Nigeria's Banking Industry Under Sanusi

By Chuks Oluigbo

Apart from the consolidation era that ended on December 31, 2005, no other period has brought Nigeria’s banking industry to the front burner of economic permutations than the present era of Mallam Sanusi Lamido Sanusi, who became the governor of Central Bank of Nigeria (CBN) in June 2009, following the expiration of the tenure of his predecessor, Prof Chukwuma Soludo. To start with, Sanusi was apparently not the preferred choice of his banker colleagues who felt that his specialisation in risk management made him privy to behind-the-scene happenings, and therefore the rot, in the banking sector. Allegedly, over N300 million was mobilized by interest groups to scuttle Sanusi’s choice. However, as they say, while the people had their say, government had its way.

As at June 2009 when Sanusi came on board, the Nigerian banking industry was already in a wobbly shape. Many factors were responsible for this. One was significant exposure to the capital market in the form of margin loans. By the end of December 2008, the industry’s exposure to the capital market stood at about N900 billion, representing about 12 percent of aggregate credit or 31.9 percent of shareholders funds. This precipitated a liquid crisis for banks. Also, in the wake of high oil prices, the banks took advantage and lent heavily to the oil and gas sector. By the end of December 2008, bank’s total exposure to the oil industry stood at over N754 billion, representing over 10 percent of aggregate credit and over 27 percent of shareholders’ funds. Thus, by the end of July 2009, the banking sector was already saturated with huge non-performing loans, which aggregate stood at N2, 508 billion, that is, 32.69 percent of total loan portfolio. This development already had an adverse effect on many banks and many of the banks had become a threat to the entire stability of the banking system. There were palpable fears as rating agencies raised alarm that all was not well with a good number of the nation’s banks.

As soon as he assumed office, Sanusi, who came from the top management of First Bank Nigeria Plc, did an overview of the entire industry and identified eight factors that, in his considered opinion, “created an extremely fragile financial system that was tipped into crisis by the global financial recession.” These were macro-economic instability caused by large and sudden capital inflows; major failures in corporate governance at banks; lack of investor and consumer sophistication; inadequate disclosure and transparency about financial position of banks; critical gaps in regulatory frameworks and regulations; uneven supervision and enforcement; unstructured governance and management processes at the Central Bank; and weaknesses within the apex bank itself and in the business environment.

Sanusi promptly compelled banks to open up and explain their toxic assets which were in excess of N1.2 trillion. By the time the CBN and the Nigeria Deposit Insurance Corporation had completed their examination of eight banks, their managing directors and other executive directors were found to be shoddy in their management. Erastus Akingbola, Okey Nwosu, Sebastine Adigwe, Cecilia Ibru and Bartholomew Ebong of Intercontinental, Finbank, Afribank, Oceanic and Union Bank, respectively, were all removed in one fell swoop. Francis Atuche of Bank PHB, Ike Oraekwuotu of Equitorial Trust Bank, and Mike Chukwu of Spring Bank followed in the second phase. They were immediately replaced. That move changed fundamentally corporate governance in banks. It also revealed that the era of paper profits, which almost ruined the industry in the 1980’s and 90’s, were not over; that our respected billionaires were merely surviving on bank facilities; and that what banks recorded as capital base were actually depositors’ funds.

To check abuses in the banking sector and entrench transparency in the system, and to ensure a complete departure from status quo ante, Sanusi initiated a tenured system for CEOs and Directors while the issue of corporate governance is also on the front burner. Non-executive directors of banks are to be scrutinized to determine their competence.

Intervention funds followed quickly to bail out the troubled banks and restore the economy to good health. N600 billion was approved for the banks, followed by N200 billion credit guarantee scheme for the Small and Medium Enterprises (SMEs) and N300 billion for the real sector to unlock the credit market. The N500 billion came via a Debenture Stock to be issued by the Bank of Industry (BOI).

