Banking Reforms: One Year After …


By Emele Onu, 06.01.2010 

The same measure of water poured into a drinking cup can either be described as half empty or half full. What often makes the difference in judgment, said a British psychologist, Allan Bramner, is one's level of contentment or how difficult or easy it is to get one satisfied with a particular situation.

In his recent assessment of the banking reforms and the personality that has dominated the landscape over the past one year, Sanusi Lamidi Sanusi, the Managing Director of the Financial Derivatives Company (FDC), Bismarck Rewane, said: “The question people should ask about the reforms is whether the Nigerian banking industry was well positioned before the CBN's intervention or not.”

He said: “The question we should ask is whether where we were was optimal.” In what seemed as his own response to the posers, the renowned economist said: “The banking industry was over-bloated and indulged in overtrading, underscoring the need to right size.”Every other person has passed one judgment or the other on the subject matter. The former Managing Director of the liquidated Liberty Bank, Chief Lawson Omokhodion noted recently: “Sanusi could err,” but however, said, “The Governor has taken remarkable steps to correct the monumental fraud visited on the country in the name of banking consolidation.”

On the areas he thought the Governor might have erred, Omokhodion frowned at the 10-year limit Sanusi imposed on the tenure of Chief Executive Officers of banks. He also faulted the resolve to institute interviews for future managing directors of banks.But some analysts have also said that a sit-tight leader is one of the worst things that can happen to an organisation, arguing that the common evolution is for the leader to assume absolute powers, leading to the abuse of office and crippling of the institution.It is common to have various perspectives to any economic issue.Economists hardly agree on any economic theory as their calculations hardly lead them to anything exact. Therefore, Economists see criticisms as something they must do to aid the decision making process.

The CBN acknowledged recently that the constructive opinions of Nigerians have assisted it in taking decisions.An economist and lecturer, Casmir Ogbodu, who spoke to THISDAY on Sanusi's programmes, said last weekend, when asked to score the Governor's performance in the past one year that “I have always criticised some of his policies but have never condemned him as a person, and in every case I still recognise the merit of his case.” He said: “A constructive criticism does not condemn a leader, it may condemn an issue,” adding: “Even when the critic seems to condemn an issue, the intention is not to write it off completely as it must have its own merit but what the critic does is to say that if the thing is done this way or the other way, better results could be achieved.”
The central banks of many countries have been at the centre of public bashing, with the global meltdown that reached its peak last year (and 2008 in some countries).

Ogbodu said: “Such criticisms do not amount to say that the central bank of that country has failed, but rather suggests that the feedback mechanism is working.”  He pointed out that what makes the difference is how the authority of a particular country responds to the criticisms.Rewane said the task of ensuring price stability, interest rate equilibrium, and a stable and strong currency (while preserving the external re-serves) can be quite daunting for any central banker, especially during a downturn.

It happens that a central bank can target the outcome in one market and score a point in that area, only to realise that it is at the risk of losing in the other market. Unfortunately, except the central bank in question is able to win in the three markets or can make reasonable success in everyone of them, which is often difficult, there is no macroeconomic stability.The Nigerian central bank has been no exception to the policy dilemma highlighted above. However, amidst the enormous challenges, the Governor has received kudos, even though it is glaring that there is the need for quick and better result in policy outcome.

The Managing Director of Unity Bank, Alhaji Falalu Bello, said last week those critical of the CBN and the reforms lack the necessary professional knowledge of the banking sector. He insisted that the reform by Sanusi is about one of the best things that ever happened to the sector in Nigeria.Speaking with Kaduna Government House Correspondents, Bello said any one without honour and integrity has no business in the banking sector.

“The reversal of some policies by Governor Sanusi is a welcome development. If you do not have honour and integrity, you have no business in the banks because banking is a question of trust.People trust you with their money, savings, and pension. So you must have honour and integrity to be in the bank, if you do not have it, get out” he asserted.Bello pointed out that the categorisation of banks into international, national, regional and specialised banks would aid the springing up of smaller banks in the country; as is obtained in other climes.“I was one of the few people who criticised Soludo's agenda. It is wrong to say let all banks be the same” he added.

