The Governor of the Central Bank of Nigeria, Mr Sanusi Lamido Sanusi recently delivered a highly revealing speech. It was not in the usual central bankers’ gibberish. He told the truth. Well, at least he told as much of the truth as any central banker in this present circumstance can be expected to admit in public. He admitted that there is a major banking crisis looming, and he said that Nigeria has already been through something ominously like what we are facing today, all over the world.
Undoubtedly, the global economy is suffering through the financial crisis of an exceptional scale. The origin or catalyst of this crisis is credit expansion. Many countries are struggling with the consequences of the global credit excess which, in the lay man‚Äôs parlance, means people not cutting their coats according to the size of their clothes. The question today, obviously, is this: How are we going to get out of this mess? This is the top priority for governments and central banks all over the world, except of course Nigeria. There are so many players responsible for the capital market boom and bust, the credit crisis, and the financial collapse that it is difficult to blame any one person–it is a broadly shared culpability. There are many who were rooting for the blame to be assessed to a particular player, or a specific act of malfeasance. In reality, the situation is far more complex. The responsibility is widespread, and there is plenty of shared blame. It is clearly a “system failure”-not merely one bad decision, but a cascade of many decisions that produced tragic results. The recklessness and incompetence seemed to be a team effort. With no single villain and so much blames to go around.
That does not mean we cannot attempt to highlight those whose contributions have disproportionately led to the catastrophe. After exhaustively reviewing this debacle, it will be deceitful to assume that the Central Bank did not cause the crisis, it will equally be wrong to assume that this could not have been foreseen. Many of the monetary and regulatory errors that directly led to the present crisis are attributable to the Central Bank. Under the guidance of Chukwuma Soludo, the CBN abused monetary policy, ignored critical lending issues, and failed to regulate new and irresponsible banking products such as the margin loans. Several of Soludo’s policies proved to be wildly misguided: the recapitalization and consolidation of banks, regular interventions to protect risk asset pricing, the unrealistic low Monetary Policy Rate (MPR) and his nonfeasance in supervising lending. Soludo made the mistake in presuming that the self-interest of banks was such that they were capable of protecting their own shareholders and depositors. If we have to put our finger on the single intellectual flaw that underlies the capital market collapse in Nigeria, the credit crisis, and the problems with bad loans, it would be the misplaced belief that markets could self-regulate.
The single biggest fault found within the CBN was its inability to fulfill its responsibilities as bank regulator. The CBN not only failed to supervise lending institutions effectively, but it also ignored the most significant shift in lending standards in the history of human finance: unsecured lending. The results were disastrous. The CBN, as an institution, failed the nation. It indirectly encouraged mass speculation. It failed to supervise innovative new forms of lending that could destroy the industry. It is rather unfortunate that the Central Bank was late in recognizing the existence of the bubbles in our economy. A proactive CBN should have known that the capital market boom was just a bubble and the largest single bubble in the history of Nigeria. Or what did the central bank think that it was?
Gentleman Soludo is no longer in office. It is therefore no use to plummet him. He tried his best and was no doubt exceptional. He is a man I will always admire. It is left for the new man to correct what was inappropriate in the strategy of Soludo. The rest is history today. Lamido has stated in unequivocal terms the state of our banks which is the result of some regulatory and supervisory gaps. He has also gone ahead to intervene in some banks which in his opinion has cholera.. He does not want the cholera to be widespread and despite the curiosity of many he felt there was no need to conduct a proper test of cholera on all before taking a decisive action of such significant dimension.
What were the options open to Lamido?
Liquidity strain is the great catalyst of the present banking crisis. Soon after the consolidation of banks in 2007, many Nigerian banks were awashed with liquidity, business outlook looked very good and many foreign investors were eager and willing to invest in banks. Many of them raised funds at the international markets just before the global economic meltdown. The CBN looked on without considering the implication on the money supply. Characteristic of the mentality of an average banker, banks looked for avenue to deploy this excess liquidity. Some became very aggressive in lending which is considered a very easy avenue for increasing revenue and maintaining a lead in the industry’s unhealthy competition landscape without considering the risk, some banks used short term funds to finance long term assets and all these created a serious liquidity strain which undoubtedly threatened the safety of the industry. This is another way of saying that the bubbles that were created by both central bank and the banks eventually popped. The visibility of this popping became more apparent during a time of global credit crunch when the foreign investors had to repatriate their investments.
