Following a banking crisis in 2008, Nigeria has embarked on ambitious reform in the sector. This has included a rigorous audit that resulted in replacement of management at several banks, the ending of 'universal banking', measures to boost lending to industry and small businesses, and a new corporation to take over banks' bad loans. Stephen Timewell assesses how likely this transformation is to succeed.
At a meeting of Nigerian bankers and officials in Enugu, the capital city of Enugu State, last December, there was unanimous agreement that the future of the country depended upon a revitalised banking sector. Now, more than 15 months since the governor of the Central Bank of Nigeria (CBN), Lamido Sanusi, assumed office and initiated a dramatic series of banking reforms, the question today is whether the governor's transformational agenda is enough to rebuild the banking sector and provide the necessary catalyst for economic growth.
In the second half of 2009, Mr Sanusi, the former chief executive of the country's largest bank, First Bank of Nigeria, oversaw a mass of reforms going right to the heart of the industry in order to ensure a strong, sound and reliable sector and to stimulate increased lending to other sectors.
Previously, credit was going to margin lending to invest in stocks, oil importers and insider lending, all of which led to the domestic crisis.
In the aftermath of the global financial crisis, Mr Sanusi's strategy was to stabilise the banks, especially those that incurred monumental losses in the stock market (the Nigerian Stock Exchange lost 45% of its value in 2008) and the downstream oil and gas sector.
The root of the problem
Mr Sanusi's approach was brutal and was designed to tackle structural problems at the root. A key aspect of this reform was to carry out what rating agency Standard & Poor's (S&P) described in a report earlier this year as an "extraordinary audit" of the banking sector.
S&P encapsulated the process in the following way: "The creditworthiness of Nigerian banks is shaped by the high risks inherent in operating in Nigeria - including high unemployment, low wealth levels and high political risk. Economic deterioration, weak corporate governance and poor risk management prompted major intervention by the CBN in the second half of 2009 to safeguard the stability of the domestic financial system.
"Following the reliance of a number of banks on the CBN's liquidity facility, the CBN and Nigeria's National Deposit Insurance Corporation conducted an extraordinary audit of the banking system.
"Finding large-scale fraud, severe and unrecorded asset-quality deterioration and increasingly tight liquidity, the CBN took control of 10 banks in two rounds, removed the senior management from eight of them and recapitalised them. These banks accounted for approximately 50% of the total assets of the sector. The estimated amount used to recapitalise these banks stands at about N600bn [$3.9bn]."
Bailout to strategic banks
Mr Sanusi was keen to avoid financial meltdown and a run on the banks. The bulk of the N600bn bailout was given to five banks that were seen as strategic to the economy to shore up their operating capital. These banks were Intercontinental Bank, Oceanic International Bank, Union Bank of Nigeria, Bank PHB and Afribank.
At the end of 2009, according to S&P, 14 banks had successfully passed the CBN's audit, with 10 banks (including the above five) being brought back to health in varying degrees by the central bank; eight of these 10 so-called 'quasi-nationalised banks' have new senior management. The accompanying list (right) shows the 14 banks that have passed the CBN audit and the 10 that have not.
The CBN's deputy governor, Dr Kingsley Chiedu Moghalu, noted in July: "Had those [five] banks been allowed to fail, other major banks that were otherwise not in a fragile condition would have been adversely affected, with dire consequences for the country's economy. We should not forget that the affected banks had N3600bn in deposits, nearly 10 million customers and 50,000 staff members."
Cleaning up the mess
The CBN audit highlights not only the desire for greater transparency and improved corporate governance in Nigeria but also the need for improved supervision and regulatory oversight. S&P notes: "Corporate governance issues including fraud and falsified financial accounts, lending to directors for stock investments and lending to related parties, among other factors, resulted in the arrest of several bank chief executive officers [CEOs] and the removal of entire executive committees from the banks rescued and recapitalised by the CBN."
In other moves, the CBN mandated a common year-end for all Nigerian banks from December 31, 2009. In some of the tables in these articles, the relevant year-ends can differ between banks, making comparisons awkward. The authorities have attempted to provide a series of figures as at September 30, 2009, and helped to clarify issues regarding non-performing loans (NPLs) and capital. Rating agency Fitch notes: "Union Bank and Oceanic were technically insolvent at September 30, 2009, and were operating under regulatory forbearance from the CBN."
