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Bank crisis: The road to hell (2)

This is where I classify the new capital requirement of the CBN. It is the anti-thesis of an entrepreneurial approach. That is why I am certain that X years from now some policy maker will reverse it. The only loser will be the Nigerian economy —Professor Pat Utomi, The Guardian, July 25, 2004.

It is easier for an economist to understand the

CBN building
CBN building

theory of banking than for a banker to understand economic theory —Atedo Peterside, O.O.N, chairman IBTC, The Guardian , July 21, 2004.

FIRST of all, please note that the first prediction and call for the reversal of the consolidation policy was made by a southerner of Igbo extraction in the person of Pat Utomi; because we shall return to it before closing this series – given the allegations of a northern agenda that some have now adopted to discredit on-going reforms.

The minute the former governor of Central Bank, Professor Chukwumah Soludo, announced the new capital requirement for banks on July 6, 2004, only one word could effectively describe the reactions of all the bankers attending the meeting – panic. And that emotional reaction trailed all of them back to their offices – mostly in Lagos. A great deal of that panic was shared by their major shareholders, executive and non-executive directors as well as discerning staff. For many the danger was clear and it came with a deadline.

Incidentally, what was already a firm decision by the governor of Central Bank was at first presented as “preliminary thoughts”; after which he welcomed “comments and suggestions.” It was not until a few days after that the participants realized that neither comments nor suggestions were welcome or needed.

Perhaps, if consultations were held prior to the implementation of, what was at the heart of it, a great policy decision, the result could have been different. The consolidation model adopted by Professor Soludo, we understand was based on the Malaysian example, which had imposed rapid re-capitalisation of banks at short notice resulting in mergers and acquisition of banks until only a few banks with significantly higher paid up capital remained.

It was this example that prompted the new governor of Central Bank to impose the N25 billion capital base target and also set the target date at less than 18 months. For the average Nigerian bank operating in 2004, it meant increasing paid up capital by 555 per cent. Several questions arose immediately – some of which were asked in Atedo Peterside’s epistle mentioned last week. Let me give him the floor, Atedo is always concerned about being quoted out of context by the media.

This is what he published on July 21, 2004 on the most important initial questions regarding the new capital requirements. Writing under Unanswered Questions he asked: Because Central Banking is not an exact science, many of us still question how you arrived at the figure N25 billion. Why not 10 billion or 20 billion or even N30 billion? We would appreciate an insight into the methodology that was used to arrive at 25 billion…

… With respect to the 18 months deadline, why not 24 months, 12 months or even 36 months? Again, we would like to know the methodology used to arrive at 18 months. As you may be aware, IBTC is arguably the most experienced bank in the country today in terms of M&A (mergers and acquisitions) activities….

Even in spite of IBTC’s substantial  experience in structuring M&A transactions, we are reluctant to mention timeframe below 30 months for the type of transactions you now envisage for virtually all but a few Nigerian banks to undertake at the same time. Who advised this 18 month deadline?”

Just in case you fail to understand what Atedo’s questions are all about, let me break down what Atedo had written into digestible parts because the questions asked, and which were ignored, provide some, though not all, of the answers to why we are in hell right now.

Let me again borrow a few bits of data from Atedo before adding my own. IBTC started business in 1989 with N6 million; was asked by the CBN to raise it to N12 million.

Fifteen years after, it had share capital of N7.8 billion. Zenith started in 1990 with N20 million shareholders funds and thirteen years after had grown shareholders funds to N12.9 billion. Oceanic also started in 1990 with N20 million and 13 years after was seating on N7.07 billion. Thus three of the fastest growing banks in the 1990s were growing at compound rates of about 54 per cent per annum. Suddenly, all the banks, the quick, the lame and the dead (because some were already dead even on the eve of consolidation) were required to grow on the average 555 per cent in 18 months. The obvious question is: was this realistic?

Since the answer is so obvious, the next question is: how did the banks react to irrevocable ultimatum? Or more to the point: how did the CBN governor expect them to react to the ultimatum? The options at the disposal of all of them, except three – First Bank, Union Bank and UBA/STB – were extremely limited; for a few there was none.

