The Central Bank of Nigeria succumbs to political and economic realities thereby aborting the planned liquidation of troubled banks in the process of reviving the banking sector
Major stakeholders in Nigeria’s troubled banks, especially shareholders, depositors and creditors may have course to heave a sigh of temporary relief. Liquidation, nationalisation and sale of the banks to foreign investors, which Lamido Sanusi has, since his emergence as governor of Central Bank of Nigeria, CBN, considered as possible options to resolve the crisis in the banking sector seem to have failed. A clearer indication to this emerged last week at a meeting in Lagos where Kingsley Moghalu, deputy governor, Financial System Stability, CBN, said the apex bank has achieved a significant milestone in the process of recapitalisation of the banks.
The CBN had last June, threatened to liquidate banks that failed to recapitalise by September 30. Ever since then, there had been a run on some of the banks as largely uninformed depositors of the banks scrambled to withdraw their funds. The panic also affected the Nigerian Stock Exchange, NSE, where prices of the stocks of the affected banks have maintained a downward trend. The situation further worsened the liquidity situation of the affected banks. The handling of the crisis in the banking sector by the CBN has over time, attracted condemnation following the somewhat punitive approach adopted by the apex bank and the unguarded utterances of the CBN governor, which have negatively impacted the economy.
At the briefing, which observers saw as a step towards dousing the tension generated by Sanusi’s unguarded utterances and actions, Moghalu explained that the deadline was set in order to fast-track the recapitalisation process, which had already taken one and half years. “Having been on for 18 months, it is not in the interest of the financial system for the mergers and acquisitions to be endless. As a regulator, we have to put a timeline to it, otherwise there will be no result,” he said. However, the magazine found out that the step being taken by the CBN to reduce the tension in the financial system is not unconnected with the coming of Ngozi Okonjo-Iweala, former managing director of World Bank as finance minister.
According to the magazine’s sources, liquidation of the banks, which Sanusi threatened to effect by withdrawing their licences and handing them over to the Nigeria Deposit Insurance Corporation, NDIC, should they fail to meet the September deadline, was ruled out by the Presidency. Part of the reasons adduced for the decision was that the plan to liquidate the banks was also a threat to inflow of foreign investments. It is strongly believed that making the investment climate in the country as friendly as possible through policy decisions is one of the conditions given by the incoming finance minister. That is very much in line with the task of attracting foreign investors, which President Goodluck Jonathan has given to the minister and Olusegun Aganga, her counterpart in the trade and investment ministry.
One other factor responsible for the new twist is the resolution of some of the court cases challenging initial moves to sell the banks in a manner some of the existing shareholders considered as lacking in transparency and due process. This has paved the way for continuation of the recapitalisation process. For instance, the negotiations between Intercontinental Bank and Access Bank, which was put on hold by a court order resumed after a federal high court sitting in Lagos, last June, vacated the injunction, thus placing the bank in a position to meet the deadline. The suit filed against Bank PHB was similarly dismissed.
According to the CBN, three of the troubled banks, Intercontinental Bank, Union Bank, and FinBank, have moved beyond memorandum of understanding, MOU, in their recapitalisation bids, to the signing of transaction implementation agreements, TIAs, with strategic partners as at July 5, 2011. TIA is a legal document that indicates that the agreements are binding on the parties concerned. First to reach this stage was Intercontinental Bank, which entered into an agreement with Access Bank. Union Bank also entered into a similar agreement with African Capital Alliance while FinBank signed the agreement with First City Monument Bank, FCMB. The CBN has, therefore, extended the interbank guarantee for the three banks till December 31. By this incentive, the apex bank has provided guarantee for inter-bank placements and other placements with the banks by pension fund administrators, PFAs.
“The signing of the three legally binding TIAs represents a significant step towards resolving close to 50 per cent of the capital deficiency across the universe of affected banks,” Moghalu said, assuring further that the remaining five banks would also enjoy the extended inter-bank guarantee when they are able to sign TIAs and recapitalise before the deadline. The extension granted by the CBN became necessary to sustain stability in the banks during the period of transition to new investors. Other affected banks are said to be making progress in discussions with prospective investors, and are, by CBN’s reckoning, expected to move to the TIA stage soon. At that stage, the apex bank assured they would be granted a similar extension of the interbank guarantee.
As part of its new approach, it is the first time in a long while that the CBN governor is delegating one of his deputies to make pronouncements on such policy matters. The governor has always done that. Of particular interest also is the fact that unlike its former combative posture, the CBN is now seeking the approval of major stakeholders to conclude the merger and acquisition processes. That became evident when Moghalu stated that, “the next major step is to seek various regulator approvals. Shareholder approval is another imminent major step. We believe these approvals, which are being fast-tracked, will be obtained within the next few weeks, well before the deadline of 30 September 2011.”
It is believed that the new move by CBN is aimed at pushing the banks to fast-track the process and beating the deadline without necessarily facing any sanctions. The extension of the interbank guarantee offered banks that are able to sign TIA is an indication that the CBN is eager to have the process concluded without further rancor. Afribank had a temporary setback when CBN overruled the MOU it signed with Vine Capital Partners, VCP. By the assessment of the CBN, the VCP does not have the capacity to be a core investor of Afribank. The bank has, therefore, opened talks with Fidelity Bank with the hope of signing an MOU.
