DON’T PUT ALL YOUR EGGS IN ONE BASKET

A screaming headline, DISCOs appeal order stopping them from increasing tariff was the trigger for this post.

Electricity Distribution Companies borrowed lots of money from many banks to set up shop, so a story like the above is of utmost concern to the lenders, as the outcome of the court processes impacts the ability of the borrowers to pay, or not, at the right time.

I wrote an article where I asserted that Popular Wisdom Is Often Plain Stupidity.

Obviously, some popular saying have lots of wisdom embedded in them, and “Don’t Put All Your Eggs in One Basket* would appear to be one such.

The above is one of the platitudes that is supposed to guide us in investments.. The idea that it’s good to diversify, have multiple sources of income. My mentor says, If You Have A Single Source Of Income You Could Run Into Trouble. Well, If You Put To Much Of Your Treasures Under A Single Hut, Just Pray There Is No Major Fire.

The diversification expression is used to emphasize the importance of not concentrating all of your resources into one venture. The exhortation is usually attributed to Miguel Cervantes, who wrote “Don Quixote” in 1605, and like many *Wisdom of the Ages”, has stood the test of time.

There is the opposite school of thought that says to “keep all your eggs in one basket and watch that basket keenly”. The problem with this approach is, something can still happen to your basket (and consequently your eggs) despite your best efforts.

The situation that some Nigerian banks find themselves shows the importance of adhering to this age old rule of not concentrating your resources in one honeypot.

Nigerian banks traditionally invests a disproportionate percentage of their funds in areas that give juicy and quick returns. With the precipitous fall in the prices of crude oil worldwide, many banks are literally gasping for air to stay alive. This is evident in the interminable downsizing since the golden goose (oil) caught malaria internationally.

The Treasury Single Account (TSA) implementation of the federal government has dealt a deadly blow to cheap funds that many banks were using in their lending portfolio. Relying heavily on money from government and its agencies in the form of deposits is the opposite side of investing too much in a spot. Relying too much on a single source, like the oil revenue dependency of Nigeria, has also created serious trouble in the financial services sector.

To compound the problem of the banks having too much funds sunk into oil sector, some also lent too much money to the Power Sector, specifically to help the DISCOs and other players in the power sector take positions in this apparently lucrative sector.

We have already witnessed the first victim of this in SkyEBank whose topgun was a big player as a new kid in the power sector, and funneled much of the Bank’s money into this bottomless pit.

Things have not been working as projected, with the real likelihood that the huge sums lent to the power sector players may be difficult (if impossible) to repatriate.

There is something known as the single obligator limit in the financial circles, but I suppose the zeal to maximize income has made the banks basically forget that precautionary rule.

Let us hope that, if the banks who are over exposed survive these trying times, they would have fully learnt the lesson and wisdom of always spreading your investment risks, and avoid putting too much into an oil or power basket, even if the basket is made of cast iron.

 

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