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Banking crisis; the road to hell


Every great enterprise starts with enthusiasm for an exalted aim and ends up bogged down in petty politics —Charles Peguy, 1873-1914, Vanguard Book of Quotations  p.49

PERHAPS most Nigerians also need to be reminded that “the road to hell is often paved with good intentions.” With bank consolidation, we started as usual with the greatest enthusiasm mixed with a good dose of good intentions and we have landed right in hell.

Was it predictable? Was it avoidable? It is too early to tell. But, let us return to memory lane. In July of this year, writing in my weekly column, Frankly Speaking, this statement was made with all the certainty of a prophet Isaiah. “By the time the real story of banks had become unravelled, because they are still deliberately shrouded in mystery by the banks and the Central Bank of Nigeria, CBN, rest assured there will be a lot of blood on the floor”. That was in part one of the three part series. Part three focused on Oceanic Bank which had published its Annual Report and Accounts and had announced provisions for doubtful debts of N24.5 billion; UBA shoveled in N21 billion; BankPHB threw in N16 billion. By the time the week ended, over N116 billion had been declared in jeopardy by just five banks. That was more capital than the share capital of 40 banks on the eve of consolidation and we have not reached the bottom yet.

By the time part four of the series was to be published, the Central Bank, under new helmsman, Sanusi, had struck, removing part of the veil of secrecy that had  pervaded the banking sector for almost two years.

Much earlier on, in 2008 as a matter of fact, a series of articles, on the same page, entitled bank charges and CBN supervision, bank interest charges, banking or legalised swindle and banking robbery through dubious charges had challenged the CBN to be more vigilant in its supervisory roles because Nigerian banks, against all known global practices, were actually robbing their customers mercilessly through dubious charges, sudden changes in the conditions of  service delivery, through ATM fraud which leave the customer as  victim and many other malpractices too numerous to mention. What was most bothersome was the fact that all these malpractices were perpetrated despite a publication by the CBN itself  entitled guide to bank charges, hereafter referred to as the guide, (Effective 1, January 2004).

The first thing noticeable about the guide was the fact that it needed to be updated. Nothing in it provided any guide as to the appropriate charges for the use of ATM cards for instance as well as money transfer, the maximum banks can charge if customer draws a cheque after paying for the cheque book itself. So the banks were the sole determinants of charges for what should have been collectively agreed, with the CBN representing customers. Today, many  transactions between depositors and banks are  conducted through ATM. Yet there are no regulations governing its use!!! Customers have been left at the mercy of the banks which have grossly abused the power they have usurped unilaterally and with the connivance of the CBN.  Yet, banking is a business essentially based on trust. What then could induce Nigerian banks to continuously and deliberately undermine the trust of their customers?

Could it be that returns on legitimate business transactions were insufficient to justify the huge growth of share capital and deposits? Were they attempting to conceal poor risk exposure by cheating the vast majority of their clients –the weak and silent majority – in order to make up for the losses they might have incurred in their transactions with a few influential and well-connected individuals? From lessons in Strategic Studies one learns that if someone or a group continues to behave in a manner that is not in its own interest, in the long run, then the answer for the behaviour can be found by asking two cardinal questions: Have the individuals lost their senses? The obvious answer to that is NO. None of the bank managers already indicted, or about to be indicted, appears fit for the straight jacket.
On the contrary, watching them at various fora, it is clear that they are of sound mind and body. That leads to the next question. If they have not taken leave of their senses, what would have to be true before the evidence before us makes sense? Bankers simply don’t abuse the trust of their clients without a reason. What are the reasons? That called for a return to the starting line –the year the consolidation policy was announced. From there we will retrace the road that led to the hell in which we find ourselves. Right now, banking, which ordinarily should have been an economic/financial matter has become political and ethnic issue as well and it is now constituting another threat to the nation – on many fronts. Yet, we need to understand how we got into this mess that is threatening to tear us apart – as if we don’t have enough problems.

Above is an abridged version of the table of banks and their paid up capital on the eve of consolidation. The banking sector in Nigeria has always been characterized by the Pareto principle –the vital few and the trivial many. The top 20, or so, in 2004 accounted for almost 90 per cent of the capitalization out of 89. These 20 selected banks can therefore serve to illustrate (above) the points to be made here. Perhaps the appropriate place to start addressing this abridged table is with the First Bank and Union Bank, which arrived these shores as Bank of British West Africa and Barclays Bank, D.C.O, respectively before the nation called Nigeria came into being in 1914. It had taken those two pioneers of banking in Nigeria almost two hundred years to raise their paid up capital to N35 billion each by 2003. Granted most of the new generation banks had closed the gap in a short while, but it is still significant to note that capital base is not something to be increased suddenly and in a hurry. But, that is exactly what happened in under five years. The problems associated with that will be discussed presently.

Secondly, it is pertinent to note that the paid up share capital of the top 20 banks in 2004 added to less than N200 billion. By comparison, Oceanic Bank alone boasts (?) of N270 billion almost all accumulated in the four years since consolidation started; that is almost four times what it took First Bank and Barclays Bank, put together, almost 200 years to accumulate. Was there too much haste leading to excessive waste?

