Firing the chief executives responsible for mismanaging Nigeria's banks has been the first step to fixing the country's financial problems. Now the system is more transparent, Central Bank of Nigeria governor Lamido Sanusi is spelling out his vision for banking reform and stability. Writer Peter Guest
Letting a major bank fail was never an option, according to Lamido Sanusi, governor of the Central Bank of Nigeria (CBN), but beyond rescuing the banks, holding those responsible for governance failings was critical for lasting reform.
Mr Sanusi's intervention has been swift. The CBN audited the entire banking sector in two rounds. The first, completed on August 14, saw the removal of the heads of Afribank, Intercontinental Bank, Union Bank, Oceanic Bank and Finbank, who were then quickly investigated by the country's Economic and Financial Crimes Commission (EFCC) and charged with a range of offences, including market manipulation and misreporting to regulators. A list of debtors to the institutions was also published.
On October 2, Francis Atuche, Charles Ojo and Ike Oraekwotu, of Bank PHB, Spring Bank and Equatorial Trust, respectively, were removed after their banks were found to be dangerously short of liquidity. They are also now under investigation by the EFCC.
Political minefield
Some observers have been keen to politicise the affair, with accusations of 'northern bias' - many of the bankers arrested were based in the largely Muslim-dominated northern part of Nigeria - a standard refrain among political agitators. Most analysts, however, dismiss this notion, as the evidence base for it is at best circumstantial. But managing the politics may be the governor's main challenge as he tries to move his transparency initiatives forwards.
Speaking privately, a number of investors say that they are confident that Mr Sanusi has enough political capital behind him to sustain the programme of reform. The speed with which the EFCC acted in bringing criminal charges, as well as the public airing of the list of debtors, is an encouraging sign that there is a willingness to dislodge those with vested interests in the continued opacity of Nigeria's banking system. Mr Sanusi has said on a number of occasions that he has the explicit support of President Umaru Yar'Adua in the measures he is taking. How persistent that support proves could depend on his ability to continue to keep in check the political power of that powerful club of wealthy businessmen - bank CEOs included - who have suffered since he began his programme.
Speaking at the IMF annual meetings in Istanbul, Mr Sanusi explained that "taking them on is taking on a whole class of people... But when you see one or two people in jail, you start to think that you're winning the battle." Likewise, he said, the publication of the list of debtors and their debts, a roll call of Nigeria's rich and powerful, was not simply a debt-recovery tactic, he explained, it was a deliberate attempt to undermine the credibility of those well-connected personalities who would attempt to undermine the process.
Capital rules
The specific details of Mr Sanusi's vision for the Nigerian banking sector are still being finalised, but more stringent capital adequacy rules are likely, including a tiered system which would see systemically important banks - those with about 5% or more in market share - subjected to stricter requirements. It is also unlikely that any bank will be allowed to build up more than 20% market share, he says.
Further consolidation is probable, analysts say, as the bailed-out banks will struggle to recover their brand value and rebuild their capital base on their own, although the ability of the remaining banks to absorb their rivals is questionable, especially those which have only recently rationalised their operations following the last round of consolidation under Mr Sanusi's predecessor, Chukwuma Soludo.
An asset management company will be formed to buy up the banks' written-down margin loans at a discount, says Mr Sanusi. "The government then takes those assets, holds them for a while, and then trades. And hopefully the 5% to 10% spread that we give them we can recover over the next few years.
"This will reduce the debt hangover on capital markets operators... What's happening today is that they've borrowed from banks, they've lost their equity and they still have debts hanging around their necks." The hope is that this will free up liquidity and stimulate growth in the stock market. The company will be owned by the bank but run independently, as Mr Sanusi does not believe that the CBN has the in-house capacity for such an operation. It will be funded through a bond, issued by the asset management company and bought by the central bank.
