Mixed feelings herald dawn of common year end for banks

As the year winds down today, some bank officials yesterday said the mandatory common accounting year end has its advantages and implications, given the recent happenings in the sector.

Already reports from the banks reveal that the inflated figures usually declared as value of total assets would shrink noticeably. A source at the First Bank who pleaded anonymity told NEXT, "You should expect shrinking in the total asset positions of the banks. That has already started to manifest in the industry." The source added, ‘‘Whether or not the banks declare losses, the books would shrink. The same money people kept circulating and adding to their books would no longer be available. We were more than double counting the same money, and this was possible because the banks had different accounting year end. ‘‘

Another banker observed that, "The stock market would run into more trouble. About 60% of the market's All Share Index (ASI) is controlled by banks. Listed securities are mostly banks. With this they would sell down. It means they would release more into the market and then prices would further go down. One thing is certain; the ASI would be further depressed."

Inability to create risks assets

A few of the bankers who spoke said banks would naturally not want to lend at the end of the year because they are constrained to credit, otherwise known as risks assets, adding that this situation has led to liquidity surge in the industry. "If banks are not lending, where is all the money? Banks are keeping some high level of liquidity," the source added.

An unfortunate co-incidence, according to bank officials is that "The banks were made to provide for their non performing loans the same period they were told the common year end is sacrosanct".

Bank officials have continually raised apprehension and fears concerning the mandatory common year end, stating that the not too pleasant books may discourage prospective investors and even leave the banks in more severe positions.

According to an official at Oceanic Bank, "To me, this forecast could be right, based on the current situation and the information that has been projected it might have a negative impact on the industry. It is a good idea but the only problem there is just that at this time, it's not going to work, especially for the institutions that are already challenged, and are still looking for depositors and investors. It might be difficult for some of them to survive. That is just the situation."

Akinbamidele Akintola, a research analyst for Renaissance Capital, a finance firm explained that the outlook for the sector is positive.

"The issue is that after the audit, there have been and would still be serious deposit drives. Already, there have been a lot of aggressive debt recovery and the banks have already made a lot of provisioning for their loans. The more they recover these debts, the more stabilised their outlook is. The year 2010 is a year where we would have long term investors, investors who would be ready to invest without expecting to sell their shares immediately. I think the outlook for the sector is positive, common year end notwithstanding."

Biodun Adegboye, an economist and lecturer in the Department of Economics, Obafemi Awolowo University, Ile Ife, the hardship of the common year-end could be short termed, if well managed. He said, "It would affect the borrowing capacity, the credit creation ability of the banks. They won't have enough funds to throw around. It would affect the liquidity in the economy. What has been happening before is that borrowers could source for funds from banks through interbank market. However, with this, interbank lending would be hampered, to some extent, which would directly and indirectly affect the individual borrower".

He added, "And once borrowing capacity is hampered in an economy, you can't expect investment to thrive, or employment generation. There could also be threats of unemployment and we can expect that the prices of goods and services to be on the rise".

Mr. Adegboye is of the view that, "However, all these challenges are however in the short run.

Once the monetary policy committee creates measures for the access of foreign funds and other necessary things are put in place, in a year or two, we would overcome these challenges."

Soludo's legacy

The common year-end policy was initiated by the erstwhile Central Bank Governor, Chukwuma Soludo in last year, but he was unable to insist on its execution before the expiration of his tenure.

On May 16 2008, the Central Bank had sent a circular on the agreement reached at the Bankers' Committee meeting of January to adopt December 31, 2008 as common accounting year-end for banks and discount houses in the country.

However, on August the 6th the Central Bank issued a circular titled "Circular to all banks and discount houses on cancellation of common accounting year end".

The argument for the new decision was that there was a ‘misplaced perception' that the interest rates trends was linked to the required common year end. "The CBN had at its Monetary Policy Committee meeting of 5th August 2008 further reviewed the policy in the light of the developments in the economy and the misplaced perception that the interest rate trends are linked to the requirement of a common year end and therefore decided that the common year end will no longer be a requirement. Consequently, each bank and discount house is now at liberty to adopt its own accounting year end as it deems appropriate and inform the CBN accordingly."

Each bank's report, when drafted, is expected to at least, pass through each bank's executive committee, the bank's boards, internal auditors, external auditors and approved by the Central Bank before it is made available for public consumption as annual reporting accounts.

Equal podium

The major advantage of the common year end according to bank officials is that the banks are now on equal grounds which would now make assessment of the banks easier, for the regulatory body and investors at large.