Perhaps sounding modest, the CBN has in the past one year admitted the enormity of the challenges in the banking sector as well as the macroeconomy and has always highlighted possible solutions to the problems. It has often reiterated its commitment to put in place sound banking system and robust macroeconomic framework that will support the development of the economy.On every case, the monetary authority stresses that effective supervision of the banking system; quick recapitalisation of the banks and the making of the banks to resume lending, hold the magic wand to turnaround the industry and the economy.

Attempts have been made underneath to assess how the CBN and the new leadership have impacted on the relevant pivots to correcting the anomalies in the industry and the economy over the past one year, through areas such as: the recapitalisation of the banks, the unlocking of credit, managing inflation and the value of the naira, among others.

Banks Bailout and Reforms

Before the new CBN Governor assumed duty on June 4 last year, The Eurasia Group, a New York-based research company, had  in May of that year, at the twilight of the tenure of the former CBN Governor, Professor Chukwuma Soludo, reported that Nigerian banks might have as much as $10 billion (about N1.5 trillion) of toxic assets.

Eurasia Group said much of that resulted from margin loans used to buy equities and also credit to the oil and gas sector. The regulator and bank operators at that time discarded the report as exaggerated, even though it would have served as precursor to probe the health status of the banks. It took Sanusi's appointment for operators and observers of the banking industry to remember that The Eurasia Group had said something that shouldn't have been swept under the carpet.

In his maiden press briefing, which centred on the challenges facing the financial sector in the meltdown, Sanusi noted that the primary objective of the CBN is to promote the stability of the financial system and foster sustainable output and employment, while maintaining macroeconomic stability over time.Barely a month after he assumed office, as he later said during an interactive session with the media, he was alarmed by the fact that the total amount outstanding for banks at the Expanded Discount Window (EDW) was N256.571 billion, most of which was owed by five banks.
Sanusi stated further that 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 obligations. A fifth bank, he added, had been a very frequent borrower when its profile ordinarily should have placed it among the net placers of funds in the market.

“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 source of financial instability, most likely suffering from deeper problems due to non-performing loans,” said Sanusi.To get to the root of the matter, the Governor ordered a joint examination of 10 banks by the CBN and the Nigerian Deposit Insurance Corporation (NDIC).The 10 banks were Diamond Bank, First Bank, United Bank for Africa, Guaranty Trust bank and Sterling Bank, Afribank Plc, Intercontinental Bank Plc, Union Bank of Nigeria Plc, Oceanic International Bank Plc and Finbank Plc.

By the result of the examination, which was made public on August 14, the CBN found five institutions in a 'grave situation' namely Afribank Plc, Intercontinental Bank Plc, Union Bank of Nigeria Plc, Oceanic International Bank Plc and Finbank Plc.Sanusi said the Managements of these banks were found to have also acted in a manner detrimental to the interest of their depositors and creditors. In exercise of the powers of his office as contained in Sections 33 and 35 of the Banks and Other Financial Institutions Act 1991, as amended, and after securing the consent of the Board of Directors of the CBN, Sanusi removed and replaced the executive management of the five banks.He injected N420 billion in the form of tier 2 capital to the five banks to enable them continue as going concern.

After the action on the five banks and the clean bill of health to the five other banks, the CBN commenced the audit of the remaining 14 banks namely: Bank PHB, Equitorial Trust Bank, Spring Bank, Wema Bank, Access Bank Plc, Citibank Nigeria Limited, Ecobank Nigeria Plc, Fidelity Bank Plc, First City Monument Bank Plc, Skye Bank Plc, Stanbic IBTC Bank Plc, Standard Chartered Bank Limited, Zenith Bank Plc and Unity Bank.The Special Examination primarily focused on assessing the health of the banks with particular focus on liquidity, capital adequacy and corporate governance.


