Nigeria’s Banking Reforms: End In Sight?

In August, the Central Bank of Nigeria (CBN) governor,   Lamido Sanusi, again moving with the speed and agility that has characterised his tenure during one of the most difficult periods in Nigeria’s banking history, revoked the licences of three banks – Afribank, BankPHB and Spring Bank. The banks were given until 30th September to recapitalise or be liquidated.

Simultaneously, the Nigeria Deposit Insurance Corporation (NDIC) through the ‘Bridge Bank’ mechanism nationalised and assumed ownership of the banks, under new names and management. The Asset Management Corporation of Nigeria (AMCON), the new owner, is to manage them for the next two to three years, until new investors are found. AMCON, in turn, injected N679bn ($4.3bn) into the banks, to bring them to the correct capital adequacy level after changing their brand names to Mainstreet Bank (Afribank), Keystone Bank (Bank PHB) and Enterprise Bank (Spring Bank).

Mainstreet Bank received N285bn ($1.8bn) to bring it to over 15% capital adequacy and a minimum of N25bn ($158m) capital base; Keystone Bank N283bn ($1.8bn) and Enterprise Bank received N111bn ($705m). All these transactions were concluded within three days.

The swiftness with which the changes occurred was likened by shareholders’ groups and stakeholders as a ‘coup d’état’ on investors. But the regulators were said to have weighed the impact the unresolved banks are likely to have on the economy and decided a timely action was required. The nationalisation of these banks has therefore closed the circle on a two-year process that started when the CBN commenced its reforms.

The CBN deputy governor, Financial System Stability, Kingsley Moghalu, said the apex bank revoked the operating licences of the banks because there was nothing on the ground to show that they would attract investors before the expiration of the ultimatum. He noted that to ensure public confidence in them, the apex bank has extended inter-bank guarantee to them.

This move, according to Renaissance Capital, an investment firm based in Lagos, has brought down the curtain on the resolution process for the intervened banks.

The final picture shows five banks, Oceanic Bank, Intercontinental Bank, Finbank, Equitorial Trust Bank and Union Bank of the original eight distressed banks signing agreements with new investors. Two others, Unity Bank and Wema Bank have since recapitalised.

AMCON’s role

The managing director/CEO, AMCON, Mustafa Chike-Obi, said the acquisition and transfer of ownership has been effected through a subscription agreement with each of the three banks. By the subscription agreement, AMCON has become the owner of the three banks, and will provide sufficient capital to restore them to the level of capital adequacy stipulated by the CBN.

Chike-Obi said the capital provided by AMCON will strengthen beneficiary banks’ liquidity positions to enable them meet their obligations to depositors. Consequently, the banks have since liquidated the loans obtained from the CBN in the first bail-out carried out in August 2009.

The liquidity positions of the banks are equally enhanced by CBN’s extension of their interbank obligations till 31st December 2011. The AMCON boss added that the corporation will continue to evaluate its strategic options and consider the optimal and timely exit strategy that maximises its returns.

“AMCON expects that the action it has taken, in fulfillment of its role as a resolution vehicle, pursuant to the provisions of the AMCON Act 2010, will further reinforce confidence and stability in the banking system,” he stated. Analysts said the primary focus of the new CEOs is to keep the banks in business.

Chike-Obi expressed confidence that the new teams appointed to run the nationalised banks will establish strong market positions and effectively compete in the Nigerian banking sector, providing quality service to their customers and value for shareholders.

“Although debate over the authorities’ pre-emptive action continues, it is difficult to see the justification for not taking action ahead of the end-September deadline,” said Razia Khan, head of Africa research at Standard Chartered. She said that by stepping in early to safeguard a small number of institutions and guarantee their deposits, the authorities may have protected the wider financial system. From this perspective, there were few arguments in favour of delaying intervention.

Khan maintained the extent of official support now extended to the ‘newly incorporated bridge banks’ will be key to restoring confidence in the sector and seeing a smooth transition.

“The official guarantee on interbank deposits was clearly the lifeline that had been extended to all rescued banks, and was instrumental in the authorities’ ability to restore calm rapidly following their August 2009 banking sector intervention,” she said.