Although the banking industry in Nigeria has in the last three years undergone successive wide sweeping financial reforms that shook its very foundation and sparked a lot of controversy, tension and uncertainty. But as the dust gradually settles, most banks seem to have emerged stronger than they were before the storm. Hilton Etakoh reports.
When in July 2009, Sanusi Lamido Sanusi, Governor of the Central Bank of Nigeria announced the result of a ‘Stress test’ (audit) conducted on the 24 banks in the country, in which 8 banks were declared technically insolvent and their CEOs dismissed, little did Nigerians know that the exercise was just the beginning of a wave of reforms that would change the face of banking in Nigeria for many years to come. A joint team of officials from the Central Bank of Nigeria (CBN) and Nigeria Deposit insurance corporation (NDIC) had subjected the books of the different bans to stringent scrutiny that exposed major weaknesses in corporate governance, poor risk management practices, large scale insider dealings, stock market manipulation and reckless lending in several banks.
Eight banks including Oceanic Bank, Intercontinental Bank, Union Bank, AfriBank, Fin Bank, Bank PHB, Spring Bank and Equatorial Trust Bank were declared technically insolvent, chronically liquid and said to have eroded their shareholders’ fund. In a bid to rescue these troubled banks, the CBN injected N620 billion as loans into them to enhance their liquidity status. However, the most intriguing part of the unfolding scenario was the immediate dismissal, arrest and resultant trial of CEOs of the affected banks.
Sanusi went on to appoint an interim management team for each of the eight banks. The new management teams were given a mandate to steer the banks out of troubled waters to tranquil harbor. This intervention, Sanusi explained was aimed at stabilizing the troubled banks rather than liquidating them.
Three of the eight rescued banks, have since been nationalized, and placed under the management of Asset Management Company of Nigeria (AMCON) that would oversee their recovery, growth and stability, and there after sell them to suitable investors within the next 2 to 3 years. The other five banks, after a compulsory recapitalization exercise, and due consultation and agreement with their respective shareholders, a number of merger and acquisition deals were endorsed. The deals saw Access Bank acquire Intercontinental Bank, Eco Bank acquired Oceanic Bank and Fin Bank became a part of First City Monument Bank. Capital Alliance bought stakes in Union Bank while Sterling Bank and Equatorial Trust Bank merged into a single bank.
Although Wema Bank and Unity Bank both passed the Sanusi’s stress test, their positions were however considered a bit fragile. Consequently the two banks were asked to recapitalize to mach the level of their operation or risk being reduced to regional banks. While Unity Bank successfully recapitalized and raised its capital base by additional N17.7 billion, Wema Bank however opted to become a regional bank. In all, the intervention played out without any loss of fund. Today the reform is being hailed as the only banking sector intervention or bailout where depositors did not lose their deposits. According to Sanusi, ‘‘Nigeria is the only country where no depositor has lost money. Nigeria is also the only country where the banks are responsible for the cost of the clean up exercise”. Moreover, the transparent and firm manner in which Sanusi carried out his banking sector intervention and bailout has gone a long way in restoring confidence in the banking sector.
A Diary of Reforms
In January 2010, Sanusi issued regulations limiting the tenure of CEOs of banks to a maximum of 10 years. Under the new regulation, CEOs were limited to two renewable terms of five years each. This forced some CEOs that had exceeded their tenures to resign. The regulation also disqualified ex-CEOs from serving as directors within three years after expiration of their tenures as CEO. The reason for this reform was to Improve corporate governance of banks by avoiding the ‘sit-tight syndrome’ that allowed bank chiefs to manage the banks as personal businesses rather than as public corporations accountable to shareholders, depositors and government regulators.
Sanusi also got the approved of the Federal Government to create the Asset Management Company of Nigeria (AMCON) to purchase toxic assets from banks. It had the responsibility of holding, managing, realizing and disposing of banks assets including the collection of interest, principal and capital due, as well as taking over the collateral searing such assets. The company had within its first year acquired about N1.7 trillion toxic assets from the rescued banks.
Recently Mustapha Chike-Obi, Director of AMCON, disclosed that the company’s total assets comprising loans, investments and debts among others had reached about N5 trillion, making it the largest financial institution in Nigeria.
In yet another reform, the CBN directed all banks and financial institutions to adopt a uniform financial year end. Before now, financial year end varied among the different banks. Usually between January and May. Consequently the new regulation made it mandatory for all banks and discount houses to adopt December 31 as a uniform accounting year end. The former practice made financial comparison among banks difficult and also limited transparency of bank’s financial statements and results. The essence of the reform according to the CBN was to avoid regulatory arbitrage, and provide a level playing field for all operations.
Also the CBN had gone ahead to impose the International Financial Reporting standard (IFRS) on Nigerian banks to ensure greater disclosure and good corporate governance. The new system is also an attempt to instill discipline in the industry and further mitigate insiders’ abuse.
Earlier had suspended the former universal bank licenses granted to 24 banks in Nigeria and introduced new regional, national and international bank licenses based on new minimum capital requirement for regional banks was fixed at N10 billion ($ 65 million), N25 billion ($ 164 million) for national banks, and N50 billion ($ 329 million for international bank license. Formerly, all 24 banks had a minimum capital requirement of N25 billion and all operated as universal banks. A regional bank’s operation is restricted to just two geo-political zones of the country. Moreover banks were asked to specialize in their areas of strength such as SMES, Merchant/investment banking, forex trading, etc.
