21 January 2008

Nigeria: The Other Side of Consolidation


Lagos — On July 6, 2004, the then freshly appointed Governor, Central Bank of Nigeria, CBN, Professor Charles Chukwuma Soludo, unveiled a 15-point proposal he intended to pursue as a CBN Governor.

The most important and far-reaching item of this was the proposal to increase bank's shareholders funds to a minimum of N25 billion by December 31, 2005. As at 2004, the authorised capital for commercial banks in Nigeria was N1 billion and plans were on to raise the capital to N2 billion in two years. Anyway, by the end of Soludo's recapitalisation deadline, 69 banks merged into 19 consolidated banks and six banks stood on their own having been able to successfully raise their capital to N25 billion. Sadly, 14 banks that did not meet the consolidation deadline had their licenses withdrawn and were liquidated. Some shareholders of the liquidated banks challenged the exercise in court but they won't win because government is next to God in Nigeria.

The trauma of the banking consolidation programme must not go unrecorded so that future policy decisions of that magnitude may benefit from the lessons of experience. This piece would reveal the huge financial losses suffered by the Nigerian taxpayers in contrast with half-truths told to the Nigerian public by the CBN Governor. The CBN banking consolidation exercise was to create a stronger, safer and swifter banking industry. In truth, a few but strong and enabled banks capable of giving confidence to depositors and customers were destined to emerge from the programme. These new banks were to be the anchor of a newly industrialising Nigeria. The Soludo consolidation proposal was initially presented as a proposal but it later assumed the nature of an immutable law. It became policy without discussions.

The publicised consequences for banks that could not recapitalise were that such banks would neither participate in the CBN officially regulated foreign exchange market nor allowed to access deposits from government departments, ministries and parastatals. However, when the consolidation programme came to an end on December 31, 2005, the banks that could not meet the hurdle were simply and callously liquidated, thereby flushing jobs, deposits, and other financial assets down the drain. This was a tragedy.

The now bigger and consolidated banks were also expected to lend at highly reduced interest rates. However, two years after the conclusion of banking consolidation, interest rates in these banks have remained high at 18%p.a. - 22%p.a. Indeed, in early 2004, the former CBN Governor, Chief Joseph Sanusi, had, through moral suasion, brought bank-lending rates to 17.5%p.a. The existence of high interest rates in Nigeria now or in the past is not the fault of the banks. The country is hopelessly deficient in the provision of basic infrastructure such as power supply. Thus for CBN to expect banking consolidation to now force banks to lend at an interest rate of 10% p.a. is to live in a fool's paradise. Similarly, bank customers and the general public that thought that Soludo's consolidation would save them from the condemnable practices adopted by unscrupulous bankers in sending young girls in skimpy dresses to chase deposits must be surprised at the increase in the number of girls now prostituting themselves for deposits. Even the capital market is shocked at the way banks are now coming for funds despite Soludo's consolidation or is it because of it? Is the real sector listening?

In the days and weeks of the consolidation, the CBN perfected the act of making promises it never intended to keep and in the process deceived a number of honest sector participants. The CBN promised to create a help desk to provide technical assistance to banks that required help. The CBN even boasted that their consultants would be available to man the help desks and visit banks when required. However, the CBN help desks were helpless in themselves. The CBN promised that staff that lost their jobs in the course of the consolidation exercise would be helped to access funds from the SMIEIS funding base. That empty boast also disappeared as CBN proved incapable of helping the disadvantaged. The truth was that Soludo's CBN was just talking to be heard.

The CBN banking consolidation programme compromised the major kernel of economic development. In building a sustainable economy, three categories of enterprises or industries must co-exist. It is in the same way that the poor, the middle class and the rich must co-exist in every society. The small becomes medium sized the medium sized becomes big and new small sized ones are born to subsequently grow. That is why SMEDA and NAPEP exist in Nigeria today. It is antithetical to growth and development for every organisation to be big. But for Prof. Soludo, all Nigerian banks had to be big; of equal size and of similar complexities. This was a travesty and a major failing of the consolidation programme. It is unbelievable that several efficiently run but small sized niche banks had to be decreed out of existence in order to take a new life form. Now, all Nigerian banks have been forced to be like the others - the one size fits all syndromes. The financial services profile of a country that is serious about development must not be so straitjacketed. Prof. Soludo turned a deaf ear to the strident calls for the categorisation of Nigerian banks into small, medium and large with different shareholders' funds.

It is trite perhaps to talk about the monetary cost of consolidation, the unfulfilled promises by the CBN to ensure the reduction of the statutory fees charged by Corporate Affairs Commission (CAC), Security and Exchange Commission (SEC), Nigerian Stock Exchange (NSE) and the CBN failed promise to appeal for tax breaks from the Federal Inland Revenue Service (FIRS). But more worrisomely was the total deceit that Prof. Soludo visited on the banking system when he announced to the world that an Asset Management Company (AMC) was to be set up and banks would be required to transfer at a discount their properly collateralised but non-performing loans to that company for management. Many bankers who took the CBN on its face value and hoped that it would fulfill its promise were roundly disappointed. Till date, CBN has not set up an AMC and the consolidated banks have simply been left with their problem loans. The powerful debtors of the liquidated banks now walk the streets with their heads held high in contrast with the past when they were in hiding. Even in Malaysia where Prof. Soludo got his inspiration, the Malaysian Government spent a fortune to set up and manage an AMC. But in Nigeria, the people are "animals"_ and must be allowed to suffer policy hardships.

