What happened in our banking industry

Sanusi looks back: ‘’ What really happened in our banking industry?’’
By CHIMA NWOKOJI
Barely a year after the intervention of the Central Bank of Nigeria (CBN)into the banking industry, the bank’s Chief, Mallam Sanusi Lamido Sanusi has once again provided further details on why the apex bank intervened on 14 August, 2009, the new four pillars of banking reforms now being pursued. He addressed financial correspondents and business editors in Benin City, Edo State capital on issues ranging from investors confidence, consumer protection, financial crimes by banks and the roadmap for Nigerian economic growth. Below are excerpts of the CBN Governor’s unscripted address:
What Happened?
We have spent a long time talking about what happened. The world changed about two years ago with the Lehman Brothers collapse, the sub-prime markets, excessive leverage and concentration. Banks took a lot of money relative to their equity and excessive risks in some assets. There was a moral hazard on the part of bankers and with the regulators.
When shareholders set up a bank and put in 25 billion naira, they come to the Central Bank for a banking license. What they were asking for was a piece of paper to collect money as deposits without collateral. It’s not a complex accounting principle but simple deposit takings. So without questions, depositors give bankers their money on trust. That license was the quickest way to collect money without any question asked. Depositors know nothing about the bank managers and staff but know the banks only in a name. That is a moral problem. If your (bank) balance sheet is 300 billion naira, you have a balance of 250 billion naira to trade with and 25bn naira in capital. People who control the 25 billion naira are running the institutions. They may be core investors and top managers who can manipulate the balance of 250 billion naira in their own selfish interest. Depositors don’t decide how lending is done, nor bank salaries or bonuses and contributions for socially responsible activities. All depositors want their money back when accounts are opened. So who is to make sure that those that hold the 25billion naira does not place your (depositors) 250 billion at undue risk in their quest for profit? Who has that moral responsibility? It is the one that gave the banking license, the CBN. So you expect us the CBN to keep to our responsibility. If we believe that the people managing the money are at variance to what we gave them the license, we will act. In plain terms this is what has happened. And we acted.
I had run a bank and have worked in banks. It’s easy to run a bad bank for a very long time. People need to understand that. Who told you (depositors) that the banks were good banks then? A bank has a balance sheet of 700billion naira, if one quarter of that money is gone, the bank can continue for 10 to 20 years without anyone knowing because no single depositors’ demand of 250billion naira would occur in one single day. All that the bank needs to do is to have enough money for the 10 million naira or 20 million naira needed every day, even with your cheques of 5 million naira. But depositors do not know whether it comes from interbank or borrowed from the Central Bank. You (depositors) won’t know that 200 billion naira is gone until there is a crisis. The crisis we are recovering from provided a catalyst for anybody that does not know to know what happened inside those institutions. They (the banks) were chronically incapable to cope with the problems in the system.
What We Have Done
We admit some shortcomings on what the CBN did or did not do. Operators and regulators went into state of denials. We convinced ourselves that this was a temporary problem but as evidence mounts, we still think it would go away. So we reduced liquidity ratio from 40 percent to 25 per cent. We reduced cash reserve requirements, still the problem persisted. We opened the Expanded Discount Window (EDW); so they can pay up to 150 days. Some banks were at the EDW at 12 months negative not able to pay. When I took over, I went in to find out what happened. I was not wishing to sit down but to find out what bank was sick or fine and what nature and how to cure them: solvency or governance or what. I must find out. There are many good banks and professional bankers no doubt.
We found that some of the consolidated banks say they raised 100 billion but in actual fact they never raised any capital but took depositors money and through many schemes turned it into capital. Some get a stockbroker to borrow the money and buy the shares of the banks and then the banks buy the shares back through a subsidiary. A particular bank raised only 12 per cent capital and got dubious 88 per cent capital, through buying its own shares. Another commercial bank that said it raised capital of 80 percent was owned by its own subsidiaries.
The inherent dangers
The dangers of these schemes are three: Under the CBN rules, we have a rule of risk weighted assets to capital of 21 per cent. If a bank says it has 100 billion naira in capital, it can have up to one trillion naira in risk weighted assets. If half of that capital is not real capital, it means that the ratio is 20 per cent to 1 per cent and not 10 per cent to 1 per cent. Two: we have a single obligor limit in which a bank cannot lend more than 20 per cent of its net worth to a single customer; but some banks actually lend up to 40 per cent to a single person. Third: the banks’ balance sheet was sitting on a huge market risk because it had moved depositors funds to equities traded on the stock market. If the stock market crashes that capital is wiped out. But because it (the capital) never came from shareholders, it’s the depositors’ money that was wiped out as it happened in Iceland. Banks there were lending against their own capital leading to bankruptcy of the country: punching against their own weight. Some Nigerian banks bought their own shares at 22 naira. Now the same shares are down to 2 naira. Another problem of the banks was bad loans. As I speak, one of the rescued banks has a loan book of 900billion naira. 90 percent is not performing and even with the Asset Management Company (AMCON), when we buy the loans there would still be 500billion naira whole left of depositors’ loss without collateral or worthless. They give money to oil marketers to import fuel. The marketers sell and walk away. No petroleum products were delivered, no letters of credits delivered, no other collateral.