The second phase of Sanusi’s banking reforms hinged on four pillars: strengthening the quality of banks through industrial remedial programmes to fix key causes of the crisis, establishing financial sector stability, which centres around strengthening the financial stability committee within the CBN by establishing a hybrid monetary policy and macro prudential rules; enabling healthy financial sector evolution, with emphasis on banking industry structure, banking infrastructure such as credit bureaux, registrars, cost structure of banks and the role of the informal economy; and ensuring that the financial sector contributes to the real economy. These, he believed, were inevitable in the drive to restore the sector to good health and for it to play its assigned role as the engine room of economic growth and development.

In his opinion, rapid financialization did not benefit the real economy as much as had been anticipated. To change this, he adopted six measures: (a) Leveraging the CBN governor’s role as adviser to the president on economic matters; (b) Taking the lead in measuring more accurately the relationship between the real economy and financial sector and the transmission mechanism; (c) Evaluating continuously the effectiveness of existing development finance initiatives, such as agricultural credits as well as import and export guarantees; (d) Taking the public lead in encouraging examination of critical issues for economic development; (e) Leading further studies on the potential of venture capital and private public partnership initiatives for Nigeria; and (f) Cooperating with state governments to run a pilot programme in directing the financial sector’s contribution to the states’ socio-economic development.

By the turn of 2010, Sanusi unbundled his plans for universal banking, insisting that banks must remain banks. If they must go into other areas, then they have to do that through an omnibus entity in the form of a holding company. Before now, banks were known to own subsidiaries in sectors considered to be outside their areas of core competence, with the attendant risks such ventures brought on depositors’ funds. The new banking model will be expected to correct the mistakes of the past, where banks used their financial leverage to crowd out competition, including by those who have the expertise but lacked the financial resources. Under the new rules, financial institutions will need to obtain separate licenses from the central bank for their core lending business, stock broking, and other non-banking divisions. Financial institutions will be categorised into monoline and specialised banks. Under the monoline banking, banks will have the option to play regional, national or international. Regional banks would require N15 billion, national banks N25 billion and international banks N100 billion as capital base. Regional banks will operate in a minimum of five and a maximum of 10 contiguous states, in addition to having the word "Regional" in their name. The national will have a branch network restricted to Nigeria while the international bank is allowed to operate offshore branches and subsidiaries. Banks must hold a minimum of 10 percent capital against their risk assets. Mortgage banks must possess a minimum capital of N5 billion and a minimum of 50 percent of mortgage assets to total assets.

The CBN governor also unfolded the planned introduction of Islamic banking, a non-interest banking system. Islamic banks would transact banking business, engage in trading, investment and commercial activities, as well as provide financial products and services in accordance with Islamic commercial jurisprudence, and their services would be available to Muslims and non-Muslims alike.

One other innovation of Sansui’s reform is the creation of Asset Management Corporation of Nigeria (AMCON). When fully operational, AMCON is expected to be a resolution vehicle which will soak the toxic assets of the CBN-intervened banks and provide liquidity to them as well as assist in their recapitalization. It will also offer a window through which the banks can discount voluntarily any non-performing loan that is above 10 per cent of their total share capital. In the words of the CBN governor, “the creation of AMCON will provide the first step towards resolution of the non-performing loan problem in banks and eventually facilitate further consolidation. This process is on-going and we expect all banks to be totally weaned off CBN support by end of the third quarter of 2010. That also explains why we have started a process of mergers and acquisition discussions to encourage the banks to look for partners who will bring in the capital to strengthen the bank balance sheet. Once that is done, the banks will have the capital and the liquidity to lend.”

For all these achievements, Sanusi has received commendations from both individuals and institutions. Some Nigerians have compared his decisiveness to that of Mallam El-Rufai who, as FCT Minister, transformed Abuja through his radical reforms. Members of the Federal Executive Council chaired by President Goodluck Jonathan gave kudos to the CBN governor for a reform that has returned confidence to the banking sector. Minister of State for Finance, Remi Babalola, at a conference organised by Business Day Media Limited in Lagos conveyed government’s total support for the reform. Bisi Onasanya, Managing Director, First Bank of Nigeria (FBN), also extolled the reforms, saying they have facilitated the repositioning of the banking system to serve as an effective intermediary to the real sector.

