Restoring Confidence to the Banking System

A few months ago, i wrote an article pleading with the then Governor of the Central Bank of Nigeria (CBN) to allay our fears about the state of our banks. Alas Professor Soludo did not do much to calm my nerves. Since my plea, a new Governor, Sanusi Lamido has taken over the leadership of the CBN from Soludo whose term expired in May.

On 14th August, less than 3 months after taking over, Sanusi Lamido acted decisively to deal with the uncertainty hanging over the banks by sacking the Managing Directors of Afribank, Finbank, Intercontinental, Oceanic and Union Bank. In his view these 5 banks pose a serious threat to the financial system and the management of the banks have acted in a manner detrimental to the interest of their depositors and creditors. The CBN was forced to act to save depositors and restore confidence to the banking system.

In my view, this is a welcome development. In a time of crisis, there is often a need to show leadership and act decisively. For almost a year, the 5 banks have been suffering from illiquidity, surviving on the Expanded Discount Window and interbank borrowings. As the Governor said, three of the banks were very important to the banking system and something needed to be done before they lead to a collapse of the financial system.

The Governor’s actions required courage. For there are vested interests that would have done everything possible to stop this decisive action. However, the actions of the CBN are in order and are in the interest of depositors and long suffering investors. Some of the actions of the banks were shocking. Take Intercontinental bank for example. The bank loaned out more than thirty four billion Naira to three companies they themselves called “fringe” players in the downstream sector of Oil and Gas. It is shocking that such huge sums will be loaned out to three companies that have no significant record of success to speak of. Where was the risk management?

Then there are the billions loaned out to speculators on the Nigerian Stock Exchange (NSE) in the form of margin loans. The value of the securities have since collapsed by more than 70% in some cases. In the process trillions of Naira vanished.

The management of these banks have shown themselves not capable of managing the growth experienced by the banks. Within three years the five banks have frittered away more than three hundred billion Naira in fresh capital. The CBN did the right thing by sacking the managers. Something needed to be done to save what is left of the banks.

Depositors should remain calm. The CBN has injected over 400 billion Naira to save these banks in an unprecedented move backing its words that no bank will be allowed to fail.

It is my hope that these actions by the CBN will restore confidence to the system, reduce the cost of funds and lead to recovery of the economy in general.