This, the CBN argued would ensure greater product diversity, deepen specialization, curb stock market manipulative activities, ensure greater market segmentation and improve overall structural stability of the banking sector. In addition, banks were also bared from using depositors’ fund for proprietary trading, venture capital investment, asset management, equity underwriting, etc.
In July 2010, Sansui’s CBN introduced the Nigerian Uniform Bank Account Number Scheme (NUBAN). The Scheme made it compulsory for Nigerian banks to a digit bank account number format for their customers. A nine months compliance period was allowed for banks to migrate to the new system.
Before now bank account numbers ranged from 12 to 15 digits. The CBN explained that the new format would promote best practices in the account number scheme and also eliminate some of the problems associated with the Automated Clearing House (ACH), thus enhancing the e-payment system.
In November 2010, the CBN directed all customers of banks and financial institutions to update their account information. According to the directive, customers who fail to update their information would have their bank accounts suspended. According to the CBN, the exercise was part of the Customer Due Diligence CDD which involves the Know Your Customer KYC compliance which is accepted worldwide as a tool for the fight against money laundering and terrorism financing.
In 2011, Sansui once more announced the new cash withdrawal lodgment policy that placed limits on the amount of money customers could lodge or withdraw from the bank without an extra charger. The initial limits were N150,000 and N1million for individual account holders and corporate account holders respectively.
The announcement caused a national outcry and debate that alarmed the CBN, forcing it to adjust the policy by raising the figures to N1 million and N5 million for individual and corporate customer’s respectively. The aim is to reduce the high dominance of cash in the Nigerian economy. The economy is still too heavily cash-driven in transaction of goods and services. Secondly, It is estimated that about 65% of the cash in circulation in the Nigeria economy is outside the banking system thus making it cumbersome for the CBN to carry out explain that the higher the volume of cash transaction in the economy, the higher the cost of cash management which constitutes a substantial part of the operating cost of banks that is passed on to customers in the form of bank charges and lending rates. In 2009, the direct cost of cash management to the banking industry was estimated at N114.5 billion and it is estimated to reach N192 billion in 2012.
Impact of the Reforms
Nigeria’s GDP growth rate is said to have improved over the last three years. It expanded by 7.7 percent in the fourth quarter of 2011. Looking back, Nigeria’s average quarterly GDP growth between 2005 and 2010 was 6.71 percent reaching an all-time high of 8.29 percent in December 2010 and a record low of 4.50 percent in march 2009.
Analysis believes that Nigeria’s investment image has improved with assets and profits picking up above pre-reform levels. FSDH securities, a capital market service firm declared in January 2012 that the total volume of the Nigerian banking industry’s asset increased by 7.62 percent to N15.74 trillion ($ 96.6 billion) in December 2011 as against N14.63 trillion ($89.8 billion) in December 2009. Similarly, customer deposits are said to have increased by 5.42 percent to (N10.99 trillion ($67.4billion). meanwhile, profits are also believed to have shot up with First Bank recording an increase in profit before tax by 20 percent to N49 billion ($300.7million) In the last quarter of 2011 compared to the same periods in 2010. in October 2011, Zenith Bank announced an increase of 28.4 percent in profit before tax at N50.13 billion ($307.6 million) between January and September 2011 compared to N39.15 billion ($240.2 million) within the same period in 2010. records have also shown that Stanbic IBTC Banks profits increased by 10 percent between January and September 2011. to most analysts, this growth is a sign that the CBN reforms are working after all.
In another development, investigations have shown that bank lending to the private sector has increased by 51.8 percent, indicating that banks are beginning to focus more on their core function of financing the productive sector of the economy. Data available from the CBN’s money and credit statistics proves that banks have extended about N12.9 trillion worth of loans to the private sectors as at December 2011 as against N8.5 trillion in 2009. Prior to the reforms, banks were unwilling to lend to the private sector because of the attendant high risk rather they would channel the bulk of their credit to funding insider-related deals and margin trading activities on the stock market which resulted in the Non-Performing Loans (NPL) crisis of 2009.
In July 2011, 9 Nigerian banks made the list of the top 1000 World Banks Ranking by Tier One Capital in the 2011 edition of the Banker Magazine. Zenith Bank led 8 other Nigerian banks as it was ranked 296, First Bank came 310, GTBank 3444, Access Bank 495, UBA 513, Fidelity Bank 567, FCMB 586, Diamond Bank 650 and Skye Bank ranked 657. Beside making the 1000 World Banks ranking, all 9 banks dominated the list of Africa’s Top 25 Banks.
Sansui on assumption as Governor of the Central Bank of Nigeria announced a four pillar policy framework namely, enhancing the quality of banks, establishing financial stability, enabling a healthy financial sector evolution and ensuring the financial sector contributes to the red economy. All of Sansui reforms have been predicated on these guiding principles, and the results are already evident in the economy especially with Nigeria sustained global financial and economic rating of BB by Fitch.