Decisive measures were not taken until after the crisis had reached a critical point. The Central bank did not recognize the problem soon enough, and only when a major crisis emerged and banks stopped lending to each other as is expected, did they take steps to solve the problem by creating the Expanded Discount Window (EDW). The EDW policy assumed that the liquidity strain of some banks or the industry in general was a short term thing. The CBN did not at any time compute the volume of foreign capital that came in and how much has left, it did not compute the potential loss facing banks as a result of loss of value of assets they funded through the capital market and attempt to extrapolate their capital impairment. If the sums had been done it would have been clear how much the industry requires and an appropriate strategy fashioned out.
From the various comments of the CBN governor, one can clearly deduce that the major ailment of the banks is the bad risk asset (loans) they carry in their books. This may also have led to the desperation of some banks to doctor reports sent to the regulator. It is very normal in banks worldwide to see risk assets go bad. There is a measure of risk attached to lending money and it has never been a criminal offence to lend or borrow money.. It is what banks live on. It is this lending activity that ensures that the economy is growing, people are employed and the standard of living is improving. That is why the US government as governments in other developed economies feels concerned when banks stop lending. It can be likened to stopping the flow of blood in the system. It is however the dimension of these bad loans that have given the governor a lot of concern just as it should for any discerning mind. When a loan goes bad the implication is that a bank has to write it off from the profit the bank has made and if the profit is not sufficient then it is charged to the capital of the bank. This literarily means the shareholders will bear the loss. From the statistics that have been released so far some of the banks have such huge bad loans that may have completely eroded their capital. This does not however mean that the depositors of the banks have lost their money. Proactive regulators make efforts to protect the depositors as the deposits are insured even though there is a lot of room for improvement in the amount insured in Nigeria. It is speculated that huge bad loans is an industry wide problem.
One of Lamido’s concerns therefore is the heavy credit losses CBN has identified in the banks which have impaired on their capital. Typically, when banks or any going concern are found to be capital-deficient, the natural thing to do is for the authorities to encourage them to carry out re-structuring and raise additional capital from private investors. This is exactly what is being done today in many countries. In the peak of the global financial crisis in the United States, the Federal Reserve System released a vague summary of the results of the so-called stress test that was placed on the 19 largest banks. There were a few details released to the public about which banks are in what degree of trouble, but the FED stated clearly and unequivocally the banks that must be recapitalized by private investors. The FED did not tell everybody how badly these banks need this recapitalization; for fear that the money will not be forthcoming, the banks will be priced cheap and depositors will move their hard earned monies from such banks. This is a US economy where the average level of public enlightenment can be assumed to be higher than that in Nigeria. The FED identified the need to protect the confidence the banking and investing public have in the system.
The first and credible option open to CBN in a situation like this is for the CBN to give the existing shareholders and management of the banks the opportunity to recapitalize their institutions. In an extreme case where CBN has doubts on the quality of management it can compel the Board Of Directors to restructure and effect a management change. There are different instruments that can be used to recapitalize the banks and bring them to an acceptable capital ratio. Unlike the comedy of the Soludo era the capital verification will be expected to be more thorough. It is not clear to me how Lamido expects the capital markets both domestic and international, to supply enough capital to recapitalize a banking system that has been badly ridiculed and sensationalized as ours in recent times. It is also not clear to me how any analytical mind will expect foreign investors to bring their hard earned money into Nigeria that is perceived as a high political risk. Except of course he intends selling those banks for peanuts and to his cronies with complete disregard for the sweat equity and goodwill the founders of the business have injected over time. It will be curious to see the value that will be placed on the banks after the audit he said would precede the sale. Hope springs eternal. Some of the banks we are talking about have been built from nothing by hard working Nigerian entrepreneurs, they have toiled day and night to bring the banks to the height they are and whether Sanusi Lamido likes it or not some of the banks are symbols of the ingenuity and hard work of Nigerians.
The CBN governor, in one of his numerous interviews, has also hinted, as an option, to merge the insolvent banks with the more solvent banks. That sounds good, but there is a problem: some of the largest banks in Nigeria who control probably 70% of the deposits are among the banks that have been “captured” by the powers that be. Mergers and acquisitions have their own challenges globally. The problems of some of the “captured” banks can be traced to the forced consolidation of the Soludo era which diluted skill competence, culture and strategy. If indeed he likened the “captured” banks to patients having cholera it will be better for these banks to continue to be in intensive care with proper attention than for them to be merged with anyone that is otherwise strong and healthy.
