The Nigerian banking sector (II)

August 2009 was a tumultuous month for the Nigerian banking sector. It saw wholesale changes at board level, arrests of some executives and loan defaulters, confronting the industry with a serious confidence deficit. In this second and last article, the focus falls on the CBN’s attempts to clean up the Nigerian banking sector and the challenges this presents to the new governor of the CBN, Sanusi Lamido Sanusi.

By the last quarter of 2008, Nigeria’s economy – the second largest in sub-Saharan Africa after South Africa – was clearly feeling the strain of the global economic downturn. The strain was further exacerbated by a drop in the price of crude oil that weighed heavily on the economy of this oil-exporting country.

Despite a general downturn in Nigeria’s economy, the country’s banking and financial services industry appeared to be weathering the storm remarkably well. In the course of 2008, the governor of the CBN, Dr Charles Soludo repeatedly assured the federal government and public at large that all Nigerian banks were in good health.

Yet, beginning in early 2009, the chorus of voices challenging Soludo’s rose-tinted views grew.

Enter Sanusi Lamido Sanusi
The tenure as governor of the CBN of Dr Soludo, an Igbo originally from the predominantly Christian southeastern Anambra State of Nigeria, was set to come to an end in June 2009.

One of the early frontrunners in the race to take over the post was rumoured to be Sanusi Lamido Sanusi, then group managing director of Nigeria’s First Bank of Nigeria.

Sanusi was born in 1961 to the Fulani ruling family in Kano. He is the grandson of the 11th Fulani Emir, Muhammadu Sanusi, of Kano, while his father occupied the post of Permanent Secretary in Nigeria’s Department of Foreign Affairs in the 1960s.

Sanusi holds an MSc degree in Economics obtained from the Ahmadu Bello University (Zaria State) in 1983, and in the early 1990s pursued Sharia and Islamic Studies in Khartoum, Sudan.

In 1997 Sanusi returned to Nigeria and was appointed one of the principal managers at United Bank for Africa (UBA), rising to deputy general manager by March 2005. At UBA he spearheaded the bank's drive to comply with Basel 2 capital adequacy requirements.

Sanusi's success in credit risk management at UBA resulted in First Bank of Nigeria poaching him in the second half of 2005 to take up the post as its executive director of Risk Management. In January 2009 he became the bank’s group managing director.

The rumours of Sanusi’s possible takeover as governor of the CBN caused dismay among southern politicians and Igbo intelligentsia who saw Soludo’s replacement with a Muslim from Kano State in the north of the country as further ‘proof’ of Nigerian President Umaru Musa Yar’Adua’s implicit policy of easing out Igbos from government positions irrespective of their performance in office.

Southern tempers flared over what some described as the brazen "northernisation" of Nigeria's public service offices. They noted that under Yar’Adua’s presidency, most of the heavyweight ministries – including the ministries of Petroleum Resources, Agriculture and Water Resources, Finance, National Planning, Federal Capital Territory, Works and Housing and Justice –have gone to northerners. (And even in the north itself, there were some complaints that most of the jobs were reserved for only a few northern states – Kano, Katsina, Bauchi and Kaduna.)

Sanusi’s immanent takeover as head of the CBN simply added fuel to southern concerns.

However, Yar’Adua dismissed these concerns and on 1 June 2009 formally recommended Sanusi as CBN governor to the Nigerian Senate – the first northerner nominated for this post in Nigeria’s history.

Following Sanusi’s confirmation hearing on 3 June 2009, the Senate unanimously accepted his nomination effective the following day. With this acceptance, virtually all the high profile members of former Nigerian president Olusegun Obasanjo’s economic reform team – which included Nasir el-Rufai (former Minister of the Federal Capital Territory, Abuja) and Nuhu Ribadu (former executive chairperson of Nigeria's Economic and Financial Crimes Commission – EFCC) – had now been replaced by Yar’Adua.

