More than two years after the Central Bank of Nigeria embarked on the banking sector reforms with a special audit that culminated in the sacking of eight bank chiefs, ADEMOLA ALAWIYE reflects on the advancement so far.

The reforms started when it became clear that poor corporate governance practices, overt and undue exposure to the capital market, oil and gas sector, poor risk management practices and inadequate disclosure and transparency about the banks’ financial position characterised the Nigerian banking sector.

The CBN, in June 2009, took a three-pronged approach to assess the financial condition of the 24 banks. One of the approaches was the special audit jointly carried out by the CBN and the Nigeria Deposit Insurance Corporation. The exercise highlighted inadequacies in capital asset and liquidity ratios as well as weaknesses in corporate governance and risk management in nine banks.

These banks were found to be in distress as they failed to meet the minimum 10 per cent capital adequacy and 25 per cent minimum liquidity ratios. Apart from accumulating high non-performing loans, the banks were seriously exposed to the oil and gas sector as well as the capital market. Poor risk management practices in the form of absence of necessary control measures were prevalent as the boards and managements of the banks had failed to observe established controls. Although the remaining 14 banks had holes in their books, they were found to be in a relatively sound financial condition and did not require immediate intervention by the CBN.

After two years, there have been divergent views on the reforms and the way the apex bank has, so far, handled them.

A foremost rating agency, Standard and Poor’s, in a report published on Wednesday, said after more than two years of reforms by the CBN, Nigerian banks were now fewer, larger and supporting the economy.

The rating firm said, “After more than two years of Central Bank support, Nigeria’s commercial banks are again engaging with the domestic economy. Nigeria now has fewer, but larger banks with better corporate governance and regulatory oversight.

The report, which examined the progress of the country’s overhaul of its banking system, however, said the sector needed a longer regulatory track record before it could stop considering corporate governance and regulatory oversight to be among its key risks.

S&P, which totally endorsed the banking reforms, noted that the industry and its regulation had improved significantly.

“In our view, long-term success for Nigerian banks will chiefly depend on them enhancing their risk management, improving their governance, diversifying their loan portfolios, and securing their funding profiles,” it said.

In the same vein, Renaissance Capital, an emerging markets investment bank, last week released a research report on Nigerian banks. It stated that some significant positives have emerged over the past few years, with stocks in the banking industry having significant upside potential.

But the report stated that loan growth numbers from some players had been gravely disappointing in light of management guidance. The investement bank added that the expected recovery in returns and profitability in 2011 was woefully unsatisfactory for many Nigerian banks.

Despite this, the report said that some significant positives had emerged over the past few years.

It said, “Firstly, Nigeria now has a stronger banking sector. Secondly, governance structures have been improved, and the new guidelines on the tenure of senior management, non-executive directors and auditors are a welcome change.”

 Other positives highlighted in the report are the CBN’s audit, the creation of Asset Management Corporation of Nigeria, which helped to contain the NPL contagion.

It noted that failed banks had been dealt with in a manner that had not threatened the viability of the entire sector, adding that reporting requirements had been improved, and provisioning policies tightened.

The report explained that though the industry had been through some challenging phases, it had in other ways registered significant improvement and laid out the necessary foundation for better times ahead.

The Head of Research, West Africa, Standard Chartered, Ms Razia Khan, said for the first time, depositors did not end up losing their money as a result of the crisis in the banking sector.

She added that it was deeply significant because of the trust it created in the banking sector, noting that, “had the outcome been different, it would have represented a significant setback to financial sector development in Nigeria.

Khan said the fiscal impact of the crisis was more or less contained, adding that, “Nigeria’s deficit today has more to do with profligate spending in response to an oil boom, than it does to the bailout of the banks.” There are no meaningful implications for the country’s debt metrics, given the way the resolution of the banking sector crisis was enacted through the AMCON.

She said, “The troubled banks have largely been dealt with, either nationalised, when no buyers could be found, or sold where buyers could be found. A line has been drawn under the crisis, and the sector is now poised for a return of profitability.”She, however, said that the ultimate test in the management of the crisis would be in terms of how much real sector lending could be restored, which was not a particularly strong characteristic of the banking sector before the crisis.

“Nonetheless, a lot of what needs to be fixed – the structural constraints in the economy that impede the viability of real sector companies – are beyond the capacity of the CBN alone to fix.”

Also, the Chief Research Analyst, Stakes Capital Limited, International Corporate Research, Mr. Sanyaolu Kehinde, said the industry was still very credit shy and not lending to economically progressive industries and ventures.

“Even lending to the rent based oil importing firms has suffered a setback due to the recent subsidy row, he added.

The Chief Executive Officer, Lambeth Trust and Investment Company Limited, Mr. David Adonri, said although shareholders lost heavily in the process of resolving the crisis, confidence in the banking sector had been restored because depositors were fully protected and no bank was allowed to fail.

 He also said, “To ensure that banks comply with the required standards of risk management and do not engage in reckless lending practices again, the regulatory authorities must intensify their surveillance. The corporate governance failure that crippled most of the banks must no longer be tolerated.”

Source: Punch