Fresh impetus for the Nigerian banking sector

Central_bank_AbujaThe Central Bank of Nigeria has made reforming the banking system its top priorityThe recent reforms in the Nigerian banking sector have received a vote of confidence with the signing of a 240mn euro loan deal between the European Investment Bank (EIB) and three Nigerian banks.

 The EIB, which is owned by the European Union (EU) governments, said funding for the three banks - First Bank, Guaranty Trust Bank (GTB) and Stanbic IBTC - would be used to finance infrastructure development in the country.

"We look forward to working closely with three of the strongest banks in Nigeria to increase infrastructure finance in the country following regulatory reforms and the transformation of the banking sector," EIB vice-president Plutarchos Sakellaris said. "The three banks should be commended for their leadership in governance, transparency and risk management," he said.

Reforming the system

The Central Bank of Nigeria (CBN) has made reforming the banking system its top priority following a $4bn bailout of nine institutions found to be so weakly capitalised that they posed a systemic risk. The three banks in the EIB deal all passed the CBN audit. The EIB has provided more than 220mn euros of funding to Nigeria in recent years.

The loan deal is a breathe of fresh air to the country's financial sector which has been rocked by scandals over the past year. Last August CBN governor Lamido Sanusi sensationally sacked the chief executives of five banks for corruption as part of a major clean up of the sector. Afribank, Finbank, Intercontinental Bank, Oceanic Bank and Union Bank, which between them accounted for 40 per cent of the country's credit, were accused of handing out fraudulent loans totalling $7.6bn. This resulted in dangerously low capital base and the CBN was forced into a $2.6bn bail out to secure the sector from systemic failure. Nigeria's central bank has been forced to intervene in the affairs of five other banks found to have dangerously low cash reserves.

Following the sacking of five bank chiefs in August by the CBN, another three were shown the door after another audit. Francis Atuche of Bank PHB; Ike Oraekwuotu, Equatorial Trust Bank and Charles Ojo of Spring Bank were axed in October after the CBN found they were running insolvent operations. A $1.37bn lifeline has been made available to the distressed banks. Two other banks, Wema and Unity, were given until June 30 this year to get off the critical list. The CBN said that although they had low capital reserves they displayed a healthy liquidity position with no indication of poor corporate governance. Access Bank, CitiBank Nigeria, Skye Bank, EcoBank Nigeria, Fidelity Bank, First City Monument Bank, Stanbic IBTC Bank, Standard Chartered Bank and Zenith Bank were all given a clean bill of health.

Meanwhile, following questioning by the government's anti-graft body, the Economic and Financial Crimes Commission ( EFCC), Cecilia Ibru of Oceanic, Bartholomew Ebong of Union, Raymond Obieri of Intercontinental Bank, Okey Nwosu of Finbank and Sebastian Adigwe of Afribank were arraigned before a federal high court in Lagos, Nigeria's commercial capital, on various charges of fraud, granting loans without adequate collateral, and failing to keep proper accounts . Police are searching for Erastus Akingbola, also of Intercontinental Bank, who is said to be out of the country. The CBN also published a list of people whose toxic debts to the banks had threatened to bring the whole system down. They included some of Nigeria's wealthiest and most powerful men. The EFCC says nearly $300m of bad debt has been recovered, but that billions are still outstanding.

Sanussi embarked on an examination of the country's 24 banks, shortly after assuming office last June following rumours that the sector was not as robust as the his predecessor Charles Soludo had suggested. The latest audit probed the remaining 14 banks. It is now hoped that the exercise will result in a rebound of credit facilities. Bismark Rewane, chief executive of Financial Derivatives, told Businessday, a financial daily, "Things can only get better. I am confident that credit to the economy would improve, consequently the economy may blossom." The three sacked bank chiefs were not arrested but Sanusi warned, "The bank chiefs will be referred to agencies for investigation and where there is evidence of serious infraction we will bring in the EFCC."

Despite the criticism of his tactics, the CBN governor maintains his banking reforms programme, is on target. His reforms were endorsed by President Umaru Yar'Adua, who said the aim was to achieve economic stability and inspire confidence of the international community. "The recent reforms embarked upon by CBN are part of holistic measures aimed at ultimately ensuring requisite macro-economic stability. The goal is to have banks and financial institutions that can be effective partners with the government in delivering economic growth," he stated shortly before he flew to a Saudi Arabian hospital for treatment for his heart and kidney ailment. Finance minister Manur Muktar added that the measures taken by CBN were temporary and would not lead to nationalisation of banks in Nigeria.

International endorsement

IMF_HQNigerian banking reforms have been praised by the IMFThe measure also received ringing approval from the IMF, which raised concerns about the country's banking sector early last year. Jose Vinals, director of the Fund's monetary and capital marketing department, said it was better to act in the short term and expect medium to long- term returns. He said the recovery in bank earnings are signs that the banking system has stepped back from the brink of collapse. Similarly Razia Khan, head of Africa Research, Standard Chartered Bank, told Reuters, "While the banks rescued in mid - August were noted to have been under severe liquidity distress, subsequent CBN action has served to reassure markets that risk will be ring-fenced and depositors protected."

Banks that have been given the all clear are Guaranty Trust Bank, United Bank for Africa (UBA), First Bank of Nigeria, (FBN) Diamond Bank, and Sterling Bank.

Jon Offei-Ansah

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