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Bank crisis: The road to hell (3)

There are some commercial banks that have a negative net worth. What is CBN’s plan for them? Who is going to merge with a bank with a large negative net worth under your N25 billion scenario? Is this a disguised way of putting them out ofbusiness by December 31, 2005? Why would the Central Bank of a country watch commercial banks keep their doors open to the public, when they have negative capital? —Atedo Peterside, July 21, 2004.


DESPITE all the efforts at balance sheet doctoring and hasty mergers, by the middle of 2005, it was clear that several banks were not going to meet the deadline for the simple reason that their shareholders capital had been completely eroded. Why they were allowed to continue to operate was a mystery to close bank watchers. Some even had negative net-worth meaning that in reality they had ceased to exist except on paper and on the forbearance of the Central Bank of Nigeria.

Among these was the Bank of the North, BON, with its corporate headquarters in Kano. As its name suggested, it was really the bank of the north; it had the largest branch network in the north reaching places which other banks avoided like the plague.

The bank also provided the bulk of the agricultural loans to farmers and middle men in the north. Those were its positive attributes. It also played another role in the north which is not often mentioned – it provided uncollaterised loans to the northern elite a great percentage of which ended bad debts. On the eve of the consolidation policy, BON had about N3.7 billion paid up capital and reportedly N8 billion in non-performing loans – a significant percentage of which should have been written off.

To BON, therefore, both the capital market and merger options were closed. The only option left was for the 19 owner northern states to fund the re-capitalisation. This they refused to do. On the face of it, that was the end of the road for BON – until politics intruded in what had hitherto been an essentially economic/financial undertaking.

By mid-2005, it was becoming clear which banks will meet the deadline; it was also apparent who the managing directors/chief operating officers would be. Mrs Cecilia Ibru would emerge as “the only woman standing” and no northerner would head any bank. Soludo was no fool; he knew instinctively that consolidation would be regarded as a southern agenda if that occurred. So the Central Bank assumed the role of matchmaker and financier of the wedlock.

First, N8 billion bail-out money was provided to BON; then it was wedded to five other banks to form Unity Bank. This is important because of the current noise about the N420 billion bail-out money provided by the new governor.

To the best of my knowledge, Soludo did not seek the approval of the National Assembly to give out public money in 2005 to pursue what essentially was a political, not an economic, agenda. He played the northern card in order to save the policy from becoming hostage to petty politics. Was the N8 billion a grant? Or was it a loan? Was it repaid? Till today no answer had been given. Incidentally, BON, got into trouble partly because of the alleged mis-management of the bank by a former managing director, Alhaji Bulama, who reportedly approved loans for himself and highly-connected northerners.

Alhaji Bulama was removed by the CBN as a first condition for granting the bail-out money, without consulting the shareholders, using the same powers that Sanusi had used to remove five bank chief executives recently. And Bulama was not the only CEO removed by Soludo; the managing directors of Omega and Wema banks also fell under the hammer of the Central Bank governor.

To the best of my knowledge, no Yoruba or Hausa person read any ethnic agenda into those measures even though there were other banks whose share capital had been eroded. Apparently, it is acceptable for Soludo to remove bank managers but not Sanusi judging from the noise emanating from certain quarters. The National Assembly which also failed to query the N8 billion must also have been on leave while that was going on.
The absurdity of that forced merger, involving BON, is on display at Burma Road, Apapa, Lagos, among other states, where three branches of Unity Bank, situated on the same side of the road, are within shouting distance of one another.

A visitor to any of their banking halls will usually be confronted with an empty hall. Public money had been used to create the sort of mess which private money would have never attempted – all in the bid to ensure that at least one northerner is managing director of a bank from January 2006. That deviation from the original consolidation script was by no means the last as we shall soon see. Till today, Unity Bank continues to be regarded as the “poor cousin” among banks and it has achieved nothing spectacular since its birth.

Meanwhile, many of the other banks, now armed with the doctored documents, headed for the capital market to raise funds in order to achieve the N25 billion target. But, first they needed to whet the appetites of prospective investors. Billions of shares were coming to the capital market at the same time presenting operators with unprecedented challenges regarding how to dispose of them; and the banks were desperate. The key question at this stage was: how can prospective investors be convinced to surrender their hard-earned money in exchange for share certificates?

