InvestIQ: Weighing The Effects of The CBN Banking Reform On The Nigerian Ecomony

Weighing The Effects of The CBN Banking Reform On The Nigerian Ecomony
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Chukwumah Biosah on 29/04/2010 19:17:00
 
Last week, the National Security Adviser, Lieutenant-General Aliyu Gusau (rtd),
made a statement that the banking reforms carried out by the Central Bank of
Nigeria (CBN) lead by Lamido Sanusi, CBN Governor, were damaging to the Nigerian
economy.  Additionally, the NSA represented that the CBN reforms have been
selective and partial.
Since the statement was made, several individuals including the National
Chairman of Independent Shareholders Association of Nigeria (ISAN), Mr. Adebayo
Adeleke, have come out with comments supporting the National Security Advisers
statement. As noted in the April 23, 2010 issue of the Vanguard, Mr. Adeleke
made the following comments:
*He believed that the “The statement credited to General Aliyu Gusau (rtd),
National Security Adviser to the government has clearly vindicated ISAN and some
other shareholders of the troubled banks.   	*When the reforms were instituted
and the actions taken against the banks’  were executed, ISAN mentioned that
the actions were not in the best interest of the economy. Therefore, for the NSA
to make such a statement, it shows that the Presidency is not happy and
comfortable with some of the reforms and actions of the CBN Governor, Malam
Lamido Sanusi.  	*Those who supported the reforms initially were looking at the
effect from a myopic perspective. 	*CBN reforms have a multiplier-effect and
that is what we are seeing. Every sector is suffering from the effect; industry
and commerce, agriculture, energy, aviation, private and public sectors. 	*It is
time for the Presidency to intervene and call the CBN to order. The reforms will
cause more damage if urgent steps are not taken. When banks refuse to lend, how
can the economy as a whole move forward? What is the primary responsibility of
banks in any country? As our banks have refused lending, the economy will soon
be crippled. If it were in advanced economies, the CBN governor would have
resigned if the public and even the government came out to declare a vote of no
confidence in him. “It is a shame that the man is still there, he should
resign.”
Analysis
It is a free world and a free country.   Therefore everyone is entitled to their
own opinion and their own view point in any issue.   Nevertheless, everyone is
not entitled to their own set of facts because facts are undisputable.
While I am not hundred percent in support of all aspects of the CBN reforms, I
believe that some aspects of the reforms have been more beneficial to the
Nigerian Economy than harmful.  To illustrate, one of the reforms I vehemently
disagree with was the implementation of tenures for CEOs’ of public companies,
and the CBN’s requirement that all potential CEOs’ have to be approved by
the CBN. Traditionally, these roles are solely for shareholders and the Board of
Directors.  In my humble opinion, the CBN is over reaching in this respect. 
Although it might be okay for the CBN to appoint, or remove CEOs’ of bailed
out banks since technically, the Federal Government is the majority shareholder,
it is not the traditional role of the CBN to appoint or remove CEOs’ of
publicly traded companies that are duly owned by shareholders.
However, with this said, I believe the critics of the CBN should back their
claims with facts. For example, when the CBN took over the nine (9) bailed out
banks in the 2nd quarter of 2009, some of these banks had been using the
expanded discount window (EDW) for long-term borrowing as opposed to short term
fund needs. Majority of these banks were unable to pay back the funds because
they were in precarious cash positions.
Recently, Dr. Kingsley Moghalu, CBN Deputy Governor, Financial Sector Stability,
noted in one of his speeches “that beginning in October 2008, CBN had offered
financial support to the ailing banks by providing liquidity through the
Expanded Discount Window (EDW), adding, however, that the financial hemorrhage
continued and the financial condition of the banks continued to deteriorate even
as the EDW was abused”.   It would really be mind bugling to assume that these
critics would prefer that the CBN continued to allow these banks to keep
borrowing with reckless abandon from the EDW; thereby furthering the
perpetration of the little or no regulated lending policies which eventually
would have plunged the Nigerian economy into a deeper crisis.
Furthermore, are we also to assume that the National Security Adviser’s claim
that the banking reform was partial and selective is true? I will not dispute
this claim, since I do not have any evidence to the contrary.  However, this
type of statement from the NSA who is exposed to information that the average
Nigerian is not predisposed to is damaging to the credibility of the CBN and the
CBN Governor, because an official in such a prominent position definitely knows
more than the “average joe”.
Therefore, I challenge the NSA to divulge his proof that the reform was
selective and partial.  It is my educated guess that it is not only the nine (9)
bailed out banks who had problems with non-performing loans or who used the EDW
for long-term borrowing due to cash flow problems. The bailed out banks were
probably the biggest abusers of the system.  Banks like Zenith Bank, First Bank,
UBA, and GTB, who were deemed to be financially strong by CBN had gone to the
bond market to raise funds, or made their intentions known that they will be
raising new capital either through the bond market or secondary offerings since
the conclusion of the bailout scheme.  In light of the fact that these banks
raised substantial sums of money less than 3 year ago from the capital markets,
one can conclusively deduce that these banks all had cash flow problems, and the
problems were therefore, not exclusive to the bailed out banks.  However, like I
previously noted, the bailed out institutions must have been the biggest abusers
of the EDW and other financial infractions.
