingsodiscussestheimplicationsandapplicabilityoftheAccordstotherisk-basedsupervisionof depositmoneybanks(DMBs)inemergingeconomies
l Providesbankers,depositinsurers,analysts,academics,andstudentswitha practicalunderstandingofcreditriskincidence,dynamics,andmanagementrequirementstunedintotheneedforoptimumassetportfoliosand returnsinemergingeconomies.
Acknowledgments
Iwasencouragedinwritingthisbookbybankerendorsements.Praiseformy bookskeepspouringinfromWestAfricaandbeyond.IndeedIamhumbledby kindwordsofencouragementIreceivefrombankerstoonumerousto acknowledgeindividuallyhere.Manyofthesebankersareamongover2000 connectionsIhaveontheLinkedInnetwork.SomearemyfriendsonFacebook,whileothersarefollowingmeonTwitter.Ilovethemandtreasuretheir interestinmeandmywriting.Iwillcertainlycontinuetodothemproud.
IoweaspecialdebtofgratitudetomymarketingpartnersinNigeria, Ghana,SierraLeone,andotherpartsofWestAfrica.Myspecialthanksgoto ChrisObikara(Nigeria),BenedictFrimpong(Ghana),GodfredKofiOfori (Ghana),andBeatriceAnderson(SierraLeone)fortheirinvaluablesupport. ThesamegoesforcustomersinAmerica,Europe,andelsewherewho patronize Amazon.com formybooks.Theirapprovalwasoneofthefactors thatspurredmetowritethisbook.ImustsayhowunreservedlygratefulIam toCreateSpace,anAmazoncompany.It’sagoodlaunchpadfromwhichI benefitedimmensely.
IhavecomeacrossincrediblykindprofessionalsinthecourseofpromotingmyworksinNigeria.Icannotlistallofthemintheseacknowledgments.However,itisdifficultformenottomentionafewofthemwhoserare kindnesstouchedmeinaspecialway:
l AbiolaBabajide,PhD(Mrs.) HOD,BankingandFinance,Covenant University,Nigeria
l Adigun UniversityLibrarian,CrawfordUniversity,Igbesa,Nigeria
l ChristopherNkiko,PhD Librarian,CovenantUniversity,Ota,Nigeria
l ClementOmagbemi Librarian,BellsUniversityofTechnology,Ota, Nigeria
l EmekaEzike(Professor) DepartmentofFinance,UniversityofLagos
l EmmanuelAdebayo,PhD UniversityLibrarian,Redeemer’sUniversity, Nigeria
l EvansWoherem,PhD FormerED,BankingOperations,UnityBank, Nigeria
l GraceOkoro,Professor(Mrs.) Librarian,BabcockUniversity,IlishanRemo,Nigeria
l ImoAkpan AcquisitionsSection,UniversityLibrary,UniversityofLagos
xxviii Acknowledgments
l OcheiIkpefan,PhD SeniorLecturer,BankingandFinance,Covenant University,Nigeria
l OlukemiFadehan,PhD(Mrs.) UniversityLibrarian,UniversityofLagos
l KuburatOluwakemiTowolawi(Mrs.) ResourcesDevelopmentLibrarian, TheBellsUniversityofTechnology,Nigeria
l PromiseIlo(Mrs.) AcquisitionsLibrarian,CovenantUniversity,Ota, Nigeria
l SamOyovbaire,EmeritusProfessor FormerNigeriaMinisterof Information
l StellaAnasi,PhD(Mrs.) AcquisitionsLibrarian,UniversityofLagos, Akoka-Yaba,Lagos
l ’UjuOgubunka,PhD FormerRegistrar,CharteredInstituteofBankersof Nigeria
Iaminfinitelygratefultomydearfriends:YinkaSanni Managing Director&ChiefExecutiveOfficer,StanbicIBTCBankLimited,Nigeria;Sam Osuala ChiefInvestmentOfficer,AongCapitalLimited;MatthewUponi ProcurementManageratShellCanadaEnergy;ChikaOkoli ChiefExecutive Officer,WABECO(Nigeria)Limited;andHonGCOgenyi Commissioner forHumanCapitalDevelopmentandPovertyReduction,EnuguState,Nigeria. Theyaretrustworthy,realgems,andtruefriendsinneed.
IowethegreatestdebtofgratitudetoScottJ.Bentley(PhD),Senior AcquisitionsEditoratElsevierInc,forshowinginterestinmybookproject, forbelievinginmywriting,andforproposingandofferingmetheElsevier contract.Hepainstakinglyguidedmethroughwritingagoodprospectusfor theproject.Scottwasyetkindenoughtohelpmetoputpeerreviewers’ opinionsthrough,andwiththefollow-through.Itwashestillwhoguidedme throughtheprocessesleadingtothecontractitself.Ireallycannotthankhim enough.He’sawesome!
IamequallyindebtedtoSusanIkeda,EditorialProjectManagerat Elsevier,whoworkedtirelesslywithmeonthechaptermanuscriptsand relateddocumentstowardproductionofthisbook.Susanwaseverenthusiastic abouttheproject.Sheisareallygoodmotivator.Hersubtleencouragement boostedmymoraletofinishwritingthebookearlierthanoriginallyscheduled. MyheartfeltthanksgotoDebbieClark,thebook’sProjectProduction ManageratElsevier,towhomIremaingratefulandimmeasurablyindebted. Debbiedemonstratedrarecareincoordinatingthebook’scopyediting,typesetting,proofreading,andsundryproductionwork.Hergreatattentiontodetail isunparalleled.Besides,sheisexceptionallyconsiderate.Shealwaysaskedfor howtofitworkshehadformeintomybusyschedule.