The International Monetary Fund (IMF) and the World Bank have also endorsed Sanusi’s ongoing banking reforms. A World Bank research finding indicated that Nigeria’s financial sector has fared better than prior to last year’s intervention by the CBN. At a top level dialogue in Abuja on performance of Nigeria’s financial sector with Goodluck Jonathan, Isma’il Rodwan, President of World Bank Nigeria Country Mission, who described the CBN reforms in the banking sector as both necessary and timely, noted that “contrary to the perception in certain quarters, research has shown that Nigerian banks, before the intervention of the Central Bank of Nigeria (CBN), were not lending significantly to the economy, instead lending was concentrated on margin loans to the capital market and oil and gas sector.”

In a related development, IMF's country chief and representative in Nigeria, David Nellor, said the reforms were “essential to building a sound financial sector that can promote long term growth and development consistent with the goals being set for the Vision 20-2020." And we have no option but to also say “Kudos, Sanusi, but…”

In spite of Sanusi’s apparent lofty intentions, there are indications that unintended negative effects of the CBN action have been taking their toll on the banks, the real sector, Nigerians and the entire economy. The first immediate fallout of the CBN hammer on the chieftains of some banks was a rundown on the affected banks. The unprecedented panic withdrawals by customers of the respective banks defied the CBN’s bailout funds and the assurance that it would guarantee the liabilities of the affected banks. The capital market was also deeply affected because the banking sub-sector accounts for 60 percent of the market capitalisation of the Nigerian Stock Exchange. With the clampdown on the five banks and the auditing of 14 others, equity investors became wary of investing in bank stocks. This, according to findings, has inhibited stocks from appreciating. Retrenchment hit the banking sector. While some of the banks retrenched their staff, others slashed salaries and allowances in a bid to cut cost amidst the existing tight fiscal policies. An estimated 30,000 bank workers have lost their jobs since August 2009 when the new banking reforms commenced. Lending has ceased. Even businesses that legitimately obtained loans from banks have been hounded to repay them, and projects banks were financing remain on hold.

Again, experts have condemned Sanusi’s ‘reckless’ public utterances on the health of the banking sector. In Iceland, where the banking system collapsed; the United Kingdom, where some banks ran into a troubled weather; and the United States, where some 120 banks have collapsed in the last two years, the central bank governors of those nations did not call a press conference to announce that the banks were in deep trouble, as that would have meant sheer Armageddon. Some also say that Sanusi has been running in circles, a perfect case of motion without progress, and has failed to offer an alternative vision to Soludo’s Financial Services Strategy 2020, which seeks to make Nigeria’s financial services the most competitive in Africa by 2020.

But Sanusi has also replied his critics. Speaking with African Confidential magazine, he challenged critics of his banking reforms to point out exactly which of the policies has harmed the economy. Marshalling out some of the achievements of his reforms in the past one year, Sanusi stated that when he became governor of the central bank, the rate of inflation was 15 percent; as at March 2010, it was 11.8 percent. The differential between the official rate and the parallel market rate was about 25 percent; it is now less than 10 percent. The naira was trading at 189/190 in the black market; it has been down to about 150/152. Inter-bank rates were at 22 percent and have now been down to about 2 percent. The stock market has gone up 30 percent since January 2010. All the indicators of market confidence have gone up. Also, the lending of foreign banks to Nigerian banks that had been disappearing has now come back up. US EXIM and the European Investment Bank have come to give credit lines to Nigerian banks; the AFC which used to restrict itself to trade finance is now giving long term loans to Nigerian banks.

All said and done, there is no doubt that Sanusi has done well in many respects. However, he should check the remarks he makes about the banks. Tim Congdom of Daily Telegraph once said that “If you are in a system prone to panics, the last thing you want is to advertise that an institution is in trouble”. So, Sanusi should stop making comments that are likely to excite panic in the sector, especially among depositors. There are also palpable fears in many quarters that the introduction of Islamic banking is a subtle move to Islamise Nigeria. The CBN governor should do more in the coming months to allay these fears. Again, it is advised that Sanusi should allow the banks’ shareholders to recapitalise them and not sell any bank the shareholders are able to re-finance. He also needs a quick plan to return the banks to private ownership and stop the haemorrhage on public funds.