Guarantee scheme
The reforms, however, involve much more than just the audit and were not a one-off phenomenon. They are ongoing. As Chris Newson, CEO of Stanbic IBTC Bank, puts it: "Reform is a process, not an event. It will take time." And as part of this process Mr Sanusi has initiated a number of other initiatives.
One key move is the establishment of the N200bn Small and Medium Enterprises Guarantee Scheme, which is expected to catalyse adequate flows of finance to the small and medium-sized enterprise (SME) sector. Under this programme, the CBN provides guarantees for 80% of the risk exposure of banks that lend to SMEs. This, the CBN believes, will absorb the risk element that inhibits banks from lending to industry and will also limit the collateral impediments to borrowing.
This 80% guarantee by the central bank for SME lending has been warmly welcomed by banks, especially institutions such as Skye Bank, whose main focus is on SME lending, which accounts for 25% of its loan portfolio. Discussing the guarantee scheme and other initiatives, Timothy Oguntayo, executive director of Skye Bank, says "the net benefit will be enormous" and that lending to SMEs will increase. He adds that if government plans to improve the country's electricity and power supplies are implemented, this will help SMEs significantly and enable them to reduce their high production costs.
Mr Newson agrees. While he notes that it is difficult to develop a credit environment among SMEs, he believes that the 80% guarantee fund will kick-start the informal sector and give time for traders and others to improve their financial expertise.
He adds that in an estimated working population of more than 42 million in Nigeria, there are 10.9 million traders who are part of the large informal sector, which has only limited access to bank funding. He further adds that farmers constitute 25% of the working population and that agriculture contributes a little more than 40% of Nigeria's gross domestic product, but bank finance to the agriculture sector accounted for just 1% of the total bank lending of N9000bn at the end of 2009.
Investing in industry focus
Another CBN initiative has been the establishment of medium- to long-term financing in the form of debentures amounting to N500bn issued by the state-owned Bank of Industry for investment in industry. The funds are to be channelled through the Bank of Industry for lending to banks at a maximum interest rate of 1% for disbursement of loans with a tenor of up to 15 years at concessionary interest rates of not more than 7%. N300bn of this facility is devoted to the power and airline sectors, while N200bn is dedicated to the restructuring of loans for manufacturing and SMEs.
Amcon to the rescue
The prime move in the strategy to restore stability and growth in the banking sector has been the ambitious creation of the Asset Management Corporation of Nigeria (AMCON). This measure, which was signed into law on July 19 by president Goodluck Jonathan, is designed to stimulate the recovery of the financial system and, in turn, the wider economy by providing liquidity to the banks through buying their NPLs.
Under the new law, the toxic assets of the banks would be exchanged for seven-year bonds or other debt instruments issued by AMCON and guaranteed by the finance ministry. With bad loans off their books, the central bank hopes new investors will recapitalise the rescued lenders (or quasi-nationalised banks), resulting in more credit to the private sector and stronger banks.
"AMCON will help restore confidence in Nigeria's capital markets and prevent continued job losses in the country's banking industry," says O J Abuah, special adviser to Mr Jonathan.
While the establishment of AMCON is seen as setting the stage for the resolution of Nigeria's banking crisis, there are clear concerns about whether the new institution can achieve its aims. Worries have emerged over how effectively AMCON, which was expected to begin operations at the end of September, will be managed.
However, the appointment of an experienced banker, Aliyu Kola Belgore, as chairman in early September, along with Mustapha Chike Obi as managing director, has been well received by stakeholders. Mr Belgore has been described in the local press as "one of the most brilliant minds Nigeria can boast in the business community".
Bankers are enthusiastic about what AMCON can do and the opportunities it offers. In late July it was announced that a N1050bn sinking fund is being set aside for AMCON by the central bank, the Nigeria Deposit Insurance Corporation (NDIC) and all banks operating in the country.
According to Mr Moghalu, this is the first time that banks anywhere in the world have contributed to bank bailouts on a voluntary basis. He adds: "Moreover, based on estimates that NPLs in the banking system amount to N2000bn, a combination of the sinking fund and projected recoveries by AMCON mean that the Nigerian banking bailout will probably be accomplished with little or no contribution of taxpayer funds."
Believing that AMCON would act as a shock absorber for the risks troubling Nigeria's banks, Aigboje Aig-Imuokhuede, managing director of Access Bank, says: "We have no doubt that when AMCON becomes operational, the Nigerian banking industry will be starting almost with a clean slate, a very derisked banking industry."
