By Ijeoma Nwogwugwu; firstname.lastname@example.org
To satisfy my curiosity, I spent some hours last week watching the first round of presentations at the reconstituted probe of the equities market in the House of Representatives. Refreshingly, the Hon. Ibrahim Tukur El-Sudi-led committee comported themselves with unusual decorum. The chairman, in particular, using his legal dexterity, deftly kept the presenters in check and within the confines of the brief before the probe committee.
But what I found bothersome was a misrepresentation of the facts and circumstances that led to the near crash of the equities market, especially the role of the banking system with regard to the performance of the market, and a clear misunderstanding of the roles of the Central Bank of Nigeria, Nigeria Deposit Insurance Corporation and the Asset Management Company of Nigerian in salvaging the Nigerian financial system between 2009 and 2011.
I noted with interest the presentations made by some of the principal stakeholders who were invited to make presentations at the equities market probe. The first to hold my attention was that made by a Mr. Godwin Owoh, an executive director with the Society for Analytics Economics. The second was the one made by Mr. Mike Itegbojeh, who is president of the Chartered Institute of Stock Brokers, and the third was from Mr. Boniface Okezie, one of the leaders of the numerous shareholders’ associations in the country, which claim to champion the interest of shareholders in the market.
What came off from the presentations by some of these experts called by the House committee to explain the market’s downward spiral, was a collective refusal to acknowledge the truth that had the CBN, NDIC and AMCON not intervened in the banking system in the manner that they did, the equities market, for all intent and purpose, would be worse off than it is today.
Starting with the comments made by Mr. Owoh, he informed the House panel that the CBN owns AMCON, and since the CBN Act bars it from owning shares in banks, its subsidiary cannot do likewise. Owoh went on to pontificate that the troubled three banks which failed to meet the September 30, 2011 deadline for recpitalisation were “liquidated”, not nationalised. He added that the process that took place was merely a change of name of the affected institutions, and that a valuation should be undertaken of the three banks to establish the interest of Nigerian shareholders who had lost their shares in the banks.
Itegbojeh, on the other hand, could not decide on if the three banks were liquidated or nationalised, and kept using both words interchangeably. He then tried to make a weak case for the restructuring of their share capital so that shareholders who had lost their investment would still hold some marginal interest in the banks. While Mr. Okezie engaged in a blame game, accusing the CBN, NDIC, AMCON and the Securities and Exchange Commission of breaching the law and wiping out shareholders’ interests in the three banks. The objective, mind you, of most of these presentations to the committee was aimed at determining how investor confidence can be restored in the equities market.
Sadly, the presentations were distorted either for lack of knowledge or the sheer desire to adulterate the facts. For one, AMCON is not owned by the CBN. It is wholly owned by the Federal Government of Nigeria whose shares are held in trust by the Central Bank and Ministry of Finance Incorporated in equal proportion of 50 per cent each. Second, the three banks – Afribank, Bank PHB and Spring Bank - which failed to recapitalise last year were at no point in time liquidated. Had they been liquidated, they would have been taken over by the NDIC, which would have commenced the process of winding them up to pay off their depositors and creditors. But that was not the case.
Instead, what transpired was the NDIC, in August last year, having established that the three banks were not going to meet the recapitalisation deadline, moved in to protect the depositors of the banks. Knowing fully well that had it waited a few more weeks till September 30, there would have been a run on the three banks, which could have snowballed into a systemic crisis, it moved promptly to take over the assets and liabilities of the three banks and transferred them to new institutions called bridge banks. The NDIC, having taken this action, left the CBN with no option than to withdraw the banking licences of Afribank, Spring Bank and Bank PHB because they were no longer money deposit banks.
It was only after both steps had been taken that AMCON came in to buy the bridged banks on behalf of the federal government and not the CBN. It must be noted, however, that AMCON’s objective was two-fold: the first was to bring the negative asset value (negative capital) of the banks back to zero; the second was to inject additional capital to meet the capital adequacy requirement of N25 billion each as stipulated by the CBN to operate as banks in the country. It was for this reason that a total of N678 billion was injected into Enterprise, Mainstreet and Keystone Banks.
But before getting to this point it will be necessary to summarise some of the factors that led to the capital market’s downfall, the nationalisation of the three banks and their subsequent delisting from the Nigerian Stock Exchange. The banking consolidation programme of 2005-6 led to a series of mergers and acquisitions in the banking sector and repeated forays into the capital market to raise funds by the banks which had been scaled down from 89 to 24.
The growth in the banks’ balance sheet between 2006 and 2008, introduction of margin lending and aggressive marketing strategy deployed by the banks to get investors to buy their shares also led to an exponential growth in the number of retail investors in the equities market and, of course, market capitalisation.