IexpressmyunreservedappreciationforallofCindyMinor’shardwork, inmuchthesamevein.Cindyhandlesthemarketingaspectsofbookprojects. Needlesstosay,thesuccessofabookhasalottodowithmarketing,beyond thequalityofwritingandcontents.Inthissense,thebuckstopswithher.
Acknowledgments xxix
Iacknowledgetheimmeasurablesupportofmymotherandchildren. Myheartleapsknowingtheystandbymealways.Theyaremybelovedever. Idedicatethisbooktothem.Ultimately,Isay“glorytoGod.”Needlesstosay, HeisamercifulGod,theAlmighty,whomakestheimpossiblepossibleinHis infinitemercies.
QuestionsintheMaking ofEmergingEconomies andMarkets
ChapterOutline
LearningFocusandOutcomes5 SettingtheScene6
RiskinCountriesEvolvinginto EmergingEconomies8 EthnicityFueledbyAlien PoliticalModels9
MilitantandTerroristActivities9
MilitaryIncursionintoPolitics10 PoliticizationofCivilService11
Background AHistorical Perspective15
Developed,Developing,and EmergingEconomies17 LessonsoftheAsianTiger,BRICS, andTigerEconomies18 StrictlyDefiningEmerging Economies19 ComparingEmergingEconomies withEmergingMarkets22 QuestionsforDiscussionand Review23
LEARNINGFOCUSANDOUTCOMES
Thepost WorldWarIIerawitnessedalong-runningdebateoverthemeaning andconnotationofeconomicdevelopment.Thedebatecontinuedintothe 1970sandremainedunsettledattheturnofthecentury.Thecontending issueswereunderlainbythedevelopmentcrisisofthatepoch,ostensibly reflectingalackofconsensusonanapproachtoeconomicdevelopment analysis.Writersonthesubject,mostofwhomwererenownedeconomists, didnottakesides thusfosteringthedebate.
Thecontentiousissuesborderedonseemingangeratthefrustratinglife thatwasthelotofordinarypeopleintheso-called“ThirdWorld”countries. Economistsevolvedconstructs,someofwhichhadconflictingconnotations,to pictureanddepictthissituation.Theydidsoinlargelycontrastingways, apparentlyinsearchofappropriatecharacterizationofthedevelopmentphenomenon.Unfortunately,thequestforconsensusremainedelusive.Thusthe debateragedon.
InthischapterIreviewthehistoricalcontextofthedebate.ThenI demonstratehowthedebateinformedcurrentthinkingonthemeaningand innerworkingsofdevelopment.Itakeastandonthequestionofeconomic development,onethatclarifiesthecontextofthisbook.Idefineemerging economieswithinthebroadercontextofsocialchange.Theobjectiveindoing soistoappreciatetheintricaciesofdoingbusinessinemergingeconomies. Iexploretheterm“market”asappliedineconomicanalysistoestablish whetherandhowitinformstheconceptofemergingmarkets.Indoingso, Iinvestigatewhetheremergingmarketsandemergingeconomiesare synonymous andiftheyarenot,howtheyaredifferent.Idrawconclusions basedontheindustrializingexperiencesoftheBRICS,AsianTiger,andTiger economies.Thereaderwilllearnabout:
l Conceptsusedbyeconomiststodenotelevelsofdevelopmentattainedby differentcountriesandregionsoftheworld
l Issuesinthehistoricalcontextofthedebateoverthemeaningandapplicationsofeconomicdevelopmentconstructs
l Howthedebatehasinfluencedcurrentthinkingon,andunderstandingof, theconceptandinnerworkingsofeconomicdevelopment
l Whatconstitutes“development”inpracticaltermsbasedonevidenceof theplightofordinarypeopleinemergingeconomies
l Thedefinitionsandmeaningsof,aswellasdifferencesandrelationships between,emergingeconomiesandemergingmarkets
l Howemergingeconomies,emergingmarkets,andemerging-market economiesarestrictlydefinedinthecontextofthisbook
SETTINGTHESCENE
ServiceBankLimitedhad170branchesnationwide,ofwhichtheLagosregionboastedmorethanhalf.1 WithitsheadquartersinVictoriaIsland,Lagos, thebankheldaregularmonthlyperformancereview(MPR)meetingonthe lastworkdayofeachmonth.Allofthebank’sbranchmanagersreported promptlyforthemeeting.TheEDsandheadsofthebusinessandoperations divisionsalsoattendedthemeeting.Usuallythebank’sMDpresidedovereach MPRmeeting,ostensiblytounderscoreitsimportance.Inmostcases,thefate thatbefellbranchmanagerswhowerefiredoriginatedinthefalloutofMPR meetings.That’sthereasontheMPRoftenpanickedbranchmanagerswho wereunpreparedforthedemandsitmadeonthem.
Besidesfinancialperformance,oneofthethornyissuesthatalwaystopped theagendafortheMPRmeetingwasthequalityoftherisk-assetsportfolio.
1.AlthoughthisstoryissetinLagos,Nigeria,thenameofthebankandthoseoftheindividualsin thestoryarepurelyimaginaryandforillustrationpurposesonly.Theydonotrelatetoany knownorunknownbankorpersonsinNigeriaorelsewhere.
Oftenareviewofcriticizedriskassetsbecamethesubjectofheateddebate duringthemeeting.Onoccasion,tempersflaredduringthemeetings.The bearingofsomebranchmanagersbetrayedtheircharacterandemotions.This wasusuallyevidentintheirfranticeffortstofreethemselvesfromchargesof wrigglingoutoftheirresponsibilities.
