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Summary: The Nigerian banking sector was seriously undercapitalised and riven with corporate governance failures when the financial crisis hit. Through enhanced supervision and direct intervention, the Central Bank of Nigeria has turned around fragile institutions, strengthened their capital bases and restored confidence in the system.

Since the emergence in 2008 of huge systemic risks across the global financial system, the importance of strong, independent central banks has become ever more clear. Apex banks across the developed and developing economies have found themselves under greater public and political scrutiny than before.

In 2009 and throughout the financial crisis, the Central Bank of Nigeria has been characterised by its independence and its strong supervision of the banking sector, which have at times attracted criticism, but have reformed a financial industry whose reputation had foundered.

A well-developed financial system makes intermediation more efficient, which in turn improves a country's deposit base and promotes investment and business growth. A developed, effective banking industry allows for better risk management within an economy and promotes investment in technological and commercial innovations. Making the financial system work for the wider economy means a banking sector that is wellcapitalised and well-regulated. The negative consequences of weak regulation and inadequate capital provisions were seen worldwide, in developed and developing markets, in 2008 and 2009.

In 2004, the Nigerian banking industry was dangerously fragmented, with nearly 90 individual players, many of which had capital bases of less than $10m. Even the largest bank had a capital base of just $240m. This meant that the country's entire financial system was vulnerable to external shocks. The sector was characterised by an over-reliance on public sector deposits, poor corporate governance and corruption.

Many banks were uncompetitive and had little reach into the domestic market. Across the entire industry there were only around 3,300 branches; many banks had high costs, weak systems and were inefficient due to their small size. This in turn translated to high costs of intermediation, slowing the growth of credit to the real economy and stunting the growth of Nigerian corporates.

In July of that year, the CBN, under the previous governor Chukwuma Soludo, announced new capital requirements, driving a major consolidation in the sector. When the dust had settled at the end of 2005, there were 25 remaining institutions. In the most part, these companies were stronger and more competitive than their predecessors, better equipped to participate in a growing Nigerian and African economy. Nigerian institutions began to expand internationally and participate more actively in new sectors of the domestic economy.

This new confidence in the sector came against the backdrop of global economic growth and high commodity prices. African countries, particularly those with economies exposed to the energy boom, were thriving, while improvements in domestic political stability and macroeconomic management were driving a wider surge in confidence in the continent.

The Central Bank of Nigeria has been characterised by its independence and its strong supervision of the banking sector, which have at times attracted criticism, but have reformed a financial industry whose reputation had foundered

Nigeria's economy had been growing at more than 5% per year since 2000, and its continued expansion was driving more international interest in its emerging middle class and associated industries. Telecommunications, real estate and consumer goods all experienced major investments, and interest in the stock market and financial sector were strong.

Despite the apparent successes of the economy, however, there remained serious concerns within the banking industry. The CBN had implemented a new corporate governance code of conduct, and there had been some improvements in how the banks were run, but transparency was still poor and vested interests in politics and business maintained what many saw as undue levels of influence within the system.

While the global economy continued to grow, the persistent flaws in the financial sector were less obvious. When, in 2008 and 2009, the global financial system convulsed from the fallout of the US sub-prime mortgage crisis, the effects were keenly felt in Nigeria. The stock market collapsed 70% under pressure from huge capital outflows. International investors repatriated their money to cover positions in Europe and North America.

The Nigerian banking industry was once again in crisis; crippled by $4.4bn worth of non-performing loans that it had amassed by lending to stock market speculators. Several institutions were on the verge of complete collapse. The CBN, now under its new governor, Sanusi Lamido Sanusi, stepped in. The central bank injected $3.9bn to recapitalise the troubled institutions and removed the chief executives of eight banks.

Non-performing loans were taken off the balance sheets of banks by the creation of an asset management company, "Amcon", which finally began operation in July 2010.

As the reforms continued, the picture that emerged from within the banks was one of startling corporate governance and ethics failings, which had been masked by the widespread availability of capital. The institutions had grown in size and complexity after consolidation, but their accounting, auditing and other management functions were insufficient. Bank directors and executives had themselves been taking unsecured loans at the expense of depositors. Some had created special purpose vehicles for this exact purpose. In one bank, 100 fake companies were established solely to siphon off money. In another, a private jet was bought with depositors' money and registered to the CEO's son. Several companies used depositors' money to fund share purchases, recapitalising the banks with their own deposits. The recapitalisations of the pre-crash consolidation, it transpired, were not all what they seemed.

So began a concerted campaign to not only reform the character of the entire banking sector, but to actively target and pursue the individuals who had unscrupulously profited from dishonest practices within the banks. An expert in risk management, Sanusi became the figurehead of a campaign to dislodge the vested interests that had prevented true reform at the banks. It was not enough, he explained in a February 2010 speech in Kano, to simply say that the banks had failed and fix them with recapitalisation and new rules.

"The owners and managers of banks, the rich borrowers and their clients in the political establishment are one and the same class of people protecting their interest, and trampling underneath their feet the interest of the poor with impunity," he said. "So this time we turned the tables and said 'enough is enough'. The banks did not fail. They were destroyed and brought to their knees by acts committed by identifiable people."

