As we are aware, the world economy has been hit by recession following the
financial meltdown that started with the sub-prime mortgage crisis in the
United States of America and spread to Europe and other parts of the world.
This crisis have led to the collapse of many banks and other financial
institutions, and even rendered an entire nation bankrupt.
In Nigeria, the banking system appears to have weathered the storm due to a
number of factors. Among these is the fact that our financial system is not
strongly integrated into the international financial System as well as the
relatively simple nature of financial products and strong capitalization and
liquidity of Nigerian banks.
However, there are many who have been aware for a while that whereas the
system in general is likely to absorb and survive the effects of crisis, the
effects vary from. A few Nigerian banks, mainly due to huge concentrations
in their exposure to certain sectors (capital Market and Oil and Gas being
the prominent ones), and a general weakness in risk management and corporate
governance, have continued to display signs of failure.
In October 2008, some of the banks showed serious liquidity strain and had
to be given financial support by the Central bank of Nigeria (CBN) in the
form of an "Expanded Discount Window" (EDW) whereby the CBN extended credit
facilities to these banks on the basis of collateral in the form of
Commercial Paper and Bankers' acceptances, sometimes of doubtful value.
Since June 4, 2009 when I assumed office as Governor of the CBN the total
amount outstanding at the Expanded Discount Window was N256.571 billion most
of which was owed by the five banks.
A review of the activity in the EDW showed that four banks had almost been
permanently locked-in as borrowers and were unable to repay their
obligations. A fifth bank had been a very frequent borrower when its profile
ordinarily should have placed it among the net placers of funds in the
marker. Whereas the five banks were by no means the only ones to have
benefited from the EDW, the persistence and frequency of their demand
pointed to a deeper problem and the CBN identified them as probable source
of financial instability, most likely suffering from deeper problems due to
non-performing loans.
The impact of the situation of these banks was being felt by the market in
different negative ways. Because of this strain in their balance sheets, the
banks pushed up the interest rate paid to private sector depositors and
their competitors had to follow suit. They also contributed to the
destabilization of the inter-bank market as many of their competitors were
unwilling to take unsecured risk on them.
It was primarily because of these banks, or at least some of them, that the
CBN decided to guarantee the inter-bank market when it stopped granting new
lines under the EDW. Without that guarantee, almost four banks would not
have been able to borrow in the inter-bank and would probably have
collapsed.
CBN guaranteed the inter-bank market to give us the time to conduct a
thorough diagnostic of the banks and ensure that appropriate remedial action
is taken. At least four of the banks in question have since the guarantee
came into force either remained heavy users of funds at the EDW or drawn
from other banks under cover of the CBN guarantee to wind-down at this
window. In all event, it is clear that they do not have the ability to meet
their obligations to depositors and creditors as they are in a grave
situation.
Due to these circumstances, I instructed the Director of Banking Supervision
of the CBN to carry out a Special Examination of the following banks:
1. Afribank Plc
2. Finbank
3. Intercontinental Bank Plc
4. Oceanic bank Plc and
5. Union Bank Plc.
The examination was conducted by a joint team of CBN and Nigeria Deposit
Insurance Commission (NDIC) officials. The major findings on the banks
include:
1. Excessively high level of non-performing loans in the five banks which
was attributable to poor corporate governance practices, lax credit
administration processes and the absence or non-adherence to the bank's
credit risk management practices. Thus the percentage of non-performing
loans to total loans ranged from 19 per cent to 48 per cent. The five banks
will therefore need to make additional provision of N539.09 billion.
2. The total loan portfolio of these banks was N2,801.92 billion. Margin
loans amounted to N456.28 billion and exposure to Oil and Gas was N487.02
billion. Aggregate non-performing loans stood at N143 billion representing
40.81 per cent.
3. From the first two findings, it is evident that the five banks accounted
for a disproportionate component of the total exposure to Capital Market and
Oil ad Gas, thus reflecting heavy concentration to high risk areas relative
to other banks in the industry.
4. The huge provisioning requirements, have led to significant capital
impairment. Consequently, all the banks are undercapitalized for their
current levels of operations and are required to increase their provisions
for loan losses, which impacted negatively on their capital. Indeed one is
teachnically insolvent with a Capital Adequacy Ratio of (1.01 per cent).
Thus, a minimum capital injection of N204.94 billion will be required in the
five banks to meet the minimum capital adequacy ratio of 10per cent.
