How They Killed Nigeria’s Banks

I got fascinated each time I read Mallam Sanusi Lamido Convocation Lecture delivered at the Convocation Square, Bayero University, Kano, on Friday 26 February, 2010 to mark the Annual Convocation Ceremony of the University. Mallam Sanusi, The central bank of Nigeria governor, wouldn’t have given his speech a better title than the “The Nigerian Banking Industry: what went wrong and the way forward”
 
According to the CBN Chief, the original title of his paper was “Transformative Disruption: Relocating the Nigerian Banking Crisis from the Economic to the Social.” Mallam Sanusi Lamido has been described as a radical economist. He is known to be very articulate and down to earth. One thing that distinguishes him is his audacity. He simply calls a spade a spade.
 
Mallam Sanusi said that it would be wrong to say the bank failed but rather they killed the bank. In his address at the event he put it this way: ‘’In previous crises we said some banks had failed a passive and complicit phrase that masked a gross irresponsibility and crass insensitivity. “The bank has failed”. This is somewhat like coming across the corpse of a man whose throat was slit, or whose body is covered with knife wounds or riddled with bullets and saying “the man died.” The man did not die. He was killed. He was murdered. And he did not kill himself. To use the term “death” instead of “murder”, excuses us from the responsibility of finding the killers and bringing them to book.”
 
The recent report by Standards and poor has generated a lot of controversies. While some commentators are saying such report should be discarded others are clamouring for its proper perusal and examination. Investors are beginning to panic over their investments. The question in the lips of Nigerians is that if S&P could foresee Nigeria dilemma, why did the big banks in the U.S. die (remember not fail)? Why is it that their forecast could not have prevented the ‘hit mounted on tax payers’ money in the U.S’? Let me ask S&P, which bank is prone to failure next in the U.S.? Hope we have not forgotten the demise of BASELL II? This rating to some extent may be true but it could largely be to an attempt for “hostile takeover” of our banks.  
 
The Central bank of Nigeria will still, in the future, impose more stringent regulations in the banking sectors especially in the areas of ‘’credit scoring’’. All these regulations will mean more costs to comply, may require more complex reporting system, changes in computer hardware and software, e.t.c. “Higher capital requirements may cut bank profits, but they will help the system withstand the withering losses that led to the credit crisis,’’ says Yalman Onaran.
 
Unethical practices, regulatory failure, poor governance structure, small capital base, macro-economic instability caused by large and sudden capital inflows and weaknesses in the business environment were some of the factors put forward that triggered the weak financial system in Nigeria. The CBN Governor admitted that internal structure within the Apex bank was weak. While Professor Charles Soludo, The former CBN Boss, tried to resolve the capital inadequacy by recapitalizing Nigeria banks the Governance issues in banks and at the Apex banks were left to suffer. In his lofty policy statement, the Rhodes Scholar, aimed at achieving the following in the post consolidation era stated thus: “Nigeria as Africa’s Financial centre, and CBN as one of the best in the world; Within 10 years, Nigerian bank(s) should be among the top 50—100 banks in the world; Facilitate evolution of a strong and safe banking system; Improve transparency and accountability in the sector; Drive down the cost structure of banks and make them more competitive and development-oriented and that a New Banking System that depositors can trust and investors can rely upon: to usher in a new economy”
 
The above was from Soludo’s paper titled “Beyond Banking Sector Consolidation in Nigeria’’, at the 12th Annual Economic Summit in June, 2006. Do the banks Executives understand the simple grammar or there was conflict of objectives? To achieve the stated objective, Prof. Soludo aimed at pursuing zero tolerance on misreporting and infractions, stricter enforcement of corporate governance principles and risk-based supervision. Maybe Prof. forgot in a hurry the above reform during/after consolidation or maybe the political ambition of Prof. changed the tone. The banks’ ‘big boys’ maybe willing to sponsor his political campaign and that might have created a ‘cabal’ within the banking sector.
 
How do you explain the regulatory laxity or lack of integration in regulatory framework within the financial sector? Unchecked governance malpractices at consolidation within the banks became a way of life with Chairman/CEO possessing unfetter powers over the bank. The board committees were inactive maybe because ‘the cake’ in their mouths couldn’t make them talk. It was also discovered in the recent bank examination conducted that several abnormalities were done in the consolidation exercise. Mallam Sanusi put it this way: “One bank borrowed money and purchased private jets which we later discovered were registered in the name of the CEO’s son. In another bank the management set up 100 fake companies for the purpose of perpetrating fraud. A lot of the capital supposedly raised by these so called “mega banks” was fake capital financed from depositors’ funds. 30% of the share capital of Intercontinental bank was purchased with customer deposits. Afribank used depositors’ funds to purchase 80% of its IPO. It paid N25 per share when the shares were trading at N11 on the NSE and these shares later collapsed to under N3. The CEO of Oceanic bank controlled over 35% of the bank through SPVs borrowing customer deposits. The collapse of the capital market wiped out these customer deposits amounting to hundreds of billions of naira. The Central Bank had a process of capital verification at the beginning of consolidation to avoid bubble capital. For some unexplained reason, this process was stopped. As a result, we have now discovered that in many cases consolidation was a sham and the banks never raised the capital they claimed they did”.
         
Accountants in public practice within financial sector no longer abide by the oath they sworn and the professional ethics of the accounting profession. Public interest is now a secondary issue. They just want to ‘cook the book’ and make the figures attractive. Accountants were with the banks in all the consolidation exercise. Dissolving any accounting firm(s) caught in such unethical practices and withdrawing all the partners certificates may serve them right. Let’s try what U.S. did with Arthur Andersen. The recapitalization exercise lacked proper ‘capital’ definition. Effective enforcement of “CODE OF CORPORATE GOVERNANCE FOR BANKS IN NIGERIA OF 2006” will resolve a lot of governance issue in the bank
s and mitigate banks’ risks exposure.
 
I would suggest that all the regulators in the financial markets should have a forum to educate investors. There should be convergence of regulatory framework. There is no protection for investors and consumers in Nigeria. Whenever any retail investor faces an institutional failure he does not get help from any quarter and has to accept it as a bad luck. Regulators only highlight the value addition of new intermediaries, new instruments and new system of trading but nobody discloses inherent risk. Let’s have quick reference guide for investors and consumers alike.
 
I want to follow up with the proposed solutions by the CBN Governor. The Apex banks should put in place procedure to ensure that credits are only granted to credit worthy customers. Credit scoring systems of banks should be integrated with the Apex bank’s Credit Rating Management System (CRMS). Let’s ask if the CRMS of the Apex bank is even working effectively? Credit scoring agencies should be made CBN consultants and be paid by the Apex Bank. By so doing, they have regulatory backing. Data capturing should be robust and reflects high level of integrity.
 
Nigerians are eager to see the change. Sir, we want to see internal structure that does not place over-reliance on one man Governor. There are capable hands within the Apex bank, men and women of international repute. If we do not act fast, we may prove S&P right. Regulators, Banks Chiefs, accountants in public practice, other consultants and ‘’ignorance’’ should not be allowed to kill our banks. Our banks are not failing, they are killing our banks!
 
Gbenga Okubadejo
Okubadejo Gbenga is the Business and Investments Analyst of AMG Consulting.

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