After a review of the findings of the Special Examination report in respect of the 14 banks, the CBN announced on October 2 that nine banks had adequate capital and liquidity to support the level of their current operations and future growth. The nine banks were: Access Bank Plc, Citibank Nigeria Limited, Ecobank Nigeria Plc, Fidelity Bank Plc, First City Monument Bank Plc, Skye Bank Plc, Stanbic IBTC Bank Plc, Standard Chartered Bank Limited and Zenith Bank Plc.The 10th bank - which was Unity Bank, was adjudged to have insufficient capital but not in grave situation because it had a healthy liquidity position.

The remaining four banks were found to be in a 'grave situation' namely: Bank PHB Plc; Equitorial Trust Bank Plc; Spring Bank Plc; and Wema Bank Plc. The CBN sacked and replaced the executive management of three banks: Bank PHB Plc, Equatorial Trust Bank Plc and Spring Bank Plc.


The banking watchdog also injected N200 billion as liquidity support and long term loans for the four banks adjudged in a grave situation to enable them continue normal business, while pursuing recapitalisation options. Also, it ordered Unity Bank and Wema Bank to recapitalise not later than June 30, 2010. Analysing CBN's action on the banks, Rewane said: “Something had to happen to bring the structure of the banks back in line with the realities on ground.”

However, the analyst added: “The diagnosis of the problem in the banking industry is correct but the prognosis is questionable and therefore one can say that the outcome of the measures is probable.”The Executive Secretary and Chief Executive of the Financial Markets Dealers Association of Nigeria (FMDA), Mr. Wale Abbe, said: “There is hope that the CBN's actions will usher in a regime of robustness of the Nigerian banks in 2010.

Clarifying its actions, Sanusi explained that the intervention was informed by the need to save the banking system from total collapse.CBN's Deputy Governor, Financial Sector Stability, Dr. Kingsley Moghalu, explained recently that the apex bank's intervention was based on concern for the national economy as well as restoring confidence in the financial system.The deputy governor said: “The joint examination of banks revealed credit concentrations and undue exposure to margin lending,” adding: “The examination reports formed the basis for the type of regulatory and banking reforms that were introduced by the CBN."

Moghalu explained that weak risk management, serious liquidity shortages, sub-standard corporate governance, insolvency, among other serious problems were present in many of the banks.
He said the objective of the intervention was mainly to assist the institutions to stabilise and continue their normal business as going concerns."Had the capital and liquidity shortages persisted, the weak corporate governance that supported the abuse of the financial system continued unchecked, and the concentration of lending to weak business sectors continued unabated, the Nigerian financial sector would have been smothered and a systemic crisis of immense proportion would have ensued,” said Moghalu.The question then is: What is being done by the CBN to return normalcy to the industry, following the intervention?

Recapitalisation/ AMCON

Sanusi had said last year that the final rescue for the banks would come when the institutions have recapitalised, pay- off the government and return to profitability.The CBN had mid- December last year asked potential bidders for the banks to register their interest to test the appetite for acquisitions. Also, last year, it appointed advisers to the banks and charged them with the responsibility of advising the managers of the banks and also package the organisations for recapitalisation.

The banking watchdog had announced it was targeting the end of September, this year for full resolution of all issues concerning the recapitalisation. It said through a statement, it was making progress on the final resolution of non-performing loans of the banks; their recapitalisation issues and was also getting all shareholders buy-in as well as regulatory approvals.There are however, criticisms in some quarters that the recapitalisation is delayed and also fears that some banks might not make the recapitalisation.  

Renaissance Capital said in a report towards the end of the first quarter of this year that the rescued banks would need a minimum $14 billion, about N2 trillion fresh capital to bounce back to business. That raised fresh concern that some of the affected banks might not to be able to raise such money.Renaissance Capital said that the fund is imperative for the banks to bring their collective capital adequacy ratios (CAR) to 10 per cent, which is the regulated minimum.

But local analysts have argued that the speedy setting up of the Asset Management Corporation of Nigeria (AMCON) and the buying over of the bad assets of the banks by the corporation will clean up the books of the banks for fresh investors to participate and invest massively. That is also the thinking of the CBN, which has lobbied for the speedy passage of the AMCON bill. The Bill, which was presented to the National Assembly by the CBN and the Executive arm of government last year, seeks to assist banks in the efficient management and disposal of their toxic assets as well as help to relive the burden of non-performing loans.

