…Long Time Coming
he sudden dismissal of five bank CEOs last Friday must have come as surprise, but it has been long time in the making and shouldn’t be the last if Nigeria is poised for transformative economic and political shift. This typifies five years ago in June 2004, when Charles Soludo upon assuming office as Central Bank of Nigeria (CBN) Governor summoned bank chiefs and broke the news of an impending tremor in banking business.
It would be recalled during the meeting, Soludo warned that by the time his restructuring was over most of the people sitting in the room would be history. True to form, Soludo delivered on his promise and was showered with encomiums thereafter. Few years later his words have become self-fulfilling prophesy.
That draconian masterstroke saw the pruning of banks from 89 to 25 in 2006 and spike in minimum capital-base to 25 (twenty five) billion Naira. That the industry and Nigeria benefited from this bitter pill is without question. Few emerging banks have gained immense credibility and global recognition leading to tough competitive landscape and increased fund-flow from abroad and new investments into banks and Nigeria’s economy – it was therefore high time to take things further.
The reason adduced by Soludo for his prescription in 2004 is not too far apart from why Nigeria’s banking industry continues to limp and is overdue for another round of shake-up. If previous reform was system-wide, this time the emphasis is targeted and focused on identifying institutions that could be vulnerable and remain weakest links in the value chain. Like analysts will agree, higher capital base doesn’t necessarily translate into improved risk management or superior corporate governance.
Recent global financial meltdown that is already receding in Europe and Asia made late entry into Nigerian space. The crisis reverberated widely and buried famous Wall Street powerhouse Lehman Brothers while threatening behemoths like AIG, Citibank and Merrill Lynch. On the surface most Nigerian banks may have survived in the time-being, but there’s no saying how well they are faring in the face of such daunting challenges.
Precarious financial condition of the five banks in question is evidenced by data released by CBN. Their aggregate non-performing loan portfolio is 41%; capital adequacy ratio of the weakest amongst them is 1% as opposed to minimum requirement of 10%, whereas the banks account for 40% of total industry-wide loan book, 30% of deposit-base and 32% of total assets.
To be fair, banking consolidation initiated by Soludo somewhat strengthened the financial base of respective institutions but cant shield them from cyclical corrections such as we saw late last year, nor did it finally cure the reputational hazard that have come to characterize banking in Nigeria. Financial systems in modern times have evolved to experience some type of correction ever so often. In a “frontier market” environment like Nigeria, banking sector remains not fully integrated into the formal/informal economic structure, thereby hampering ability to catalyze economic activities and fully energize productivity.
The situation is made worse by questionable corporate and financial practices, which if unmitigated could escalate to crisis proportion. Sloppy corporate governance, ineffective risk management procedures, high ratio of inactive loan/bad debts, non-adherence to prescribed liquidity ratios, huge exposure to single or few obligors and high level of inter-bank indebtedness are some of the manifestations. Therefore the onus is on the regulatory agencies to recognize when and how to take decisive action to forestall impending disaster.
There comes a time, when someone steps up to leadership in the apex institution (like we saw previously in Soludo and now Sanusi) with a reformist agenda and radical mindset that could initiate aggressive assault on financial shenanigans. Rather than be more analytical and balanced in their assessment some critics will prefer to view such actions from prism of ethnic or political agenda – that could be expected in Nigeria but shouldn’t deter current central bank helmsman from pursuing any well-meaning policies.
Further more, part of the problem in Nigeria banking system can be attributable to operating in an awkward and extremely difficult terrain, albeit potentially lucrative, where competition is stiff and survival instinct becomes the over-arching driver of performance. Short-term and public sector deposits remain predominant sources of lifeline, whereas loans are mostly short-term in nature, often funneled to areas with quick turn-around or issued to well-heeled/large customers.
There is dearth of reliable consumer credit report or accurate/accessible database on corporate entities and potential borrowers, hence no sound operating platform exist that could guide bank lending to broad consumer-base (small to mid-sized businesses and retail consumers), as bedrock of modern commercial banking.
The net effect is that banks crowd into limited sectors and activities that seem profitable like oil/gas, telecommunication, stock/margin lending, consumer product importation and preferring few big ticket customers than lending to large sections of small and mid-sized companies or long-term projects. Most of all, banks in chasing deposits or striving to make ends meet indulge in illicit transactions like round-tripping (buying forex from the official window and selling in the parallel market) or sending young pretty ladies to source money. These actions are not only harmful to their corporate integrity but open them to severe market downturn and regulatory sanctions.
At some point this unwholesome approach becomes intolerable and inimical to overall economy. Therefore if Soludo’s consolidation exercise was prima on strengthening Nigeria’s banking sector, the current overture by Sanusi should be seen as logical continuation in the arduous task of elevating the industry to new heights in the long-run. It will take assertive reformist with political backing to drive home this point. From look of things within just few months in charge of CBN, Lamido Sanusi seems to have the gumption and enjoys the confidence of the Presidency. According to recent media account, Sanusi was quoted as saying “so many things have been done wrong in Nigeria for too long, this is time for change” – sounds more like a revolutionary than central banker.
Bring it on Sanusi...
If press release from the Central Bank is anything to judge by, then we haven’t seen the last of the shock – the stress test will continue with scrutiny of 11 additional banks between August/September this year. Naturally, change is imperative and takes a toll when it occurs. Just as several notable personalities and senior bankers lost out in the last dispensation, there are bound to be winners and losers this time around, especially amongst senior management and investors in banks adjudged to be frail. If that’s what is required in sanitizing the system, so be it.
In propping up the banks and restructuring their operations to avoid systemic failure while protecting depositors, devising and implementing suitable methods for recouping government investments, (amounting to 420 billion Naira in just these 5 banks) should remain paramount in this exercise. Thus, fundamental issues to address by surviving banks, their new or existing management as well as regulatory agencies should be:
- How can corporate governance standard be continuously enhanced and strictly enforced to elevate the banking system to higher level of financial compliance and probity?
- How can technology and human capital be leveraged to implement improved enterprise-wide risk management strategies that are vital to hedging against excessive exposure or minimizing impact of cyclical correction on financial institutions?
- What steps should banks take to deepen their appeal to consumers, continuously expand array/quality of service-offering and quality of customer-care, while diversifying product portfolio into new territories, market segments and industries locally or abroad?