In a dramatic move, Nigeria's central bank governor, Lamido Sanusi, on Friday sacked the CEOs of five banks and announced a N400 billion bailout to the respective banks. Jaco Maritz takes a look at what prompted the central bank to take this step and what it means for Nigeria's banking sector in general.
Since the collapse or near collapse of many of the world’s foremost financial institutions last year, there has been much talk about the health of Nigeria’s banking sector. The general belief was that although the sector couldn't distance itself from happenings in the rest of the world, everything was under control with no need for any government intervention. Still there has always been speculation that everything was not right.
New Central Bank of Nigeria (CBN) Governor, Sanusi Lamido Sanusi, on Friday however ended the rumours when he announced a N400 billion (US$2.5 billion) bailout for five of the country’s banks – Oceanic Bank, Intercontinental Bank, AfriBank, Finbank and Union Bank. The CEOs and executive directors of the five banks were also suspended and immediately replaced.
During the press conference on Friday, Sanusi, previously GMD/CEO of First Bank of Nigeria, said that as far back as October last year, some Nigerian banks showed serious liquidity strain and had to be given financial support by the CBN in the form of an Expanded Discount Window (EDW) where the CBN extended credit facilities to these banks on the basis of collateral in the form of commercial paper and bankers' acceptances. When Sanusi assumed office as governor of the CBN on 4 June 2009, the total amount outstanding at the EDW was N256 billion ($1.6 billion), most of which was owed by the five banks.
“A review of the activity in the EDW showed that four banks had been almost permanently locked in as borrowers and were clearly unable to repay their obligation. A fifth bank had been a very frequent borrower when its profile ordinarily should have placed it among the net placers of funds in the market," Sanusi explained.
“Whereas the five banks were by no means the only ones to have benefited from the EDW, the persistence and frequency of their demand pointed to a deeper problem and the CBN identified them as probable sources of financial instability, most likely suffering from deeper problems due to non-performing loans.”
The five banks singled out by Sanusi are believed to have impacted negatively on the market in various ways. Strain in their balance sheets prompted the banks to push up the interest rate paid to private sector deposits, leaving their competitors little option but to follow suit. They have also contributed to the destabilisation of the inter-bank lending market as many of their competitors were unwilling to take an unsecured risk on them. It was primarily because of these banks that the CBN took the step of guaranteeing the inter-bank market.
|"This injection is sufficient to resolve and stabilise all the institutions and enable them to continue normal business."|
To get to the heart of the problem and to devise a proper recovery plan, the CBN then did a proper audit of the five banks. It found that the banks do not have the ability to meet the obligations of their depositors and creditors and that they are in a grave situation.
Speaking at the press conference, Sanusi said that a further special examination of the five banks revealed that:
According to Sanusi, the CBN is conscious of the fact that changing management alone cannot solve the problem hence the injection of N400 billion into the five banks. "This injection is sufficient to resolve and stabilise all the institutions and enable them to continue normal business," he said.
The Governor added "the injection of fresh capital by the CBN is a temporary measure as government does not intend to hold the shares for long and shall divest its holdings as soon as new investors recapitalise these banks".
The CBN has extended its examination to cover all off Nigeria's 24 banks. Currently 10 banks have been audited with the whole batch expected to be finished by mid-September.
Following Friday’s announcement by Sanusi, a full suspension was placed on the shares of the five banks for two weeks in order to prevent panic selling. Still on Monday, the share prices of the majority of other banks fell by the maximum level of 5%, indicating nervousness about the entire system.
Despite the markets initial negative reaction to the news, most commentators seem to view the move by the CBN as a positive step. Razia Khan, head of Africa research at Standard Chartered writes in Business Day that "the decision to inject N400 billion of equity into the troubled institutions is a sign of the authorities’ resolve to protect depositors and to ensure that no bank will fail.
"The banks are now more, not less, safe, as a result of the authorities' actions. Based on this precedent, the authorities would likely be prepared to inject further capital into other institutions to stabilise them and safeguard depositors if necessary. Given this, the degree of market nervousness – as reflected in volatility in the US dollar/naira exchange rate – appears to be overdone, in our view," she argues.