In a situation of bad loans of unimaginable proportion as we have seen, a credible and transparent option open to a proactive Central Bank desirous of protecting the industry would be the separation of the bad assets and creation of an asset management company or what can be called the “bad bank”. Nobody else has enough money to fund it but the government. It can also be funded through the issuance of a debt instrument like bond guaranteed by the CBN. With the availability and joblessness of EFCC the government can buy these bad assets from banks at a discount and get the law enforcement agents who will be expected to recover the full value of the debts to go after the bad debtors. This could be another avenue for the government through the CBN to make additional revenue with which it can use to fund its budget deficit. In my opinion, it is a better approach than injecting capital into the banks without the tax payers, whose money has been injected, deriving any direct benefit from it. Nobody knows whether the infusion of capital by CBN will solve the additional problem it has created for the banks.
For a government that understands the very important role that banks play in an economy, it is not out of place for the Central Bank to consider the possibility of injecting public funds as some have criticized. This means recapitalization with the state budget. This is being done in the United States, it is being done in Great Britain. It is being done all over the world. The governments are intervening in order to bail out private banks. This is the ultimate protection given to what can be considered as the most powerful special-interest group in the world economy. Whenever banks sneeze the economy develops flu. So, as a good central banker Lamido is spot on in using state funds to bail out banks. Perhaps, he should have obtained approval of the National Assembly. A creative central banker would however use the injection of state funds to create value for the state without destroying the basic existence of the banks or creating unnecessary panic and distraction. To further buttress this possibility, the US government on Monday reported about $4billion in profit from large banks that have repaid their obligations from last year’s bail out. It will be recalled that at the peak of the financial crisis, Ben Bernanke the US Federal Reserve Chairman, pressed the congress to approve a $700billion financial bailout of some of US’ financial institutions which were in danger of collapsing if not recapitalized. These institutions include Goldman Sachs, Morgan Stanley, American Express, Citibank and Bank Of America. It is worthy to note that some of these institutions represent the cherished American entrepreneurial spirit. It would have been disastrous if they were allowed to go under when all that was required was the injection of capital for them to survive.
Financial system is built on the trust between lenders and borrowers. Once this foundation is shaken, it takes time to resume a normal functioning of the financial system. Currently, the global financial system is still afflicted by a loss of confidence. In order to allay widespread fears over financial instability, the authorities around the world have taken numerous steps such as capital injections, public guarantees for banks’ debts, separation of toxic exposures and the like. It is therefore curious that it is only at this time that our central bank governor will choose to create panic and confusion in the financial system. It is no crime to borrow neither is it a crime to owe. It would have been challenging and a mirage for our committed industrialists to set up the various factories and industries employing thousands of people if they did not borrow. The economies of many developed nations survive on credit. More than 70% of citizens of Great Britain are on one form of credit or the other. Our brothers and sister abroad who send pictures of beautiful homes and cars have borrowed to achieve that feat. Companies need to leverage to grow. It therefore beats my imagination why the CBN governor had to muddle issues up and create a situation where people feel it is now a sin or criminal offence to borrow. For every debtor that is compelled to pay before term a number of jobs will be lost and every job lost there is a potential increase in crime rate. The publication was needless and reveals the immaturity Lamido has brought into the office of the CBN governor. There are more civil and cultured ways to approach the issue of bad bank debtors.
The key issues here are “impaired assets,” which is often designated as toxic assets. They are loans that have been given to business men to expand their business, create jobs and improve the GDP of Nigeria. Regrettably, some of these business men have diverted the funds to buy houses in Dubai and other choice areas of the world and blaming it on recession. These are clearly dubious individuals who must be brought to book for money laundry. Their assets both domestically and internationally must be confiscated and sold to recover whatever can be recovered. Such unscrupulous elements must also be sent to jail if found guilty. There are also loans that have been given to both informed and uninformed Nigerians to buy shares in mind boggling proportions. A time was when all your banker friend told you was to come and borrow money to buy shares. Everybody was doing it and making money so why not you? This is akin to the real estate scam in the US. People were given loans far beyond their income and hinged strictly on the capital gain of the asset. Many lost their homes when the bubble bust, many became tenants and squatters and the banks moved on. Repossessed houses in the US have brought down the value of real estate. It was clearly recklessness and unwarranted gamble on the part of the banks. The banks have lost money and the borrower too has lost money. In civilized world, whatever is left of the asset under finance is sold because it is expected that the borrower would have made a form of contribution or the other. The crude method adopted by CBN cannot therefore be appreciated.