The Senate recently endorsed the report of its Committee on Banking, Insurance and other Financial Institutions by passing (taking through third reading) the AMCON Bill. The CBN Governor is hopeful that the bill will soon become law to give impetus to the recapitalisation of the banks.Two of the banks, Wema Bank and Unity Bank, have announced the setting up of machinery to meet the June 30 deadline. The other burning issue in the past one year remains the capacity of all the banks to extend credit, with the intervention and 'pains' of the reforms.

Banking Credit

After the CBN intervened in the sector, virtually all the banks shut their doors to borrowers.Although the CBN is responding to the situation, it remains a major cause for worry. Explaining the situation, a treasurer with one of the banks said: “We are not yet in comfortable position on capital adequacy and liquidity ratios as to resume lending fully”.The Chairman of Progressive Shareholders Association of Nigeria, PSAN, Mr. Boniface Okezie, told THISDAY there is the need to make banks resume lending. “If banks are not lending, then, what are they there for?,” he asked.

According to him, “banks cannot thrive, survive or make headway when they cannot give loans or lend and grow their earnings, which will translate to profit based on the amount of money made.”When loans are given out by banks, he said, “they generate interest that permit the banks to make profit to meet their basic needs in terms of running cost and also give loans to entrepreneurs.”But the CBN has been responding to the challenges through its policy instruments.The monetary authority noted during its last monetary policy committee (MPC) meeting that its key policy challenges remain the negative growth in credit to the private sector, “and subsisting high lending rates in the face of declining inter-bank rates and relative liquidity surfeit in the banking system.The CBN added that it “will however, continue to monitor developments in the market to ensure that measures are taken to eliminate speculative demand and volatility in the market.” 

At the end the meeting, it retained the Monetary Policy Rate (MPR) unchanged at 6 per cent, however, the lower corridor around the MPR was reduced by 100bps, resulting in a halving of the rate on the CBN's Standing Deposit Facility, from 2 per cent to 1 per cent.In a bid to establish a relationship between the MPR and the prime and maximum lending rate of banks, the CBN directed banks to submit to its office their Risk-based Interest Rate Pricing Model on a monthly basis. The CBN said also that henceforth loan pricing would be stated as fixed spread above MPR, and shall be adjusted along with MPR movements.

Sanusi has always desired to make the MPR an anchor for lending rates in the economy, and to make funds cheaper for borrowers.The monetary authority also extended the CBN guarantee for all inter-bank transactions and foreign credit lines as well as pension funds' placements with banks to June 30, 2011, in a bid to address the difficult credit market conditions.According to data from the CBN, aggregate domestic credit (net) in March 2010, grew by 6.1 per cent over the December 2009 level, and by 24.5 per cent when annualised, which was far below the 2010 indicative target of 55.54 per cent.

Credit to government (net), which grew by 28.4 per cent (or 113.6 per cent on annualised basis, was the major contributor to the growth in aggregate credit (net) in March 2010, as credit to the private sector declined, by 1.7 per cent ( or 6.8 per cent on annualised basis). The annualised growth rate of credit to the private sector of -6.8 per cent was far below the provisional growth benchmark of 31.54 per cent for 2010.“The substantial growth of credit to government (net) reflects the risk aversion of banks to lending to non-government borrowers, implying the crowding out of private sector credit,” CBN further noted.

On the positive side, average maximum lending rate dropped to 22.88 per cent in March 2010, from 23.32 and 23.18 per cent in February and January 2010, respectively. The rate was 23.45 per cent in December 2009. Also, on the positive side, average prime lending rate dropped to 18.06 per cent in March 2010 from 18.28 and 18.38 per cent in February and January 2010, respectively. The weighted average savings rate was 3.20 per cent in March 2010, from 3.33 per cent in January 2010 and 3.38 percent in February.

But faced with the possibility that bank lending might still remain slow given observed sub-trend growth in the sector; the erosion of the capital of the banks and the fact that there might be further write-down, the CBN has in the past one year been thinking of various other means to push credit to the real economy.