Margin loans saga and what we did
Huge exposures to stockbrokers were meant to manipulate the market and show that there was demand when there was none. Huge levels of Non Performing Loans were found and this also was a third - fraud or outright stealing. We are going to charge some people with criminal stealing. It’s pure stealing not misappropriation. If I am the managing director of a company and I did not tell the board that I have set up another company but go ahead and get approval for a loan and give myself that authority and disburses money; take the money and use it to acquire property or private investment and from the day I took the money until CBN intervened three years later, I did not pay any money back into the bank, but created a commercial paper and sell it to a discount house what do you call that? So you hide the loans and later you pay the discount house. Many people blamed me, including the press for cancelling commercial papers and bankers’ acceptances but therein, we found accounting frauds of up to 5 years covered. Some people have even forgotten. Some banks book loans with other people’s names and companies. Some people have come to thank the CBN for frauds committed in their names without their knowledge. So we had to act. I don’t know what you would have done. Maybe you would say its human nature or rationalize it. I am cattle rarer and I don’t know what is called innovation. What I was taught was that if you steal money, you are taken to court and if convicted you go to prison. It takes intelligence to deal with these problems another way. But since I knew, should we do it now or later. Nobody has disagreed but people say we just don’t agree and I said how would you have done it? We removed the people, hand them over to law agencies. Let us see whether your own ideas would have been better than what we did. So we took those actions. We lent money to the banks and the money is there, they will have to pay back. We stabilized them.
By this date last year or 29 July, 2009, I was called before the House of Representatives. I was called to a public hearing and have finished the first stress test and ready to disclose. But if I did disclose, it wouldn’t have happened. People need to be in position not to know, so I said when we finished in September. So everybody was waiting till October, as at that date I already had the approval of President Umaru Yar’Adua to go ahead. Even as at that date, we did not know whether we would have a banking sector after the intervention, but if we don’t act we won’t have an industry anyway. It cannot continue that way but we have to manage the consequences of the fallout. So we took the actions. And it’s now one year. Immediately after that, we made sure that we did not lose the industry. That meant giving assurance to depositors and creditors and assuring correspondent banks that all is well by going overseas. I told them in London and elsewhere about the banks that had problems and the disclosures and said the handling is not beyond our abilities to deal with it. And because of our reputation they believed us.
Crisis of negative capital
In the last one year: we had a crisis. We discovered that 50 per cent of all indigenous and controlled banks had negative capital base. The rescued banks had negative capital totalling 1.5trillion naira in the first 5 banks in August last year. There were massive frauds in a number of those institutions. A lot of bubble capital, insider related transactions, margin loans. Even two days ago (July 27th 2010), the Securities & Exchange Commission started the process of taking 260 companies and people to the securities tribunal. Not a single human being has lost a single kobo in any Nigerian bank in spite of all these. It’s easy for you to dismiss it, but people have died because of failed banks in Nigeria.
The Asset Management Company (AMCON)
The Asset Management Company will purchase the toxic loans for collateral. It will purchase the loans for Tier One or Tier Two capital as the case may be for the banks, and get the banks ready for whatever type of bank combination or mergers as the Directors deem fit. We have also got the banking system to levy itself on 30 basis points of their total assets to complement the CBN into the sinking fund and finance the resolution without adding to the fiscal debt. No Central Bank in the world has done this to bring the system from the brink of catastrophe without adding to fiscal debt or losing money.
False accusations
Now, I see here some comments about the investors and shareholders. A bank has to be profitable on a sustainable basis and make profit. To that extent, we cannot have a safe and sound institution without the shareholders. We are not interested in loss making institutions. So the idea that the CBN is opposed to shareholders is false. What is true is that where there is a conflict between depositors and shareholders I am morally bound to take side with depositors. So the desire of bank managers and shareholders for profit must not be taken ahead of depositors. In a bank the shareholders are not the most important of the stakeholders. We will not allow people to destroy depositors at the expense of the shareholders.
