Wish We Had Done The Same, US Congressmen Tell Sanusi

Lamido Sanusi, the Central Bank of Nigeria’s no-nonsense governor, accepted an invitation to address the US Congress on his reforms. Michael Nwadike reports on this and other developments in the country’s banking sector.

The CBN’s plain-speaking governor, Mallam Lamido Sanusi held some of the most powerful legislators in the US in thrall as he articulated the reforms he had instituted in Nigeria’s banking sector to halt what had threatened to develop into a full-scale meltdown.

Sanusi was speaking during a congressional hearing titled ‘The Global Financial Crisis and Financial Reforms in Nigeria’ before the US Congress Subcommittee on International Monetary Policy and Trade.

The Chairman of the Subcommittee, Gregory W Meeks, remarked: “We were fascinated by the CBN governor and impressed by the tough, decisive and transparent actions that he and his colleagues had taken in Nigeria in a way that many Americans wish had also been done here, with the leaders of financial institutions that benefitted from taxpayer funded bail-outs.”

He said it was uncommon for senior government officials from another country to agree to testify before the US Congress, but conceded that “these are unusual times, as the global financial crisis from which the world is only beginning to emerge continues to hang over many nations’ recovery plans.”

Meeks was supported by Ranking Member, Honourable Gary G Miller. Members of the House of Representatives, the press and the public were also in attendance at the occasion.

Sanusi reiterated the background to the crisis in the Nigerian financial sector, recounting the stress tests conducted on all banks and a further examination of the nine banks identified as ‘distressed’. He
reported that the sector had been beset by liquidity problems, the collapse of interbank lending, ‘bubble capital’, asset concentration and serious governance issues, which led the CBN to embark on an aggressive reform programme.

The reform targeted the removal and prosecution of ‘bad’ chief executives; the recapitalisation of fragile banks; the establishment of the Asset Management Company of Nigeria (AMCON); the review of the universal banking model; and the integration of the financial sector with the real economy.

Todd J Moss, Vice President and Senior Fellow, Centre for Global Development, who was a witness at the hearing, said the global economic crisis may turn out to be a good thing for Nigeria, explaining that the country’s banking troubles were largely local in nature and the pressure of the global crisis exposed the hidden problems in the banking sector.

M0ss emphasised that Nigeria’s success is undeniably in the US national interest, asserting that as a regional powerhouse and a neighbourhood enforcer when necessary, Nigeria is key to regional security.

“Nigeria is vital to US energy security, as well as a lynchpin in the global fight against 21st century transnational threats such as terrorism, diseases, drugs and arms trafficking. A strong Nigeria can be an indispensable ally to contain those threats,” Moss concluded.

The banking reforms in perspective

Before Sanusi assumed leadership of the Central Bank in June 2009, he showed deep disdain for cooked-up figures and under-the-table deals. He was firm on entrenching transparency, good corporate governance, and making banks open their books to scrutiny.

It was therefore not surprising that Sanusi’s first assignment with the CBN was to compel the banks to open their books, which contained toxic assets in excess of N1.2 trillion (about $8.1bn).

By 14th August, when the first stage of auditing was completed by both local and international auditors, 10 banks had bad loans amounting to $4.9bn. The CBN promptly sacked the five banks’ chief executives alongside their executive directors and appointed new ones. Three more chief executives were later sacked too and handed over to the Economic and Financial Crime Commission (EFCC) for prosecution.

The first conviction came in October, when Cecilia Ibru, former Managing Director of Oceanic International Bank, was convicted by a Lagos High Court on a three-count charge of giving loans beyond her credit limits, providing incorrect accounts to the CBN and giving out loans of N20bn ($0.1bn) without due process. At the end of a legal battle that carried on for nearly a year, Justice Dan Abutu jailed Mrs Ibru for 18 months while she forfeited assets worth $1.2bn.

The CBN spokesman, Mohammed Abdulahi says the judgement is a vindication of the report of the examiners that found serious infractions against her which led to her removal as the managing director of the bank on 14 August 2009. “It will be recalled that the actions of the CBN in removing the managing directors of the eight affected banks had drawn criticisms and allegations of regional, religious and even personal agendas, all aimed at eroding the integrity of the banking reforms. This decision by a Court of competent jurisdiction, and the magnitude of the recovery made, has put a lie to all those claims,” Abdulahi said.

Sacked chief executives of Intercontinental Bank Plc, Union Bank of Nigeria Plc, Bank PHB Plc, Finbank Plc and Afribank Plc, among others, are currently facing trial for offences ranging from reckless credit management to outright stealing.

The former managing director of Intercontinental Bank Plc (Erastus Akingbola) is now back in the country to face charges of financial mismanagement and insider-related loan abuse leveled against him by the EFCC.

