Banking industry reformation and national transformation

Semiu Salami
Semiu Salami
CBN Gov., Sanusi Lamido

In July 2014, it will be ten years since Professor Charles Chukwuma Soludo, a brilliant academic-cum-development expert, former Governor of Central Bank of Nigeria (CBN), and now a politician, initiated the banking industry consolidation agenda. The following month will make it five years since Mallam Sanusi Lamido Sanusi, an accomplished banker and current CBN Governor, launched the most audacious intervention and reform of the Nigerian banking industry.

Over this period, Nigerian banks have shown considerable abilities to raise capital, compete fairly and sometimes unprofessionally, become flag-bearers of the resurging Nigerian economy locally and internationally, inflate incredible bubbles in the capital market, and provide a platform for talented Nigerian professionals (with a sizeable number of them returnee Nigerians in the diaspora) to express their skills. What’s more; Nigerian banks, since the introduction of the reforms, have increased credit to the private sector. They have demonstrated weak capacity for good corporate governance, disclosure and risk management. And their directors and senior management have continued to hobnob with the-powers-that-be, in continuation of the time-tested strategy for winning public sector deposit.

The aggregate effect of the good, the bad and the ugly sides to the banking landscape since July 2004 is that the industry has been positively transformed. Nigerian banks are way ahead of where they used to be ten years ago.

Regulatory reforms have not been solely responsible for the significant change in the banking industry. Technology, product innovation, new approaches to service delivery and international framework agreements around access to financial services, especially by the unbanked and under-banked, have all contributed to this transformation. But without the interventionist reforms, it is doubtful Nigerian Deposit Money Banks (DMBs) would have been able to seize the new opportunities that have emerged, or attracted the partnerships that have revolutionized delivery of financial services in our country today; a country where some people still insist, against evidence, that nothing works.

Thus, the Nigerian banking industry provides important evidence that institutional and industrial transformation can occur in Nigeria. Indeed, they are occurring; even if the pace is rather slow and the magnitude still yearning for up-scaling Some of the manufacturing projects which Nigerian Export – Import Bank (NEXIM Bank) has funded are part of the larger industrial transformation that is happening in the country today. This is a subject of my future articles. It will take strong indifference or outright disinformation, for whatever reason, to insist that these things are not happening. Large-scale socio-economic transformation in Nigeria is a reasonable expectation as a result of the oases of change we are seeing already in the regulatory and market space.

Soludo’s Vision

The banking industry transformation has not been fortuitous. The recapitalization-cum-consolidation programme was by design. It was powered by a bold vision and commitment to deliver on the economic potentials of the country. Significantly, the two epochal regulatory regimes that have brought about the transformation of the Nigerian banks have asserted the virility of the domestic economy, with the banks being important fronts for expressing this.

Today, quite unlike what it was ten years ago, the Nigerian banking sector commands attention anywhere. Some South African banking franchises have been hovering over the Nigerian banking landscape for more than four years, looking for opportunities for acquisitions.

In January 2007, (just over one year after the mandatory recapitalization programme was concluded), a Nigerian wholly-owned indigenous banking franchise – Guaranty Trust Bank – successfully issued $300 million Eurobond (which was oversubscribed by $221 million), and later became the first African bank to list its security on the London Stock Exchange.

Against previous lack of access to the international capital market, several Nigeria banks have raised funds and are planning to do so in the global markets. Nigerian banks are now very strategic to the distribution of retail credit products by multinational financial institutions, especially card issuers. Even at current levels of integration into the global payment system, Nigerians are tapping into global eCommerce; the payment subsector has been transformed and has provided the impetus for the CBN to launch the Cashless Policy.

All these were beyond contemplation for the pre-June 2004 Nigerian banks, which were marginal even within Africa. But today, a Nigerian bank – United Bank for Africa – has subsidiaries in 19 African countries.

The 2004 consolidation agenda envisioned and targeted certain outcomes. The more generally known was the N25 billion minimum capital base for any bank that intended to operate beyond December 2005, the deadline for the recapitalization exercise. Embedded in the regulatory capital requirement was the consolidation of the industry from 89 banks to preferred 25 maximum.

The two objectives were achieved, by and largely. On the minimum capital requirement, most of the surviving banks basically used it as a stepping stone.

Several Nigerian banks now have ten-fold the baseline capital. Whereas the existing 89 banks in 2004 had struggled to meet N2 billion mandatory capitalization, the shareholders’ fund of Nigerian banks grew to N2.37 trillion in 2012.

The debate is welcome and ongoing as to whether or not the policy target that the banks would use their bigger capital bases to leverage funding of real sector growth has been achieved.

This debate ensues not because bank credit to manufacturing and agriculture has stagnated at the levels they were before introduction of the reforms. But expectation on the scale of the impact the reforms would have on real sector funding is what has been at issue.

Similarly, in a progressive fashion, governance of the banks seems to have improved over these years, even though we had to navigate through a period of infractions on banking rules and ethics.

Of all the gains of the 2004 reforms, it was the unforeseen benefit that became most significant in global context. Two years after the conclusion of the regulatory recapitalization programme, a debilitating financial crisis, which later morphed into an economic crisis, broke out on the global market.

Those who prognosticated that the crisis would not affect Nigeria because the domestic economy was not correlated to the global financial market simply got it wrong.