It is on the basis of the possibility of alternatives and options with less disruptive tendencies open to the CBN governor that conspiracy theorists have gone to town. One theory suggests that the CBN action is one of the grand plans of the ruling party the People’s Democratic Party (PDP) to hold on to power and create a one-party state in 2011. It is on record that politics in this clime is capital intensive and the biggest pocket so far belongs to the PDP who control the Federal Government and many states and by extension the nation’s vault. The egg heads in PDP have therefore done an environmental scanning to see the possible areas where the opposition whether real, imagined or apparent can get financial support in the face of the ruling party’s mismanagement of state affairs and dwindling popularity. The regular appearance on the radar is the banking sector which is heavily dominated by southerners and has enough deep pocket that can create problems for the PDP in 2011. This was perhaps the plot that the Vanguard Newspaper stumbled on in March and mis-interpreted to be a northern agenda. The idea was to completely mask it so that the political agenda is not obvious. The targets were obvious.. They have to be the CEOs that wield influence and that appear not to be easily influenced.
A plot was therefore hatched to create a situation where banks appear to be unsafe and therefore create panic and fear in the banking sector that will ensure that they do not contemplate giving loans or donations frivolously and therefore weaken opposition financially. The search was on for a CBN governor that can be trusted to do the hatchet job and mask the intention. Naturally, Sanusi Lamido Sanusi became a popular choice among the egg heads. His credential is his strong commitment to the north, loath for affluence, his bitterness against some of his colleagues in the industry, his extreme views on the practice of banking in Nigeria, his unforgiving spirit and his talakawa lifestyle. Up until recently, Lamido as a GM in First Bank insisted on remaining in his Oyadiran Estate, Sabo, Yaba home with his 3 wives and 12 children when his colleagues and contemporaries were living in sprawling compounds in Ikoyi, Lekki and Victoria Island. The egg heads also worked very well on their colleagues in the National Assembly using the already existing political structures and this ensured the quick approval of Lamido by the National Assembly.
The second conspiracy theory says that this intervention in banks and the humiliation of the executives of the banks is Sanusi Lamido‚Äôs agenda at taking a pound of flesh on Erastus Akingbola the Vice Chairman/CEO of Intercontinental Bank Plc. It is a well known fact that Akingbola drew the first blood when Lamido was the GMD/CEO of First Bank which was alleged to be de-marketing Akingbola‚Äôs Intercontinental Bank for market share. Akingbola wrote a protest letter to the regulatory authorities including the CBN governor and some state governors in the north and caused to be published the protest letter. It is believed by the theorists that Lamido was convinced that Akingbola was working with some elements in First Bank to remove him as the MD because there was a circular from the then CBN Governor Professor Soludo that any bank caught de-marketing the other would have its CEO removed. Despite the fact that Lamido wrote a letter of apology to Akingbola then he has not forgiven him and therefore found his new position as an opportunity to finish his adversaries. The theorists‚Äô further claim that upon assuming office Lamido boasted to friends and associates that what they see as Intercontinental will soon dissolve into oblivion. Lamido may not have woken up to say let me bring down Intercontinental Bank. The strategy was to use a twisted, backwards logic, and set out to do what he thought was ‘good‚Äô for the industry and the people will embrace but which will ultimately hurt his adversaries. Today, skillful politicians around the globe have proved adept at manipulating populist sentiment and using democratic and institutional structures to erect forms of personalized agenda. As Hitler said ‚ÄúThe great masses of the people will more easily fall victims to a big lie than to a small one‚Äù. According to this theory, the thinking is that it is better not to isolate Akingbola in order not to make the intention obvious.
The third conspiracy theory claims that the bank CEOs especially Akingbola and Cecilia Ibru were becoming too visible for comfort and the powers that be do not clearly understand their intentions. The best thing therefore to do is for their image to be eclipsed now before it’s too late.
Whichever of the theory sounds credible to you the fact remains that if there is no crack on the wall it will be impossible for the lizard to penetrate. The affected banks obviously created situations where it became easy to make them preys. It is a situation of the thunder aiding the bomb to explode. Should any of the conspiracy theories be true it will be the tragedy of our nation. We have seen politicians go to the negative extreme to achieve their objectives which usually are not in the interest of the masses. A grand plan of this nature will be a new dimension that should be closely watched. In whose interest is it if Nigeria becomes a one party state?
Be that as it may, there are three major reasons why individual banks fail. The reasons are credit risk, interest rate risk, and foreign exchange risk. Two other potential sources of failure are bank runs and fraud. Bank runs occur when depositors or other creditors fear for the safety of their funds and try to withdraw them. During the financial debacle in Russia in August 1998 and recently in Northern Rock in Britain, CNN and other television stations showed long lines of Russians and Britons respectively trying to withdraw their funds from local banks. Most banks do not keep sufficient funds on hand to meet unanticipated large-scale withdrawals. Under these circumstances, the banks cannot pay off all depositors, words go round and the long lines become longer. A “silent run” occurs when large creditors withdraw their funds especially through the clearing system. If the run is on an illiquid but solvent institution, that institution may be able to borrow from the lender of last resort, the CBN. Insolvent instituÔ†òtions may fail but illiquid institutions may survive if well handled.
