Some Nigerian banks have become victims of their own success. This is especially true after the latest bank consolidation exercise by the Central Bank of Nigeria. While it is a bit difficult to explain how a perfectly profitable business like a bank can 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 that experienced by most Nigerian banks after consolidation, can make an organization feel overconfident. Therefore, the management strategy of such companies becomes rigid with a greater emphasis on what worked in the past, thus stifling innovation and reducing flexibility. Ultimately, the organization cannot adequately respond to changes in environmental dynamics until it is too late. This is exactly what the Icarus Paradox concept brings to light.
The very important lesson for corporate managers is to be more cautious at the point of success. For success to rise to a higher level, each current level of success requires more managerial ingenuity, vigilance, and commitment to key performance areas. The truth is that a company can be successful and grow to the point where the growth rate itself becomes unsustainable. At this point, it continues to grow out of proportion until it eventually explodes or drastic action is taken to reduce its size. Either way, you’ll 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 current action by the Central Bank of Nigeria as part of a holistic attempt at damage control. They say prevention is better than cure. What we are witnessing is an attempt to cure an already bad and cancerous disease. In the future, it is important that banking regulation be strengthened so that this type of situation does not go so far. Imagine what N420 billion could do if it were directly invested in the economies of our local communities instead of being used to bail out incompetence and management mistakes. The argument that the multiplier effect of allowing any of Nigeria’s banks to fail can be devastating still needs some empirical testing. After all, this is not the first time banks have faced 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 effects on inflation, excess liquidity, and relative currency devaluation.
Having heard a wide range of different arguments over the past two weeks, a recurring opinion from some obviously unenlightened commentators is that some of the five banks taken over were in perfect health. This view is generally based on the claim that in recent years, some of the banks declared profits and paid dividends. Once again, it is important to state that most trade failures are due to liquidity problems rather than insufficient profitability. When the Central Bank says that no Nigerian bank will be allowed to fail, it simply means that no Nigerian bank will be allowed to fail, which is preparatory to liquidation/administration. It does not mean that any Nigerian bank faces liquidity problems. Whether or not a bank faces liquidity problems depends entirely on the management of each bank. The regulator does not go in unless a lifeline is required.
In short, it is equally vital that all stakeholders bear in mind that recovery from this type of business failure relies heavily on leadership and good corporate governance. It requires a massive injection of long-term capital and some form of contraction. The intervention of the Central Bank of Nigeria bears the hallmarks of a hostile takeover except that it was not done through the stock market. Integration, standardization and restructuring issues will remain paramount, always bearing in mind the banks’ long-term strategic objective.
In conclusion, I would like to close with quotes from the famous book by Robert Greene; The 48 laws of power. In the book, Law 47 is “DON’T GO OVER THE MARK THAT DIRECTED YOU, IN VICTORY, LEARN WHEN TO STOP.” Introducing the literature on Law 47, Robert Greene states that: “The moment of victory is often the moment of greatest danger. In the heat of victory, arrogance and overconfidence can push you over the finish line.” he had set out to do, and by going too far”. away, you make more enemies than you defeat. Don’t let success 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 breaking the above law, it is my opinion that more leaders and managers should beware of such breaking.