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.

Was there a better way to effect the significant changes required in the practice of banking in Nigeria without creating all the drama that is currently prevalent in the Nigerian banking industry? Many have argued that the CBN could have forced all the banks to make the required provisions, declared their losses and take the hit on their capital that would have invariably resulted and demanded the recapitalization plans from the board of the banks. Where they were not in a position to recapitalize, the CBN will move in with its new capital and as the new majority owner, sack the board and effect the necessary changes.

This may have taken a longer time but no doubt the process would have been more tidy and transparent. The haste with which CBN has sacked the MD’s has been overtly populist. Surprisingly, the CBN sacked only the MD’s leaving the board, whose responsibility it is to ensure proper banking is enshrined in their institutions, intact. It is not clear why the CBN sacked the MD’s and left the boards intact. If there has been a failure in these institutions, it was a failure of the board rather than executive management. Leaving the board intact is an endorsement of poor corporate governance and the continuation of board negligence and inactivity which has primarily been the course of recurrent bank failures. If the CBN really wanted to change the way banking is done in the country, sacking the board would have be the best action as it would sent the strongest signal that sitting on the board of a bank comes with its privileges but it also comes with huge responsibilities which must not be taken for granted.

Regulatory exuberance is further displayed in the CBN action with its hasty publication of the list of bank debtors without even allowing the new management it had put in place in the banks it had taken over to settle in. Basically, the CBN action has removed the greatest tool the new management has in collecting these loans, that is the threat of “Name and Shame” the debtors. Having lost this tool, they have now resorted to the lame tool of threat of arrest.

This is a lame threat considering that lending is not a crime neither is borrowing. Lending without collateral is an offence under BOFIA but there is no definition what collateral is and besides no bank lends without a form of collateral. And still in the spirit of regulatory exuberance the EFCC goes ahead to ask debtors to pay within seven days by issuing a draft in favour of the Federal Government. The first question is, did the Federal government lend money to these so called debtors? So why should they pay money to the Federal Government?

Then where will the alleged N774 billion owed by the debtors come from? Is it from the supposedly healthy banks in the system? How many of the supposedly healthy banks survive the removal of N774 billion from their vaults in seven days? This order does not only smack of regulatory exuberance but also strong ignorance of how the financial system works. And the truth is that if the banking system had N774 billion lying around in its vaults, there will not be liquidity crisis, neither will interbank and lending rates be hitting new highs.

The most dangerous aspect of the current regulatory exuberance however is the current attempt to criminalize lending and borrowing. Since 2005, the Nigerian economy has been able to sustain a growth rate of six percent and above and this period also marked the unprecedented growth in bank lending to the private sector. The link between economic growth and bank lending is not coincidental as many economists will tell you. This is where the danger lies in the current CBN/EFCC joint efforts to criminalize the act of lending and borrowing.

There is a real possibility that this may result in a credit freeze to the economy. First banks may become averse to take the risk of lending to the vulnerable sectors of the economy that usually have a higher risk of default why entrepreneurs will also become averse to borrowing. If this happens, the impact will be disastrous to the economy. The already high unemployment rate will get worse and poverty will be intensified.

There is no doubt that following years of carefree growth; the banking industry needed an urgent dose of sanity. But sadly, the way the CBN has gone about it will harm the Nigerian economy in the long run. The CBN under Sanusi has effectively replaced irrational market exuberance with its own regulatory exuberance.

Finance and communication specialist with experience in banking, research and financial analysis and media. Academic qualifications include an M Sc in Banking and Finance, a Bachelor’s Degree in Finance and professional affiliation to the Chartered Institute of Stockbrokers (CIS level I) and the National Investor Relations Institute (NIRI) United States. Good computer skills- Microsoft Excel, Access and Word-. Won four different merit awards in financial journalism

From all indications the CBN attempt to isolate and safe the five banks by pumping in N420 billion ($2.6 billion) and a installing a new management may not really end up saving the banks. It will just keep them alive to absorb more money from the apex bank which has already gone ahead to guarantee a permanent lifeline to the five banks domestic and international depositors and creditors.