A house of cards comes tumbling down
Sanusi’s three-and-a-half hour confirmation hearing before the Nigerian Senate in June 2009 provided some indication as to the policies he intended pursuing as governor of Nigeria’s apex bank.

Three policy indicators of particular significance were his insistence on more stringent risk management systems that needed to be introduced into the banking sector; the emphasis he placed on strong corporate governance within banks, conservative lending strategies and the closer supervisory role the CBN should play over banks; and his description of the earlier consolidation of the Nigerian banking sector in 2005 as merely a precursor to further action – intimating that another round of consolidation in the banking sector might be required.

It took Sanusi less than two months in office to bring down the Nigerian banking industry’s house of cards and expose his predecessor’s misrepresentation of the industry as being in good health.

The axe came down hard on 14 August 2009 when the CBN felt compelled to inject 420 billion naira into five ailing banks – Oceanic, Intercontinental, Finbank, Union Bank of Nigeria and Afribank – and sack their chief executives and top management on the ground of being “principal causes of financial instability in their banks and for acting in a manner that was detrimental to the interest of their depositors and creditors”. (The CBN appointed interim heads for the respective banks.)

The CBN said that the affected banks had accumulated loans amounting to 1.2 trillion niara, part of which was non-performing loans, thus posing a risk to other operators in the industry.

According to the CBN, the bailed-out banks accounted for 40% of banking sector credit. The executives removed included members of the business aristocracy long seen as almost untouchable. Trading in shares in the five ailing banks was suspended on 17 August 2009.

Five other banks – Diamond Bank, First Bank, Guaranty Trust Bank, Zenith Bank and UBA – were cleared by the CBN audit, but this did not prevent a loss of confidence in the Nigerian banking sector. The day after the CBN’s announcement, investors offloaded millions of banking shares, leading to a further decline of 2.5% in Nigeria’s all-share index.

Nigeria’s anti-corruption body, the Economic and Financial Crimes Commission (EFCC), stated that it was preparing to prosecute the five sacked bank executives named as Mrs Cecilia Ibru (Oceanic), Mr Erastus Akingbola (Intercontinental Bank), Mr Okey Nwosu (Finbank), Mr Bartholomew Ebong (UBA), and Mr Sebastian Adigwe (Afribank).

Some days later, Ebong, Nwosu and Adigwe were detained by the EFCC on suspicion of a variety of crimes including fraud and insider trading. Operatives of Nigeria’s State Security Service (SSS) also prevented Ibru from travelling out of the country on her private jet, but Akingbola (Intercontinental) appears to have successfully escaped to the United Kingdom.

After the CBN published the names of over 200 people and organisations who purportedly owed the five troubled banks more that 746 billion naira in non-performing loans, the EFCC gave debtors six days in which to repay their debt.

Though some debtors have been arrested since, others have vigorously disputed the CBN’s description of their loans as being “non-performing”.

The battle between the CBN and debtors appears to be far from over.

What now?
Even before this latest crisis in the banking industry, Nigeria was a country in turmoil.

The armed insurrection conducted by the Movement for the Emancipation of the Niger Delta (MEND) among the creeks and mangroves of the southern oil-producing states of the federation has lowered Nigeria’s oil production output from a hypothetical capacity of around three million barrel per day to only 1.68 million barrels per day in July 2009.

This drop in oil production, which allowed Angola to surpass Nigeria as sub-Saharan Africa’s largest oil producer some time ago, severely affects Nigeria‘s ability to weather the global economic downturn and the government’s capacity to provide basic services to its citizens.

The Nigerian government’s current federal budget is predicated on a projected growth of 9.2% in gross domestic product (GDP) during 2009. Such a robust growth now seems impossible to attain.

Speaking in Kenya in the first week of August 2009, Sanusi lowered the CBN’s GDP growth forecast to 5%. But Soludo added that even this adapted forecast is dependent upon a solution being found in the troubled Niger delta region where MEND regularly attacks oil installations run by foreign firms and kidnaps workers employed by foreign oil companies in their struggle to enforce a more equitable distribution of Nigeria’s oil wealth.