The loss of jobs attendant to the CBN consolidation programme has been most telling. Thousands of bank staff lost their jobs. A number have gone abroad but many have become unemployable. As is usual in the context of mergers and acquisition, staff of the acquired companies is always at the mercy of the acquirer. Apart from the top echelons of management and executive staff that were wiped out in the consolidating banks several lower level staff were immediately rendered jobless. In many of the consolidating banks staff aged 45 years and above could not be retained by the acquiring bank. Many bank staff that had proven themselves on account of the excellent job they did despite holding such qualifications as HNDs and NCEs have all been sent packing.

The magnitude of financial losses suffered by the Nigerian taxpayers has been mind-boggling. The 14 banks liquidated by the CBN created a void. All public sector deposits, in naira, dollars, and pounds sterling and in other currencies, held in these banks were lost. For the Federal Government alone these deposits run into well over N50 billion. Add the state governments' deposits from ministries; commissions, parastatals and local governments over N100 billion will be involved. These deposits were being properly managed before the consolidation programme created a run on these banks. These were taxpayers' money lost on account of a poorly implemented programme. The shareholders of the liquidated banks actually got a raw deal. They lost all their investments and shareholdings running into billions of naira. The CBN later came up with a contraption called P and A (purchase and assumption); a mechanism by which some strong bank is able to acquire a liquidated bank for peanuts. In this way, the private customers are saved from losing all of their money. Eight banks have been acquired so far under the P and A model but in all of them, all the public sector deposits running into billions of naira and the indigenous investors equity funds were lost.

The most tragic inadequacy displayed by the CBN in the course of the consolidation exercise was the decision not to allow the Alliance Bank Plc in-consolidation to conclude their merger plan. It would have been a test case of how a CBN can truly be positive in creating sustainable structures. A regulatory body must deploy its arsenal of resources to help the system grow but the CBN failed woefully when confronted with an opportunity to show how a group of weak banks can be amalgamated, managed and provided with appropriate governance structures. The Alliance Bank was a group of weak banks that could not strike a merger or acquisition deal with any of the stronger banking groups. They were seven or so in number. The CBN asked the member banks as an entity to deposit N10 billion in a CBN escrow account before they could be allowed to merge. The banks ran around and put up N5 billion in cash. They now asked for an extension of six weeks to pay the balance. But the CBN said no, and Prof. Soludo, in an uncharitable move, liquidated all member banks of the Alliance Bank group. How callous!

The action of the CBN in not supporting the well-meaning efforts of the Alliance Banking group action was the worst display of naked power in the regulatory history of Nigeria. In the Republic of South Africa one of the biggest banking groups known as ABSA (amalgamated banks of South Africa) was an amalgam of disparate financial institutions put together by the Reserve Bank of South Africa, the Central Bank, and nursed to the health of a first class commercial bank of international repute. If the CBN had only been more positive with the Alliance Banking Group, the huge financial losses of over N50 billion suffered by way of lost federal public sector deposits would have been avoided. It probably would have taken an extra N5billion of a myriad of support from CBN for Alliance Bank group to work effectively.

In a move that did suggest some form of contrition on the part of the CBN coming several months after the conclusion of the consolidation programme, the CBN commenced the licensing of micro-finance banks from the ashes of the community banks. But the Nigerian economy would have benefited tremendously from a more positive decision to convert some of the weaker commercial banks to regional of state-based banks specialising in micro-finance and other business but with a more pervasive branch network. As is always with ill-conceived policies in Nigeria, the damage is caused first then there is a rethink and an attempt is made to effect some remediation, a kind of medicine after death. At present rural banking is on hold because no mega bank in its right senses would open a branch in Akassa in Rivers State, or Ajagbodudu in Delta State no matter how public spirited it may be. The micro-finance option as currently conceived cannot make a dent in the quest to industrialise Nigeria.

It is true that the CBN consolidation programme exposed some unethical practices in the banking industry. But such practices were the exceptions rather than the rule. The phenomenon of family banks, which the CBN programme sought to wipe away, remains very strong in the industry. Yes, some crooks and criminals who paraded themselves as bankers were liquidated with their banks. But many so-called bank owners found to have abused public trust are enjoying the fruits of infamy. Let Soludo tell Nigerians what has happened to the owners of liquidated Societe-General Bank Plc. Depositors may now sleep well but the existence of squabbles and personality clashes in a number of boardrooms of consolidated banks portend a major danger. The crisis that recently engulfed Spring Bank Plc is just a tip of the iceberg. The heated boardroom occurrences are normal because in a desperate attempt to survive the CBN ordered consolidation programme several banks went into merger relationship with strange bedfellows. The repeated visits to the capital market by banks may reduce the funding/personality pressures on these banks whose intrinsic weaknesses were not cured by consolidation.

The lesson to learn from the bank consolidation programme is that a policy is an effective tool of behaviour modification. It requires discussions and consolidations to avoid a pyrrhic victory. Serious nations and institutions of acclaim do not play with policy conceptualisation as it takes several levels of discourse for consensus. Policies are strategic because they can destroy decades of growth, if wrong. The CBN banking consolidation policy announced in 2004 was not properly thought through. There were no consultations. The policy was mechanical, and ill conceived. It was an arrogant display of the naked power of coercion. Its imposition was reminiscent of the Nigeria military era. The relief is that many well-meaning senior and executive staff of the CBN opposed the Soludo type consolidation programme. All told the consolidation programme has come and gone and we shall live with the consequences until there is a government rethink.

-Chief Omokhodion, ex-MD/CEO Liberty Bank Plc, ex-ED, Conoil, is Akoamen of Ekpoma.

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