Ensuring credibility and corporate governance in the banking industry

While revelations on the rot that crept into the banking industry continue to unfold, depositors point the way forward and advocate good corporate governance as a means of correcting the anomalies in the sector, writes ALEXANDER CHIEJINA

Nigerians were bewildered with the sudden sack of the Chief Executive Officers of five banks in the country last Friday. This came as a surprise to a lot of Nigerians within and outside the country. However, the shake up in the banking sector was not expected so soon bearing in mind the recent consolidation that was said to have strengthened the banks. Far reaching as it was, analysts believe that the move by the Central Bank of Nigeria to painstakingly sanitize the sector however shouldn't be the last if Nigeria is on the brink for transformative economic and political advancement.

It could be recalled five years ago in June 2004, when Charles Chukwuma Soludo upon assuming office as the Central Bank of Nigeria (CBN) Governor, summoned bank chiefs and broke the news of an impending restructuring in banking business. During the meeting, Soludo warned that by the time his restructuring was over, the confidence in the banking sector would have be restored.
In the face of disbelief and feeling in some quarters that such ambitious consolidation programme was far-fetched, Soludo was able to deliver on his promise. Encomiums were heaped on him for achieving the feat in the industry. Few years later, his effort that was applauded by all Nigerians has now left some unanswered questions in the lips of Nigerians.

The move by the past CBN Governor to consolidate the minimum capital base of the banks to twenty five billion naira, saw the trimming of the number of banks from 89 to 25 by the middle of 2006. This move was carried out to strengthen the financial base of respective institutions. There is no doubt that the banks that survived the consolidation exercise gained immense integrity and global recognition. This saw a tremendous improvement in the economy of the country as there were new investments into banks and increased funding from abroad

The reason, according to Soludo was that the banks needed huge capital base to effectively provide support for the economy. This view generated intense discussion among economic and financial experts in the country.But like some analysts will agree especially going by the cause of the global financial crisis, higher capital base doesn't essentially shield the financial institutions from cyclical correction such as improved risk management or better corporate governance.

The recent global financial meltdown already thinning out in Europe, the United States of America and other industrial nations of the world penetrated into the country more than most people expected. Enormous crisis resounded in the famous Wall Street, and the consequent effect on renowned US banks: Lehman Brothers, Citibank and Merrill Lynch including America largest Insurance Company, AIG, leaving many people in dire situations.

Driving this point home, palpable panic in the banking industry began to manifest when Africa Report in one of its findings indicated that Nigerian banking sector was under pressure. The report of June-July 2009 termed
"Nigerian Banks signs of life" read thus: "Most of the Banks have over-leveraged their balance sheets during the boom cycle and are stuck with trillions of Naira worth of bad debts with out disclosing it to investors. Nigeria's minimum reporting standards only demand the quarterly publication of gross earnings, pre-tax profit and net profit, making it difficult for investors to estimate future trends."

This feeling of anxiety in the industry prompted President Umaru Yar'Adua to call the erstwhile CBN governor, Chukuwma Soludo to a meeting. This was coming at the end of the tenure of Chukwuma Soludo as the CBN Governor. Thus, in a move that took some Nigerians by surprise, Umaru Yar'Adua appointed Sanusi Lamido Sanusi, a risk management expert and Group Managing Director, GMD of First Bank Nigeria as the new CBN Governor with a mandate to go and clean up the banking industry.

However, on resumption of duty, Sanusi who was already conversant with the pitfalls in the sent examiners to the banks to ascertain their true state of health.  During the examination, it was discovered that over four banks were sustained by the Expanded Discount Window (EDW) introduced last year September by Chukuwma Soludo. EDW for banks was meant to address their liquidity problems.

The current CBN Governor decided to shut the EDW and leave the guaranteed interbank market open as an elixir for the banks. Seeing that some banks needed further assistance, he decided to admit interbank lending. With the interbank lending, depository institutions could buy or sell funds so as to meet reserve requirements. It was this facility that further exposed troubled banks.

Further revelations showed that "the total loan portfolio of the five affected banks amounted to N2, 801.92 trillion; margin loans was N456.2billions; and exposure to oil and gas, N487.02 billion. Aggregate and non-performing loans, he said stood at N1, 43 billion representing 40.81 percent. According to Sanusi, a capital injection of at least N204.94 billion will be required in the five banks to meet the minimum adequacy ratio of 10 percent."

At the end of the day, the bank chiefs as well as the executive directors of the indicted banks were given the matching orders. The affected banks are Oceanic Bank, Union Bank, Intercontinental Bank Plc, Fin Bank and Afribank Plc.

The development has so far attracted mixed reactions, especially in the camp of depositors.
Kehinde Ololade, a radiotherapist with Lagos State University Teaching Hospital (LUTH) described it as shocking but welcome development.

"The shares at the stock exchange have already been technically suspended which means that if I have shares, I cannot do any transactions on it. However, don't forget that no one would want to buy the shares of the affected banks at the moment. What I can do is to follow the trend of development as it unfolds. The Central Bank has already assured depositors of the safety of their monies so; there's is no need to panic."

Kunle Olagoruwa, managing director, Asset Base Capitals who believed that "the bank crisis happened as a result of the lack of thoroughness in the legal framework of the bank recapitalization exercise in 2006" warned that it was of foremost importance " protect depositors and shareholders investment in the affected banks.
" The Central Bank and the new management in place in the affected banks should do everything possible to assure depositors confidence of their investment. I still believe more banks are victims but have not yet been caught," Olagoruwa concluded.

Meanwhile, Jude Ozokwor, Product Line Manager, Sterling Chemicals and allied products, noted "I represented some shareholders in one of the banks currently under the Central banks heavy hammer. The point is that the bank management betrayed the trust and confidence we reposed in them by trading with our money unprofitably and carelessly. There is no reason for such mistakes. Besides, many who lost money in the failed bank crises sometime ago are yet to recover from the shock," Ozokwor maintained.

Though, none of the sacked bank chiefs and their directors may have been charged with any criminal wrong doing, the ability to effectively complete this task of prosecuting the individuals remains an enormous task before the Economic and Financial Crime Commission (EFCC)

Although Joseph Adefulalo, Chairman, Senior Staff Association of Nigerians Universities (SSANU), UNILAG chapter wants depositors to be rest assured that their money is be safe in these five banks, as promised by the central bank, he is however surprised that such things were happening behind the backs of the customers. He however wants credible Nigerians to be put in a position of authority "because it beats my imagination how monies of Nigerians will be placed in the hands of a few Nigerians."

Meanwhile, many Nigerians are concerned that corporate governance has continued to be an issue in the industry. They want the key elements of good corporate governance principles which includes honesty, trust and integrity, openness, performance orientation, responsibility and accountability, mutual respect, and commitment to the organization to rule the hearts of those leading the financial institutions.

Ethical and responsible decision making is not only important for public relations, but it is also a necessary element in risk management and avoiding lawsuits, says Joshua Ojo, a Lagos based financial expert. "Banks should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. It is important to understand, though, that reliance by a company on the integrity and ethics of individuals is bound to eventual failure."

In addition, banks should ensure shareholder and depositor funds are no longer exposed to unrealistic risks. Arguments that banking may be a fast changing business and board of directors are made to relinquish their oversight roles or simply incapable of performing the roles should no longer tenable.

Many also feel that the audit committees of affected banks should also be investigated for their roles in the near collapse of affected banks. "More importantly, the roles that regulatory agencies, particularly the CBN played should be investigated and erring personalities should be exposed. The CBN must critically examine why these allegations are now coming out when it appeared they existed more than few months ago", he also said.