The CBN guarantee was the minimum it needed to safe the banks from a experiencing a domestic run on their operations. With the CBN openly admitting that the five banks were in trouble, it was the signal that depositors needed to get out their funds from the banks. The aftermath of the CBN action has seen a consistent withdrawal of funds from the vaults of the five banks with little or no deposits occurring. No bank will survive a continuous outflow of cash from its vaults.

Internationally, the five banks especially and other Nigerian banks have suddenly had their international credit lines cancelled. One of the five banks is said to have had an international credit line of $1.5 billion cancelled in the wake of the CBN action. Nigerian banks may have lost international credit lines in excess of $10 billion following the CBN action. Hence the rush of the CBN governor to London, the world’s financial capital to explain his actions in the Nigerian banking industry.

The situation of the five banks have been compounded by the fact that the anticipated fast paced recovery of the nonperforming loans on their balance sheets has not materialized even with the intervention and harassment of debtors by the Economic and Financial Crimes Commission. As at the last count by the EFCC total loan recovery for all the five banks stood at about N70 billion from a total nonperforming loans of N747 billion as alleged by the CBN.

A clearer picture of the desperate situation faced by these banks becomes obvious when it is realized that deposit mobilization in these banks have come to almost a standstill, lending is at a total standstill as the newly installed management struggle to retool the operations of the five banks. However, even with no fresh money coming in, the banks are still forced to maintain their operations, paying staff salaries and other overheard costs incidental to their existence.

Faced with this situation the CBN will be forced to keep its cash tap open for these banks to stay alive. Already, there are strong speculations that the CBN bailout for the five banks will increase to a trillion naira ($6.67 billion). But this was before the House of Representative intervened and questioned the right of the CBN governor to lend money to the banks without its approval. Until this controversy is resolved, the CBN may be reluctant to give fresh money to the five banks.

This may raise critical issues for the survival of the five banks. Would they resort to the interbank market to stay alive? With the guarantee from the CBN, they are likely to be able to borrow from the interbank market. However, this will effectively return the five banks to the state they were in before they were taken over by the CBN, net borrowers of funds from the interbank market.

The new management of these five banks may have started seeing the desperate position they are currently in and have positioned for massive loan recovery. How successfully they do this will determine their liquidity but considering the current state of the economy, and the conservative disposition of the banks yet to be directed affected by the CBN action, success will be relatively minimal.

The new CBN governor, Sanusi may have not anticipated this logjam. His initial strategy seems to have been hinged on a quick sale of the banks hence the road show in London and subtle moves to seek foreign investors for the five banks. The foreign buyers have chickened out living Sanusi in a serious dilemma. This has been compounded with the series of court cases instituted by the former management of the five banks and also shareholders against the propriety of the CBN’s action against the five banks. Until these cases are dealt with in court and a decision reached, none of the five banks can be sold.

The implication is that Sanusi is left with keeping these banks on its cash lifeline through guarantees or call on the NDIC to wind them up.

So what should Sanusi do? Keeping the banks on its cash lifeline will prove too costly for the apex bank. One, the public would not find it funny to see the CBN pump in more than a trillion naira to keep these banks alive. The national law makers will bring the roof down on him. Besides, how would the CBN finance such a lifeline? Print more naira as it has done with the initial N420 billion bailout? Already, the initial N420 print has heightened inflation fears in the economy. A trillion naira fresh print will burst the inflation roof.

So should the CBN call in the NDIC to wind up the five banks? The pending court cases will make this difficult. Besides, it will raise a lot of issues as to the fact that the CBN took over healthy banks and ran them aground. Then considering how big, three of the banks, Intercontinental, Union Bank and Oceanic Bank are, the NDIC will find its hands full for several years, if it attempts to wind up the five banks at the same time. The sum of the deposit base off all the banks the NDIC wound up since its inception are not up to the deposit base of any of the five banks. Any attempt to wind up the five banks will also increase the reputational damage already suffered by the banking industry so far.

