Global financial flu finally catches up with Africa

Nigerian financial institutions are in the grip of their own banking crisis. And if you deposit your hard earned money in a bank rather than under your mattress, then you need to be worried too, as swine flu tends to be highly infectious.

Let’s first recall the breaking news in Nigeria. Last week, the Central Bank of Nigeria injected about $2.6 billion (just over Sh200 billion) into five banks as equity capital as they were heavily undercapitalised and posed a systemic risk to the banking industry.

The reason for their undercapitalisation was financial losses attributed to poor lending practices.

So how did Nigeria catch the flu?

The global financial crisis caused capital flight out of many emerging markets, Nigeria and Kenya being some of them, as foreign investors facing liquidity issues in their own home markets and liquidated investments.

In Kenya we were hit hard as prices on the Nairobi Stock Exchange spiralled downward and real capital appreciation wiped out overnight.

But perhaps our saving grace was that with the exception of the Safaricom IPO in 2008, our banking industry did not promote frenetic lending to individuals to purchase shares.

However, in Nigeria, with bigger balance sheets arising from the banking consolidation in 2005, a large number of banks aggressively grew their lending books part of which growth was lending to customers to purchase shares on the Nigerian Stock Exchange, known as margin lending.

Central Bank of Nigeria estimates of Nigerian bank exposure to margin loans is about $ 4.8bn, close to Sh369bn, which analysts say accounts for approximately 13 per cent of total commercial banking assets at the end of 2007.

With the Nigerian All-Share Index falling by more than 58 per cent since its peak in March 2008, this would cause large loan loss provisioning for banks that had given loans secured by shares whose values were being whittled down rapidly.

But this was not the only problem facing Nigerian commercial banks.

In 2005, Nigerian Central Bank Governor Charles Soludo entered the annals of financial history by taking the extremely bold step of raising the minimum capital requirements for Nigerian banks to 25 billion Naira, or $100 million (approximately Sh7.5 billion) by December 31 2005.

Comparatively, the minimum capital requirement in Kenya is Sh250m with a CBK target of Sh1bn by 2012.

In a presentation to the Global Banking Conference on Nigerian banking reforms held in London, in March 2006, Governor Soludo painted his vision of seeing Nigerian banks being among the top 100 in the world in the next 10 years.

This would be driven by an uncompromising reform of the banking sector underpinned by among other things stronger capital bases, stricter enforcement of corporate governance principles and strengthening of risk management.