The depositors’ lack of confidence in the banks currently being managed by CBN is because they believe that the banks have large losses due to credit risk and that their deposits are at risk. The basic raw material of banks is funds. It can be likened to the blood that flows in the human system. If a doctor diagnoses a patient to be insufficient in blood, it is not enough reason to allow the patient to die. Just like humans who have different types of blood, banks have different types of funds or capital they can rely on. The challenge is usually to find the right type of blood and the right quantity for the patient. The parents or family members of the patient will be given the opportunity to look for a donor and in the event that they are unable to find one the doctor may decide to sell to them from the blood bank at his own term. The urgency of the blood transfusion will also determine which approach is adopted.
I do not understand cholera as much as the CBN governor because I thought it is no longer a common disease and there are clear ways to eliminate such diseases. The more I read between the lines the more I am tempted to believe that one or all the conspiracy theories may be correct. It is curious that the 5 bank CEOs were not given the benefit of fair hearing. Never in the history of this administration has the president or the government taken such quick action on any matter of the state and that affects the welfare of the citizens. We are all witnesses to the President’s promise to declare an emergency to address the power problem which is critical to all other sectors of the polity and economy of Nigeria. There are many and more pressing issues awaiting the attention of Mr President which are yet to receive his glance. It’s needless to list them. Why and how then did this issue of banking attract the urgent attention of Mr President? How then did Lamido hurriedly obtain approval from the President to effect the sack of the CEOs? The precision with which this was executed reminds me of a military coup de tat. The principle of fair hearing cannot be sacrificed on the altar of expediency as he explained with his cholera analogy. The action of the CBN governor is tainted with fundamental defect. Like a child who was just bought a new toy the CBN governor was too much in a hurry to exercise the absolute powers conferred on him by Banks And Financial Institutions Act (BOFIA) to remove any manager or officer of a bank. Lamido had complete disregard for the fact that these companies are public quoted companies with shareholders who should be given the opportunity to know the state the CBN found their banks.
Still reading between the lines, the choice of words of the CBN governor tempts me to want to believe in the conspiracy theory. During the BBC Hausa Service on Monday reported in many newspapers, Lamido vowed that the “highly placed Nigerians” involved in the collection of non-performing loans that almost crippled the nation’s commercial banking sector would soon get the shock of their lives. Has Lamido become the judge, prosecutor, and witness in the same case? How can he be crying more than the bereaved? The biggest losers in the confusion that Lamido has created for whatever agenda are the shareholders who are numerous. In his quest to kill a rat Lamido has ended up setting the whole village on fire. He has completely disregarded the fact that the value of N10billion to Akingbola, Ibru and others is the same as the value of N1,000.00 to the common man who has invested his hard earned benefit as shares in any of these banks. There are more questions begging for answers. Unfortunately, we will never get the answers and these conspiracy theories will continue to haunt us.
There are much more compelling restructuring of the banking system that Lamido should sit down to tackle. A situation where a company that has a paid up capital of N10m is borrowing N1billion is ridiculous and laughable. Successive CBN regimes have ignored this landmine and relied on what is called Single Obligor Limit for banks. This is the maximum amount that a bank can lend to a single entity and it is a function of the shareholders’ funds that the bank has.. In my opinion, this is archaic and does not address the peculiarity of our clime. A more tolerable risk management framework will be to index the amount a company can borrow from banks to the company’s paid up capital. This will ensure that companies retain profit in the business if they must grow. It also opens up a lot of companies to the opportunities of raising funds from the capital market. He needs to address the issue of corporate governance which we have seen is non-existent in most banks in Nigeria and he needs to look into the amount insured of depositors with banks. These are in addition to the huge challenge he is facing in Nigeria’s macroeconomic model. His score card after his tenor should be marked against the inflation rate, exchange rate and convertibility of the naira..
Finally, fraud is a legal concept, and what constitutes fraud in one country may be standard business practice in another as we have seen in many instances. If the CBN has evidence that the executives and board of the banks have been fraudulent they should prosecute them through the legal process. Muddling up issues never get us anywhere. Clearly, the Lamido and his advisers were not thorough. They did not consider the consequences of their action. Just yesterday, it was reported that Lamido vowed to resign if his decisions were fundamentally wrong. My heart bled for this nation. What is the significance of Lamido’s resignation to the irreparable damage he has done to individuals, to the institution of banking, to the nation’s image and to the economy? The good names which these lady and gentlemen have taken time to establish have been dragged in the mud. Even when the dust settles the scar will always be there.
