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How sound are Nigerian banks?

By Dele Sobowale

“Credit risk is expected to trend higher into the second half of 2016 owing to increased loan impairments resulting from the depreciation of the naira.” Governor of Central Bank of Nigeria, CBN, in DAILY TRUST, October 5, 2016, p 13.

In the report titled ‘Banks bad loans rise above CBN limit’, the report which was attributed to Bloomberg, the global rating agency, also quoted Mr Emefiele’s statement in which he tried to re-assure Nigerians and the international community that all is well. According to the CBN Governor: “The Nigerian financial system remains stable and resilient in spite of prevailing macroeconomic challenges.”


However, a closer look at the details of that report by the CBN gives much less room for assurance. Indeed, it contradicts it. Readers of the report would gather that “the ratio of non-performing loans rose to 11.7 per cent at the end of June [2016] from 5.3 per cent at the end of June 2015.” The CBN requires banks to keep non-performing loans at 5.0 per cent.

That means bad loans in the banking system are now 234 per cent of the CBN requirements. Furthermore, the CBN report specifically and inexplicably mentioned First Bank Plc — which is the country’s biggest lender. First Bank’s non-performing loans had risen to 23 per cent as of the end of June or 460 per cent of the prudential guidelines established by the regulatory authorities.

Obviously, the CBN is speaking from the two sides of its mouth at the same time while attempting to calm stakeholders’ nerves. In the same report the CBN paints an alarming picture of a banking sector on the verge of returning the nation to the horrors of 2008/9 when stakeholders, especially shareholders, were suddenly faced with evidence that the much celebrated directors and managers of many of the leading banks were robbers in designer suits. Some of the cases are still in court till today.

Two questions the report failed to answer were: at what point would the CBN step in to protect other stakeholders from the likely repercussions of increasing non-performing loans? And how can the banks continue to play their statutory role in the economy when they have increasing non-performing loans?

As it is, what the CBN has told us is easy to understand. Depositors place their funds in banks which lend them to dead-beats. For how long can this continue before the financial system collapses?

In that connection, the day of reckoning might be closer than many of us realize. When Bloomberg released its report, raising fears about Nigerian banks in crisis, the CBN rose to the defence of the banks while forgetting that its own separate reports, when assembled have pointed to the same conclusion as Bloomberg’s.

According to Bloomberg, two lenders are close to being insolvent and two others will need dilutive capital increase – meaning they need to raise fresh capital urgently and their current shareholders might not be capable of providing the needed funds. One of those banks is now in the capital market trying to raise N8 billion. Whether it gets or should receive the support it needs from the capital market will depend on the market’s perception of the bank’s probability of survival.

The CBN highly emotional reaction to the Bloomberg report is not very helpful because it focuses on the needs of the banks and their directors, and it is an attempt to avert a situation in which the CBN would soon have to take stronger measures to save the banks’ depositors from the indiscretions and criminal activities of their managers. This approach is myopic.

When banks are liquidated, it is not the directors and top managers who lose their investment. As insiders they always knew what would happen in advance and they invariably take steps to protect themselves. It is mostly the depositors of the banks who suffer the consequences of the collapse of banks.

The closure of SAVANNAH and SOCIETE GENERALE banks probably did not affect the directors much materially. It was the millions of small depositors whose funds were lost to the closure who suffered the consequences. It would appear that the CBN pays no attention to these people in its knee-jerk reaction to Bloomberg.

Yet, there is sufficient evidence to support Bloomberg that at least two banks are on their knees and might not get up again and three, not two, are merely hanging on the ropes. The CBN had provided most of the evidence to arrive at this conclusion. Let us take a recent one.

The CBN in early October posted on its website the Finance Systems Stability, FSS, report, which informed Nigerian and the global community that ONLY fifty (50) customers owe the commercial banks N5.23 trillion and that non-performing loans grew by 158 per cent since December. The FSS report further stated that banking loans to oil and gas sector had reached N4.5 tn or 28.77 per cent of all industry loans.

Nobody needs a Bloomberg report to understand that with crude oil exports down and indigenous oil companies largely closed down on account of high production costs, banks would wait a long time to recover the loans made to that sector – which is the highest chunk of the non-performing loans.

The CBN had also made some public announcements which impair the ability of certain banks to instill confidence in depositors. Recently, all the banks, except First Bank, were excluded from selling foreign exchange to Bureau de Change.

It might not have occurred to the CBN, but that measure had provided FBN with a vital competitive advantage in mobilizing deposits – which would place the other banks at a competitive disadvantage. Most of the fresh deposits FBN would receive will come from the others.

Instead of making a blanket statement  of defence for the banks, CBN should tell depositors the truth. Many experts on Nigerian banks believe that at least five banks are living on borrowed money and time.



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