The answer was not long in coming; manipulate the share prices. Thereafter, a few months before a bank issues its IPO, the share price would start an upward climb such that on the day of launching the IPO the quoted price was always higher than the offer price – the unwary investors were lured into believing that they were getting a premium.

All that was required was for somebody to request for 5000 shares of a bank at a specific price and the price went up immediately by five per cent. In less than twenty trading days, the price would have doubled and another fifteen days would double it again. Convinced that banks share prices were riding a perpetually upward mobile escalator, the Nigerian populace, and foreign portfolio investors, trooped into the capital market to snatch up the shares whose prices had been artificially induced. Any one reading any prospectus published in 2004 to 2007 can readily see how deceptive they were. Few prospective investors bothered to ask the simple question: what has changed to suddenly make a bank’s share worth four times the price in one year? Indeed, very little had changed.

The impact of the unprecedented avalanche of bank shares in the capital market was devastating to other sectors, particularly manufacturing. When capital invested in shares could grow by 300 per cent in one year, with promises (even if on paper prospectus) to grow another 300 per cent the following year, the incentive to invest in the real sector was no longer there where returns were generally under 25 per cent; still high by global standards but now unacceptable in Nigeria.

Factories closed down; transporters stopped their businesses; even farms were sold to divert the funds to the capital market where, “without sweat” (as one investor said), one could multiply his money. Unknown to the bankers, the sectors to which they would have to lend in order to justify their build up of share capital were being steadily destroyed. Until now the CBN routinely reported increased lending to the real sector whenever the banks are accused of starving manufacturing. Figures are reeled out to silence critics. From recent revelations, it is obvious that the former governor of Central Bank was not aware that less than 5,000 businesses accounted for over 70 per cent of the loans out of over 400,000 registered companies in the real sector. The lion’s share went to speculators and front men.

What could be regarded as the first round of IPOs ended when 24 banks were announced in January 2006 as those qualified to carry on the business of banking. Unfortunately, a new element had been introduced into the sector – the race for leadership. Hitherto, First and Union Banks had been the acknowledged leaders; with UBA coming a distant third. At one time the big three accounted for close to 70 per cent of deposits. And for a long while, it appeared as if the status quo would be maintained. Consolidation changed all that. Suddenly, some other banks after successfully scaling the consolidation deadline, through means fair and foul, developed ambitions to become the largest banks in Nigeria.

That ambition called for another trip to the capital markets – both in Nigeria and abroad. Size for its own sake, without complimentary regard for quality banking practices, then became the main driver of banking practice. The second, and even third, trips to the capital markets followed the same patterns that had proved successful at first. Manipulate your own share price for weeks, then launch with assurance that the ignorant masses will buy once again.

It is not clear at what point, promoting Nigerian banks to be ranked among the top 1000 became a CBN agenda. It was certainly not specifically stated in 2004. But it gradually crept into statements made by the former governor. He was certainly gratified that four or five Nigerian banks were listed among the top 1000 in 2008.

On the eve of consolidation, the paid up share capital of the top Nigerian banks was less than that of the fourth largest South African bank. However, we know that by 2007, the CBN was pursuing the FSS: 2020 Agenda designed to make Nigeria the financial hub of Africa and the leading economy on the continent despite the fact that the nation ranked fourth in Gross Domestic Product, GDP, at the time, behind, South Africa, Egypt and Algeria. Why a larger economy would surrender the financial leadership to us in 2020 was never explained. But, it was consistent with this doubtful ambition that Nigeria should have big banks. That race, which the CBN encouraged, has proved fatal. It has produced clumsy giants as we are now discovering.

Unfortunately for the banks, something went wrong this time. The prospective shareholders had little money of their own to absorb the new deluge of shares. Yet, they must be sold. What was to be done? Enter margin loans – like the apple given in the garden, the idea born in innocence, and encouraged by the CBN and the Nigerian Stock Exchange, NSE, had turned out to be one of the major reasons we are in this hell today.
Next week: how margin loans ruined the NSE and banks


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