Beyond The Banking Tsunami

Now that the Central Bank has completed its special audit of the country’s twenty-four banks, it is necessary to do a post-mortem on the whole exercise. At the end of the CBN’s “stress tests”, ten banks were “indicted” by the regulators and fourteen certified fit. The fourteen “good” banks were First Bank, UBA, GTBank, Diamond, Sterling, Access, Skye, Zenith, FCMB, Fidelity, Ecobank, Standard Chartered, Stanbic IBTC and Citibank. Two banks, Wema and Unity (interestingly Nigeria’s remaining regional banks) were deemed by the regulators to have issues with capital and/or liquidity, but those issues were in the opinion of the bank obviated by other issues and both were given till June 2010 to raise capital. The remaining banks-Union, Oceanic, Intercontinental, Afribank and Finbank (in the first phase), and Bank PHB, Spring and ETB were deemed to be in grave condition and the executive managements were dismissed.
The CBN has injected a total of N620billion into these eight banks and has applied other sanctions (for instance the removal of a non-executive controlling director, Mike Adenuga in ETB) and criminal prosecutions against the erring bank CEOs, some other officials and some stockbrokers to signal a tough stance against financial malpractices going forward. I have always believed strong measures were required to restore transparency and professionalism in Nigerian banking (and to avert a more cataclysmic systemic crisis not too far in the future) and therefore we broadly support the Governor’s actions stated above. On the other hand, it was clear that the management of the first phase involving the audit of the first ten banks left the CBN exposed to plausible charges of breaching legal, constitutional and procedural requirements precedent to the actions embarked upon in relation to the banks.
More troubling was the involvement of the Economic and Financial Crimes Commission (EFCC) in pure debt recovery matters and the breach of banking confidentiality involved in the publication of debtors names in the national newspapers. As we have always maintained, borrowing is a legitimate (and desirable) economic activity and except where there are specific crimes such as insider abuse, diversion, false pretences, fraud, misrepresentation etc, a defaulting borrower can only be dealt with under our civil laws. One must acknowledge however that the unorthodox strategy has been effective in getting some of the difficult loans repaid. The other point about the management of the first round of the sector clean-up was the fact that a clear strategy for managing the systemic implications did not appear to have been put in place before the Governor’s action. Our strategy and policy consultancy, RTC has in its monthly business and economic reviews for the past three months anticipated the Governor’s actions and noted that it would entail some short term shocks and hoped that the bank would have a strategy in place to mitigate those dislocations.
Nevertheless the banking clean up was the right thing. The financial sector must be professional, transparent, sound and credible, locally and internationally for it to play its proper economic role in a modern economy. It was no longer possible for anyone to separate hype from reality in respect of our banks and all semblance of governance and risk management was being lost in a large proportion of the sector. By and large, the CBN’s measures should pay off in the medium to long term and perhaps sooner than we expect as investors and counterparties deal with the unindicted banks with increased confidence. The real policy challenge is what to do with the eight banks now under government control. A disturbing kite about nationalisation is already been flown! Given our history with nationalised banks in the 1970s and 1980s, this would be a severe error.
The CBN should move towards recapitalisation of these banks by their owners, a quick off load to other acceptable international private core investors or a merger or acquisition of these institutions by the stronger of the remaining 14 banks. The CBN can take deliberate steps to make these banks attractive to potential acquirers. Contrary to some opinions, I do not consider it necessarily undesirable if some of the banks are acquired by credible international banks. As we seek to become an international financial centre, some might even argue that such should be a deliberate strategy. Unfortunately given the confusion and law suits around the process, it is unlikely any foreign institutions would want to rush in until all clouds are cleared. It may be necessary for the CBN to accept a negotiated solution with the bank owners that preserves the regulators original goals. The bankers have an incentive to negotiate-avoidance or mitigation of criminal liability, and so does the regulator-its actions may strain under judicial review.
But after all these the substantive issues remain-strengthening regulatory capacity; improving governance, risk management, ethics, transparency and professionalism; deepening human capital, skills and competences in the industry; creating a macroeconomic environment conducive to lower interest rates; reducing inflation; diversifying our nation’s revenue base away from oil; improving foreign currency and reserves management; resolving the structure of financial sector regulation going forward; poverty reduction; and achieving sustained economic growth and development.