OneparticularincidentduringanMPRmeetingaptlycapturedthemoodof theparticipants.ItwouldseemthattheMDwasinafoulmoodthatday.He shoutedatbranchmanagerswhoeitherreportedlossesormadehugeprovisionsontheirlendingportfolios.Heconfrontedthemanagersaboutthepoor performanceandwarnedthathewouldnothesitatetofirethemiftheir branchesfailedtoimprove.Foramoment,themanagerswerecompletely takenabackbyhisunkindremarks.Adeafeningsilenceensued.
Oneofthemanagers,Steve,summonedcourageandfoundhisvoice tryingtoexplainhispeculiarsituation.
“Sir,Iagreewithyourobservations.”Hisvoicetrembled.“Iwilldomy bestforthebank.Ishallendeavortomeetperformancetargetsassignedto me,”hepromised.“ButIfaceapeculiarsituationintheIslandEstatebranch, whichItookoverfromtheformermanagerthreeweeksago.Alotof things especiallylendingdecisions werewrongwiththebranchfromits past.Letuslookbackatwherethisbranchiscomingfrom.Hereisabranch thathashadfourmanagersbeforemeinlessthanoneyear. ”
“Stop,Steve!”theMDcutinonhim.“Weknowthathistorytoowell,”he ridiculed.“Itisrashofyoutowanttodistractusbydwellingonthepast,”he lashedoutathim.“Don’teverlookback!”hewarnedsternly,staringathim. “Ifyoulookback,youturnintosalt,”heintimidated.
Hepausedforamoment,glancedathiswatch,andleanedovertowhisper somethingtotheEDinchargeoftheLagosbranches.Alleyeswererivetedon him.
Thenheresumedhisdeeplyoffensiveremarks notminding,apparently, whetherthemanagersthoughtbadlyofhim.“Ourbankwillbeindirestraitsif wehavemanymanagerslikeyou,Steve.Youandothersinthesameboathad bettersettledowntoseriousworkandstoppassingthebuck.Makesureyou arebetterprepared withfactsandfiguresoftheperformanceofyour branches forthenextMPRmeeting.”
Attherootofthepoorperformanceofsomebrancheswascreditriskcrisis. Manybrancheshadlargeholdingsofnonperformingloansintheirportfolios. Thus,thesebranchesreportedlossesevenastheirmanagersdidtheirutmostto makehandsomeprofits.Thelossesmainlyresultedfromtheapplicationofspecificandgeneralloanlossprovisionstotheearningsofthebranches.Thisinternal financialreportingprocedure onethatmainlyservedMPRpurposes had demoralizingeffectsonotherwisehard-workingmanagers.
LikeSteve,themostfrustratedmanagers andtherewerequiteanumber ofthem werethosewhoinheritedalargenumberofcriticizedriskassetsand whosebranchesweremadetobearthebruntoftheirassociatedloanloss
provisions.Thefearandeffectsofbadloansweresooverwhelmingthatsome branchmanagersstartedtinkeringwiththeirgameplans.Inmostcases,they realignedtheirbalancesheetswithaviewtooptimizingandretainingearnings.Indoingso,manyoptedtoplayitsafe focusingontheliabilitiesrather thanassetssideofthebalancesheet.
Playingtheirbudgetsthisway,themanagerswereassuredoflowto moderate,butquality,earnings devoidofloanlossprovisions.Butnotall branchmanagerswerecowedintotinkeringwiththeirbusinessstrategies. Ratherthandothat,theysetabouthoningtheirskills.
Meanwhile,StevemetanddiscussedthefatethatbefellhimattheMPR meetingwithsomeofhiscounterpartsfromotherbanksthefollowingday. TheyweresurprisedattheMD’sverbalattacksonStevedespitehis commitmenttoturningaroundhisbadlyperformingbranch.
“Wearealldoomedtofailure,”oneofthemanagerssaidinanger.“Can’t youunderstand?”hequeried,gazingintospace.“Weoperateinadeveloping economy,”hecontinued,becomingmoreforceful.“I’msorry,butthatisour baneandthetruth,”hesaidbluntly.Thenheposedthebigquestion,“Howon earthcananemployersohumiliatesomeoneofamanager’sstanding?That can’tbewhathappensinthedevelopedworld,”heconcludedsadly.
Theforegoingviewsmirrortheconflictingconceptions,misconceptions, andenduringdebateonthecontentandinnerworkingsofdevelopment.The questioniswhenwouldacountrybesaidtobedeveloped,underdeveloped, lessdeveloped,developing,poor,backward,orintheThirdWorld?Under whatcircumstancesisitappropriatetodescribeanationasanemerging economyoremergingmarket?Thesearerealquestions.Thischapterexplores thequestionsinawaythatsetsthestagefortheentirebook.First,areviewof thecountryriskofthedevelopingeconomiestowhichamanagerinthestory abovealludedispertinent.Followingthatisacasestudyofcreditcardlending initsstillrudimentaryforminemergingeconomies.
RISKINCOUNTRIESEVOLVINGINTOEMERGING ECONOMIES
Usuallythenotionofcountryriskisthatinvestorsstandthechanceofdiminutionoroutrightlossofwealthinariskycountry.Riskinthissensereferstoa myriadoffactorsthatmayravagethevalueofassetsaninvestorhasina countrydirectly,orthroughastockexchangeorotherregulatedmarket.Besidesthediminutionofassetvalue,lossesresultingfromcountryriskoften reflectanerosionofoperatingprofit.Investorsarescaredtocommitfundsto projectsincountriesthathavehighriskratings,ostensiblyinstrictdisplayof economicrationality.Ofcourse,noonewantstobeexposedtothepotential lossofhard-earnedwealth.Whatfactorsconditiontheperceptionofriskin countriesevolvingintoemergingeconomies?Iprovidetheanswertothis questionusingtheAfricanregionasthesetting.
