Recent Developments in the Nigerian Banking Sector: A defence of Fair Value Accounting

There have been much debate and outcry over the recent statements of the new Governor of the Central Bank of Nigeria: Sanusi Lamido Sanusi regarding the health of Nigerian banks and the need for full disclosure of asset quality. This new line has prompted a number of hitherto unprecedented write downs by Nigerian Banks in their latest results: Ecobank Nigeria has written off N12 Billion; First Bank - N25 Billion and to the mother of all writedowns: Oceanic Bank - N42 Billion. These write downs have primarily been in their margin and other equity collateralised loan portfolios and are meant to reflect the steep losses witnessed in the Equity Capital Markets over the last 15-18 Months. Many analysts have sought to paint this new found penchant for fair value accounting on the part of the regulator as being ill-advised and a misguided adoption of western standards. I however beg to differ, I believe the dual and complementary emphasis on detailed disclosure and adoption of fair value accounting are two of the best initiatives in the Nigerian Banking Industry.

A bank’s – and indeed any company’s – balance sheet should be a reflection of value and its stated asset valuations should reflect the monetary value that can be obtained as consideration for the sale of such assets (there is no point listing an asset that can only fetch N40 Billion in an arms length sale as being worth N100 Billion in any balance sheet). This principle should apply to banks as well, for example I don’t think a N5 Billion loan - wholly and solely collateralised by equity securities of an equal value - advanced by a bank to a brokerage firm in 2007 is worth the same in 2009 when the basket of underlying securities serving as collateral has declined in value by over 50%. The truth is that the bank will be lucky to get N2 Billion if it recalls the loan by seizing the underlying collateral and selling it off in the market. To then account for this loan at the initial value of N5 Billion - even if a token and often reduced interest is still being paid - is unrealistic at the very best and downright fraudulent at the worst.

Fair value accounting also helps bankers and portfolio managers make the tough decisions necessary for the functioning of markets. Many bankers and portfolio managers will remain reluctant to exit losing investments under a cost or historical value accounting system, since they would not have to book the losses until they actually sell the investments. Fair value accounting helps them out by making decision making more straightforward: they would have to recognise the losses whether or not they sell the securities , so they might as well recoup whatever is left of shareholders’ or investors’ capital. Furthermore, marking down the loan books will make the Asset Management Company being proposed by the CBN more effective, without the writedowns most banks would have been seeking to sell their margin loan books to the Company at historical values.

Although I am aware that Fair Value accounting is not without its drawbacks and that it often results in volatile Balance Sheets, if given a choice between Fair Value and Voodoo accounting, I will choose Fair Value accounting over and over again!

Michael Jackson – Le Roi est mort, vive le Roi!

Anybody for whom the death of Michael Jackson is still news must either be: living under a rock or just waking up from a very deep coma. The news of his death put so much stress on – and sometimes crashed – Google search; Tweeter; numerous SMS platforms and TMZ.com. To say that he was a superstar is to underestimate the scale of his achievements, he was the superstar and it is by him that superstardom will come to be measured and defined. His music transcended race; religion etc and made a mockery of geographic boundaries, he was as accepted in Western Europe as he was in America, Africa and the Far East and he came to be accepted as the first true global icon. I can remember that growing up in a little corner in Nigeria, my elder brother had a full Michael Jackson outfit complete with sequined glove; black loafers and white socks.

He is sure to add – in death - many more record sales to the estimated 750 Million that he was reported to have sold during his lifetime. He went from prodigy to superstar then on to megastar and finally – in the last 2 decades of his life – to Wacko Jacko (the crazy uncle in the attic!). In his five (5) decades on earth he achieved more success and attracted much more controversy to last a couple of lifetimes, a friend of mine described him as a bicentennial man who experienced near universal acclaim and hero worship in the first century of his life and then endured near universal gossiping; ridicule and oftentimes disgust in the final century.

In the sheer significance of his life – whether in fame or infamy – lies the true lessons to be learnt from the death of Michael Jackson, the King of Pop. He lived for only 50 years but he will be remembered for centuries and will join a small group of men who lived relatively short lives but whose memories have endured in the minds of generations to come. His death made me remember a sermon I heard many years ago in Secondary School, the preacher recited the whole of Genesis Chapter 5 (which by the way is a litany of XXX begetting Methuselah, who then begat XXX who in turn begat XXX and so forth). However two things were striking: each of the guys in the passage must have lived for at least 900 years and they were each allocated just one sentence in a Bible that must contain millions of sentences. Then contrast this with another man (Jesus Christ) who lived for only 33 years but had five entire gospels devoted to chronicling his short life and whose death led to the creation of a sect of Judaism whose devotees were named in reference to him: Christians. This “sect” – initially regarded as a body of people on the fringes of society – has become the biggest religion in the world and a source of hope; pride and moral anchor for billions on planet earth.

Alexander the Great also died at 33, yet he had conquered the entire known world before his death and turned a group of bickering city-sates into a nation called: Greece. Joan of Arc died at age 19 but had managed – despite being unschooled in millitary affairs – to lead French armies to victory over an imperious England; and succeeded in uniting her country (in the process earning the epithet: Maid of Heaven). John F. Kennedy died at just 46 but only after he had succeeded: in winning election as President of the United States; in instituting a new policital order (which came to be regarded as the Age of Camelot) and in establishing the concept of the celebrity politician (of which Barack Obama is just the latest incarnation).

There is one inalienable truth: we will all die, but when we die will we just be accorded a sentence and quickly forgotten by men? Or will we leave our indelible footprints on the sands of time? Are we going to have a life of impact or just one preoccupied with subsistence; survival and the accumulation of wealth?. The King is dead but he lives on: in the hearts of his numerous fans; in the pages of the countless tabloids and biographies that will each attempt to put a new spin on his life and death. Above all, he will live on in the minds of generations yet unborn who will download “Billy Jean” and think its the coolest song ever or attempt to borrow a few lines from the lyrics of “Speechless” to convince some teenage girl to go out with him on a first date.