Mindless accumulation

Thirdly, it was not only Oceanic that was sucking in funds at this astonishing rate. Intercontinental, Zenith, UBA, First Bank, Access, GTB and, of course Union, as well as others now existing, also rushed to the capital market to raise funds; not only to meet the required N25 billion capital base, but in order to compete for the sectional leadership. Many analysts of the sector believed then, and now, that the race for leadership and mindless accumulation of capital which it entailed, were the major causes of the crisis in the banking sector today and the lack of growth in the real sector which was starved of funds as an increasingly unjustifiable percentage of the money in circulation and deposits drifted to the banking sector where, after a while, diminishing returns on investment set in.

At this point we need to again to return to that point at which the consolidation policy was announced by the new governor of Central Bank, Professor Chukwumah Soludo, who was the first economist since Dr Clement Isong, of blessed memory, to head the bank. Soludo had never worked in a bank; although given the primary function of Central Banks, that would not ordinarily have been a handicap since he had two deputy governors – Mr Tunde Lemo and Dr Shamsudeen Usman, who between them had over 30 years of banking experience to bring to the table. Neither of them had discussed with anyone how the consolidation policy was formulated; there is gap in our knowledge regarding whether their advice and inputs were sought. But, from within the CBN the reports reaching researchers would suggest that they were kept in the dark until almost the week before the announcement. May be the outcome might have been different if they were fully consulted. Perhaps, the unintended negative consequences of consolidation could have been avoided. As former insiders of banks, they at least would have had an idea of what some of their former colleagues would have done if cornered by the new policy.

Instead, on July 8, 2004, a Special Meeting of Bankers’ Committee was held and the bomb was dropped on the mostly astonished bankers. The word astonished is deliberate because, even right from the start, there were allegations that some favoured bankers were aware of the impending policy change and had rushed to the capital market to raise funds a few weeks before the announcement. This is not the point to stop and examine the evidence on that.

Previous knowledge

Suffice to say that July 8, 2004 marked the beginning of the end of the careers of many bank executives and directors and the sudden rise of others to leadership. Every banker at the meeting was stunned – except perhaps those who had previous knowledge. The trip back to Lagos for many of them was the most traumatic they have ever experienced.

The most significant aspect of the policy announcement consisted in the fact that the bankers were not even asked to make any input or suggest amendments to the policy framework –it was take it or leave. Never in the history of Nigerian banking had such hutzpah – Jewish word for hubris – been on display apart from military regimes; and by a civilian too. To every question asked, the Governor had a ready answer – which generally satisfied himself. To the question: Why not give more time? His answer was: “if not now, when?” To the quantum jump in capitalization required, he responded that “Nigerian banks need to be strong so that depositors can go to sleep with their two eyes closed”. To one question he, however, failed to give a satisfactory answer: “Why N25 billion and not N15 billion or N50 billion?” To this the CBN governor could only answer: “That is in our best judgment”. Even, he recognized that the answer fell short of the standard expected when critical decisions are made.

Not everybody was sold on the consolidation policy however. The foremost critic among bankers, and the only one who demonstrated guts, was Atedo Peterside, O.O.N, who took out advertorials in several news papers after failing to reach the former governor in a bid to register his concerns about several aspects of the new policy. In an advertorial in The Guardian of July 21, 2004, Atedo wrote as follows: “In my e-mail dated 08 July 2004, I said as follows and I quote: “I would still like to have an opportunity to discuss some of the implications and unintended consequences with you. If I attempt to write every single thing down, I would have to almost write a book”. Atedo did not write a book; instead he sent a four-paged Epistle (was it to the Galatians?) For all his troubles, Atedo might have addressed Zumo Rock. He was totally ignored. Unfortunately for the banking sector and Nigeria, the unintended consequences, appeared right from the start. But, the speed of implementation of the new policy did not permit the CBN to take notice of the factors that would later turn the dream into the nightmare it is today.

A few weeks ago, Atedo, like a prophet whose predictions have come true, had this to say on what became of the sector afterwards. “The Emperor had no clothes on, but the CBN under Charles Soludo insisted it was fully clothed and went ahead to threaten sanctions against any bank’s CEO whose staff dared to make reference to this open secret that the capital of a handful of Nigerian banks was completely eroded, and tried to turn the clock back on greater financial disclosure.”
Next week: How and when did this experiment go wrong?

1   First Bank      N35 billion  Dec 31, 2003.
2   Union Bank   N35 billion   Dec 31, 2003
3   U.B.A              N20.5 billion December 31, 2003
4   STB                 N17.4 billion  De, 2003  before IPO April 2004
5.  Zenith             N16.6 billion  December 31, 2003  before IPO March 2004
6.  GTB                 N11.7 billion December 31, 2003 before IPO to raise N10 bn
7. WEMA           N7.4  billion
8.  Oceanic          N7.0 billion
9. IBTC                N5.8 billion
10. Gulf                  N5.5 billion
11. Afribank         N4.7 billion  excluding the Group capitalization
12. Diamond         N4.7 billion
13. Chartered       N4.2 billion
14. FSB Inter        N4.2  billion
15. Fortune           N4.2  billion
16. First Atlantic  N3.7  billion  2002
17. Habib              N3.7 billion
18. Ecobank         N3.5  billion
19. UTB                 N3.3  billion
20. Manny             N2.8  billion


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