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.

The result of Soludo’s tough reforms was a massive consolidation of the banking sector that saw the number of commercial banks reduce from 89 to 25 with an aggregate capital base of $5.9bn (Sh442bn) from the pre-consolidation base of $3bn, virtually double the amount of capital.

This meant that there was literally $3bn (Sh225bn) of new investment in 2005 which was the single largest non-oil sector investment in one year.

Comparatively, the Kenyan banking aggregate capital base was approximately Sh168 billion or $2.2bn as at December 2008 which is $800m shy of the Nigerian aggregate capital base before consolidation took place.

Soludo’s reforms had made the Nigerian financial industry the darling of emerging market investors with over $500m of the new investment coming from foreign institutional investors. As stated earlier, margin lending was only one of the problems facing the Nigerian banks.

A poor lending regime, some say, which had elements of cronyism, to borrowers who did not have the ability to pay for their business loans also brought the chickens home to roost.

To the Central Bank of Nigeria’s credit, they have maintained an extremely tough stance on their commitment to reform and maintenance of corporate governance principles.

Tough decisions
After providing the $2.5bn capital injection to the five banks in question, the CBN proceeded to sack the CEOs of the five banks, some of who were significant shareholders in the banks themselves.

The regulator has also published the names of the top 200 borrowers of the defaulting loans.

What can we learn from the Nigerian experience? Firstly, that it is possible to have a Central Bank that not only talks the talk, but walks the walk.

It is one thing to publish papers and issue statements about commitment to financial sector reform, but it is quite another to make tough decisions like injecting capital and looking for new investors to take over problematic banks rather than the mundane act of putting a bank under statutory management.

While injecting capital, the Nigerian government was quick to clarify that it was not looking to nationalise the five banks, but was ensuring that the banking sector stability was maintained as it looked for new investors to take over the banks. Continuity: that is what the Nigerians are committed to.

Capitulation: that is what statutory management does. Kindly show me any bank that has ever come out of statutory management and continued to do business and I’ll be pleasantly surprised as will the big depositors of such a bank.

Secondly, Soludo’s successor, the current Governor Lamido Sanusi has displayed a remarkable tenacity and exceedingly thick skin by publishing the names of the top 200 defaulting borrowers.

Such a list invariably will have names that can pick up the phone and direct dial to the Nigerian State House seeking censure of the Governor at the highest level for such abject humiliation.

Not to mention the fact that the chairmen of the boards of the five banks whose CEOs have been fired will probably be in the reception of the same State House waiting to hand over their appeals for the regulator’s decision.

I have said this before, and I am saying it again. A crisis should never be wasted.

Previously I said that I would draw great comfort if I found a CBK team dispatched to New York to learn from the Americans on what not to do.

I wish to restate it thus: I would draw great comfort if I found a CBK team dispatched to New York via Lagos to learn from two markets in crisis on what not to do.

carol.musyoka@bungani.com