August 08, 2011
1. The 5th August nationalizations bring to an intermediate end a sorry chapter in Nigeria’s recent banking history
2. Soludo had under estimated the scale of the problem
3. Today, two years later, Nigeria’s banking system is probably one of the most stable in the world
4. In Nigeria, unlike in the US or Europe, all the complicit bank executives have been removed, the toxic assets on bank balance sheets have been accounted for and bought by the bad bank and new risk management protocols have been implemented across the board.
5. Foreign suitors shun newly reformed banking sector due to a generalized risk aversion to Nigeria and domestic stresses in the various foreign banking capitals
6. The comprehensiveness of its banking sector reforms over the past two years is yet to be matched by London, Rome, Berlin or Washington DC
True to his threat from early July, Nigeria’s Central Bank Governor Lamido Sanusi on August 5th authorized the nationalization of three ‘rescued banks’ after they had failed to find appropriate suitors to take them over.
The banks affected include: Afribank PLC, Bank PHB and Spring Bank PLC and renamed them Mainstreet Bank Ltd., Keystone Bank Ltd. and Enterprise Bank Ltd. The new bridge banks will work with the Nigerian Deposit Insurance Corporation (NDIC) and the central bank to liquidate the said banks even while ensuring that depositors in the nationalized banks receive their monies.
Already, in several states, panic withdrawals occurred on Friday and Saturday following the announcement; however it is expected that by early this week as the CBN and NDIC make extra efforts to inform depositors that their cash is safe, the panic withdrawals will ease.
According to the NDIC “It has been two years since the commencement of the banking reforms and to date, two of the banks (Wema Bank Plc and Unity Bank Plc) have been successfully recapitalized, while four banks (Union Bank of Nigeria Plc, Intercontinental Bank Plc, Finbank Plc and Oceanic Bank International Plc have signed legally-binding Transaction Implementation Agreements (TIAs), a significant step towards recapitalization by the deadline of September 30th set by the CBN. Equatorial Trust Bank (ETB) Ltd is currently in the final stage of negotiation with a prospective investor with strong likelihood that it will meet the recapitalization deadline. However, the remaining 3 banks (Afribank Plc, Bank PHB Plc and Spring Bank Plc), have not shown the necessary capacity and ability to recapitalize within the September 30th deadline.”
The 5th August nationalizations bring to an intermediate end a sorry chapter in Nigeria’s recent banking history. In late 2008 as the world’s major economies slid into a recession and oil fell towards $60 a barrel, Nigerian banks, which had been reformed and capitalized three years earlier started showing signs of distress.
Deposit rates at several banks rose by triple digit percentages in weeks as many middle tier banks sought to mobilize cash to stave off a liquidity crisis. The then central bank governor Charles Soludo publicly denied any stress in the banking system and claimed that the banks were adequately capitalized.
However very quickly it became clear that Soludo had under estimated the scale of the problem. The Nigerian local currency by January 2009 had come under intense devaluation pressure and the entire stock market was in a tailspin.
With the central bank governor in denial, local accounting firms complicit and local bank research desks afraid to point the finger at problems at other banks, DaMina’s chief Africa analyst, then at Eurasia Group in New York published a series of widely decimated incisive articles on the crisis pointing out that it was the middle tier banks – rather than the larger banks, who were likely insolvent.. His research then went on to estimate about $10bn of toxic assets on Nigerian bank balance sheets that needed to be recognized.
Eventually the late President Umaru Yar’Adua and his advisors seeing the mounting evidence of bank insolvency refused to re-appoint Soludo and chose Lamido Sanusi to resolve the crisis.
Today, two years later, Nigeria’s banking system is probably one of the most stable in the world – even counting OECD countries, where recent stress tests were loosened to avoid further bank panics.
In Nigeria, unlike in the US or Europe, all the complicit bank executives have been removed, the toxic assets on bank balance sheets have been accounted for and bought by the bad bank (Asset Management Company of Nigeria – AMCON) and new risk management protocols have been implemented across the board.
The universal banking model, which helped trigger the crisis has also been dismantled and local banks are being forced to stick to their well-defined core areas of business.
While disappointedly, no major foreign bank has swooped down to Lagos to buy any of the rescued banks, it is likely more a function of generalized risk aversion to Nigeria and domestic stresses in the various foreign banking capitals rather than a statement on the trajectory of future bank profitability in Nigeria.
Despite the occasional internet taunts over online fraud, Nigeria’s banks today are safer than many in OECD countries.
The comprehensiveness of its banking sector reforms over the past two years is yet to be matched by London, Rome, Berlin or Washington DC.
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