Can AMCON deliver the results expected of it? Much depends on whether the new management installed can make the process of buying bank NPLs efficient and effective and also provide confidence for potential new bank investors.
Funke Osibodu, the new chief executive of Union Bank of Nigeria, one of the country's largest banks and also one of those bailed out by the CBN, is hopeful but cautious. "A lot of work has been done on AMCON; it now depends on how fast it works. If AMCON does not work, nothing will happen - it all depends on AMCON," she says.
Can new investors be found to recapitalise banks such as Union Bank? While there are rumours of possible mergers and acquisitions among the rescued banks, the outlook is uncertain, with much depending on the effectiveness of AMCON. Nevertheless, Mrs Osibodu is cautiously optimistic. She says: "Recapitalisation is possible by the end of 2010."
End of universal banking
Another important step in the reform process has been the plan to abolish universal banking (where Nigerian institutions can operate across several banking sectors), which was first adopted in 2001. In April this year the CBN said it was reviewing the policy and on September 8 it announced the abolition of universal banking, saying it had exposed the banking business to risks that "challenged the stability of the financial system".
Now banks will be required to define their business in terms of three core areas in line with either commercial (regional, national and international), merchant, or specialised banking (microfinance, mortgages, non-interest and development financial institutions). All the existing universal banks in the country are required to prepare and submit to the CBN their plans for compliance with the new banking regime no later than January 2, 2011.
A CBN statement says its governor will authorise the operation of commercial banks on a regional, national and international basis as of October 4, 2010, when the regulations come into force. No commercial bank will be permitted to offer insurance, investment advisory or asset-management services, which were allowed previously under the universal banking regime. In short, banks' operations will be streamlined, non-banking activities will be prohibited and this will allow regulators to keep a better track of events.
With separate licences to be issued for each category of activity such as commercial or merchant banking, the CBN is keen to ring-fence depositors' funds by limiting commercial banks to core banking business and preventing them from engaging in proprietary trading with depositors' funds, in effect adopting the so-called Volcker Rule used in the US. This major structural banking reform is another part of the transformational process, which appears to have had close industry involvement and support.
Central to success: the Central Bank of Nigeria in Abuja is taking a leading role in banking reform
Severe challenges
How effective have the CBN reforms over the past 15 months been in stabilising the banking sector and creating a genuine platform for economic growth? The CBN interventions followed a crisis in Nigeria's banking sector, where banks were not lending to the wider economy but concentrating on margin loans to the capital markets and oil and gas sectors. With the additional impact of the global financial crisis, Nigeria's financial system faced severe challenges that could not be overcome overnight and required major restructuring.
On August 31, World Bank senior economist Ismail Radwan gave a blunt assessment of the situation at a Lagos conference. "Less than 1% of Nigerian businesses have access to bank finance," he said. Stressing the need for responsible growth in lending to industry, he warned that unless something is done, there would hardly be any economic development in the country.
Meanwhile, on a positive note, research by the World Bank on the Nigerian financial sector, presented to Mr Jonathan on August 27, suggests that there is no evidence of a credit crunch in the Nigerian economy. The World Bank says there is gradual credit growth in the economy but, for understandable reasons, margin lending has declined since the crisis in the banking sector that led to the intervention of the CBN.
Mr Radwan of the World Bank said that, in order to ensure there is no repeat of the banking crisis, the Nigerian authorities should introduce International Financial Reporting Standards and train officials of the Nigerian Accounting Standard Board, the CBN, the NDIC, the Securities and Exchange Commission and other stakeholders in these standards. He also spoke in favour of improved banking supervision training at the CBN and the NDIC, a resolution of current issues with rescued banks to remove market uncertainty, allowing banks to focus on an expansion of their core business, and moving forward with AMCON.
On credit information and identity systems that will make lending more attractive for banks, Mr Radwan wants the CBN to mandate banks to share all information with a central repository, avoid issuing any more credit bureau licences and continue developing the commercial court system.
While the World Bank's comments on the limited access to credit available for Nigerian businesses are disturbing, it is important to note that the recent banking reforms have significantly addressed these issues and created the environment where real solutions to the problems of lending to the economy are available.
The "extraordinary" audit carried out last year grasped the magnitude of the problems and helped to set out solutions: the guarantees for SME lending, AMCON and other measures.
Much of the banking reform agenda has now been established, a remarkable achievement in a relatively short time. Given the huge problems at hand, a successful outcome will not be easy, but it can be said that a new, improved financial infrastructure is now in place and Nigeria's banks will be stronger as a result.