Fourmainfactorshavehistoricallycontributedsignificantlytoenduring countryriskintheAfricanregion.Ethnicityfueledbyalienpoliticalmodelsis theforemostfactor.Thenthereistheissueofmilitantandterroristactivities. Militaryincursionintopoliticsisalsoacontributoryfactor,whilepoliticizationofthecivilservicecapsthefactors.Thesefactorsprecipitatesundryinstabilitiesinthesystem,whichadverselyaffectforeigninvestment,local business,andindustry.Thesamefactorsholdswaywhethertheproblemsat issueareanalyzedfromtheperspectivesofsovereignriskoreconomicand transferrisks.Forexample,itcouldbearguedthatthevexatiousissueof corruptioninemergingAfricaneconomiesisrootedinmilitaryincursioninto politicsandthepoliticizationofcivilservice,amongotherfactors.
EthnicityFueledbyAlienPoliticalModels
DemocratizationofpoliticsinAfricahasproventobeanarduoustaskasthe countrieshavebungleditspractice.Westerndemocraticnormswerealiento Africa’spoliticalculture.Thehistoricalclaimtopoliticalpowerbycertain ethnicgroupsinsomeofthecountriesstilllingersincontradictiontomodern democraticvalues.Inmanystates,ithasnotbeeneasytosubstitutemodern democracyforthetraditionalhereditarypracticeforleadershipchanges.In principle,thecountriesacceptedthenewdemocraticconstitutionsonwhich theexitsofcolonialrulerswerepredicated.Butinpractice,theleadersofthese countrieswerestronglyinclinedtoupholdtheirvariousethnictraditions.The resultantstrife,internaldisorder,andcivilwarssoonengulfedonecountry afteranother.
ThissituationcontinuestotakeaheavytollonbankinginAfrica’s emergingmarkets,especiallyinthelendingsphere.ThecaseofAfrican DevelopmentBank(AfDB)clearlyillustrateshowpoliticalinstability adverselyaffectsbankingoperations.TheBankhadtorelocatefromitsstatutoryheadquartersinAbidjantoTunisfollowingthecivilwarinCote d’Ivoire.ItoperatedfromTunisfor10yearsbeforereturningitsheadquarters operationsbacktoAbidjanin2014afterpeaceandorderwererestored.Of course,thecrisisaffectedtheBank’sfundingofprojectsinthatandcountries similarlyaffectedbyeithercivilwarorotherpoliticalstrife.
MilitantandTerroristActivities
AtypicalexampleofanunfavorableconditionforbanklendinginAfrica’s emergingeconomiesistheprevalenceofpoliticalupheaval.Letmeillustrate this andthereforetheimpactofmilitancyandactivitiesofterroristson lendingdecisions withreferencetohappeningsinNigeria’sNigerDeltaand North-Easternregions,andinsomeNorthernAfricanandMiddleEastern countries,intherecentpast.Disturbancesthatstartedasstreetprotests demandingpoliticalreformsanddemocraticgovernanceinsomeNorthern
Africancountriessoonsnowballedintogravepoliticalupheaval.Between JanuaryandSeptember2011,wildprotestsbyaggrievedcitizenscrippled economicactivityandtoppledthegovernmentsinTunisia,Egypt,andLibya, inthatorder.InIran,governmentforcesruthlesslycrushedsimilarprotests, whileprotestsinSyriaclaimedthousandsoflives.
InthecaseofNigeria,amutinyofmilitantyouthsintheNigerDeltaregion tooktoarmstopressforreformsinthecountry’soilsectorandthedevelopment oftheoil-richNigerDelta,andavoiceinthedistributionofoilrevenue.While allofthiswashappening,economicactivitybecameparalyzed.Forinstance, someoilexplorationandminingcompaniesinthetroubledregionclosedor relocatedtheirmajoroperationsinthewakeofthecrisis.Amoreserious unfavorableconditionforbanklendingwastheemergenceofterrorismin Nigeria’sNorth-Easternregion.Terroristactivitiesintheregion,andthefederal government’sresponsetotheattendantsecuritycrisis,cametotheforein2012. Withmountinginsecurityoflivesandproperty,businessesinstatesthathad becomehotbedsofterrorismcouldnolongerfunctioneffectively.Someeven relocatedtheiroperationsjusttosavetheirinvestmentsfromwanton destruction.
Itseemsinconceivablethatabankwouldwanttolendmoneytoindividualsorcompaniesdoingbusinessesintheseturbulentzones.Ratherthan lend,bankswoulddemandthepayingdownoroutrightrepaymentofexisting creditfacilities.Thisisoneoftherealitiesofbanklendingandcreditrisk managementinAfrica’semergingeconomies.
MilitaryIncursionintoPolitics
Politicalinstabilitywasaccentuatedbymilitaryinterventionintothepolitics andgovernanceofthecountries.Likeawildbushfire,thetrappingofpolitical powerbymilitaryofficerssweptAfrica.In1963,themilitarystruckandtook overpowerinTogo.In1967,historyrepeateditselfinthatcountrywhena juntaoverthrewthegovernment.In1965,Algeria,Dahomey,andCongo (Kinshasa),inlikemanner,experiencedtheshockofmilitarycoupsthat sackedtheirdemocraticallyelectedcivilianregimes.ItwastheturnofUpper Volta,CentralAfricanRepublic,Nigeria,andGhanain1966whentheillwind ofmilitarycoupd’e ´ tatblewthroughthemandswepttheirelectedcivilian governmentsoutofoffice.Evenwhilemostofthesecountriesexperienced severalfreshcoups,counter-coups,andabortivecoupsd’e ´ tat,additional countriesbecameinfestedwiththedisease.
