By DELE SOBOWALE
The Chinese character for crisis contains a mixture of problems and opportunities —Anonymous
PERHAPS now that three other bank chief executives have been removed and there is another talk of more consolidation, those who basked in the temporary, albeit false, claim about five banks being specifically targeted can, like actors who fumble on stage, bow and take their leave. Similarly those who went about shouting about a northern agenda, usually the same ignorant crowd, can also follow them through the exit door.

CBN Building

After the second round of blood letting, it should be clear to any dunce in Nigeria, that what we had in Nigeria from 2004 to 2009 was not banking but legalized swindles designed to make a few immensely rich while at the same time sending the rest of us to the poor house.

The first, second and last functions of banks, according to economic principles, which remain sacrosanct, is to create wealth for a large segment of the population by placing funds where they will most profitably be utilized for production of goods and services; and to operate within the ambit of the law. Banks had failed to do that during the period under review.

In that connection there are three questions for those still defending the sacked managing directors, among others. How can the acceptance of bank shares owned by a state as collateral by a private company not owned by the state be regarded as banking? How can the award of several billion naira worth of shares of a bank to himself by a bank’s managing director be justified? And, how does falsification of results be acceptable from a sector that is based on confidence, or its synonym, trust? As the new CBN governor announced when he visited the Nigeria Stock Exchange, NSE, “we are all guilty.”

Well, the “we” referred to bankers, operators of the NSE, starting with “Madam Obama” (who sat and smiled through the tongue lashing as if she was being praised), the Securities and Exchange Commission, SEC, now under a different helmswoman.

The former SEC director general demonstrated more remorse than ‘Madam Obama” apparently can. He threw in the towel. She is waiting for “God-knows-what”. But, she won’t get sacked.

Those who should sack her were part of the problem; they all sat through the share prices manipulations which worked to deceive the gullible and get everyone in trouble. She knows too much. So she will stay until her retirement age of 60. Thank God that will be very soon. And we can heave a sigh of relief. Good riddance, most honest shareholders would say.

Her departure will constitute one of the indispensable elements to our recovery – both in the capital market and the banks. Confidence can only be restored to the banks and the capital market when all those directly or remotely connected with the downfall of both are shown the way out.

Since last May, “Madam Obama” had assured of recovery which had proved elusive so far. But, hope is not lost. We can now fashion out real and sustainable recovery from the ashes of banks and the depleted capital market by adopting methods that are honest and based on sound economics – the sort we learn at Jankara university. The first thing to do is to rebuild trust and institute transparency in the money markets. The next is to ensure that banks once again practice banking. For too long, in this country, we have had anything but banks in the real sense of the word.

Contrary to what the governor of the Central Bank, CBN, had said, there can be no strong and sustainable recovery without the intervention of the CBN and the Federal Government through robust and expansionary fiscal policy. That is a lot of grammar for what in effect means that we can only recover quickly if the authorities spend more money through stimulus packages. Granted a lot of people have said that before; but to the best of my knowledge few or none had stated in plain language how this is to be done.

Let me, at this point, take some steps backwards before sticking my neck out with proposals for recovery. To begin with, we can agree on certain facts based on historical evidence. And, the history is not as ancient as the first Punic War, 264-241 B.C either. It is as recent as 2006 because that was when we took the wrong turn on the road. The tables below summarise our journey from May 2004 till today.

As anybody who had followed  activities of the capital market would recollect, the comparatively slow growth of the market capitalization which Nigeria experienced still placed the Nigerian Stock Exchange among the top ten emerging markets based on returns on investment. Few, if any, share prices were manipulated and the results largely reflected the situation prevailing. That was until 2004 when N25 billion was announced by the Central Bank as the minimum capital requirement to open a bank effective January 1, 2006; the actual deadline for qualification being December 31, 2005.

The first series of IPOs by banks from 2004 to 2005 were largely designed to scale the N25 billion bar since the average bank’s paid up share capital was N4.5 billion with only three banks having in excess of that amount in 2004. But, no sooner were the 24 qualifying banks announced than another flurry of activities occurred; this time a race was on to become the most capitalized bank in Nigeria and one of the top thousand in the world.

Thus, before the nation had adjusted to the fact that most of its available funds were now in the banking sector, the sector was again asking for more. To get people to continue to invest in shares, the manipulations written about in the third part of this series occurred. The banks actually went out of their ways to artificially pump up their own share prices and then turned around to lend money to people to buy those shares at the unsustainable prices – each time pretending that the shares were being offered at a discount to the investors. They largely achieved their objectives as funds were withdrawn from virtually every other sector to purchase bank shares and to beef up the paid-up share capital of the bans.

Unfortunately, the banks failed to realize that most of their new investors were not accustomed to long term investment. The vast majority wanted quick gains as reflected in the prevailing share prices and the prices those shares were offered. Also unfortunately, the artificially induced rapid rise in share prices invited foreign portfolio managers to drift to the Nigerian capital market where the returns, especially in banking, were in the order of 200 per cent – the highest in the world and perhaps in history.

Just as unfortunately, Nigerian banks and the foreign investors did not foresee the global financial meltdown which compelled the foreign investors to retreat. In one sad month $3 billion (or N150 billion) was withdrawn from the Nigerian capital market. Since then there had been a steady withdrawal of foreign investment from the Nigerian capital market. That was the beginning of the downfall which this writer predicted in May last year.

Before going further on the suggestions for recovery, let us briefly return to the table above. What is apparent was the fact that shares in the real sector, represented by the best firms in breweries, food and beverages, pharmaceuticals and conglomerates recorded share prices that were more reflective of an economy growing at about five per cent per annum during the period; especially if the company had successful years. But, a look at banks share prices reveals a different story.

Real sector share prices After May 2008 every bank had declined as shown; some even more terribly. Oceanic which sold for N27.20 last year is now limping at N3.74. Meanwhile, some real sector share prices have actually gone up.

The market valuation which grew by 142 per cent between 2004 and 2006 suddenly developed wings between 2006 and 2008 and skyrocketed by 426 per cent mostly on account of manipulated banks’ share prices as well as those of some oil companies and others we now read about in the papers.

The phenomenal growth of market value against the background of an economy growing at a modest five per cent per annum was the most significant evidence that we at Jankara university needed to predict a sharp fall in share prices and the impact it would have on the banks and most investors.

Unfortunately, not all the money the banks threw into the capital market will be recovered. But, all is not lost.
Today, the NSE has shed about 55 per cent of its value from 2008 and that drop has spelt the doom of several million Nigerian investors – especially pensioners and those who placed their retirement benefits in the stock market.

The banks themselves which were mostly responsible for creating this crisis in the capital market are stuck. They cannot get their money back unless there is external intervention. There can be no significant recovery until this nation addresses this matter. The question is: how? NEXT: Bank crisis: The road to recovery -2