16 August 2012

Nigeria: Nationalised Banks - in Defence of Depositors' Interest


My attention has been drawn to certain misrepresentations published in some national dailies on the establishment of three bridge banks by the Nigeria Deposit Insurance Corporation (NDIC), namely Main Street Bank Limited, Keystone Bank Limited and Enterprise Bank Limited which acquired the assets and assumed the liabilities of the defunct Afribank Plc, Bank PHB Plc and Spring Bank Plc, respectively. The bridge banks were later acquired by the Asset Management Corporation of Nigeria (AMCON).

Although I neither work for NDIC nor Central Bank of Nigeria (CBN), I believe as a Nigerian, it is important to comment on the issues in order to share my views on the bold step taken by the NDIC in collaboration with the CBN in the establishment of the three bridge banks.

For instance, in an opinion article by Godwin Ijedogor and Samson Ezea which was published in The Guardian of Saturday, 13 August 2011 with the headline: "Nationalised Banks: The Pains of Owners/Shareholders," major stakeholders, particularly the Independent Shareholders' Association of Nigeria (ISAN) whose members invested heavily in shares of the three affected banks were said to have groaned over the total loss of their investments as a result of the takeover of the affected banks. The ISAN National Co-ordinator, Mr Sunny Nwosu, said "the nationalisation of the affected banks was a clear indictment on the CBN".

In a separate article by one Godwin Onyedika, also published in The Guardian, the ISAN national co-ordinator was quoted to have said "the establishment of AMCON was intended ab initio to re-rationalise banks and rape shareholders," adding that the idea was an "empty boast geared towards short changing shareholders, to enable them give the banks to their friends".

Obinna Chima, writing in another article, "What Next for Afribank, Bank PHB, Spring Bank Shareholders?" published on 10 August 2011 in Thisday also quoted ISAN national co-ordinator as saying "the revocation of the operating licences of the banks was an illegal policy that had clearly showcased Nigeria as an unfriendly polity for sustainable business."

It is pertinent to ask: whose interest is the Shareholders' Association serving? We are all aware that their stake in those failed banks was limited to value of their shareholding, but the interest of depositors as the largest providers of the funds far outweighs whatever value that may be ascribed to the value of the shares of the owners. Even at that, the shareholders funds in those banks had been completely eroded. Therefore, the responsibility of the regulatory authorities is to protect the depositors and to ensure safe and sound banking system. It was as a result of their concerns for the safety of the depositors' funds that they embarked on regulatory intervention, culminating in the acquisition of the assets and assumption of the liabilities of the failed banks by the bridge banks established by the regulatory authorities.

It would be recalled that during the last bank consolidation exercise, under the watchful eyes of the shareholders' association, share capital raised by their banks was financed from depositors' funds. Similarly, one of the banks under liquidation used depositors' funds to purchase 80 per cent of its shares at N25 per share when the shares were trading at N11 on the floor of Nigerian Stocks Exchange. These prices later collapsed to under N3 per share. Who will bear the loss? Depositors or shareholders? My guess is as good as yours. Otherwise, how does one justify the situation whereby the banks' CEOs set up Special Purpose Vehicles to lend money to themselves for manipulation of stock prices? The shareholders' association also needs to realize that the objectives of their financial institutions should not be in conflict with that of depositors' interest. It is an onerous responsibility of the Shareholders' Association to ensure that sound corporate governance practices are instituted in their banks.

In another article entitled Investors in Nationalised Banks Bemoan Regulators' Action, which was published on August 9 edition of Daily Sun, the Chartered Institute of Bankers (CIBN) described the nationalization of banks as confusing, pointing out that there were no clarifications concerning the action. The MD/CEO of Star Insurance Brokers, Chief Emmanuel Akambi, reportedly questioned why the NDIC should take this action when the deadline was still far ahead, stressing that the action would worsen the investors' confidence in the economy as foreign investors would see our government policies as not being stable. In its editorial of 14 August 2011, Leadership opined that investors' confidence had been dampened by the CBN action as indicated through the devaluation of the nationalized banks' shares. The editorial queried CBN Deputy Governor Dr Kingsley Moghalu's assertion that the bridge banking was "neat" pointing out that it failed in the Republic of Ireland.

However, the truth is that the NDIC/CBN could not afford to wait for the September 30 deadline because there was a continuous deterioration in the financial conditions of the banks. Their shareholders' funds were negative and they were living on the life support system of the CBN. Most importantly, they were not able to attract new credible investors that would enable them meet the 30 September 2011 deadline set by the CBN. The regulatory authorities could not fold their arms and watch helplessly while depositors' funds were being dissipated.

Consequently, the NDIC acted on its mandate by establishing the three bridge banks in Nigeria in accordance with Section 39 (i) of its enabling Act 2006. Some key reasons for the use of this intervention mechanism were to protect depositors' interest which is the primary mandate of the Corporation, to safeguard jobs in the affected banks as well as to prevent systemic repercussions of the failure of the banks on the entire financial system. It was also the most cost effective option, in the circumstance, for the banking system and the economy considering the size of the three banks, volume of their deposits as well as the number of their depositors and employees.

The NDIC Managing Director/Chief Executive, Alhaji Umaru Ibrahim, was quick to point out that the NDIC's decision to establish the three bridge banks was deliberate, saying "there is no question of us and the action being premeditated. You must plan to execute things very well and that's what we did in the interest of the nation's economy, stability of the financial system, the banking sector and the depositors in particular."

It is also important to note that before the deadline set up by the CBN for the eight intervened banks to recapitalize, the rot in the system was so deep that the proportion of non-performing loans of the banks to their total loan assets, according to the CBN, were 85 per cent, 40.8 per cent and 47 per cent, for Spring Bank Plc, Bank PHB Plc and Afribank Plc, respectively. Waiting for September 30 before taking any regulatory action would have been disastrous for the depositors whose funds were being dissipated. The banks also deceived investors in the capital market by buying back their shares with depositors' funds. This abuse from the banks gave the CBN no choice but to revoke the licences of the erstwhile banks.

On the acquisition of the three bridge banks by AMCON, many critics did not appreciate why CBN/NDIC took that decision. The NDIC boss said, following their acquisition, the rescued banks became fully recapitalized, which enabled them to carry on normal banking operations. He also said that the three new banks remained under the insurance cover of the NDIC in order to protect their depositors.

Adekunle wrote from Ikeja, Lagos.

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