For example, as I noted in my October 2009 article “Corporate Bond Craze and
Its Implications on Financial Institutes in Nigeria” There is no doubt that
FBN is one of the better run banks in Nigeria. However in 2007, FBN had a hybrid
offer of public offer and rights issue. The offer was oversubscribed and the
bank raised more money than was originally projected.  However, FBN decided to
keep only N250 Billion and returned the excess funds to subscribers in spite of
objections from several influential shareholders. Therefore FBN’s current
intentions to approach the bond market  to raise expensive funds that might be
detrimental to the future growth of the bank and its stock price barely two
years after it refused to keep the cheap non-interest bearing shareholders funds
is problematic and proof that the bank has tight cash problems.
In attempts to further explain the notion that the CBN reforms are detrimental
to the Nigerian economy, the National Chairman of the Independent Shareholders
Association of Nigeria (ISAN), Mr. Adebayo Adeleke noted that  Nigerian continue
to refuse lending to businesses which will eventually cripple the Nigerian
economy.  It is my professional opinion that the CBN cannot entirely be faulted
for the lack of lending to individuals and businesses by Nigerian Banks. The
primary problem is that prior to the CBN interventions, most Nigerian banks had
very lax and questionable lending standards. Majority of the loans made by these
banks were either uncollateralized or lacked proper/stringent collection
procedures as evidenced by the recent CBN listing of several non-performing
loans. Again, the lack of lending by banks is not unique to Nigeria. For
example, the United States government invested over $600 Billion Dollars to bail
out most of their major banks and financial institutions in 2008. However, since
the infusion of these funds, lending by these banks has dried up. Most of the
Banks in the United States had very lax lending standards which caused rising
mortgage defaults and credit crisis that virtually froze inter-bank lending
prior to the financial crisis. Individuals with very questionable credits and no
visible source of repayment were given loans to buy Million Dollar homes and
expensive cars.
It now appears that after the bail outs, most of the banks learnt their lessons
and have developed very strict lending standards. This is happening around the
world and Nigeria is not an exception.  Banks gave several uncollateralized
loans and margin loans supported by worthless assets and over priced/over-
valued stocks in Nigeria which contributed to the economic and financial crisis.
However, the CBN’s sanitization program revealed these excesses.  The banks
are now more prudent and do not want to loan money without proper standards and
collateral.
Finally, I believe that the sanitization of the banking sector by the CBN has
been good for the Nigerian Economy and the average investor. Some of the
benefits of the reform program include the following:
·         The reform program forced many large borrowers with non-performing
loans, who did not have any intentions to pay back their loans to scramble to
pay back or make payment arrangements; thereby reducing the number of
non-performing loans and the need for larger loan provisions for most of the
banks.
·         Banks with questionable uncollectible and non-performing loans were
forced to set up proper loan loss provisions, which revealed the true financial
health of most of the banks in Nigeria.
·         CBN’s decision to set up an Asset Management Corporation gave
financial institutions the optimism that some percentage of their bad assets
will be absorbed by the corporation. Also, investors had renewed confidence that
absorption of some bank bad assets will free up capital to banks which will
eventually trickle down to investors and the capital market.  Although the AMC
is not a panacea to most of the problems with the banking sector, the notion of
its implementation helped spur the bullish resurgence that the NSE has
experienced since the beginning of 2010.
·         Many foreign investors who had taken hiatus from the Nigerian capital
markets are now returning as they are now comfortable with the transparency that
the CBN reform has ushered.
·         CEOs’ who did not act as shareholders custodians, and who thought
that the banks were their personal properties were given the boot,  dispelling
the illusions by most of the former CEOs’ that they owned the banks and were
not answerable to the shareholders.
Although I have listed some of the benefits of the CBN reforms, there are many
Nigerians and investors who might disagree with my view points. This is the
essence of a healthy debate. However, as I previously noted, we are all entitled
to our opinions, but not entitled to our own set of facts.  I believe that the
NSA, investors, financial institutions, and the Nigerian public are all
interested in having a strong capital market with strong transparency because an
improved capital market will have a positive impact on all other sectors of the
economy.  While some of the recent CBN rules (.i.e., tenure limits, approval of
CEOs’, etc) are somewhat over reaching in terms of regulations, the current
CBN Governor has been good for the banking system.  This is not the time to be
calling for his removal.  The position of the CBN governor should not be
politicized.  My recommendation is that if the NSA has evidence that the CBN was
selective and partial in their reforms, the NSA should provide proof, because
off the cuff comments are truly unhealthy and will hamstring the CBN in
implementing their policies. Finally, the NSA, investors and any financial
institution who believes that the CBN reforms have damaged Nigerian economy
should present the public with such evidence