A bigger concern was that the banks became greedy, reckless and engaged in insider trader to manipulate their stock prices (a few other companies did likewise in other sub-sectors, but most were mostly sanctioned and de-listed by the relevant agencies). The banks achieved this by lending depositors’ funds to their stock broking subsidiaries and all sorts of associate companies to buy up their stocks and in the process pushed up their prices. Seeing that a stock market bubble had been created and that the banks were exposed to the inherent market risks, the Central Bank in 2008 took a dim view on margin loans and instructed banks to stop lending through stock brokers. It also instructed banks to harmonise their financial year ending by December 2008. With the benefit of hindsight, the CBN may have been well intentioned when it raised concerns over the magnitude of margin trading.
However, what it did not anticipate was the margin calls that would be made by stock brokers who subsequently started acting on the instruction of banks to limit their (banks) exposure.
In other words, there was a massive sell-off of shares, thus depressing assets prices in the equities market. Although the crisis of confidence instilled by the directive on margin lending later forced the CBN to deny it had discouraged banks from extending facilities to investors, considerable damage had already been done to the market psyche. Also, in a bid to restore some measure of confidence and limit the damage it had inflicted on the market, the CBN director of Banking Supervision at the time, Mr. Ignatius Imala, instructed banks to restructure their margin loan portfolios and were given till December 2009 to start making provisions for bad and doubtful debts as required under the prudential guidelines for non-performing assets. The problem with this directive was that banks with considerable exposure to equities trading simply continued to recognise (or accrue) the interest income on non-performing loans which amounted to an accumulation of paper profits.
By 2009, it was obvious that the Nigerian financial system was in crisis mode and was on the brink of collapse. Banks, in particular, devised panic tactics and started to de-market themselves in a bid to survive and convince depositors and the public that all was well with them. Investors and depositors, on the other hand, had started to fret over their investments and savings in the banks.
Knowing that he could no longer remain in denial over the systemic rot, the CBN governor at the time, Professor Chukwuma Soludo, instituted a number of measures to give the banks a lifeline, chief of which was the expansion of the discount window from which banks could borrow to meet their obligations. Another was to provide interbank guarantees to restore confidence in the banking system. But this was too little, too late to save the financial system and amounted to a postponement of the evil day.
Taking over from Soludo, Mr. Sanusi Lamido Sanusi, being a banker and an economist, knew that a number of painful, but corrective steps had to be taken to reverse the rot.
He undertook a joint forensic audit with the NDIC in tow, and established that ten out of the 24 banks were illiquid and their capital had been eroded well below the capital adequacy requirement stipulated for banks. He promptly took over eight of the institutions by sacking their executives, who were to blame for running the banks aground, and injected Tier II capital into them.
Through the audit, the CBN was able to deduce that eight of these banks that had been badly exposed to margin lending and facilities to the oil and gas sector, were permanently stuck in the expanded discount window, which was a sure sign that they were in grave danger. Rather than opting for liquidation through NDIC, CBN chose the more difficult option of giving the banks a lifeline by instructing the troubled and so-called healthy banks to write down all their non-performing loans, sell same to AMCON, and gave the troubled banks a timeframe within which they were expected to be recapitalised. Repeatedly, the recapitalisation deadline was moved by CBN but three out of the eight banks, including their shareholders who opted for the courts, failed to meet it.
It is instructive that the shareholders’ associations, stock brokers and market experts, who have drawn flak with the Sanusi-led CBN to clean up the financial system, have failed to acknowledge a number of issues. One of these is that the shareholders of the banks had a fiduciary responsibility to ensure that the banks they owned were properly managed. However, owing to the incestuous relationship that exists between the shareholders’ associations and stock brokers, on the one hand, and quoted companies, on the other, they failed in that responsibility and turned a blind eye to the irresponsible management teams that were running the banks.
Having failed to exercise due care in the management of their banks, the minute it was established that the capital of the banks had been eroded, the shareholders should have realised that their investments had been wiped out. It was not the CBN or AMCON that wiped out their investment; rather, it was the management teams they had left in place in the banks that mismanaged and frittered away their investments.
Second, contrary to the erroneous impression that a central bank is in the main business of protecting the shareholders of banks, it is not. Its primary responsibility is to protect depositors who have entrusted their money and savings to the banks. At the slightest sign of trouble, a central bank’s first concern is to save depositors’ funds and prevent a run on the bank. Shareholders of banks are always secondary in the scheme of things.
So rather than blame CBN, NDIC and AMCON for the misfortunes of the equities market, these so-called experts should accept their negligence and complicity for not ensuring that the quoted companies on the stock exchange were properly run. It is only when they begin to tell themselves the truth that investors will begin to regain confidence in the market. As it stands, there is little evidence that much has changed between 2008 and 2012.