Contrary to the erroneous belief that the current administration in the Central Bank of Nigeria (CBN) lacked the strength and technical-know-how to tackle the challenges being faced by the banking sector in Nigeria, the bank has overtly explained the four pillars that drive the current banking reforms. This was made known at the 15th Seminar for Finance Correspondents and Business Editors which held in Benin City recently. The theme was “The Blueprint for Banking Reforms in Nigeria: Issues, Challenges and Prospect”. The seminar which had the CBN Governor, Sanusi Lamido Sanusi and some of his directors in attendance was well attended by media practitioners.
The Director of Banking Supervision, Samuel Oni stated the four pillars include; enhancing the quality of banks, establishment of financial stability, enabling healthy financial sector evolution and ensuring that the financial sector contributes to the real economy.
In the bid to expatiate on the Four Pillars of Banking Reforms, CBN started by clarifying what went wrong in the banking industry which necessitated the prompt intervention of the apex bank. According to Sanusi “we had a global crisis, although we were not affected by the first round of the crisis, but like all other African countries we were hit by the second round of the crisis. Oil price had gone up to $147 per barrel and suddenly crashes to $40 per barrel and this affected government financing, it affected liquidity in the system.” It therefore means that if Nigeria had other major sources of income apart from oil, the country would probably not have felt the impact of the crash in oil price.
The liquidity problem caused by crash in oil price exposed those banks whose MDs have been engaged in sharp practices for a very long time. The problems that we see in the banks today did not just start, they have been there for several years; “it is possible to run a bad bank for a very long time” Sanusi added. This is possible because, if for instance a bank has a total liability of N500bn and one third of that money disappears through bad loan or theft, it will not have an immediate effect on the bank until there is a crisis, this is because you do not need all the N500bn for the day to day running of a bank, all you need is perhaps between N10bn and N20bn for people that would come every day.
The question now is; why were some of the Nigeria banks affected by this Global Financial Crisis (GFC) while other remained strong? First: some of the banks did not raise capital after consolidation, whereas they claimed to have raised N100bn as capital. Instead, what they did was to turn depositors’ money into capital through all sorts of dubious schemes. For instance, a bank gets a stockbroker to borrow money from somewhere while the bank guarantees the loan for the broker. The broker uses the loan to buy the bank’s shares and after some time, that same bank buys those shares from the broker through a subsidiary. One of the banks did that and in the process purchased 88% of its own Initial Public Offer (IPO), it raised only 12% new money and yet claimed to have raised capital.
Some other banks employed similar tricks thereby taking risks with depositors’ funds. In other words, by employing the above scheme, the bank’s balance sheet is sitting on a huge market risk, because, it has moved depositors’ fund to equity which is then traded in the stock market. If the stock market crashes, that capital is wiped out, and because the capital did not come from shareholders, it is depositors’ money that has been wiped out. For instance, there was a bank that bought its own shares for N22 and then the price crashed to N3, when the difference was calculated, the bank had lost about N140bn (depositors’ money) on the stock market.
The second reason why some of the banks were affected by the GFC is because they had huge level of non-performing loans. One of the banks rescued by the CBN had a loan book of about N900bn and 90% of the loan is non-performing, even with the intervention of Asset Management Corporation of Nigeria (AMCON) there will still be a vacuum of about N500bn, because these were loans without collaterals. N500bn of depositors’ money given away without collateral!
The third reason was the problem of fraud. Some bank MDs registered company names for themselves and using this fictitious company names they approved loans for their own personal use with the intention not to pay back this money, not to talk of paying interest on it; they bought properties in choice locations within and outside Nigeria and they invested in their private businesses. Whenever examiners come to check the bank’s records, they would create commercial paper and sell it to a discount house in order to raise money. The money comes in and the account is in credit, when the examiners say ‘show me your table of loans’, everything will appear normal. When the examiners are gone they pay the money back to the discount house and the bank is in debt again.
The regulator and the operators met to discuss the crisis and thereby find solutions to the problem. Firstly, the CBN reduced liquidity ratio from 40% to 25%, some banks could not meet up with the 25% ratio. Secondly, the cash reserve requirements was reduced, they still had problem. Thirdly, an expanded discount window was opened to allow additional instruments and permit banks to borrow for up to 360 days, some of the banks still could not pay back after 12 months. At this point it became imperative to find out exactly what was going on in the banks. The findings led to all the dramas that has taken place in the past one year: some MDs lost their positions and new ones appointed, the anti graft agencies were invited to investigate the defaulting banks and bailout funds were made available to the banks to save them from total collapse.
In CBN’s effort to resolve the problems in the nation’s economy as a whole, it came up with the Four Pillars of Banking Reforms. The first pillar is aimed at enhancing the quality of banks in Nigeria, better regulations of banks and protection of depositors’ interest. Sanusi said that “where there is a conflict between the interests of depositors and shareholders, I am morally bound to protect the depositors”, in other words “the profit motive of shareholders or the desire of management for a bonus, cannot be achieved at the expense of depositors… shareholders must understand that in the banks, they are not the most important stakeholders, they own only 5% or 10% of the money that the bank is trading with”.
The second pillar is focused at establishment of financial stability. By this, the CBN would champion causes to develop alternative sources of income for the economy rather than depending mainly on income from oil. CBN said they will develop “fiscal policies to reduce oil-related volatility in the system”.
The third pillar has to do with the evolution of an enabling healthy financial sector. Under this pillar, the CBN said it would welcome foreign participation in the sector in order to improve and strengthen the financial system. It would support domestic mergers and acquisitions activities that would create stronger banks. And it will also establish the Asset Management Corporation (AMCON) to help buy toxic banks.
The last pillar focuses on ensuring that the financial sector contributes to the real economy. The CBN is convinced that the future of Nigeria banking industry has to be tied to the future of the real economy. Recently, the CBN disbursed N130bn loan to manufacturers at a fixed rate of 7% interest for various pe
riods, ranging from 7 years to 15 years. This is aimed at creating jobs, increase in productivity as well as set a marker for the way forward. The economy can only be vibrant if problems of manufacturing and agricultural production are fixed.
WE may not but agree with Sanusi’s assertion that the banks cannot go back to taking depositors’ fund and investing them on the currency markets, or on the stock market or even on the commodities market. We have to create an environment in which banks find viability in infrastructural transactions, power transactions, agricultural projects and manufacturing companies that they could gladly invest in them. The financial sector must contribute to the real economy.
Executive Editor, Economic Confidential