A number of characteristics notably marked the consolidation quite apart from the herculean effort it took on the part of the CBN as industry regulator to see the exercise through on schedule. In a country like Nigeria, this was no mean feat. But mixed blessings lay beneath the surface. First, while the conceptual basis of the consolidation was sound, it created a completely uniform structure of banks in which there was no room for smaller banks with lesser levels of capital, which some critics considered an artificial one-size-fits-all approach.
Second, the emphasis on size, while positive from the standpoint of creating strong banks against a historical legacy of many bank failures in Nigeria and their attendant destabilizing effect, on the other hand fostered an obsession with size or the illusion of size to the neglect of quality in many banks. The size factor also created a situation in which several banks became “too big fail”. The positive and negative dynamics unleashed by this reality remain hotly contested and had implications for Lamido Sanusi’s subsequent reforms. On the balance, most observers consider the size factor as ultimately beneficial to the banking system. But, did it create a moral-hazard problem in which public resources would have to bail out the shenanigans of private business operators, an individualization of profits and a socialization of losses?
Third, the CBN-induced banking sector consolidation directly resulted in the globalization of Nigerian banks. With a much stronger base of capital and visions far beyond Lagos and Abuja, Nigerian banks went global with gusto, setting up subsidiaries and exploiting market opportunities in many African countries and even beyond to Europe and North America. Real capital had entered Nigeria’s banks for the first time ever, and now drove their worldview of capitalist expansion. It was a giddy moment in time, the apparent rise of the indigenous African multinational corporation. Nigerian banks became the African knights at the roundtable of globalization. With their brand imprimaturs firmly evident on global CNN Television advertisements, they became the new face of an increasingly assertive African business identity on the world economic stage.
But the post-consolidation banks’ emphasis on ever-increasing size through frequent forays into capital-raising on the stock market, and their globalizing trajectory, partly conflated vanity with real strategy and the fundamental soundness of their institutions and business models. A better approach would have been one built on high-quality service delivery, domestic impact at home, and globalization, in ascending order. Instead, the banks were in a hurry, going from a partial attempt at the first phase straight to the third, ignoring the second rung of the ladder. Moreover, they sank deeper and deeper into speculative activities on the back of the stock market boom of the mid-2000s in a classic demonstration of the risks of financialization.
The gathering storm
The global financial crisis of 2007-2008 strained the consolidated gains made in the Nigerian financial sector. Nigeria was affected by the second-round effects of the financial crisis which led to the crash of the Nigerian stock market in 2008, when the market lost 70 percent of its value as foreign investors whose investments in equities made up nearly two-thirds of market’s value took a flight to safety. The banks’ exposure to the capital market through margin lending for stock purchases stood at N900 billion as at December 2008, representing 12 percent of aggregate credit or 31.9 percent of shareholders’ funds.
The collapse of oil prices in 2008 was another channel through which the second-round effects of the crisis entered Nigeria’s banking system. As of December 2008, some banks were exposed to the oil industry to the tune of N754 billion, representing over 10 percent of total industry lending and over 27 percent of shareholders’ funds. These exposures created liquidity stresses for Nigerian banks. As part of liquidity support to the banking system, the central bank expanded its Discount Window to accommodate money market instruments such as Bankers Acceptances and Commercial Paper. As of June 2009 the total commitment under the EDW was N2.6 trillion, while outstanding commitments were N256 billion, most of which was owed by half of the existing banks. When the CBN later shut the window and in its place guaranteed interbank placements, the same numbers of banks were the main net-takers under the guarantee arrangements. Clearly, there were deep-rooted liquidity problems.
The situation of the banks was aggravated, perhaps even more fundamentally, by weak corporate governance. In many banks, the boards of directors were beholden to the CEO and management instead of exercising supervisory governance, insider-lending was rife, and many of these loans went bad. Indeed, in several examples the intent was not to repay the loans at all, making it a case of the saying that “the best way to rob a bank is to own one”.
A decisive intervention
The appointment of Lamido Sanusi, a banking risk management expert, as governor of the CBN was a game-changer. This was the first time a CBN governor would have a strong risk management background in an industry in which lip service was paid to the concept but few banks were truly serious about managing risks effectively. Sanusi decided to ascertain the true state of the banks through a joint special examination led by CBN bank examiners, working with others from the Nigerian Deposit Insurance Corporation (NDIC). The examination’s purpose was to review, evaluate and determine the quality of the banks’ loan portfolios. The examination found substantial amounts of non-performing loans, poor corporate governance, weak risk management, and weak capital adequacy and liquidity. Nine banks were found to be in a “grave condition” and a tenth was found to have insufficient capital. The stage was set for a decisive intervention in the threats to Nigeria’s banking system.
The CBN moved decisively to strengthen the industry, protect depositors and creditors, restore eroding public confidence in the stability of the banking system and safeguard its integrity. First, Sanusi in the exercise of his powers as governor under the Banks and Other Institutions Act (BOFIA) removed five chief executives of banks from their positions in their banks in one day (and later fired another three).
Kingsley Chiedu Moghalu
Being a keynote speech at the Commerzbank Investment Banking Conference for African Banks, Frankfurt, Germany, October 20, 2015.