Violence in Nigeria is not restricted to the southern states: In the northeast of the country, clashes between Nigerian security forces and the radical Al-Qaeda aligned Islamic group, Boko Haram, in July 2009 resulted in an estimated 700 deaths and the extrajudicial killing of the sect’s leader.

Added to such security concerns, Nigeria is also faced with a plethora of problems affecting the buoyancy of and trust in its economy. Corruption is deeply entrenched in both the private and public sectors; electricity supply is erratic; hospital services are failing; the country’s transport infrastructure and education systems are in decay; and its judiciary appears beholden to the ruling party.
Deeply divided along ethnic and religious fault lines, Nigeria is now governed by an emaciated and politically weak President Yar’Adua, who rose to power from obscurity on the back of the political machinations of his predecessor Olusegun Obasanjo, and fraudulent elections held in April 2007. (Re-run gubernatorial elections in 2009 have proved to be even more fraudulent than the original 2007 elections.)

On such narrow shoulders rests the task of guiding this rapidly failing state through turbulent times. Little wonder then that US President Barack Obama in July 2009, on his first visit to sub-Saharan Africa, chose to shun this self-proclaimed ‘giant of Africa’ in favour of Ghana.

Until recently, one of the few beacons of apparent hope, prudence and excellence in this troubled state has been its banking and financial services industry. Yet, developments during August 2009 have shown that this, too, is a crumbling edifice weakened by greed, corruption and incompetence.

The results of the CBN audit of only 10 of Nigeria’s 24 banks have been made know thus far. There are 14 more bank audits to follow, which could only increase the shock that is already reverberating through the country’s banking industry.

One thing seems clear: A further consolidation of banks in Nigeria is in the offing. This may present foreign investors with an opportunity to get a foot in the door of the Nigerian banking industry.

Despite being one of Africa’s most disorganised countries, Nigeria does present the potential investor with the almost irresistible temptation of high profits and a booming client base as opposed to a stagnant or shrinking international business environment.

But an important feature impacting on business operations is the level of entanglement between Nigerian politics and business. Virtually no business deal can be concluded without the direct involvement of the ‘right’ political figures. An error in judgement as to who these partners should be, will most probably be a very costly mistake.

In having to smooth ruffled political feathers, Sanusi may have taken on a job much bigger that simply the governorship of the CBN. Whether he will turn out to be a knight in shining armour steering the country towards greater financial health, or whether he will fall victim to the insidious and poisonous manoeuvrings of Nigeria’s political elite, is still in doubt.

In the meantime, potential investors in Nigeria’s economy, including its banking and financial services sector, should tread very, very carefully.

HYPERLINK "http://www.thisdayonline.com/favicon.ico" “Bailout May Hit N1trillion”, ThisDay, 18 August 2009.
HYPERLINK "http://www.news.dailytrust.com/index.php?option=com_content&view=article&id=4521:yaradua-asks-efcc-to-recover-bad-loans&catid=46:lead-stories&Itemid=140" “Yar’Adua asks EFCC to recover bad loans”, Daily Trust, 17 August 2009.
HYPERLINK "http://www.businessdayonline.com/index.php?option=com_content&view=article&id=4451:nigerias-oil-output-at-lowest-level-in-two-decades--iea&catid=1:latest-news&Itemid=18" “Nigeria’s oil output at lowest level in two decades – IEA”, Business Day, 6 August 2009.
HYPERLINK "http://www.businessdayonline.com/index.php?option=com_content&view=article&id=4267:cbn-governor-hinges-nigerias-growth-on-ndelta-outcome&catid=1:latest-news&Itemid=18" “CBN governor hinges Nigeria’s growth on Niger Delta outcome”, Business Day, 6 August 2009.