Working with the Economic and Financial Crimes Commission, the CBN went after the worst offenders through the judicial process. This meant taking on a cabal of politically-connected individuals.

"They've got allies in politics. They've got allies in bureaucracy, and their allies work with them and they stick together," Sanusi told the Financial Times in 2009, admitting then that the government had increased his security detail.

The successful prosecution of bank executives and their families emboldened a number of anti-corruption campaigners, and went some way to rebuilding trust in a financial system that had routinely failed the consumer.

At the same time, Sanusi identified institutional and corporate governance failings at the CBN. Systemic risks were not discussed frequently or in depth at the institution's board meetings, infractions by banks were not punished and there was a mistaken belief that, post-consolidation, the sector was sound.

"It was almost as if, having made 'consolidation' the hallmark of success, there was a desperate need to remain in a state of denial rather than recognise that mistakes had been made and take corrective action," Sanusi said in 2010.

The change in culture at the CBN has been marked, analysts and market participants say. The professionalisation of the institution has improved confidence among the international investment community, not just in the banking sector, but in the economy as a whole.

According to George Bodo, the head of financials at Ecobank, the improvement in the industry is marked. While there remain concerns over the industry's ability to support the real economy, and to expand financial inclusion, there are major causes for confidence.

"In 2012, 2013, [banks] were back in profitability," he says. "They have cleaned up their books. The banking sector is on a strong path. You have 17 strong banks that can take on big transactions, which is a net result of the turnaround that has happened in the last four years."


Signed into law in July 2010 after a difficult passage through parliament, the Asset Management Company of Nigeria was created to manage the fallout from the financial crisis and near-collapse of several Nigerian banks. The institution, headed by Mustafa Chike-Obi, raised capital by issuing bonds and injected it into banks that were struggling under the burden of bad debts.

The institution acquired the non-performing loans (NPLs) of several banks that were bailed out by the Central Bank of Nigeria in 2009. The huge burden of NPLs at the banks was seriously limiting their ability to lend to the economy. By taking the loans from their balance sheets, Amcon was designed to free up capital to support the growth of business lending.

At its peak, Amcon had $6bn in assets and was working to restructure a total of 10,000 bad loans.

The company has played a major role in rebuilding the capital base of the banking sector, improving the quality of banks and packaging them for sale.

In January 2011, Amcon injected nearly $1bn into Intercontinental Bank and took bad debts from the company's balance sheet. Intercontinental had been one of the worst hit of the country's financial institutions, and later investigations revealed that the company had used large amounts of its capital to buy its own shares, while management had been siphoning off money and using it to acquire property abroad. The cleaned-up bank was able to agree a merger with Access Bank in 2011. The deal was completed in 2012.

Amcon also injected capital into Oceanic Bank, an institution that had also suffered from poor management and fraud. Its former CEO, Cecilia Ibru, was jailed for fraud in 2010, and ordered to give back $1.2bn in cash and assets acquired during her tenure. The bank was also saddled with non-performing loans which made it far less attractive to potential suitors. With a more stream- lined balance sheet, Oceanic Bank was 100% acquired by Ecobank in 2011.

When the Central Bank of Nigeria pumped $4bn into nine struggling lenders in 2009, it set them a deadline to find new investors to raise their capital level. Those that failed to do so: Afribank, Spring Bank and Bank PHB, were nationalised in 2011. They were recapitalised by Amcon, which changed their names to Mainstreet Bank, Enterprise Bank and Keystone Bank. Enterprise Bank, formerly Spring Bank, was put up for sale in September 2013.

Amcon has since bailed out struggling companies in other industries, including the aviation sector, in which several companies were on the verge of complete collapse, and the oil and gas sector.

The banking industry ratio of non-performing loans to total credit reduced considerably over the first year of Amcon's existence, from 34.4% in November 2010 to 4.95% in December 2011.

Key Achievements

* Recapitalised the banking sector, nationalising underperforming banks and preparing them for sale;

* Created the Asset Management Company of Nigeria (AMCON) to clean up the balance sheets of banks, by acquiring nonperforming loans;

* Promoted a new risk- focused, rule-based regulatory framework, with clearer penalties for infractions and a strict enforcement of corporate governance principles; and

* Instilled a new culture of corporate governance, transparency and social responsibility in the banking sector.

The Numbers

$3.9bnTheamounttheCentral Bank injected to recapitalise troubled institutions

The banking industry ratio of nonperforming loans to total credit reduced considerably over the first year of Amcon's existence, from 34.4% in November 2010 to 4.95% in December 2011

The Numbers

$6bn The total assets managed by Amcon at its peak; a total of 10,000 non-performing loans

Amcon has played a major role in rebuilding the capital base of the banking sector, improving the quality of banks and packaging them for sale

Non-Performing loans acquired by AMCON

Financial Institution Number of Loans Percentage of Amcon Portfolio

Intercontinental Bank 1735 14.62%

Oceanic Bank 783 11.58%

Union Bank 393 11.43%

Main Street Bank 503 11.40%

Keystone Bank 740 9.15%

UBA 3326 5.80%

First Bank 289 5.21%

Finbank 782 4.04%

Enterprise Bank 1062 3.59%

FCMB 575 2.94%

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Publication:African Banker
Geographic Code:6NIGR
Date:Feb 17, 2014

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