The new head of Nigeria's Central Bank announced his presence by calling for a probe into the health of the country's banking system. An Economic and Financial Crimes Commission investigation initiated by the Central Bank governer, Lamido Sanusi, identified five banks with non-performing loans totalling N1.14trn ($7.4bn). A transparency push of this magnitude, unprecedented for Africa, is a sign that that the new governor takes banking reform seriously, and it could lead to comprehensive sector restructuring.
The Central Bank's audit of 10 banks returned with findings that Afribank, Finbank, Intercontinental Bank, Oceanic Bank and Union Bank were undercapitalised, posing a risk to Nigeria's banking system. On August 14, Sanusi announced that the banks would receive $2.5bn in bailout money and their senior management would be removed. At a press conference, he stated, "I am satisfied that these five institutions are in a grave situation and their management have acted in a manner detrimental to the interest of their depositors and creditors."
In the aftermath of the news, stock in the five banks fell sharply, leading the Central Bank to suspend trading of their shares. The Economic and Financial Crimes Commission (EFC) brought criminal charges related to the issuance of bad loans against chief executives from four of the banks on August 31.
After uncovering so many banks near insolvency in the first round of probes, Sanusi extended his investigation to include 11 more, which came up clean. "There are infractions here and there, but not on the magnitude that we saw at the five... there is nothing that will warrant similar action," an unidentified source told international press.
The new governor spoke in London on August 28, sending a strong message that Nigeria would protect depositors in the problem banks. "We will not allow any bank to fail," he vowed at meeting of financiers. "In the past, savers and creditors lost money while managers and debtors walked away. Now what we are saying is we will go after every single one of them." According to Matthew Pearson, an analyst at Russian investment bank Renaissance Capital, "The most salient point from today was that Sanusi gave confidence to the international community that Nigeria will guarantee the outstanding debts on the fallen five."
Market observers have reacted generally positively to the banking sector audit, viewing it as a big step in the right direction for Africa's second-largest economy and an example for the region. "Sanusi's actions are very credible and will go a long way to strengthen disclosure levels not only in Nigeria, but in Ghana and other sub-Saharan African countries as well," said Ghana-based Databank Research analyst Sampson Akligoh. In a post-bailout report, Fitch ratings agency hailed the "increased levels of transparency" in Nigeria, which would strengthen the country in the long run. Ranked 30 out of 48 African countries by "Rule of Law, Transparency and Corruption" on the Ibrahim Index of African Governance, Nigeria's challenge has been convincing the outside world of its commitment to reform. In this respect, Sanusi's bold moves will work to increase confidence in Nigerian banking.
In 2005, the Nigerian banking sector was overhauled by the Central Bank, which introduced a series of reforms, including encouraging the consolidation of banks and raising the minimum reserve requirements to N25bn ($162m). As a result, 89 banks were pared down to 24. Following further market-driven mergers & aquisitions, the number dropped to 23. However, rumours of corruption dogged Nigerian banking. In April 2008, a US court ruled that Nigeria's United Bank of Africa had to pay $15m for repeatedly violating anti-money laundering laws.
Appointed governor of the Central Bank on June 3, Sanusi immediately announced his intention to clamp down on the Nigerian banking sector. By publicly dragging out banks with toxic assets, he's clearly made good on his word. The new governor's clean-up effort should set a powerful example for other African countries to address systemic weaknesses in their financial systems.