Akingbola had in the heat of the crisis sought refuge in the UK, from where he filed a court case against the CBN challenging his removal. But Sanusi has promised that more former bank chief executives facing trial will go to jail. “I have no doubt in my mind that every one of the sacked bank chiefs that are being tried for criminal offences will go to jail,” he said at the World Bank Conference in Washington DC.

New banking model takes shape

The banking reform is taking a new direction based on the blueprint that the Central Bank made public in November. The proposal released by the CBN contains the long-awaited guidelines under which banks will operate come 14th May 2012.

The new guidelines stipulate that not later than 90 days from 15th November 2010, every bank currently operating under a universal banking licence is expected to submit, for the approval of the CBN, a Compliance Plan endorsed by the bank’s board of directors.

The Compliance Plan should contain such information as the type of banking licence that a bank proposes to operate under, a detailed proposal on how the bank intends to comply with the provisions of the regulations, and justification for the approach proposed.

The new banking guidelines stipulate that from May 2012, no bank shall establish, maintain or permit to exist, any related enterprise that runs contrary to the Banks and Other Financial Institutions Act (BOFIA).

Under the new regulation, no bank is expected to acquire real estate or immovable property other than as business premises for its own use, and as may be authorised by the CBN. They are also not expected to grant or permit to subsist, any loan, donation, gifts or any form of financial accommodation to any political party, or for political purposes whether directly or indirectly.

Samuel Oni, CBN’s director of banking supervision, affirmed that the plan to phase out universal banking was in line with the International Financial Reporting Standards and global best practices.

Justifying the new plan, Oni explained that the recent reforms in the sector revealed that the model which had been adopted over the years, authorising banks to carry out all manner of financial services, had exposed them to high operating risks. With the new model, CBN would now group banks into services – international banking, regional banking, national banking and microfinance banking. Oni noted that banks that wanted to go into any of these banking services would be issued with licences to guide their operations.

Bank divestment from insurance

By December, no fewer than 12 banks divested from insurance companies where they had major stakes, in compliance with the CBN policy mandating banks to focus on their core banking business or set up a holding company.

The bank-assurance synergies, which allow them to channel substantial insurance business to their subsidiaries, have become an albatross that must be addressed. Guaranty Trust Bank recently disclosed plans to divest its non-banking subsidiaries to focus on its core business. Some of the insurance firms are owned by Bank PHB, Oceanic Insurance, Zenith Insurance and Intercontinental Wapic Insurance, among others.

Before now, the industry was skewed in favour of bank-owned firms, which put insurance companies without bank owners at a disadvantage. Although such banks will still have a soft spot for companies where they have interests, the policy is expected to provide a level playing field for operators. The new policy will also ginger up the insurance companies to put on their thinking caps. “I think they will sooner or later understand that a new line of struggle for market share will ensue. They now have to be more creative and adopt sustainable business strategies that will continue to keep them ahead of others,” Bismarck Rewane, a financial consultant based in Lagos, said.

AMCON comes on board

In November, the Nigerian Senate gave the much-awaited Asset Management Corporation of Nigeria (AMCON) the green light to begin the business of managing some $10bn of toxic assets that have torn apart bank balance sheets. The corporation will buy the assets and replace them with government guaranteed bonds.

Banks will contribute N1 trillion ($6.5bn) towards the operations of AMCON releasing the money in tranches over a 10-year period at a ratio of 0.3% of their balance sheets annually. The CBN will contribute about N50bn ($0.3bn) yearly into the corporation for 10 years. Each bank’s contribution will be mandatory.

The total non-performing loans of the nine rescued banks which AMCON is to address are valued at $14.3bn. AMCON will provide a fresh window to discount voluntarily any non-performing loan worth above 10% of a bank’s total share capital. It will also help the banks to bid farewell to the tragedy of recurring collapses and their attendant crises.

The CBN is also focusing on ensuring that the financial system, in general, and the banking system, in particular, begins to serve the needs of the Nigerian economy so as to make the Nigerian economy resilient. This, the bank has been doing through ensuring the availability of long-term funds at an affordable interest rate to drive industrial activities and infrastructural developments in the country.

The CBN recently set up a N500bn ($3.3bn) fund, made up of N300bn for power and infrastructure projects and for intervention in the aviation sector, and N200bn for refinancing and restructuring banks’ existing loan portfolios to manufacturers and small and medium enterprises (SMEs).

In addition, the CBN had recently released a N150bn ($1bn) credit facility to the manufacturers at a fixed rate of 7%, through the Bank of Industry (BOI) and Deposit Money Banks, to boost Nigeria’s economic development.