Since Friday August 14, the Nigerian banking system has not been the same. What started as a rumour that some bank chiefs were about to be sacked became real. The CEOs of Intercontinental Bank, Oceanic Bank, Finbank, Union Bank and Afribank went to the office as CEOs in the morning and returned home early and jobless and with the real prospect that they were also on the verge of losing their stakes in the banks they have sat on as owner managers for close to two decades.
The Central Bank of Nigeria (CBN), the apex regulatory organ for Nigerian banks had taken the decision to wield the biggest stick in the Nigerian banking industry. Sacking five CEO’s, three of whom before the sack, were considered among the top five banks in the country, have been described as the Nigerian banking tsunami.
Justifying its action, the CBN facts are convincing. The five banks according to CBN had given out loans of close to N2.8 trillion of which close to 50 percent were classified as none performing. The five banks, said the CBN, had become virtually illiquid accounting for 90 percent of inter bank borrowing over a seven month period, first through the CBN expanded discount window and then when the window was closed and the interbank market opened, they borrowed from the interbank window to pay down their debts at the EDW. This, no doubt was a clear sign that these banks had run out of money to meet their day to day operations and will collapse like a pack of cards if they are not able to borrow short term funds from the interbank market.
Besides, their desperation at the interbank market was also distorting rates at that window where the CBN was doing all it can to reduce the lending rates. As long as these big banks engaged in desperate borrowing from this window, the CBN efforts to bring down interbank lending would be fruitless. It was obvious that these banks could only survive their critical liquidity challenges with a fresh injection of equity or debt capital.
But considering the state of both local and international capital markets, it was obvious that any attempt by these banks to raise fresh capital may be like a camel going through the eye of the needle.
So the CBN was left with the option of injecting its own capital, arranging a bail out of the banks like it happened in America. In its wisdom however, the CBN felt that, it would not pump in capital and allow the same managers, which by their action and inaction allowed their banks to run into this state of illiquidity to continue to sit at the top of management. Most importantly, it is obvious that the CBN felt that it was time, that it sent a strong message out there that poor banking practices in the industry will no longer be allowed.
But in the process of sending out this message to the industry has the CBN “over killed.†It is obvious that Sanusi Lamido Sanusi, riding on his strong reputation as a risk manager, may have unduly focused on curtailing poor credit risk practices in the industry without taking into consideration reputational risk. So in an attempt to pluck the loop holes created by poor credit risk practices, the Sanusi may have left the banks exposed to reputation risk damage that the concerned banks may never recover from and the banking industry at large may take a long time to overcome.
Continue reading ‘Nigerian Banking Crisis: From irrational market exuberance to regulatory exuberance’ »
