The Central Bank of Nigeria (CBN’s) wide-reaching reform campaign, which rocked the banking sector in 2009, is not done yet. After removing the executive management of a number of unhealthy banks and injecting additional liquidity into the system, authorities have set their sights on further improving corporate governance by setting a tenure limit for CEOs.
“All CEOs who would have served 10 years by July 31, 2010, shall cease to function in that capacity and shall hand over to their successors,” said the CBN in a statement on its website at the end of January. Additionally, local press reported that a set of minimum disclosure requirements for banks is forthcoming.
The new ruling affects three CEOs, including two from the country’s most prominent banks – Tony Elumelu of United Bank for Africa and Jim Ovia of Zenith Bank. These banks, along with First Bank and Guaranty Trust Bank, comprise the “Big Four” of top-tier financial institutions, which have a combined market share of 54%. While the CBN said the impetus for the new tenure limit was to resolve “corporate governance issues,” some in the industry have speculated that the measure was designed to force specific banking heads out
New CBN director Lamido Sanusi has been credited for spearheading Nigeria’s banking sector clean up. Appointed in June 2009, he soon after initiated a banking sector audit by the Economic and Financial Crimes Commission, which uncovered N1.52trn ($10bn) in bad debt due to lax and sometimes corrupt lending standards.
Ultimately, 10 banks were deemed unhealthy: Bank PHB, Intercontinental Bank, Oceanic Bank, Spring Bank, Afribank, Unity Bank, FinBank, Equatorial Trust Bank, Wema Bank and Union Bank. Eight CEOs were dismissed, while the government spent N620bn ($4bn) to bail out the banks and increase liquidity in the financial system.
At present, there are 24 banks operational in Nigeria, though sector consolidation looks imminent. “We’re at a point now where we’re trying to move the banks to the next stage: recapitalisation, or mergers and acquisitions,” Sanusi told OBG. In December 2009, local press reported that the CBN had set a deadline for bidders on the 10 rescued banks.
The Big Four are expected to purchase smaller competitors, though Stephen Olabisi Onasanya, the CEO of First Bank, told international press that they would “only touch candidates that have value to add to our system and that fit our strategy”. South Africa’s Standard Bank Group and FirstRand Ltd filed for due diligence on the unhealthy 10. However, they have also said publicly that they were only interested in non-distressed Nigerian banks. Other potential buyers are thought to be waiting for the bank’s 2009 annual reports to be released before making any decisions.
The recovery of the stock market is also on hold until the fate of Nigeria’s banks becomes clearer. With two-thirds of its capitalisation coming from banks, the Nigerian Stock Exchange was the world’s second-worst performer in 2009 after Ghana. However, stocks look set to buoy as the CBN pursues more transparent regulation and better corporate governance. “The banking crisis is not a bottomless pit; as the CBN-led resolution works through the system, equities will respond positively,” a report by CSL, a stock brokerage firm, stated in mid-January 2010.
Sector stabilisation will enable banks to return to their core business of lending and help revive the economy. Certainly, the Nigerian banking sector continues to offer enormous potential. After all, the CBN audit found that only a handful of banks were involved in risky margin lending practices. To help banks make better loan decisions, the CBN is looking to expand the role of credit bureaus, making it easier to calculate risk in lending to a particular client.
The long-term effects of the “Sanusi tsunami,” as the CBN head’s dramatic shake-up has been called, will likely be extremely beneficial for Nigeria, with those guilty of making toxic loans finally exposed. Hopes are high that in the coming years Nigeria’s banking sector will be both consolidated and playing by the rules.
