It has six months and two weeks since I started this blog, and in that half-year, I have probably written more posts on Nigeria's banking industry and financial markets than I have on anything else.
This 1st April post discussed the estimated $10 billion in toxic assets on the books of Nigerian banks. This number may or may not have been accurate. This Bloomberg article, quotes the Eurasia Group, researchers who help publish the Global Political Risk Index saying it is probably $10 billion, and also quotes Bank of America as saying Nigerian banks gave $6.8 billion in margin loans for borrowers to buy shares, but in this piece Bloomberg quotes Soludo saying the toxic assets figure was $5.3 billion in January.
The banks have been less than transparent in their information disclosures, and the more we learn, the more we doubt many of the Soludo-era Central Bank's statements on the banks and the financial and equity markets (Bode Agusto called it "voodoo accounting").
It subsequently proved difficult to ascertain if the government or the Central Bank was going to bail out the banks. I wrote this piece in reaction to a NEXT article that claimed Charles Soludo had spent =N=1 trillion (then worth $6.7 billion) to bail out the banks. I followed it up with this brief piece to link you to a statement from Soludo (quoted in Bloomberg) that Nigeria could not afford a bailout or a stimulus.
I have said frequently on this blog that the quality, quantity and substantive depth of information supply in Nigeria are problematic. It is difficult to identify and distinguish the truth; sometimes the truth is not even one of the information options you are restricted to choosing from.
The alleged $6.7 billion bailout was cited in a NEXT piece that was clearly designed to attack Charles Soludo. Now there are many things about Soludo's tenure that deserve criticism in retrospect (and other things that should have been criticized contemporaneously, but were not because the politico-economic discourse, much like information in general, is shallow, weak and frequently dishonest). But NEXT provided no proof of this bailout, and given recent happenings in the industry (more on that later) it is clear no bank had been bailed out as of the start of the Sanusi era at the CBN. It is okay to criticize someone without starting unproven rumours.
What is proven is the three tiers of Nigerian government (federal, state and local) were facing a potential need to borrow $11 billion to finance projected 2009 deficits (raising questions of whether the CBN-imposed interest rate ceiling was designed to allow the federal government to borrow at below-market rates from domestic banks as they had done in the past). And the Central Bank of Nigeria had expended $14 billion of our external reserves to defend the exchange value of the Naira to the Dollar in the six months from October 2008 to April 2009, dropping our reserves from just above $60 billion to under $47 billion.
So I am leaning towards believing that Soludo did not in fact bail out the banks. He did not perform his role as a regulator particularly well, but that is a different issue. A difficult issue too, as the banks, the CBN and the government have been less than forthcoming with truthful information over the last year-and-half.
Okay, having read through a digest version of six months of blog posts wondering why nothing concrete was being done (or even substantively discussed as a prelude to action) about the possibly $10 billion in toxic assets on our banks books, we now get to current events ....
Nearly a year after these "toxic" issues came to light (with the domestic stock market correction, the global credit crunch, and the dramatic fall in the price-per-barrel of crude oil), the still-relatively-new Sanusi Lamido Sanusi sacked the CEOs and executive directors of five of the 24 post-consolidation banks. These five banks are (allegedly) responsible for 40.81% of the banking sector’s total non-performing loans.
I prefer to speak in Naira terms. Becoming a massive exporter of crude oil has had many positive and negative impacts on our economy, and I suspect the dollarization of our mentality has something to do with our excessive reliance on crude exports. In a more natural economic setting, we'd probably be just as concerned (if not more so) with the CFA Franc, the SA Rand, the Maghreb dinar and the EA Shillings. Still, I started this process months ago talking about an estimated $10 billion in toxic assets, so I am going to stick to the dollar so we can keep things in a consistent context.
According to Sanusi, the five banks have a total loan portfolio of $17.5 billion, of which some $2.8 billion represents exposure to margin loans (money lent so borrowers can buy equity, too frequently shares from the bank issuing the loans), while exposure to the oil-and-gas sector (too frequently for the importation of refined fuel, an activity that was hit hard by the volatility in crude pricing and the lack of policy consistency from the Nigerian government) is estimated at $3.0 billion.
I am tempted to use the $5.8 billion figure for the five banks' total exposure to margin loans and oil-and-gas exposure, and the fact that the CBN said these five banks were responsible for 40% of all non-performing loans in the banking sector, to calculate the CBN figure for total toxic assets across all 24 post-consolidation banks. I won't because I have not seen any article where Sanusi specifically said that ALL of the $5.8 billion in loans were non-performing; the Central Bank has injected $2.6 billion in new capital into the five banks, but I have not seen them say anywhere that this will clear the problem.
I do not think they are planning on writing off all of the non-performing loans, because the Central Bank is bringing in other federal agencies (notably the Economic and Financial Crimes Commission) to help force the banks' debtors to pay back their loans. The CBN has published a list of the five banks' "non-performing" debtors. Some of the alleged debtors have refuted the CBN's allegations, arguing that their loans are in good standing, or that the amounts cited as owed are inaccurate, or that the CBN erred in naming them as directors of corporations they are not connected to. A few have threatened to sue, leading the CBN to release this statement, describing the document as being current at 31st May, 2009, indirectly admitting some of the information may no longer be current (but in standard Naija fashion, declined to admit error), and essentially promising revisions, corrections and (most intriguingly) additions as the audit of all of Nigeria's banks continues.
