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Margin loans that cost MD’s their jobs

*11 other banks under CBN scrutiny

By Gabriel Omoh & Peter Egwuatu

MORE bank chief executive officers may be sacked by the Central Bank (CBN), if the ongoing examination of  books of 11 banks by the apex financial institution and the Nigerian Deposit Insurance Corporation (NDIC) finds them wanting.

Five managing directors were dropped on Friday by the CBN, citing financial crisis being experienced by them.  They are  Dr. Erastus Akingbola (Intercontinental); Dr. Barth Ebong (Union Bank); Mr. Okey Nwosu (FinBank); Mr. Sebastian Adigwe (Afribank); and Mrs. Cecilia Ibru (Oceanic)

Of the first 10 banks examined, five were found to be in financial crisis prompting the sack of their MDs. and executive directors by the CBN.

Mallam Sanusi Lamido Central Bank Governor (right) and Babatunde Lemo  deputy Governor, Operations, Central Bank of Nigeria at the press briefing  on the managerial restructuring and developments of some Nigerian Commercial banks.
Mallam Sanusi Lamido Central Bank Governor (right) and Babatunde Lemo deputy Governor, Operations, Central Bank of Nigeria at the press briefing on the managerial restructuring and developments of some Nigerian Commercial banks.

Sanusi told reporters on Friday that “the scope of the Special Examination was widened to cover all 24 banks. So far, we have concluded the audit of 10 banks including these five, the others being Diamond Bank, First Bank, United Bank for Africa, Guaranty Trust bank and Sterling Bank. We have also commenced the next batch of 11 banks and hope to conclude them by end of August.

All in all, we expect to conclude the  audit in mid-September. The Central Bank is requiring all banks to make appropriate provision for non-performing loans and disclose them. We hope that by the end of this quarter, all banks would have cleaned up their Balance Sheets. On the basis of the information available to us so far, we are confident that the banking system is safe and sound and we have dealt with the major sources of systemic risk.”

Margin loans that got banks into trouble: The CBN action was triggered by the banks’ exposure to the capital market. Eleven of the 24 banks in the country are carrying the burden of N421.7 billion as margin lending including loans to individuals, stockbrokers or loans to corporate bodies backed by share certificates.

Margin lending and loans which are backed by stocks have generated a lot of controversy as the CBN has put the total estimate of the facilities banks granted individuals, stockbrokers as well as lending secured with share certificates at N1.2 trillion.

Available figures show that the top 11 banks in the country granted a total of N229.9 billion to individuals and corporate bodies as facilities to purchase shares. A break down of the data indicates that Intercontinental Bank tops the list of banks with heavy exposure to margin loans of N85.2 billion.

This amount is made up of N 36.9 billion facilities granted to individuals and stock brokers while a total of N 48.3 billion was granted to other corporate entities who used share certificate as collateral.  It is followed closely by GT Bank which has a total margin loan portfolio of N70.3 billion made up of N18.9 billion loans to individuals and stock brokers to buy shares and N51.4 billion to other corporates who use share certificate as collateral.

Ecobank is third in the high profile margin loan saga with a margin loan exposure of N59.2 billion. Another bank at its AGM in Burkina Faso said it had made 100 per cent provisions for the loans though it was not lost. First Bank has a total share loan exposure of N58.8 billion, but its balance sheet shows that it did not join the race for granting margin loans during the share boom years to individuals and stock brokers but corporate bodies that used share certificates as collateral.

Access Bank plc, on its part, has a total exposure of N33.5 billion of which N20.1 billion is as a result of loans granted to individuals and stock brokers for share trading while N13.4 billion was granted to other corporates which backed up the loans with share certificates. Oceanic Bank plc, granted a total of N22 billion as facilities for share trading to individuals and stock brokers.

United Bank of Africa records a loan portfolio of N21.6 billion backed by share. In the case of Diamond Bank it has on its balance sheet a total of N20.2 billion margin loans portfolio made up of N19.6 billion granted to individuals and stock brokers and N0.6 billion granted as facilities to other corporate bodies with share certificate as collateral.

Union Bank, according to the record has a total of N17.8 billion margin loan facilities. Stanbic/IBTC granted a total of N 10.1 billion made up of N 5.2 billion  granted for share trading while N4.9 billion was granted to other corporate bodies backed with share certificates.

Fitch a rating Agency based in US in its comment on margin loan granted by Nigerian banks said “It remains to be seen how Nigerian banks will address their share lending exposures in their financial statements. The agency considers that significant impairment charges could arise if these exposures become non performing or if the value of collateral continues to remain below minimum coverage ratio.

“Transparency is weak in Nigeria although there have been improvements in some of the more internationally active institutions. With the exception of GTB, bank financial statements are only presented in local GAAP. While Fitch recognises that Nigerian GAAP do not require the same levels of detailed disclosure as IFRS, the agency notes that most Nigerian banks do not provide supplementary information of their Tier 1 and total capital adequacy ratios and detailed information regarding their loan portfolios in their annual reports.

First Bank was the only bank in the sector to disclose its share lending exposure at end 2008 in its annual report. Share backed and margin lending have become a feature of many Nigerian banks over the past two years. The CBN estimated sector wide exposure to this type of lending to be about N N200 trillion at end 2008. According to the CBN, this represented 30 per cent 45 per cent of system wide share holders’ funds in 2008. Of this amount, the CBN estimates that about N400 billion related to margin lending. These facilities are primarily to individuals and stock brokers for the purpose of acquiring shares.

“Fitch makes the distinction between margin lending and share backed loans to corporates for the purpose of acquiring shares, with the former considered to be far riskier because of the counter parties’ reliance on favourable share performance in order to repay the loan. A few hours before the announcement of the removal of the five MDs, they took turns to face a panel led by Mr. Sanusi at the CBN office in Lagos.

They were made to defend their decisions in granting the loans. None of them spoke to reporters. It was  gathered that the CBN governor refused overtures by some prominent people to intervene, insisting that the banks must be saved from collapse in the interest of stakeholders and depositors.


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