Intervention Funds       

Even where the banks are in a position to lend as indications are emerging at the money market today, some analysts believe that with interest rate on overdrafts in the 20 per cent region, most small and medium enterprises including big-time manufacturers will find it difficult to borrow and nurture their businesses.

Data from the National Bureau of Statistics (NBS) shows that manufacturing sector contribution to the country's Gross Domestic Product (GDP) which was 8.1 per cent in 1970 fell to 4.13 per cent in 2008, while capacity utilisation has been on the decline, from 70 per cent in 1975 to 48 per cent in 2008.Putting the constraints to SME development in perspective, as related to funding, the CBN recently set up a N500 billion intervention fund to boost operational capacities in the manufacturing, Small and Medium Enterprises and power sectors.

Interest on the N200 billion component of the fund, which is targeted at the manufacturing sector, is pegged at 7 per cent while the rest of the N500 billion fund is to be accessed at the prime lending rate of the banks. The CBN announced last weekend that the fund has been extended to the aviation sector as a solution to the financial crisis rocking the country's airlines.But it is not the first time the CBN or the government is taking some of the measures announced recently. Operators in the real sector are calling for strict implementation of the programme such that it will not fall by the way side as others before it, as according to the President of the Manufacturers Association of Nigeria (MAN), Alhaji Bashir Borodo, Sanusi should discourage banks from adding ancillary charges over and above the agreed interest rates.

However, the MAN chief added: “The best incentive for industrial and economic growth is macro economic stability, low inflation, stable and consistent price level,” adding; “Any serious deviation from this could have negative and devastating impact on industrialisation and growth.” That brings to question, how Sanusi has been managing inflation and related variables in the past one year.

Managing Inflation

Nigeria's year on year (yoy) inflation climbed to 12.5 per cent in April from 11.8 per cent in the previous month as cost of food increased, according to the data by the National Bureau of Statistics (NBS). The inflation growth represents an increase by 70 basis points.According to NBS, the Composite Consumer Price Index (CCPI) stood at 222.10 points in the month of April 2010. The percentage change in the average CPI for the 12-month period ended April 2010 over the average of the CPI for the previous 12 month period was 11.80 per cent. That was slightly lower than what was recorded by making similar comparison in March, 2010. The NBS said core Inflation (that is all items less farm produce and energy) stood at 9.01 per cent year-on year, down from 9.21 per cent recorded in March 2010.

The yoy inflation rose from 12 per cent in the last quarter of 2009 to stabilise at 12.3 per cent in January and February 2010 and declined to 11.8 per cent in March 2010.Analysts however, believe the CBN is not going to achieve single digit inflation for the year owing to many factors outside its control such as anticipated election spending and heavy budgetary expenditure.

Sanusi even said recently that the threat of inflationary pressure in the near-to-medium term remains real given the expansionary stance of the 2010 Federal Government budget and the anticipated increase in spending usually associated with the run-up to election across the country
Assuming that Sanusi wants to prove critics wrong by fighting inflation, analysts said he will risk failing in one of its core  policy objectives in the second phase of the banking reforms, which is making credit accessible and affordable by the nation's various economic units.Sanusi has reiterated that the CBN will continue to monitor price developments in the months ahead with a view to ensuring that the downside risk of inflation to growth is minimised. The next issue is foreign exchange management in the year of uncertainty over inflation.

Forex Management

On the assumption of office in June last year, Sanusi adopted a liberalisation policy for the foreign exchange market.The CBN has successfully defended the naira against the budget benchmark exchange rate of N150 to a dollar up to the first quarter of 2010. It also successfully kept the local currency within its targets of N150/$1 and plus or minus 3 band.

But even though the naira has remained relatively stable, the CBN and observers of the market have seen some factors that might dampen the optimism of stable rates from the short to medium-term.
Rewane noted: “Inflation worries in the near term raises the spectre of a speculative attack on the naira and could increase the pressure on the external reserves.” While noting that the naira is expected to remain relatively stable, Rewane further disclosed that it could come under selling pressure as investors seek alternatives abroad.However, the Governor has assured that the foreign exchange policy of the country will continue to focus on avoiding volatility in exchange rate and growing market confidence.