The weapons at their disposal were as follows: approach the capital market to raise funds (which many did immediately); engage in M&A (which Atedo had told us take minimum of 30 months, except that this time the banks had 18 months but which some others rushed through); cheat by falsifying their balance sheets (which many did, as will be demonstrated soon); or, go out of business (which about twelve actually did, even after cheating all they could). Given the fact that the courts will soon be inundated with lawsuits arising out of the latest CBN measures, this is not the time and place to provide names. Irrespective of how banks stood at the time, desperation was the common thing. And desperate people will do anything to survive. After all, self-preservation remains the first law of nature.

Merger transactions

Let us address the cheating first. Once again, Atedo, as an insider, who promised not to write a book on the CBN policy, nevertheless provided sufficient hints about what happened shortly after the announcement. Read the pathetic story.

“The entire Nigerian banking industry is trying to structure speedy merger transactions, without an appropriate and detailed legal backing for some of their desperate (that damned word that said it all) actions. I am shocked and horrified at the classified and very confidential information which some of my colleagues are throwing at me in order to establish a case for a higher valuation of their own bank in envisaged merger deals. They are also comforted by the fact that legal redress can take seven or eight years to obtain because our courts don’t work efficiently”.

So, we have evidence from an insider that, in order to scale the almost impossible hurdle set before them, banks engaged in illegal and unprofessional activities aimed at falsifying their balance sheets.

Their most important allies in this pervasive scam were estate valuers, who, knowing that their clients were desperate did not hesitate to provide the “professional services” required to obtain the “higher valuation” for their banks.

The second group of professionals who contributed substantially was the ever creative accountants. Like the Indian company which specialized in producing three balance sheets – one for creditors, the second for the Internal Revenue Service and the third for the owners -  Nigerian banks and their creative accountants and financial consultants produced what could only be called magic.

They were confident that the CBN and hardly anybody else would have the time to go through their submissions. That was their mistake, some people, Yours truly included, knew that we were at a watershed and any mistake in handling this policy initiative could land us in hell – which is where we are right now. At any rate, it was clear to me that desperate people are not averse to breaking the law. That was the starting point of my” bank-watch”.

At the end of the day, a bank with paid up share capital of N4 billion in 2004 was re-valued and was suddenly worth N10 billion or N12 billion with not a single kobo of fresh funds coming into the bank. As Atedo said, they did it because the courts were not efficient; but they also did it because they knew that the CBN which had set the hurdle lacked the supervisory framework to detect the crimes in time – certainly not before December 31, 2005. Falsification of balance sheets was not the only step taken by some banks in order to qualify at all costs.

The CBN must have realized, after the announcement, the quantum of fresh capital that would be required if at least a reasonable number of banks were to qualify; the bank also realized that a great deal of the money might come from abroad or from corrupt officials or global crime syndicates wanting to use the opportunity to launder their ill-gotten gains. So, out went an announcement stating that the CBN would vet the sources of the funds coming into the system. The desperate banks were undeterred.

At any rate, they know the tricks of the trade better than the novice governor and they proceeded to ambush him. As deadline approached, the avalanche of documents to be vetted by the CBN forced the governor to beat a tactical withdrawal. The vetting would take place afterwards. But, by beating that retreat the CBN had lost the initiative to the banks.

As one friend banker told me, “Is it possible for him to give certificate to a bank on January 1, 2006 and withdraw it in March because some of the funds came from dubious sources? Certainly, the banks that have wangled their way through are here to stay”. And stayed they did – at least until now.

Still, there were indications that not many banks will qualify either by raising funds on their own or through M&A. The Central Bank then stepped in to midwife some marriages -  mostly of convenience. Mergers were rushed through at break-neck speed without regard for due diligence and without considering the corporate culture clashes that will necessarily result.

Perhaps the merger which produced the least post-merger problems was that of STB and UBA in which STB, the cat, swallowed UBA, the tiger, whose former board had allowed the bank to run down considerably.

Few others went on seamlessly.  Even then there were still some banks left without partners and unable to raise funds directly from the capital market. One of these was Bank of the North. The bank ruined by the northern elite.Next  week: Unity Bank – the northern agenda and capital market invasion


Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.