Nigerian Banking Crisis: From irrational market exuberance to regulatory exuberance

Since Friday August 14, the Nigerian banking system 
has not been the same. What started as a rumourThis may have taken a longer time but no doubt the
that some bank chiefs were about to be sackedprocess would have been more tidy and transparent.
became real. The CEOs of Intercontinental Bank,The haste with which CBN has sacked the MD’s
Oceanic Bank, Finbank, Union Bank and Afribank wenthas been overtly populist. Surprisingly, the CBN sacked
to the office as CEOs in the morning and returnedonly the MD’s leaving the board, whose
home early and jobless and with the real prospect thatresponsibility it is to ensure proper banking is enshrined
they were also on the verge of losing their stakes inin their institutions, intact. It is not clear why the CBN
the banks they have sat on as owner managers forsacked the MD’s and left the boards intact. If there
close to two decades.has been a failure in these institutions, it was a failure
 of the board rather than executive management.
The Central Bank of Nigeria (CBN), the apexLeaving the board intact is an endorsement of poor
regulatory organ for Nigerian banks had taken thecorporate governance and the continuation of board
decision to wield the biggest stick in the Nigeriannegligence and inactivity which has primarily been the
banking industry. Sacking five CEO’s, three ofcourse of recurrent bank failures. If the CBN really
whom before the sack, were considered among thewanted to change the way banking is done in the
top five banks in the country, have been described ascountry, sacking the board would have be the best
the Nigerian banking tsunami.action as it would sent the strongest signal that sitting
 on the board of a bank comes with its privileges but it
Justifying its action, the CBN facts are convincing. Thealso comes with huge responsibilities which must not
five banks according to CBN had given out loans ofbe taken for granted.
close to N2.8 trillion of which close to 50 percent were 
classified as none performing. The five banks, said theRegulatory exuberance is further displayed in the CBN
CBN, had become virtually illiquid accounting for 90action with its hasty publication of the list of bank
percent of inter bank borrowing over a seven monthdebtors without even allowing the new management it
period, first through the CBN expanded discounthad put in place in the banks it had taken over to settle
window and then when the window was closed andin. Basically, the CBN action has removed the greatest
the interbank market opened, they borrowed from thetool the new management has in collecting these loans,
interbank window to pay down their debts at thethat is the threat of “Name and Shame” the
EDW. This, no doubt was a clear sign that thesedebtors. Having lost this tool, they have now resorted
banks had run out of money to meet their day to dayto the lame tool of threat of arrest.
operations and will collapse like a pack of cards if they 
are not able to borrow short term funds from theThis is a lame threat considering that lending is not a
interbank market.crime neither is borrowing. Lending without collateral is
 an offence under BOFIA but there is no definition what
Besides, their desperation at the interbank market wascollateral is and besides no bank lends without a form
also distorting rates at that window where the CBNof collateral. And still in the spirit of regulatory
was doing all it can to reduce the lending rates. As longexuberance the EFCC goes ahead to ask debtors to
as these big banks engaged in desperate borrowingpay within seven days by issuing a draft in favour of
from this window, the CBN efforts to bring downthe Federal Government. The first question is, did the
interbank lending would be fruitless. It was obvious thatFederal government lend money to these so called
these banks could only survive their critical liquiditydebtors? So why should they pay money to the
challenges with a fresh injection of equity or debtFederal Government?
capital. 
But considering the state of both local and internationalThen where will the alleged N774 billion owed by the
capital markets, it was obvious that any attempt bydebtors come from? Is it from the supposedly healthy
these banks to raise fresh capital may be like a camelbanks in the system? How many of the supposedly
going through the eye of the needle.healthy banks survive the removal of N774 billion from
 their vaults in seven days? This order does not only
So the CBN was left with the option of injecting itssmack of regulatory exuberance but also strong
own capital, arranging a bail out of the banks like itignorance of how the financial system works. And the
happened in America. In its wisdom however, the CBNtruth is that if  the banking system had N774 billion
felt that, it would not pump in capital and allow thelying around in its vaults, there will not be liquidity crisis,
same managers, which by their action and inactionneither will interbank and lending rates be hitting new
allowed their banks to run into this state of illiquidity tohighs.
continue to sit at the top of management. Most 
importantly, it is obvious that the CBN felt that it wasThe most dangerous aspect of the current regulatory
time, that it sent a strong message out there that poorexuberance however is the current attempt to
banking practices in the industry will no longer becriminalize lending and borrowing. Since 2005, the
allowed.Nigerian economy has been able to sustain a growth
 rate of six percent and above and this period also
But in the process of sending out this message to themarked the unprecedented growth in bank lending to
industry has the CBN “over killed.” It is obviousthe private sector. The link between economic growth
that Sanusi Lamido Sanusi, riding on his strongand bank lending is not coincidental as many
reputation as a risk manager, may have undulyeconomists will tell you. This is where the danger lies in
focused on curtailing poor credit risk practices in thethe current CBN/EFCC joint efforts to criminalize the
industry without taking into consideration reputationalact of lending and borrowing.
risk. So in an attempt to pluck the loop holes created 
by poor credit risk practices, the Sanusi may have leftThere is a real possibility that this may result in a credit
the banks exposed to reputation risk damage that thefreeze to the economy. First banks may become
concerned banks may never recover from and theaverse to take the risk of lending to the vulnerable
banking industry at large may take a long time tosectors of the economy that usually have a higher risk
overcome.of default why entrepreneurs will also become averse
 to borrowing. If this happens, the impact will be
Was there a better way to effect the significantdisastrous to the economy. The already high
changes required in the practice of banking in Nigeriaunemployment rate will get worse and poverty will be
without creating all the drama that is currentlyintensified.
prevalent in the Nigerian banking industry? Many have 
argued that the CBN could have forced all the banksThere is no doubt that following years of carefree
to make the required provisions, declared their lossesgrowth; the banking industry needed an urgent dose of
and take the hit on their capital that would havesanity. But sadly, the way the CBN has gone about it
invariably resulted and demanded the recapitalizationwill harm the Nigerian economy in the long run. The
plans from the board of the banks. Where they wereCBN under Sanusi has effectively replaced irrational
not in a position to recapitalize, the CBN will move inmarket exuberance with its own regulatory
with its new capital and as the new majority owner,exuberance.
sack the board and effect the necessary changes.