May 03, 2012 / Punch
 

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The NCM, House Probe and the Search for a Lasting Solution

The Central Bank of Nigeria on Wednesday gave details of how insider abuses in the banking industry contributed to the crash of the capital market in 2008.
 

The CBN also gave the percentage of the huge non-performing loan portfolios against some of the banks and how their chief executive officers traded with depositors’ funds in the capital market in breach of extant regulations.
 

It said the banks committed the infractions just to raise the value of their shares.
 

The CBN made its presentation to the House of Representatives Ad hoc Committee on the Causes of the Near-collapse of the Nigerian Capital Market in Abuja.
 

The Deputy Governor (Financial Systems Stability), CBN, Mr. Kingsley Moghalu, who represented the Governor, Mallam Lamido Sanusi, told the panel that the insider abuses had an impact on the capital market because the banking sector controlled over 60 per cent of the stocks as of 2008.
 

According to him, the intervention by the CBN in 2009 with the injection of N620bn to bail out eight banks was due to “a massive systemic crisis that called for a systemic intervention.”
 

Giving the details of the crisis, Moghalu said Spring Bank Plc, for instance, had 85 per cent non-performing loans; while FinBank Plc’s non-performing loan was 47.5 per cent.
 

He added that Bank PHB Plc had 40.8 per cent non-performing loan; Oceanic Bank International Plc, 44.35 per cent; Afribank Plc, 47 per cent; Intercontinental Bank Plc, 48 per cent; and Equitorial Trust Bank Limited, 57 per cent.
 

“The banks were already on life-support before the CBN intervened in 2009”, Moghalu informed the Ibrahim El-Sudi-led panel.
 

According to the CBN deputy governor, a strategy used by the banks to deceive investors in the capital market was to buy back their own shares, using depositors’ money.
 

He cited the case of Afribank, which he said engaged three brokerage firms to buy back its shares, “using 1,258 fictitious subscribers.”
 

“So, we had a situation whereby 66 per cent of the bank’s offer was non-existent, but they used depositors’ funds,” he added.
 

Similarly, Moghalu said Intercontinental Bank bought back 3.4 billion units of its shares.
 

He explained that the banks were eventually exposed when the market came under the weight of the global financial meltdown.
 

The deputy governor stated that most foreign investors had to withdraw their funds of over $15bn from the capital market in response to the economic crisis in their home countries.
 

In spite of the development, Moghalu said that the CBN managed the situation by ensuring that no depositor lost money and “not a single bank failed.”
 

But, the panel said the bank must accept blame for the “failure of institutional regulations,” which it said caused abuses in the banks.
 

A member of the panel, Mr. Bimbo Daramola, observed that the CBN should not praise itself for intervening in the troubled banks, arguing that, “the abuses took place directly under your watch. It was because you did not do your job.
 

“It is your fault; it is an institutional failure,” he told Moghalu.
 

Moghalu, while admitting that the CBN had “accepted responsibility for the institutional regulations,” told the panel it was the reason it had to introduce drastic measures to restore confidence in the banking sector.
 

There was, however, a disagreement on the status of three of the eight recapitalised banks, whose licences the CBN revoked in 2011 and were re-named by the Asset Management Company of Nigeria as Enterprise Bank (formerly Bank PHB), Keystone (Spring Bank) and Mainstreet (Afribank).
 

The CBN deputy governor claimed that they were not “nationalised” as widely believed.
 

The committee, however, disagreed and insisted that by the nature of their acquisition by the CBN, AMCON and the Federal Ministry of Finance, they were now the property of the Federal Government.
 

Moghalu argued that the term, “nationalised,” still did not apply to the banks because their boards were intact, while there were private individuals among the directors.
 

Read the market overview report here:

The NCM, House Probe and the Search for a Lasting Solution

Source: Punch originally published this as “Manipulation by banks caused capital market crash – CBN”