Banking Supervision

The CBN announced early this year that the reforming of the Nigerian financial system in the next decade will be built around four pillars, notably “enhancing the quality of banks; establishing financial stability; enabling healthy financial sector evolution and ensuring that the financial sector contributes to real economy.” The Governor outlined the key strategies and initiatives to include: Establishment of Asset Management Corporation of Nigeria; mergers and acquisitions; categorisation of banks and formulation of licencing guidelines.

The other strategies and initiatives, said the apex bank chief, include fixing the problems of the banks, tighter regulation, adoption of risk based supervision, effective consumer protection and reform of the CBN itself.Sanusi also mentioned the adoption of hybrid monetary policy; new macro prudential rules; control of “hot” money; enthronement of directional economic policy and support of capital market development to work as an alternative to bank funding.

The CBN has over the past one year issued numerous guidelines, directives as well as measures to achieve the objectives of quality banking supervision as a key component of the reforms.  The policy measures have centred on corporate governance and adherence to prudential guidelines among others.For the reforms to be properly sustained, the Chairman, Institute of Directors, Abuja Branch, Alhaji Ahmed Rufa'I Mohammed, said recently:  "The ideals of good corporate governance seem to be lacking in many facets of our endeavours. Although we constantly espouse these ideals almost on a daily basis, we nevertheless are reluctant to observe and practice these ethos in our public and private businesses."

The CBN has in the past one year subjected banks to keeping the code  of corporate governance, one of the recent cases been adherence to the tenor of bank directors.Besides the common year end rule, the CBN announced recently it is working at the full adoption of the International Financial Reporting Standards (IFRS) by all banks in Nigeria by end-2012. Sanusi stated however, that the date would be subject to the approval of the Nigerian Accounting Standards Board (NASB).Full disclosure became a major issue for the banks as from July 13 when the CBN made the first pronouncement on the matter. The common- year- end to December 31, 2009 is believed to have been properly implemented.  

On the phasing out of universal banking, Sanusi said banks having spread their tentacles in the past neglected their areas of core competence, to the detriment of the economy, which led the phasing out of that banking model. The new model is still in the process of implementation. In another stride at sharpening supervision, the CBN signed a strategic partnership memorandum of understanding (MoU) with the   Bank Negara Malaysia (Central Bank of Malaysia) recently.

Under the MoU, the CBN is to share expertise and exchange relevant information in the areas of Banking Supervision, Small and Medium Enterprises (SMEs), Microfinance, Islamic Finance, and Monetary Policy. The other areas are Development Finance Institutions, External Reserve Management, institutional arrangement for financial crisis management and resolution, Foreign Exchange Administration, Performance Management and Corporate Strategy, Leadership Development as well as Talent Management.The other effort was the new rule on margin lending as directed by the Financial Services Regulation Coordinating Committee (FSRCC). The Committee, at a meeting of representatives of all member agencies, directed that “bank shares shall not be used in margin trading.”

It said it took the decision to avert a repeat of the abuses and sharp practices that bedeviled margin trading in the run up to the capital market collapse.However, the FSRCC clarified that the shares of banks would continue to be used as collateral for bank lending, adding that the restriction placed on bank shares are only in respect of margin trading.The Committee disclosed that the FSRCC put banks aggregate exposure to margin lending at a maximum of 10 per cent of total loans and advances and that banks with exposures in excess of the 10 per cent limit are required to submit to the CBN clear plan of how they intend to wind down their exposure in compliance with the prudential limit, among other rules.

One year after, many believe the reform of the banking system is well on course and should not be truncated, notwithstanding the reservations by some people.Ogbodu said, criticising the CBN and the reforms is not to say that the personalities involved or the system have failed but just to say, “ hey, although you might be thinking right, you can achieve better results going about it this way or the other way.”

Perhaps, only time will judge the CBN and the present leadership appropriately. But the success of the CBN reforms ultimately depends on the AMC. Should be setting up of the AMC be truncated, the CBN would have no other option than to hand over all the rescued banks to the Nigeria Deposit Insurance Corporation (NDIC) for liquidation.


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