Authoritariangovernmentlackinginaccountabilityengenderedmilitary rule.Thissituationisnotpropitiousforeconomicdevelopment.Itisboth wastefulandirresponsible.TheeconomicmiserytowhichAfricanstateshave beensubjectedinthepostcolonialperiodcanlargelybeexplainedintermsof faileddemocraticprocesses.Thereasonsforandobjectivesofmilitaryrulein Africaareindeeddiverse.Thusitwouldbefutiletostartdifferentiatingthem
hereonthebasisofacountrybycountryanalysis thatisbeyondthescopeof thisbook.However,itmustbeemphasizedthatmilitaryinterventionsinto politicsinAfricaexacerbatedpoliticalinstabilityintheregionandadversely affectedlong-termstate,business,andfinancialsectordevelopment.
PoliticizationofCivilService
TheNigeriancasebest exemplifiespoliticizatio nofcivilservice.Under PresidentBabangida’sregimeduringthelate1980sandearly1990s,politicaldirectorgeneralswereappointedtooverseefederalministries.Career permanentsecretariesweredisplacedaschiefexecutivesoftheministries. Thus,andinotherAfricancountrieswiththesameexperience,thebureaucracylostitshallmark thecapacitytomaintaintheneutralityofcivil servantsirrespectiveofwhichpartyw asinpower.Althoughsuppressionof theoppositionandhijackingofthebu reaucracywereusuallyresistedby somepressuregroups,theaffectedpoliticalleadersmaintainedanuncompromisingposture.Thus,oneoftheenduringcoloniallegacies thecivil service becameaplaythingofpoliticians .Asthepublicservicesarebeing manipulatedtosuitthewhimsandcapricesofpoliticalleaders,mediocrity tendstoreplacequalityperformance.Thishappenstothedetrimentof politicalandeconomicprogress.
CaseStudy1.1
Grapplingwithcreditcardlendinginemergingeconomies OlaMusa’ssecretaryusheredasmartlydressedladyintotheofficeofhisboss,whomthelady hadcometosee.Olawastheowner-managerofYouthFuture(Nigeria) Limited2 abusinessinitiativetoempowertheyouthwithentrepreneurialskills invariousindigenousvocations.
“Goodmorning,Sir,”shegreetedOla,fixinghimwithawarmsmile. “Welcome,andpleasehaveaseat,”respondedOla,smiling.“HowmayIhelp you?heenquired.
“MynameisClara.IworkinmarketingforBlueBank(Nigeria)Limited.I’m heretointroduceourbank’suniqueNaira3 creditcard(NCC)toyou.Itfunctions likeatraditionalMasterCardorVisacard.TheonlydifferenceisthattheNCCis ourbank’sinitiativetoofferitsdiscerningcustomers aselectgroupofhighnet worthindividualslikeyou alocalalternative.TheNCCisavailableinthree variants standard,gold,andplatinumbrands.Thebeautyofthecardisthatit providesyouwithanunsecuredline-of-creditfacilitywithatermoffive years canyoubeatthat?Iwouldproposealimitof N10millionintheplatinum categoryforyou.Tosomeoneofyourstanding,lendingeven N20million unsecuredisn’tabigdeal whatdoyouthink?”shejoked.
“HowcanIusethecard?CanIgetmoneywithittorunmybusiness inthe samewaythatIusemyATMcard?”Olaaskedexcitedly.
“Yes,youcan.Youmay ifyousowish evengetcashoverthecounter. Inthatcase,yousimplyfilloutacashwithdrawalslipandsubmititacrossthe
countertoateller andthecashyouneedisallyours!It’sthatsimple.Also,you canshopinsupermarketsandpaybillswiththecard.Yousimplyswipeyourcard ataPOSmachinewhereyoushop,andyourbillisinstantlypaidonline.Youcan doallthiswithoutahitchprovidedthattransactionsaredenominatedinnairaand conductedinNigeria.YoucanpaymoneyintoyourNCCaccountandwithdraw moneyfromitatanytimewithoutnoticetothebank.Thismeansthatyoucan alwayspaybackandredrawthemoneyyouuseonyourcardatanytime.Inthis way,thecardoperatesasanoverdraftfacility,”Claraexplained.
“Whatofchargesonthefacility?You’venottalkedabouttheinterestratethe bankchargesontheNCC orisitinterest-free?”Olaaskedinquisitively, laughing.
“Likeanoverdraft,interestischargedontheoutstandingbalanceattheprevailingmoneymarketrateplusaone-offfeepayableatthepointofinitial drawdownonthecreditfacility,”answeredClara.
“IsthereanyotherpertinentinformationabouttheNCCthatIshouldknow?” askedOla.
“TheinformationIhavegivenyouisallthatyouneedtoknowaboutthe workingsoftheNCCfacility,”saidClara.
“ImustconfessthatthefeaturesoftheNCCinterestme.HowmayIobtainthe card?”Olaaskedenthusiastically.
Claratoldhimtoapplyforthecardsothatshecouldformallyprocess, recommend,andpresentitforapprovalbythecreditcommittee.Thereafterthe bankwouldissuethecardtohim.
Olaappliedfor N10millionNCCintheplatinumbrandcategoryacoupleof daysafterClaraintroducedtheproducttohim.ClarawashappythathermarketingyieldedfruitioninthenewNCCaccountshewasabouttoopenforOla Musa.SheprocessedOla’sapplicationandsecuredapprovalforhisrequest. Armedwiththeapproval,shetookpersonalguaranteeandstatementofpersonal networthdocumentstoOla.Hewastoexecuteandreturnthedocumentstothe bankastheonlyconditionprecedenttodrawdownontheNCCfacility.