Already, all other banks have closed the tap on credit as they react to Sanusi’s action. There has been a massive movement of funds into fixed income securities which has resulted in steep drop in yields. The impact of the current scenario in the banking industry will be seen in a few months time as banks assets and incomes shrink dramatically. While the 2004 consolidation of Nigerian banks expanded the activities of Nigerian banks, the current “Sanusitization” of the banking industry is expected to lead to a sharp shrinking in banking assets and incomes. Banks will get smaller; banking jobs will vanish while the international expansion appetites which Nigerian banks showed after the consolidation exercise may have just been dealt a fatal blow.

So what should Sanusi do? The set up of the asset purchase fund may be Sanusi’s last best option to save a situation that is clearly getting out of hand. The set up of the Asset Purchase fund (APF) is similar to the strategy adopted by other developed countries to get out of a similar situation. It is expected that Sanusi will adequately capitalize the APF. The CBN has several options to capitalize the APF through additional printing of money or drawing down on its reserves or issuing bonds in the domestic and international capital markets or borrowing from the International Monetary Fund (IMF). Printing additional money will further increase the money supply base of the country and raise the risk of inflation however the other options have lower inflation risks.

The purpose of the APF will be to buy off the nonperforming assets portfolio of the five banks taken over by the CBN as well as the other banks in the system that will be willing to sell off some of the toxic assets on their balance sheets. The prices set by the APF should be commercially determined, that is the toxic assets will be priced not on their book value but on the basis of their viability as well as the cost and time value of money. The APF should have a clear profit motive in mind when buying off these assets off the balance sheet of the banks.

The advantage of the APF is the fact that it has a double advantage to the financial system. It will remove the toxic assets dragging down the operations of these banks, and at the same time help inject liquidity into the banking system freeing the troubled banks to continue their lending activities. Where loans are bought at less than book value, the difference should be written off against the earnings of the affected banks, and where earnings are not enough to absorb it, against the capital of the bank.

The APF after buying the toxic assets of the balance sheet of the banks assumes the position as the primary creditor to the bank debtors whose loans were bought. The APF will now go into negotiation with the debtor and decide on the best way to handle the debtor’s nonperforming position. The APF’s options would be open to either restructure the debt, advance additional debt to resuscitate the debtors business to put the debtor in a position to repay or wind up the company of the debtor. Whatever position adopted by the APF will be with the aim of recovering the debt taking into position the willingness and capacity of the debtor to repay and the economic cost of forcing him to pay.

South Korea is one country that has adopted this option in resolving the insolvency that threatened to collapse its banking sector. What South Korea did was set up a bad debt bank that bought toxic assets off the books of the troubled banks. The European Union is currently debating a similar option. South Korea has been so successful with this option that even the banks that were saved came together to also set a bad debt bank to compete with the governments bad debt bank in bidding for toxic assets on their balance sheets since they felt they were not getting fair prices for the toxic assets that the government bad debt bank was buying from them.

It is critical that Sanusi moves fast to stop the impending economic crisis that is building up following the takeover of the five banks and the uncertainty created by the audit of 11 more banks. It may be more important to stabilize the system than pursue the punishment of perceived offenders. In every other country that has faced a similar challenge as ours in the current global financial crisis; the first instinct has been to preserve the normal working of the financial system before culprits are sort where necessary.

Anthony Osae-Brown is a finance and communication specialist with experience in banking, research and financial analysis and media. Academic qualifications include an M Sc in Banking and Finance and a Bachelor’s Degree in Finance. He is member of the National Investor Relations Institute (NIRI) United States. Won four different merit awards in financial journalism. He has an in-depth understanding of the Nigerian financial industry and is a keen follower of developments in global financial markets. He can be reached on osaebrown@yahoo.com