Nigeria: A fresh start

Two years after the margin lending crisis first struck, the process of cleaning up Nigeria’s banking sector continues. Most recently, the Central Bank of Nigeria’s (CBN) aggressive efforts to improve governance and reporting requirements have grown to include a revision of the licensing framework, which looks to provide greater segmentation in the market. Several financial institutions were recently licensed under the central bank’s new regime, while the nine lenders the government bailed out in 2009 are looking for new sources of funds to meet a recapitalisation deadline of September 30, 2011.

In late May the Central Bank of Nigeria (CBN) announced that it had awarded new operating licences to 17 lenders. All banks were forced to reapply for licences after the CBN decided last year to abandon the country’s universal banking system.

Under the new regime, banks are categorised as international, national or regional. Institutions that want to operate at home and internationally must have at least N50bn ($326m) in capital. Banks that wish to have operations across the country require N25bn ($163m) in capital. Regional banks, which can operate in 6-12 of Nigeria’s 36 states, must hold capital amounting to at least N10bn ($65m).

In addition to meeting these new requirements, banks must divest their non-core banking business lines or establish a holding company if they wish to offer other services, such as asset management. This separation is intended to ensure that financial institutions do not use customer deposits to finance risky investments.

The CBN has said that it will allow four institutions – First Bank, First City Bank, Stanbic IBTC and United Bank for Africa – to operate as holding companies. The remaining licensed lenders have until May 2012 to divest their non-core banking business lines.

“We want to focus banking now on a narrow basis so that it will enhance the stability of the banks and enable much closer monitoring of Nigeria’s banks in terms of supervision and regulation,” Kingsley Moghalu, the deputy governor of the CBN, told local reporters.

The central bank also announced at the end of May that Nigeria’s rescued banks must recapitalise by September 30, 2011 or face the possibility of liquidation. During 2009 the government bailed out nine struggling lenders in a move to stabilise the banking sector and the economy.

Since then, the CBN has taken steps to restore the viability of these banks, including the establishment of Asset Management Corporation of Nigeria (AMCON). The purpose of this quasi-government agency is to purchase the bad loans that reside on the banks’ balance sheets to make them more attractive to potential investors.

Despite such efforts, the central bank has had some difficulties attracting interest from potential investors, at least during 2010. During the first half of this year, however, several deals have been announced that would recapitalise some of the bailed-out banks.

Afribank has signed a memorandum of understanding with Vine Capital Group, a private equity group. Finbank and Intercontinental Bank have entered into recapitalisation agreements with First City Monument Bank and Access Bank respectively. Union Bank of Nigeria has signed a memorandum of agreement with a group led by African Capital Alliance to invest $750m in the bank.

In cases where lenders fail to find new partners, the central bank has said that AMCON would inject funds, effectively nationalising the bank, or, as a last resort, liquidate the firm. “We can't keep the process open indefinitely,” Lamido Sanusi, the CBN’s governor, told Reuters on May 31. “If there is no agreement with new investors, clearly option B is AMCON recapitalisation and option C liquidation.”

This hard stance by the CBN may well be in response to lawsuits filed by bank shareholders that, in some cases, have slowed the recapitalisation process. According to a statement by Sanusi in early June, four lenders (Bank PHB, Intercontinental Bank, Oceanic Bank and Union Bank) have been affected by shareholder actions.

The central bank’s governor has publicly expressed optimism, however, that the September 30 deadline is realistic. Speaking to local media on June 6 Sanusi said, “I remain optimistic that the shareholders will come to the table and that there will be deals by September 30. I am realistic enough to make sure that there is option B and C. But it is only fair to make sure that the first option does not succeed before thinking of the next option.” He reiterated that liquidation is not top of the list, saying it would have happened before now if that were the case.

For their part, some shareholders have pointed out that it is not necessarily easy to source new capital, and have requested a period of 12-18 months to recapitalise. Adebayo Adeleke, the general secretary of the Independent Shareholders Association, told local media, “The management appointed in these intervened banks have not been able to recapitalise them in the last two years. How can they give us three months to go and recapitalise?”

At this point, it remains to be seen whether the central bank or the shareholders will prevail in their ongoing dispute. However, it does seem clear that the CBN is committed to reform and would like to see banks get on with the business of lending, which would no doubt help further develop Nigeria’s economy.