Their analyses focused on the distribution channels of the toxic credit assets that emanated mainly from U.S. banks which threatened to drag global market to the abyss with the institutions that conned the world through manipulative financial wizardry.

But linkages through the commodity market transmitted the shock to Nigeria. The price of crude oil dramatically collapsed from $147 per barrel in July 2007, to under $40 per barrel in January 2009.

The effect on the fiscal terrain in Nigeria was predictably negative. It could have been worse; but for the prudence which saw creation of a domestic savings buffer and increase in the country’s foreign reserves during the golden era of fiscal management in Nigeria before the crisis.

And Nigerian banks seemed to have been primed to withstand the crisis. They had raised their capital base and made some progress with mobilization of low-cost deposit. Therefore, when through worsening domestic fiscal terrain and the international trade links, Nigerian banks became exposed to the crisis, yet they were able to hold their ground for some time.

While the global financial crisis lingered, and irrespective of the amelioration of its effects on the Nigerian banking industry through direct and indirect external linkages, the domestic capital market bubble which was inflated by speculative foreign portfolio investment and margin lending by the banks went burst.

Following this, the bubble in the credit market, which was built by risk concentration in oil and gas lending and sheer delinquent credit behaviour by senior management of some of the banks, worsened the effect of poor risk management practices, and all this combined to bring the Nigerian mega banks into precarious conditions.

It may as well be taken as part of the crisis management framework. No central bank governor around the world came clean on the level of impact the crisis was having on their economies and banks.

For our own dear Soludo, full disclosure on the shape of the mega banks he midwifed would be self-negating, and therefore a dilemma. Many observers alleged cover-up of the rot in some of the banks, particularly because the then CBN Governor was seen to be quite close to the bank CEOs.

The kind of very sensible policy option Soludo took with regard to management of the local currency – allowing gradual depreciation of the naira instead of devaluation of it as part of the crisis response – was seen to be lacking when it concerned the required intervention to clean the banking system and rein in the (criminal) excesses of some of the bank CEOs.

It was in the middle of this dilemma that Prof. Soludo’s term of five years expired in June 2009. His successor, who definitely had insider knowledge of the undercurrent of the banking system (himself chief executive in one of Nigeria’s biggest banks), wasted no time in choosing to save the banks from systemic collapse, instead of preservation of the legacy of his predecessor, which allegedly had included micro-managing the liquidity problem in some of the banks in the wake of the crisis.

Sanusi’s Bravery

In one brave move, Sanusi intervened in nine banks. He sacked bank CEOs and a bunch of other directors, to the bewilderment of Nigerians who were used to lack of exercise of this regulatory power by previous CBN governors.

As the audit he commissioned necessitated, N620 billion was propositionally injected into the intervened banks at the first instance. Sanusi worked with law enforcement agencies to ensure that bank directors who had been indicted with criminal infractions were prosecuted. He insisted shareholders’ value was eroded by the malfeasance in the banks.

With this, he quite rightly refused to accept “privatization” of profit by bank directors and dumping losses on taxpayers. His approach to the bailout of the banks was quite unlike the circumstantial redefinition of capitalism in the West whereby their bailout programmes imposed serious moral hazard on the system.

CEOs of imperiled institutions in the U.S. nevertheless flew into Washington DC in their private jets to receive bailout fund for their badly run, failed institutions. Sanusi’s stance was antithetical to this. Instead of a bogus interventional benevolence, his approach seems to be more credible and quite capable of deterring future bad behaviours by bank directors.

Widening the scope of his intervention from merely addressing capital impairment, Sanusi went on to accentuate risk management. Introduction of macroprudential frameworks for risk management addressed the psychology of the market to the reality that individual banks, especially the ones big enough to be of systemic importance, were not islands unto themselves.

They also posed systemic risks to the entire banking system. Had dissolution of such big banks including Intercontinental Bank, Oceanic Bank and Afribank been uncontrolled, they could have dragged down the entire banking system, and thus push much higher the cost of resolution of the crisis.

Philosophically, the Sanusi-led CBN intervention simply chose to do what had to be done. It facilitated the “bad bank”; the Asset Management Corporation of Nigeria, to purchase bad loans from the banks and thus help to clean their balance sheets and protect their mega bank status.

Although Sanusi abolished universal banking to dent the fanciful idea of a financial supermarket bank (because of agglomeration of risk in such entities), his regime, nevertheless, has preserved the stature of Nigerian banks and the banking system.

A strong commitment was also made that no depositor’s fund would be lost in resolving the banking crisis. In the interim period when banks had to reorganize their lending practices, the CBN instituted a couple of intervention funds to boost flow of low cost credit to key sectors of the economy, including agriculture, aviation, textile and the SME.


There is absolutely no question that the size of a bank, as with the size of a country, defines its strength and influence. (For this reason, remaining one big country is advantageous for realization of the aspirations of the individual Nigerian and the ethnic nationalities, contrary to the misguided insinuations to the contrary in the media lately.)

However, scale that is expressed in negativity is a threat to a financial system as it is to a country. While Soludo facilitated the emergence of Nigeria’s mega banks, Sanusi preserved their status by ensuring they operate by the norms of safety without which they could never leverage their mega status. Thus, we have a transformed banking system. The core principles of the banking reforms are scalable for national transformation.

Orya is Managing Director/Chief Executive Officer, Nigerian Export – Import Bank.

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