A TALE OF TWO REFORMS.

The Nigerian banking sector has received more attention than most sectors since Nigeria’s return to civil rule 14 years ago. The banking sector has been in the news for the last decade because of the radical reforms from the current governor of Nigeria’s apex bank, the Central Bank of Nigeria (CBN), Mallam Sanusi Lamido Sanusi and his immediate predecessor, Professor Chukwuma Soludo.

Before Soludo’s period, Nigeria had 89 banks and by 1998, we had 26 bank failures and most of the banks had weak capital bases and most depended on public sector deposits for survival. There gross insider abuses resulting in huge non – performing insider related credits.

Soludo assumed the office of the governor of the apex bank in 2004 and immediately introduced a 13 point reform agenda. Soludo’s reform was targeted at bringing about a sound, competitive and transparent banking system that would be appropriately suited to the demands of the Nigerian economy but at the same time, be able to respond to the challenges of globalization.

Highlight of the first phase was the requirement of a minimum capitalization of banks at N25billion before December 31, 2005, of which the banks could do this on their own or by merging with other banks through mergers and acquisitions (m&a). Before 2006, the minimum capital requirement was N1billion for existing banks and N2billion for new banks. Most of the existing banks were small, weakly capitalized banks, family owned and privately owned and 10 banks controlled 50% of assets and deposits in the banking sector.

A major way these banks met the N25 billion minimum capital was by issuing Initial Public Offerings (IPO’s) and Public Offers (PO’s) in the capital market and this changed the way people viewed the banking sector in Nigeria. It really changed the way business was being done in Nigeria. In Soludo’s view, “it was a new dawn for the banking system. The public offers by the banks in order to recapitalize also revolutionized public awareness of the capital market. The sector boomed in subsequent years and rose to a capitalization of nearly $100 billion before the global financial crisis.”

By the end of December 31, 2005, 89 banks had decreased to 25 larger and better capitalized banks by January 2006 and 14 banks lost their licenses. There was an aggressive expansion of banks and a year later after consolidation, 14 Nigerian banks ranked among top 1,000 banks in the world and in 2008, two of them were in the top 300. But most of the funds raised was bubble capital and this was largely responsible for the spectacular collapse of the stock market in 2008 when effects of the global financial crisis began to be felt around Africa.

The stock market collapse in 2008 made banks to be unable to access funds from foreign investors, which then caused a full blown banking crisis. Banks became insolvent and were kept alive by funds from the CBN’s Expanded Discount Window (EDW). This period coincided with the end of Soludo’s tenure as CBN governor and the appointment of the former Managing Director of First Bank, Mallam Sanusi Lamido Sanusi, as his successor.

After taking over the office of the CBN Governor from Soludo, on June 4, 2009, Sanusi set up a special joint committee of the CBN and the Nigerian Deposit Insurance Corporation (NDIC) to conduct a special examination of all 24 universal banks in Nigeria. In August 14, 2009, CBN announced results of the examination done on 10 banks and found 5 banks, Oceanic Bank, Union Bank, Afribank, Finbank and Intercontinental Bank, were insolvent. The aggregate percentage of their non-performing loans was 40.81%. CBN then injected 420 billion into these banks and sacked their CEO’s and Boards, who were then handed over to the Economic and Financial Crimes Commission (EFCC) for prosecution.

In October 3, 2009, the CBN completed the special examination of the then remaining 14 banks and dismissed the CEO’s of three banks, Bank PHB, Spring Bank and Equatorial Trust Bank and added N200 billion into the financial institutions. CBN then set September 30, 2011 as deadline for the banks to recapitalize. Intercontinental, Oceanic and ETB merged with Access, Ecobank and Sterling Banks respectively, while Afribank, Bank PHB and Spring Bank had problems finding willing suitors.

In August 5, 2011, CBN revoked their licenses on grounds that they didn’t show any evidence of beating the deadline. NDIC did not liquidate them but created new banks that took over their assets and liabilities; Afribank became Mainstreet Bank, Bank PHB became Keystone and Spring Bank became Enterprise Bank. These banks were later acquired by the Asset Management Corporation of Nigeria (AMCON) which was established to acquire banks’ bad loans.

Sanusi then limited the terms of the CEO’s of banks to a maximum of 10 years tenure, got banks to adopt International Financial Reporting Standards (IFRS) and replacing the universal banking model with the new bank categorization policy. Financial analysts describe Sanusi’s policy as a reversal of the consolidation policy of Soludo in 2005 because it meant that banks would serve different markets segments that were recreated, instead of single big banks.

The IMF and international financial rating agencies have endorsed Sanusi’s reform, saying it stabilized the Nigerian banking sector, but Nigerian financial analysts say it lead to the loss of jobs created in the sector during Soludo’s era. Financial experts also say that both reforms lead to the strengthening of the banking system. The inability of the Federal Government to tackle corruption and the weak rule of law is what is causing great challenges, for not just the banking sector but all other sectors. The banks find it hard to give long term loans and when they do, they issue rude and exorbitant interest rates that Nigerian business men and women are discouraged to seek for them. Even those who do, do everything bad or corrupt to pay back their loans.

What do you think? Do you think Soludo’s policies were better than that of Sanusi’s or the other way round? Do you think that both would have gone hand in hand? What do you think the next CBN governor who would replace Sanusi, next year should do?

Posted from WordPress for BlackBerry.

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