OnceOlafulfilledthecondition,hestartedutilizingtheNCCfacility.Hedid notbothertoshopwiththecard.NeitherdidheconsidertheATMoption.His preferreddrawingoptionwascashwithdrawalover-the-counterinbanking halls perhapsbecauseheusuallywithdrewalargesumofmoneyeverytimehe usedthecard.Ononeoccasion,hewenttocash N500,000onhisNCCfacility. Thecashiertoldhimthatthebalanceinhisaccountwasinsufficienttopaythe amounthewantedtowithdraw.Theavailablebalanceintheaccountwas N36,000.Thisimpliedthattherewasanoutstandingbalanceof N9.9million.He instantlydisputedthebalance butwithoutmakingheadway.
Whenhereturnedtohisoffice,heaskedhisaccountanttoreconcilethe balanceinthebank’srecordswithhisdrawingsontheNCCfacility.The accountantfoundthatatotaldebitof N3.5millionfromtheaccountwasnot accountedforbyOla’sdrawings.ThetotalofhisvariousdrawingsontheNCC facilitywas N6.5million.
ThefollowingdayOlareturnedtothebank thistimetothebranchwherehis NCCaccountwasdomiciled.Hewantedanexplanationforthe N3.5millionin unaccounted-fordebitsfromhisNCCaccount.Againhedidnotmakeheadway.
HehadgonetoseeClarafirst.Clara,whohadstooduptowelcomehim,was hardlydonewithgreetingstohimwhenhecutinonher.
“Yourbankhasmessedmeup!Whatintheworldisgoingon?MyNCC accountisinamess!”hestatedangrily.
“What’stheproblem,Sir?”Claraasked,bewildered.
“IwasatBlueBank’sVictoriaIslandbranchyesterdaytodrawcash,onlytobe informedthatmyNCCaccountwasindebittothetuneofmorethan9.9million naira.AllIhavewithdrawnontheNCCtodateis6.5millionnaira.Idon’tknow wherethehugedifferenceof3.5millionnairacamefrom.I’mheretofindthatout fromyou.”
“MayIapologizetoyouforallthetroublesyourcomplainthascausedyou. Thedifferenceyoutalkedaboutrelatestointerestandotherchargestothe account ”
ShewasstilltalkingwhenOlacutinonher.
“Whatinterest? 3.5millionnairamyfoot!Whatrateofinterestandcharges wouldamounttosomuchmoneyinsoshortaperiod?Asyouknow,Ihaveused theNCCforlessthan10months,”hesaid.“Andbytheway,whyhaven’tIbeen gettingbankstatementsonmyNCCaccount?Whatrateofinterestarewereally talkingabout?Tellme,whatarethecharges andforwhatpurposeswerethey debitedfrommyaccount?”heaskedinquicksuccession.
“TheinterestrateapplicabletotheNCCfacilityis35%perannum.Thereare othercharges includingpenaltychargestowhichtheNCCfacilityissubject apartfroma3%flatfeechargedatdrawdown.IrememberImentionedthattoyou atthetimeIwassellingtheproducttoyou,”Claraexplained.
“Outrageous!Thisisincredible,ludicrous,andinsultingtocustomers’intelligence,”Olashouted,andthenpausedmomentarily.“Calluptheaccountnow andshowmefigures,facts,andfulldetailsofallthechargesandinterestdebited frommyaccountrightfromtheinception,”heordered,fuming.
“I’msorrySir,butIcan’tdoallthatnow.It’snotassimpleasyouthink.The NCCfacilityhasacomplexstructureandconfiguration.It’snotstraightforward. Forinstance,youaresupposedtopaymoneyintotheaccountatleastoncea month.Andthatpaymentmustbemadeonorbeforethe17thdayofthemonth. Failingtodosoresultsina2%flatfeeontheoutstandingbalance.Thereare sundryotherchargesthatIcan’teasilyexplaintoyounow,”Claraexplained.
“Look,I’vehadenoughofthisnonsensefromyou.Allthatyou’vesaidhas madenosensetome.Iwon’ttakethedebits period!”Olasaidashestormedout ofClara’soffice.
Hewenttoseethebranchmanager,whohadbeenobliviousofhispreceding rancorousmeetingwithClara.Withoutwastingtime,heconfrontedthemanager withhiscomplaint.Themanagercalmedhimdown.
“Thechargesandinterestburdenonyouwouldhavebeensubstantially reducedifyouhadoccasionallylodgedmoneyintheaccount.Iadvisethatyou paydownontheoutstandingbalancelestitbecomesstickyandclassifiedasa collectionsaccount,”hecounseled.
“Itdoesn’tseemthatyouunderstoodmyconcern,”retortedOla.“Iwanta printoutofstatementsontheaccountfromitsinception.Clarahastoldmethe interestrate,initialdrawdownfee,andpenaltyratefornondepositactivitythatare appliedtotheaccount.Myaccountantwillcross-checkthosefigureswhenIget
backtotheoffice.Canyouexpatiateontheso-calledsundryothercharges?”Ola queried.
“I’msorry,there’snothingIcandotohelpatthistime.It’sdifficultforme,and thereasonissimple.Allovertheworld,thecreditcardisacomplexfinancial product itembodiesunusualcreditriskandispricedaccordingly.WhatdoI mean?Creditcardsareusuallyveryexpensive andthosewhousethemare awareofthisfact.Sopleasedon’tseetheNCCfacilityasthenormaloverdraftor advance it’snot.Evenso,itissometimesdifficulttoappreciatethatfact.Ifyou like,youcanmeetmycolleaguesine-bankingatourheadoffice theyarethe oneswhocreatedtheproduct.Theyshouldbeinabetterpositiontoanswerall yourquestions,”themanagerexplained.
Olasimplynoddedandthankedthebranchmanagerforhistime.Heleftthe branch,dejected.
