The New Sheriff in Town

Written by Oladipupo Ogunbiyi

Wednesday, 19 August 2009 11:01

The media is rife about the Friday the 14th tsunami in the Nigerian banking sector. In an unprecedented move, the Central Bank Governor simultaneously sacked the Chief Executives of Afribank, Union Bank, Intercontinental Bank, Oceanic Bank and Finbank, for what he described as failure in their credit risk management practices (resulting in an excessively high non-performing loan portfolio), and announced a $US2.8 billion bailout package to ensure that none of the affected banks become insolvent. Market reaction to the news has been mostly positive. For instance, NIBOR (the Naira benchmark for short-term inter-bank lending) which had remained defiantly high despite various policy interventions, dropped overnight by 900 basis points across all price points in reaction to the news. While the 30-day NIBOR fell from a 19.8% to 12.3%, 60-day NIBOR fell from 20.1% to 13.0% in one trading day. Also, contrary to popular opinion, the run on the affected banks has been somewhat muted.

When Mr. Sanusi was appointed as governor of the Central Bank in May, many viewed his selection as another move by President Yar’dua to push forward his northern agenda, a conspiracy theory which contemplates the systematic take-over of the Nigerian economy by people from Northern Nigeria. However, in professional banking circles it was whispered that it might no longer be business as usual, as the risk-man was likely to point his searchlight on the weak credit practices that have plagued the industry.

Unlike his predecessor, Professor Charles Soludo, who seemed more infatuated with creating mega-banks rather than reigning in reckless banking practices, Mr. Sanusi plans to restore credibility to the system and push for increased disclosure amongst banks. In an interview with the FT in June, he hinted that the crux of his administration would be to strengthen the banking sector, which rightly in his view, was overexposed to both margin loans (Nigeria’s homegrown version of the subprime crisis), and unhedged oil positions.

Mr. Sanusi's recent move has sent strong signals throughout the financial sector as people have begun to speculate on the fate of the 14 banks yet to complete the CBN audit. There are indications that some of those indebted to the banks, whose names have been published by the CBN, are lobbying politicians in an attempt to try to stop the process as the EFCC is being invited to assist in the recovery of non-performing loans. However the plot pans out, one thing is certain, the Nigerian banking landscape will not remain the same.

As ailing banks seek an equity recapitalization in the coming months, shareholders are going to begin to demand more accountability from their agents. This would give rise to a new era of shareholder activism, where business owners would view general meetings not as a forum to accept management’s wishes, but as an avenue to push forward their agenda on how the business should be run.

But the question on everyone’s lips now is who is next? I would place my Naira on Owner/Manager institutions. Just by virtue of the conflict, there is a propensity for the abuse of privileges and a weak corporate governance structure. The culture of whistling-blowing is muffled in such environments where the lines of distinction are blurred. Given the copy-cat nature of the Nigerian financial services sector, one should not be surprised if the insurance regulator decides to fire a few insurance chief executives. In my view, that is a long-awaited cleansing.

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