5. The five banks were either perennial net-takers of funds in the
inter-bank market or enjoyed liquidity support from the CBN for long period
of time, a clear evidence of illiquidity. In other words, these banks were
unable to meet their obligations as they fall due without resorting to the
CBN or the inter-bank market. As a matter of fact, the outstanding balance
on the EDW of the five banks amounted to N127.85 billion by end July 2009,
representing 89.81 per cent of the total industry exposure to the CBN on its
discount window while their net guaranteed inter-bank takings stood at
N253.30 billion as at August 02, 2009. Their liquidity Ratios ranged from
17.65 per cent to 24per cent as at May 31, 2009. (Regulatory minimum is 25
per cent).
Noteworthy is that at least three of the banks are systemically important
(accounting for more than five per cent of assets and Deposits in the
banking system) and together the five banks account for 39.93 per cent of
loans, 29.99 per cent of deposits, and 31.47 per cent of total assets as at
May 31, 2009.
Given the extent of the asset quality problem leading to liquidity stress,
and the variety of stress points on the banks' balance sheets, failure to
secure the financial health of these banks will clearly place the system at
risk. CBN has a responsibility to protect all depositors and creditors and
ensure that no one loses money due to bank failure. The Bank also needs to
move decisively to remove principal causes of financial instability and
restore confidence in the banking system.
Consequently, I have reviewed the reports of the examiners and the comments
of the directors and deputy governors and I am satisfied that these five
institutions are in a grave situation and that their management have acted
in a manner detrimental to the interest of their depositors and creditors.
Therefore, in exercise of my powers as contained in Sections 33 and 35 of
the Banks and Other Financial Institutions Act 1991, as amended, and after
securing the consent of the Board of directors of the CBN, I hereby remove
the Managing Directors (MDs) and the Executive Directors (EDs) of the
following banks from office with effect from Friday, August 14, 2009.
1. Afribank Plc
2. Intercontinental Bank Plc
3. Union Bank of Nigeria Plc
4. Oceanic International Bank Plc
5. Finbank Plc
These persons cease to be directors and officers of their respective banks.
The Board of the Central Bank of Nigeria has also appointed the following as
the MDs/CEOs of the affected banks:
1. John Aboh - MD/CEO Oceanic International Bank Plc
2. Mahmoud L. Alabi - MD/CEO Intercontinental Bank Plc
3. Nebolisa Arah - MD/CEO Afribank Plc
4. Suzanne Irochie - MD/CEO Finbank Plc
5. Funke Osibodu - MD/CEO Union Bank Plc.
They will head a management team that will include (EDs) and Chief Financial
Officers (CFOs) to be appointed by the CBN. This team is tasked with
continuation of the businesses of the banks. I therefore appeal to the
boards of the affected banks, in their own interest, to cooperate with the
newly appointed executive management.
We are conscious of the fact that changing management alone will not resolve
this problem. Therefore, the CBN is injecting about N400 billion into the
affected banks with immediate effect in form of Tier 2 Capital to be repaid
from proceeds of capitalization in near future.
This injection is sufficient to resolve and stabilize all the institutions
and enable them continue normal business. The injection of fresh capital by
the CBN is a temporary measure as government does not intend to hold the
shares for long and shall divest its holding as soon as new investors
recapitalize these banks.
I also advise all debtors of Nigerian banks that the CBN and all government
agencies are united in our commitment to support the recovery efforts of the
banks. Debtors who do not pay shall have their names published in national
newspapers in due course and we will solicit the support of law enforcement
agencies in recovery.
Let me reassure the customers of the affected banks and all the banks in
general that there is no cause for alarm. They should continue to transact
their business in the banks where their accounts are
domiciled as their exercise is meant to strengthen the banking industry and
recapitalize the affected banks.
The scope of the Special examination was widened to cover all 24 banks. So
far, we have concluded the audit of 10 banks including the affected five,
the others being Diamond Bank, First Bank, United bank for Africa, Guaranty
Trust bank and Sterling Bank.
We have also commenced the examination of the next batch of 11 banks and
hope to conclude them by the end of August and we expect to conclude the
audit in mid-September. The CBN requires all banks to make appropriate
provisioning for non-performing loans and disclose them. We hope that by the
end of this quarter, all banks would have cleaned up their balance sheets.
On the basis of the information available to us so far, we are confident
that the banking system is safe and sound and we have dealt with the major
sources of systemic risk.
The CBN will not waiver in its desire to ensure that public confidence in
the Nigerian banking system is maintained through appropriate disclosure and
reinvigoration of its policy of zero tolerance on all professional and
unethical conduct.
We will not allow any bank to fail. However, we will also ensure that
officers of banks and debtors who contribute to bank failures are brought to
book to the full extent of the law and that all proceeds of infraction are
confiscated where legally feasible.
Central Bank Of Nigeria(CBN)
Abuja.