Hintsforanalyzingthiscasestudy ClaraconvincedOlaMusatoopenan NCCaccountbydeceptionthatwasrootedintheveiledstructureoftheproduct.TheactualfeaturesoftheNCCwereatvariancewithitsmarketingclaims! WiththeNCC,BlueBankexploitedaprice-insensitivemarket highnetworth individuals(HNI).Thoughthatservedtheearningsneedsofthebank,asa creditproducttheNCCwasnotcustomer-friendly.Curiously,BlueBankstaff, withtheexceptionofsomeproductdevelopmentstaffintheheadoffice,didn’t knowmuchabouttheNCC’sfeatures.Perhapsthiswasdeliberate,inorderto assuremarketacceptanceofthedeceptiveproduct.Bydoingso,thebank wouldhavehopedtoattainitsNCCbudgetgoal.BlueBankpursuedthiscrazy goalattheexpenseofunsuspectingcustomers.Thatgoalalsoinformedthe deceptivemarketingstylethatClaraemployedinopeningOlaMusa’sNCC account.ThegreatestvictimsoftheploywereHNI,especiallythosewhodidn’t keepmeticulousaccountrecords thosewhodidwouldsoondiscovertheploy andresistthepainfulexploitation.
Questionsonthecasestudy
1.(a) Inwhatsensedoespursuitofbudgetgoalsinformthecontemporary approachofbankstothemarketingoffinancialservices?
(b) Whatfactorsunderscoretheviewthatbankstendtodrivelendingalong thelinesofoverambitiousbudgetgoals?
(c) Arethefactorsyouidentifiedin(b)aboveevidentinClara’smarketingof BlueBank’sNairacreditcard(NCC)toOlaMusaaspresentedinthis chapter’scasestudy?
2.(a) Howcouldcompetitionformarketleadershipbasedonstandinginbogus earnings,andbalancesheetgrowthandsize,beinimicaltothequalityof assetportfoliosofbanks?Justifyyouranswerwithreferencetothefateof anytwonamedfailedbanksinNigeria.
(b) CritiquetheaccusationleveledbysomeHNIagainstbanks,that misleadingclaimsanddeceptionareusedinthestructuring,developing, andmarketingofcreditcards.
3.(a) EvaluateBlueBank’sNairacreditcardaspresentedinthischapter’scase studyagainstabackdropofsuspicionthatthebankdesignedtheproduct toexploitunsuspectingcustomers.
(b) IdentifyanddiscusstheploysthatthemarketingstaffofBlueBank adoptedtowincustomersforthebank’sNairacreditcard.
(c) Whatoptionsareopentovictimsofsuchploystoseekandobtainredress withoutnecessarilyhurtingtheirbankingrelationshipwiththebank?
4.(a) WhatwouldyousayinformedthebuildupClaragavetotheNCCinorder togetOlaMusatoopenanNCCaccount?
(b) Howdidthebuildupcontributetothepossiblelossoftheaccountinthe end?
2.TheuseofNigeriaasthesettingforthiscasestudyisforillustrationpurposesonly,inorderto demonstratehowthecasestudyplaysitselfoutinatypicalemergingeconomy.Thenamesusedfor thecompany,bank,andindividualsintheillustrationareimaginaryanddonotrelatetoanyknown orunknowncompany,bank,orpersonsinNigeriaorelsewhere.
3.NairaisthenameofNigeria’snationalcurrencyandrepresentedbythesymbol N
BACKGROUND AHISTORICALPERSPECTIVE
Whatthen drawingontheforegoingexperienceoftheAfricancountries arethecontendingissuesineconomicdevelopment?Inordertoanswerthis question,weshouldappreciatethehistoricalbackgroundofcontemporary thinkingoneconomicdevelopment.Countriesareclassifiedasdeveloped,less developed,developing,underdeveloped,backward,poor,andsoonbasedon someimaginaryeconomicscale.
Duringthecourseofthe1950s 1970s,developmentwaspredominantly gaugedbygainsinpercapitaGNPgrowth.Itwasexpectedthatincreasesin GNPwouldtranslateintojobs,economicopportunities,an dawiderdistributionofsocioeconomicbenefits.Ironi cally,writersandanalystsdidnot shareacommonviewonthecruxofdevelopment.Divergentviewswere derivedfrommisconstructionoftheadverseeconomicconditionsof developingcountriesduringthatperiod.Itwasthoughtthatdevelopment eludedcountriesthathadlowincomepercapita.Underdevelopmentwas measuredbytheratioofcapitaltopopulation.Acountrywasconsideredto beunderdevelopedornotdevelopingifitrecordedaconsistentlydeclining orlowGNPpercapita,especiallyincomp arisonwithitshistoricalstandards orperformance.
Developmentinthe1960sand1970s wasthoughttoreflectintheability ofacountrytoincreaseandsustainitsannualgrossGNP.TheUN,in1961 and1970,dubbedthe1960sand1970sthe“DevelopmentDecades.”It specifiedasixpercentgrowthrateforGNPandusedpercapitarealincomes oftheUnitedStates,Cana da,Australia,andWesternEuropeasbenchmarks ofdevelopment.Thisviewassumedthatanincreaseinpercapitarealincome wasaproxyforariseinthestandardoflivingresultingfromahighratioof incometopopulation,reductioninthepovertylevel,andhighpropensityto save.Themeasureswereshowntobeflawedwhenmostdevelopingcountries
achievedappreciableGDPandpercapitaincomegrowthrateswithout improvingqualityoflife.Thentheemph asisshiftedtoind ustrialization fundedlargelywiththeproceedsfromagr iculturalproduction.Theattendant rapidurbanizationwasachievedattheexpenseofruraldevelopment a situationthatexacerbatedpoverty.Th usthedevelopmentparadigmshifted onceagain,toanimportsubstitutionstrategyaimedatprotectinginfantindustries.Thisapproachcouldnotstandthetestoftime.Itwouldseemthat foregoingpoliciesfailedbecauseit isdifficultinpracticetoaccurately predictwhatwillhappentoconsumptionvis-a ` -vissavingsandpovertylevels asaresultofanincreaseinpercapitarealincome.Thus,thepolicieswere faultedongroundsoffailuretoaddresstheinnermeaningandcontentof development.