Like the CBN, even the banks that have not reached an appreciable level in their recapitalisation efforts are also optimistic that the September deadline will be met. Only recently, John Aboh, managing director, Oceanic Bank disclosed that the bank is in talks with about three prospective investors, but declined to name the investors, leaving the impression that there was uncertainty and that the bank had no stronghold on any of the said investors. However, Diamond Bank confirmed recently that it had expressed interest in Oceanic Bank and that it was carrying out due diligence preparatory to a possible merger. But it would have to contend with two other prospective investors. Similarly, Spring Bank is said to be in talks with ICICI Bank of India and Cloudleap Partners, a United States-based private equity firm.
Interestingly, there is optimism on the part of CBN that the remaining banks would comply and meet the deadline thus leaving no room for sanctions. According to the CBN, the troubled banks represent 23 per cent of the total asset of the banking sector and so should not be allowed to be in a fragile state. Although the economy has suffered a major setback as a result of the crisis in the banking sector, largely due to the approach adopted by the CBN governor, the apex bank still claims that the current crisis is the first in Nigeria’s history in which no single depositor has lost their deposits or denied access to their money, and also one in which no bank has failed.
In a swift reaction, Alaba Olusemore, managing consultant, Nesbet Consulting, a Lagos-based banking and finance consultancy firm, said the decision of the CBN to reverse itself on the planned liquidation of the troubled banks and allow their shareholders to recapitalise the banks is a clear confirmation that something was fundamentally wrong in the original decision of the apex bank to sell off the banks against public outcry that shareholders be given the first option to recapitalise the banks. “I think it has now dawned on Sanusi, that banking is not mathematics; that there are several stakeholders in the affected banks whose interests would be affected by whatever decision the central bank makes regarding the fate of the banks,” the economist told the magazine.
If the CBN had gone ahead with the planned liquidation of the troubled banks, on account of their failure to meet recapitalisation deadline, it would have unleashed dire consequences on the various stakeholders of the banks, the financial system and the economy in general. For instance, the liquidation would have sparked off serious crisis of confidence. The first casualty of the loss of confidence, he pointed out, would be the CBN itself as it would be portrayed as no longer capable of managing or regulating the sector.
Apart from being a major disincentive to savings, financial experts argued that liquidation of the banks would erode the confidence of local and foreign investors who would naturally take their money to other countries where stability in the financial system and safety of investments are guaranteed. Besides, liquidation would cause serious unemployment as many bank workers, and employees of corporate organisations that provide services to those banks would be thrown into the labour market.
Olusemore was, however, of a strong view that the change of gear by the CBN over the planned liquidation of the banks was linked to the re-emergence of Okonjo-Iweala as minister of finance, who, before accepting the offer, insisted on having some measure of control over some agencies and departments under the ministry. “I strongly think that the coming of Okonjo-Iweala is responsible for the CBN’s change of gear with regards to the planned liquidation of the banks,” he said, adding although, the CBN is autonomous, its autonomy is not absolute. The setbacks suffered by the economy as a result of the banking sector crisis is believed to have taken place because the actions of the CBN, unpalatable as some of them have been, enjoyed the support of former finance minister.
But for Bashir Borodo, former president, Manufacturers Association of Nigeria, MAN, “the new initiative is essential because the President has made his priority clear in job creation and there is no way you can create jobs unless the economy is active and buoyant and to do this we need the banks.” In view of the President’s resolve, the CBN has to ensure that no bank goes under; rather they must stay alive to support the economy. Captains of industry believe that the decision to spare those banks and give them a breather is therefore a good development for the economy. “It will allow for money to be put on the table for the real sector. We expect that banks will follow suit with the good gesture,” Borodo told the magazine.
Among other things, experts say this departure from CBN’s radical posture will bring about stability to the economy and comfort to stakeholders. Some people, however, agree with the CBN that the unique thing about this banking sector crisis is the fact that so far, no bank has gone under and none of the troubled banks has failed to meet their obligations to depositors. That is the essence of intervention of apex banks anywhere in the world.
Femi Odulana, a New York-based investment analyst, observed that even though the new position of CBN on troubled banks is desirable, the impression already created by the CBN is that issues and policies are not thoroughly looked into before they are issued to the public. It also creates the impression that the impacts of those decisions on the economy are not sufficiently weighed before they are made. That also calls to question, the level of input that other top executives at the apex bank make before policies are made.
To move Nigeria's economy forward in the next few months, economic experts say the incoming minister of finance needs the cooperation of the CBN and the support of the entire financial services sector. In addition, the minister will need the support of the business community, to spur economic growth, if given the appropriate incentives.
“When Okonjo-Iweala resumes, we will prepare a position paper to further enlighten her on the developments,” said Sunny Nwosu, national coordinator, Independent Shareholders Association of Nigeria, ISAN. From all indications, aggrieved shareholders of the troubled banks are still far from being pacified. Not even the current moves to calm frayed nerves can appease them.
If, indeed, the CBN has jettisoned its traditional combative mode of operation, not a few stakeholders in the Nigerian economy will heave a sigh of relief. That could also mark the beginning of genuine and constructive efforts to revive the ailing economy. And as aggrieved as shareholders of the troubled banks tend to be, it may also mark the beginning of a new era. Above all it will guarantee a favourable investment climate for both local and foreign investors.
Additional reports by Helen Eni, Muyiwa Lucas, Chikodi Okereocha and Abiola Odutola