It is not an ideal or optimal way of doing things. One would rather there were civil lawsuits that would produce clear rulings on whether Loan XYZ was non-performing, that could then either force the adoption of a structured payment plan or authorize the seizure of assets subsequent to legally defined default. There are corporate heavyweights on the list that might not have liquid assets to pay back their loans, but do have other assets than could be seized to defray at least a portion of the debt -- the rest may have to be written off. Maybe in some way the process could establish a distinction between businessmen and bankers who are true entrepreneurs, and businessmen and bankers who exist only by virtue of exploiting the many loopholes in the Nigerian political and economic system. In other words, I wish this were more constitutional and legalistic, with a more systemic approach toward solving the toxic asset dillemma.
Then again, there is something to be said for shock therapy .... and in a land dominated by Big Men and Big Women, a federal republic where constitutionality and law are "options" not guarantees, perhaps the best way to compel Big Men and Big Women to act is to threaten them with the public embarassment of pointing out that the emperor is without clothing. Nothing is more important to Big People than the public perception that they are Big; the moment a Big Person starts to look Small, their rivals and potential competitors as well as the millions of Small people who apathetically concede power to you because of intimidation factor, all lose their fear. Many a Big Man brought low has been mocked, assaulted or even chased into exile by all the people who used to cringe at their feet.
There are some really Big names on the CBN list of "non-performing" debtors, and there is a possibility these men and women could react by pulling the considerable strings of their direct and indirect political power and influence. Yes, Sanusi has thrown down the gauntlet in a very public way, so if he is mysteriously sacked (or something else) there will be no scope for pretending it is not linked to his actions to clean up the banks. On the other hand, there is not a lot the broader public can do to stop the Big People from doing what they want; our elections are a sham so the politicians do not fear the loss of votes, and we the people are so divided by regional, religious, ethnic and other superficial differences, as well as by pervasive mutual distrust, that we are so much more likely to ignore or oppose any attempt to create a fist out of our weak fingers.
Still, Sanusi's move is something of a quiet politico-economic earthquake, and the people of the federal republic are watching with interest as the battle unfolds.
The Central Bank are currently auditing all of the banks (with rumours that more bank CEOs and directors face the sack). The pressure is on the banks to improve the accuracy of their reporting or face the consequences. In terms of the five banks sanctioned and bailed-out so far, I have not seen any article where the CBN says whether or not the $11.7 billion non-margin, non-oil-and-gas balance of the five banks' collective loan portfolio of $17.5 billion is "performing". Perhaps they should say something about that.
But Sanusi has a lot on his plate right now.
Responding to speculation that the $2.6 billion injection of capital represented a federal takeover of the five banks (a "nationalization" so to speak) Sanusi made clear that this was a temporary measure. The CBN will be seeking investors, local and foreign, to come in to take over the banks as soon as possible.
I trust him on this because it is consistent with other things he has said since taking over the CBN governorship (and with things he has said and written in the years before his new appointment). Not long after taking the apex CBN job, Sanusi signalled his intention to raise the ceiling on the percentage of Nigerian banks that can be owned by foreign investors. I wrote this blog post examining the different dimensions of the move; in there is a paragraph where I recognize that Sanusi was planning to use foreign investment to provide the capital to "dissolve" our relatively small (in global terms) $10 billion toxic asset issue. Even then Sanusi must have been planning temporary federal bail-outs as a prelude to what he hopes will be increased foreign investment in the sector.
Sanusi has been pushing strongly for the banks to improve their transparency and their honesty in financial reporting. I believe these reforms (and others he plans or is already carrying out) are designed to make the sector much more attractive to investors, while strengthening Nigeria's financial markets (and the Nigerian Stock Exchange). I have mixed feelings about foreign banks owning majority stakes in Nigerian banks (concerns I discussed in that blog post), but I can understand the thinking behind a plan to attract a relatively paltry $10 billion (or more) from global markets to solve the problem and open the door to bigger opportunities. I must have written half-a-dozen or so blog posts that directly or indirectly discussed the growing footprint of Nigerian banks across the entire African continent -- perhaps this is a necessary step, the next stage of the financial revolution. Time will tell.
Sanusi has also repeated assurances given earlier by his predecessor Charles Soludo, that no Nigerian bank will be allowed to fail. The CBN has also guaranteed "all foreign loans and correspondent banking lines of the 5 banks".
Significantly Sanusi has also echoed Soludo's view that the Nigerian banking sector will have to go through a second round of consolidation; Soludo wanted bigger banks (the quest for them defined his tenure) while Sanusi has said further consolidation was likely. In responding to suspicions the five banks had been nationalized, Sanusi said "investors, local and foreign,", then specifically added "banks, local and foreign" would be allowed to open discussions with the Central Bank about taking over the five sanctioned and bailed-out banks. I do not think the CBN would be opposed to bigger Nigerian banks absorbing the smaller ones, nor opposed to bigger foreign banks taking stakes in those bigger Nigerian banks.
In this way Sanusi continues, while refining, the best of Soludo, but is (so far anyway) careful to avoid Soludo's mistakes. It might seem a little chaotic in the present day, but I think the future of Nigerian banking is bright. Hopefully, the Fashola/Tinubu "Eko Atlantic City" project and the rest of their "Mega-city" projects come to fruition, and Lagos City and State take the stage as the continent's premier financial centre.
Of course we have many more bridges to cross .... but we will get there.
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