Developingcountriessoonbecamedisenchantedwiththemeasurement ofnationalprogressinabsoluteGNPterms.Thedisenchantmentreachedits crescendointhe1970s,forcingtheje ttisoningoftheGNPapproach.Inthe 1980sandbeyond,theevolvingparadigmsofdevelopmentwerepitchedat aradicalsocialchangelevel.Developmenteconomistsstartedconsidering thecontentandqualityofdevelopmentmoreseriously.Meanwhile,most developingcountrieshadplungedintoseriouseconomicstraitsastheir economicproblemshadfestered.Difficultiesingrapplingwithmacroeconomicinstabilitytoppedthemajorconcerns.TheproblemsdemandedsolutionthroughtheadoptionofSAPundertheauspicesoftheIMFand WorldBank.ManydevelopingcountriesadoptedSAPinpursuitofthenew developmentdrive and,aboveall,asapanaceafortheireconomicwoes. TheideaofSAP,whichsweptdevelopingcountriesinthe1980sand1990s, stemmedfromtheeconomicimbalancesthatthecountriesexperienced asaresultofprolongedstructuraldistortionsinkeyeconomicsectors, including:
l Decliningagriculturalproductioninthefaceofrapidlygrowingpopulation
l Balanceofpaymentsdisequilibriacausedmainlybypersistentlyworsening termsoftrade
l Hugeandrisingexternaldebt,theservicingofwhichcouldnotbesustainedwithdwindlingexportreceiptsandforeignreserves
l Inefficientpublicsectorinvestmentreflectedintheproliferationofnonregenerativeprojects
DuringtheSAPera,somewritersstartedtoincludenoneconomicfactorsin theiranalysesoftheproblemsofeconomicdevelopment.Thoughcasual, referencestosocialindicatorssuchasgainsineducation,health,andhousing weretypical.SAPwasastrongandpopularstrategy.Yetitfailedduetopoor coordination,halfheartedimplementation,bureaucraticbottlenecks,and excessivegovernmentintervention.
DEVELOPED,DEVELOPING,ANDEMERGINGECONOMIES
Emergingeconomiesarenotbackwardcountries farfromit.Theyare, rather,developingatafastandcommendablerate.Noraretheyunderdevelopedinthesenseoflackinginmodernindustryorintheabilitytofullyexploit theireconomicpotential.Theyarenotpooreither inmostcases,theyare endowedwithsomenaturalorotherproductiveresources.Yetequating emergingeconomiesto“lessdeveloped”or“developing”economiesbegsthe question ifaneconomyisnotdeveloped,itmustbelessdevelopedor developing.Ideally,backward,underdeveloped,poor,andsuchlikedepict economiesinwhichthepaceofdevelopmentdoesnotmatchupwiththe tempoofemergingeconomies whichareconsideredfaster,oftenspectacular, andmoresuccessfultoo.Inviewoftheirfastpaceofgrowth,emerging economiescommandattentionwithintheworldeconomicsphere.
Developingeconomiesareatthelowerrung,strugglingtomeetbasic developmentdemands forwhich,inmostcases,theyexpectandoften receiveaidfrominternationaldonorsandtradepartners.Featuresofdevelopingeconomiesincludelowincomepercapitaandthepreponderanceof ignorance,disease,andsqualor.Inmostcases,developingeconomiesalso featureenvironmentaldegradation,politicalinstability,threatstoindividual liberty,anddisconnectedsocioculturalvalues.NowadaystheHumanDevelopmentIndex(HDI),whichtakesmanyfactorsintoaccount,isusedasa metrictomeasureacountry’slevelofdevelopment.
DevelopedeconomiesareseenasnationswithhighratesofGDPandreal incomepercapitathatcomplementanenviablequalityoflifefortheircitizens. Thusdevelopmentisaneconomicprocessofimprovingthequalityoflife.Itis achievedwhenthemarchofprogressleadstoadvancesineducation,health,and nutrition,aswellasincreasedemployment,reducedpoverty,moreequityinthe system,andahealthierenvironment.Developmentpermeateseveryaspectof humanandnationallife thevalues,attitudes,institutions,andmaterialwellbeingofthepeople.MostEuropeancountriesmakethelistofdeveloped economies,asdotheUnitedStates,Canada,NewZealand,Australia,andJapan. TheAsianTigersarealsonumberedamongdevelopednations.
Countriestaggedasemergingeconomieshavehighlevelsofdevelopment poweredbyrapidindustrializationandexceptionalratesofgrowthinthreekey economicsectors energy,informationtechnology,andtelecommunications. Inmostcases,agricultureisnotthemainstayoftheireconomies.Theyare seenasindustrializingnationsthathavemovedon,theaforementionedfeaturessettingthemapartfromdevelopingeconomies.However,inordertotest ifacountryisanemergingeconomy,wemustasktherightquestions.Isthe marchofprogressinthecountrysignificantlyimprovingthequalityoflifeof ordinarypeople?Isitbuildingconfidenceintheeconomy?Isitcreating possibilitiesfordoingbusinesswell?Isitattractinglocalandforeign investment?Doesithavesocialchangepossibilities?
