Investors in the Nigerian capital market appear uncomfortable with the Central Bank of Nigeria’s sinking fund. UDEME EKWERE writes on its main areas of impact

Since the Central Bank of Nigeria’s audit of the banking sector in 2009, the nation’s capital market began a slow descent, which it has been unable to recover from, even at present.

The CBN, in June 2009, took a three-pronged approach in assessing 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 was conducted with the aim of highlighting the inadequacies in capital asset and liquidity ratio as well as weakness in corporate governance and risk management in nine banks.

The banks were found to be distressed 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.

The audit had revealed that poor risk management practices in the form of absence of necessary control measures were prevalent, as boards and managements of the banks had failed to observe established controls.

Although the remaining 14 banks at the time had holes in their books, they were found to be in a relatively sound financial condition and did not require any immediate intervention by the CBN.

It was in an attempt to guard against a recurrence of the failed bank syndrome, as witnessed after the assessment, that the CBN came up with the Banking Sector Resolution Cost Sinking Fund early last year, and signed a Memorandum of Understanding with the banks to fund distressed banks in the future.

While explaining the reason for setting up the fund, the CBN Deputy Governor, Financial Sector Surveillance, Mr. Kingsley Moghalu, noted that the fund was set up to ensure financial stability and soundness of the banking system.

According to him, the fund is to be jointly financed by the CBN and the banks over a period of 10 years. While the CBN is expected to contribute N50bn annually, each bank will contribute 30 basis points or 0.3 per cent of its asset base to the fund annually.

Moghalu had explained that the fund was to supplement the resources of the Asset Management Company of Nigeria, set up to purchase the bad debts of banks.

He said, “The CBN and the 24 Nigerian banks (Participating Banks) realised that funds from the management and realisation of the eligible bank assets to be acquired by the AMCON might turn out to be insufficient to meet the resolution cost of restoring financial stability. Therefore, they resolved, in national interest, to establish a Banking Sector Resolution Cost Fund to meet any shortfalls and to ensure financial stability and the soundness of the banking system.

“Of course, the establishment of AMCON was to assist in the resolution of the high level non-performing loans in the banking industry and help banks in cleaning up their balance sheets as part of the reform programmes initiated by the CBN.”

Some market experts had, at the time, lauded the initiative of the CBN and the banks, saying that it was a good step in the right direction.

The Managing Director, Sotice Investment Company Ltd., Mr. Adedayo Toluwase, said, “This is happening for the first time in Africa, the CBN and the banks deserve commendation. With this, the era of taxpayers bearing the cost of financial crisis should be over.”

In the same vein, the General Manager, Strands Alliance Financial Company Ltd., Mr. Joseph Adeshina, had said that the agreement was an important milestone in the history of banking in Nigeria.

“The banks should be commended for their corporation, especially the banks that passed the stress test. It’s going to complement the efforts of AMCON in bringing stability to the banks,” he said.

However, following the release of the full year results of most banks for the 2011 financial year, stakeholders and players in the Nigerian capital market appeared to be having a change of position on the fund. Some of the stakeholders have been kicking against the fund on the ground that the fund required as contribution by each bank into the sinking fund was on the high side, adding that it has been eating deep into the profits and dividends of the banks.

For instance, the President, Independent Shareholders Association of Nigeria, Mr. Sunny Nwosu, said that this remained one of the major reasons for the reduction in shareholders’ dividends by banks in the 2011 financial year.

He noted that the 0.3 per cent contribution, which banks were required to make, was high and a huge financial burden for the companies as they grappled with the challenges of making the banks as stable as possible.

He said, “Frankly, I do not know why the banks are made to contribute this money, because the reasons given by the CBN are actually absurd. The other time, they told us that our holdings in the three defunct banks, Bank PHB, Afribank and Spring Bank had been eroded. Now, they have come up with this idea again to take some of our money into the sinking fund.

“For me, I think the mandatory deposit is ridiculous because it ties down investors’ funds unnecessarily; the money is taken away forcefully without us getting any form of return from it. I think the whole thing is just unfair and our bank directors have to do something about it.”

Nwosu called on directors of banks to ensure that the issue was brought up and duly addressed during their meeting, as the situation was becoming unpalatable to shareholders.

Another shareholder, Mr. Nonah Awoh, said that the amount the banks were required to pay was too much, especially into a fund that might not be used in the forseeable future.

He said, “United Bank of Africa, for instance, had to pay N81m as mandatory interest to the CBN for the 2011 financial year alone. That amount is just too much. I do not understand while some of the policies are not brought out to the table of shareholders before decisions were taken.

“The worst part is that such funds are not garnering any form of interest for the company as well as the shareholders. This is not good enough. We hope that the relevant authorities would look into this issue critically.”

A board member with May&Baker Plc, Mr. Adebayo Adeleke, said that the N5.9bn, which First Bank of Nigeria Plc, for instance, was required to pay into the sinking fund was too high, and could have been converted into higher returns for shareholders.

Adeleke, who is also shareholder, said, “I think this is a policy that sounds punitive for shareholders to part with such an amount every year. The problem the banks encountered was even as a result of the fact that someone somewhere did not do his job properly, and now shareholders are being made to pay for such carelessness. It is not right.

“We know that the CBN cannot claim ignorance of being part of the people that caused the crises in the banking sector in the first place. And so, the funds that we are now contributing should have been used to produce more funds for investors, thus increasing our dividends. I think the issue should be looked into critically.”

Source: Punch