The Icarus Paradox – Why Some Nigerian Banks Failed!

October 3, 2009 by  Filed under: Management 

Some Nigerian banks have become victims of their own success. This is especially true following the last bank consolidation exercise undertaken by the Central Bank of Nigeria. While it is a bit difficult to explain how a perfectly profitable business such as a bank can just fail almost overnight, the challenge of simplifying the explanation will always remain due to the technical nature of the subject.

Success always comes with a price tag. Corporate success, such as what was experienced by most Nigerian banks after the consolidation can make an organization over-confident. Hence, the management strategy of such firms becomes rigid with increased emphasis on what worked in the past thereby stifling innovation and reducing flexibility. Ultimately, the organization is not able to respond properly to changes in environmental dynamics until it becomes too late. This is exactly what the Icarus Paradox concept brings to light.

The very important lesson for corporate managers is to be extra wary at the point of success. For success to be lifted to a higher level, each present level of success demands more managerial ingenuity, vigilance and commitment to the key areas of performance. The truth is that an enterprise can succeed and grow to a point that the growth rate itself becomes unsustainable. At this point it either continues to grow out of proportion until it eventually explodes or a drastic action is taken to shrink it to size. Whichever way it will need life support to stay afloat. This is exactly what has happened to some of the Nigerian banks.

This is why I strongly view the Central Bank of Nigeria’s current action as part of a holistic attempt at damage control. Prevention they say is better than Cure. What we are witnessing is an attempt at curing an already bad and cancerous disease. Going forward, it is important for banking regulation to be strengthened so that this sort of situation is not allowed to go this far. Just imagine what N420 billion could do if directly invested in the economies of our local communities rather than being used to rescue managerial incompetence and mistakes. The argument that the multiplier effect of allowing any of the Nigerian banks to fail may be devastating still needs some empirical proof. After all, this is not the first time banks are facing challenges in Nigeria. However, it is important to note that the bailout itself will have some economic and financial cost to the entire Nigerian economy such as the effects on inflation, excess liquidity and relative currency devaluation.

Having listened to a wide spectrum of differing arguments in the last two weeks, a recurring view by some obviously poorly enlightened commentators is that some of the five banks taken over were perfectly in good health. This view is usually premised on the assertion that in the last few years, some of the banks declared profits and paid dividends. Once again, it is important to state that more business failures result from liquidity challenges rather than lack of sufficient profitability. When the Central Bank says No Nigerian bank will be allowed to fail, it simply means that no Nigerian bank will be allowed to be declared bankrupt which is preparatory to liquidation/receivership. It does not mean that no Nigerian bank will face liquidity challenges. Whether or not a bank faces liquidity problems is entirely up to the management of each bank. The regulator does not come in unless a lifeline is required.

In summary, it is equally vital for all stakeholders to note that recovery from this kind of corporate failure is greatly dependent on leadership and good corporate governance. It requires massive injection of long term capital and some form of contraction. The Central Bank of Nigeria’s intervention has the hallmarks of a hostile takeover with the exception that it was not done through the stock market. Issues of integration, standardization and restructuring shall remain paramount while constantly keeping in view the long term strategic objective of the banks.

In conclusion, I will like to close with quotations from Robert Greene’s famous book; The 48 Laws of Power. In the book, Law 47 is “DO NOT GO PAST THE MARK YOU AIMED FOR, IN VICTORY, LEARN WHEN TO STOP”. While introducing the literature on Law 47, Robert Greene states that: “The moment of victory is often the moment of greatest peril. In the heat of victory, arrogance and overconfidence can push you past the goal you had aimed for, and by going too far, you make more enemies than you defeat. Do not allow success to go to your head. There is no substitute for strategy and careful planning. Set a goal, and when you reach it, stop”.

Since some top bank executives in Nigeria have learned the hard way from the transgression of the above law, it is my view that more leaders and managers beware of such transgression.

Mr. Shafii Ndanusa is a Certified Chartered Accountant (ACCA) and Fellow of the American Academy of Financial Management (FAAFM). He wrote from Abuja. Nigeria. Emails: shafii@accamail.com, shafiie@hotmail.com Mobile:+2348033713910.

Article Source: http://EzineArticles.com/?expert=Shafii_Ndanusa

Shafii Ndanusa - EzineArticles Expert Author

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