Some say that the CBN Governor talks too much. And somebody said I should allow the professionals to speak for me. Every time I am invited, my staff write all the speeches and distribute them. But seriously, what you say is informed by what you see. Some people think: would the President like what they say? Some don’t want to offend anyone. I never had that ability. I had never any desire to say what makes people happy but to say the right and correct thing to say. If you are happy that’s fine. I also don’t have this urge for being popular. I don’t crave it. It’s the reality. Forgive me if what I say is not pleasant but ask if it is true. Theologically I am a Marxist. I read a book entitled: “I say what I like.” If you have to speak and be passionate about it, you don’t bother whether you will be locked up. It is wrong for you to be the managing director of a bank and take depositors fund and steal them. And you cannot tell me that because you are afraid of a credit crunch, you should allow that to continue, if it does, no bank will exist. Where is Gulf Bank, Savannah or SGBN today? They don’t exit. And countries that have no credit crunch such as South Africa still have lower credit growth to Nigeria, even Ghana despite of our crisis.
Monetary policy
We have worked closely with the Ministry of Finance that is responsible for managing the government finances but the Central Bank is responsible for stable microeconomic finance. We have done that. When I became Governor, inflation was at 16 per cent, at the end of last June it was 10.3 per cent. When I came in, the secured Open-Buy-Back (OBB) rate was 8 per cent and overnight was 22 per cent, a reflection of lack of trust between banks. Even at that time some banks weren’t lending to each other. Now, we have all seen a total convergence of OBB and overnight rate and that has been in place almost a year now. Official currency rate was 145 naira to the dollar, the black market rate was 190 naira but we have closed the differential to about 2 per cent for almost a year now. The stock market lost 70 per cent last year, but between January to June this year, the index is up almost 30 per cent. In almost all the indices, we have done well. So what is the problem?
Where We Are Going
Yesterday, we discussed with 300 companies to get 130 billion naira for manufacturers with 7 per cent fixed interest rate for about 10 year period first time in this country. We are saving jobs, creating output and setting the way for the market to go. I am convinced this economy is not going anywhere until we face the problems of manufacturing, agricultural productivity, power reforms, petroleum subsidy. We are not interfering in other people’s portfolio, but the fact remains that the future of banks is tied to the future of the economy. Banks cannot go back to speculating with depositors’ money on the stock market or interbank or commodities but into key economic sectors that are viable: manufacturing, agriculture, etc.
What we have done in the past was to preach to the banks. You just cannot preach. We have changed prudential guidelines. Any lending that goes bad in one year should be provided for. If the loan goes into Small and Medium Scale (SME) it would take 3 to 5 years to write it back and for power sector as well. We have made provisions for capital allocations that will grow the economy. The banks had been overloaded and no one has come to their aid in the past. Banks lend money to manufacturers to buy armoured vehicles, generators, etc. Those were depositors funds deployed to finance general inefficiency in the system. You should not be a power plant to set up an industry. Many of them today are Independent Power Projects (IPPs). How many SMEs can survive? So as we make progress in these areas, you will see credit growth. This government is working hard, we need to do more. Demand cycle will go up with production but if you fix only the supply side of banks we won’t grow.

Reality of statistics
Our statistics department takes rigorous steps on inflation and other Gross Domestic Products (GDP) data. People can believe in anything and they query the data. It’s not a religious matter. 42 per cent of the Gross Domestic Product comes from agriculture growth. But the question is not so much about agric but also telecoms. In the past few years, we have concentrated on increasing land under cultivation. So 42 per cent of the GDP is agriculture but bank lending was just 1 per cent to the farmers. You have to look at agriculture policy to see what can be done to make it commercially viable so that banks can lend to them: investment in capacity building for farmers, irrigation, insurance, high yield fertilizers for higher productivity and mechanized farming.
Lending
In the last six months, we have locked into power process and agriculture. I have got bankers to sit with the President to discuss on lending. We have met with the Agriculture Minister and the bankers say we want these policies and we shall continue to pursue it. If we don’t do it, banks won’t find any viable one, so they lend to stockbrokers or steal the money.
One of the pillars of the reforms was to build on the four pillars of banking reforms. That was to build on the growth of the general economy: tax incentives on bonds, working with PENCOM on guidelines on lending for infrastructure, power committee engagement, intervention done in manufacturing, etc. And that is the future of central banking in Nigeria. We will continue to have stable foreign exchange rates, interbank rates and more. I said to them at the Senate screening a year ago that my idea was not about GDP growth but for me, the issue is how many Nigerians are getting jobs, how many hungry people can find food, how many illiterates find education, medical treatment, etc. I went to public schools in Nigeria; we didn’t have any comfort even at the Kings College. My university was on scholarship. How many Nigerians can get credit to go to school and no jobs even there after? People must earn real wages and get out of poverty. So where are we going? This is a central bank focused on growing the real sector of the economy and making sure that the banks are really lending to the economy, not an incestuous relationship between bankers and other financial institutions within the sector.