The banking consolidation fiasco

WHILE I was battling to reposition Liberty Bank Plc as its Managing Director, the tenure of Chief Joseph Sanusi as the governor of CBN since June 1999 quietly came to an end on May 31, 2004. Thereafter, Prof. Charles Chukwuma Soludo was appointed the new CBN governor on June 3, 2004. Unlike Chief Sanusi, who had held the position of deputy governor of CBN and Managing Director of First Bank Plc before becoming the governor of CBN, Prof. Soludo was an academic, a professor of Economics at the University of Nigeria, Nsukka and later chief economic adviser to President Obasanjo. Soludo had also done extensive economic consultancy engagements with several multilateral agencies. Precisely on July 6, 2004, Prof. Soludo summoned the 89 chairmen of boards of directors of banks, and their Managing Directors, to the CBN Head Office in Abuja. He stunned his audience with the presentation of a proposal titled, ‘‘Consolidating the Nigerian Banking Industry to Meet the Development Challenges of the 21st Century.”25 Prof. Soludo told the meeting that he wanted to share his preliminary thoughts on major elements of the reforms by the CBN as part of the first phase of the reforms in the banking sector. He said he was seeking comments and suggestions from the banking community before he would finalise them. He outlined the key elements of the reforms as follows:

(i) That the minimum capitalisation for banks should be N25 billion with full compliance before enddecember 2005, effectively giving the banks a grace period of 18 months to comply with the directive. Only the banks that met the requirement could hold public sector deposits and participate in the foreign exchange Dutch Auction System (DAS) by end 2005. Names of qualifying banks would be published by December 31, 2005.

(ii) Phased withdrawal of public sector funds from banks, starting from July 2004.

(iii) Consolidation of banking institutions through mergers and acquisitions.

(iv) Adoption of a riskfocused and rule-based regulatory framework.

(v) Adoption of zero tolerance in the regulatory framework; especially in the area of data/information rendition/reporting. All returns by banks were to be signed by the Managing Directors of banks. The so-called‘re-engineering’ or manipulation of accounts, especially in hiding information under ‘other assets/other liabilities and off-balance sheets, to henceforth attract serious sanctions.

(vi) The automation process for rendition of returns by banks and other financial institutions through the electronic financial analysis and surveillance system (E-FASS) will be completed expeditiously.

(vii) Establishment of a hotline, confidential internet address (governor@cenbank. org) for all Nigerians wishing to share any confidential information with the CBN governor on the operations of any bank or financial system.

(viii)strict enforcement of the contingency planning framework for systemic banking distress.

(ix) Work towards the establishment of an Assets Management Company as an important element of distress resolution.

(x) Promotion of the enforcement of dormant laws, especially those relating to the issuance of dud cheques and the law relating to the vicarious liabilities of Board members of banks in cases of failings by the bank.

(xi) Revision and updating of relevant laws, and drafting of new ones relating to the effective operations of the banking system.

(xii) Closer collaboration with the Economic and Financial Crimes Commission (EFCC) in the establishment of the Financial Intelligence Unit (FIU) and the enforcement of the anti-money laundering and other economic crime measures.

(xiii)rehabilitation and effective management of the Mint to meet the security printing needs of Nigeria, including the banking system which constitutes over 90 percent of Mint’s business. CBN hoped that in due course banks would not need to print their cheques abroad. He promised to unveil other reform measures in the months to come.

To sweeten the deal, Prof. Soludo added that a technical committee, including national and international consultants to provide consultancy services to banks intending to merge or were involved in mergers and acquisitions, would be invited to help the process. He concluded that a gamut of incentives and guidelines would be unveiled within one month to guide the process and banks that merge to meet the minimum capital base by March 2005 would be rewarded.

As at the year 2020, these incentives and rewards were still being awaited. Prof. Soludo then hoped that “in a few years’ time we will realise that the Nigerian economy and bank shareholders are better for it.” At the end of this address, the bankers and their chairmen left, mostly confused, disoriented, and anxious about a very tough period of hard work and uncertainties that was ahead of them. A flurry of activities followed as banks began the search for options to meet the consolidation mandate of N25 billion capitalisation.

A good look at the announced reform measures revealed that, apart from three new initiatives in (i), (ii) and (iii), other parts of the speech were simply a rehash of existing policy guidelines. As at the date of the address, the capital requirement of existing banks was N1 billion while that of new banks was N2 billion. Similarly, at the time of the address, the CBN and the Nigeria Deposit Insurance Corporation (NDIC) had just concluded a joint inspection of the 89 Nigerian banks. They returned the verdict that 62 of the banks were sound and operationally satisfactory while 14 were marginal and 11 were unsound. In summary, the CBN-NDIC report indicated that 70% of the 89 banks were operating according to the rules established by the monetary authorities and only 27 of them needed special attention. Among the 27 banks were two banks, namely, Societe General Bank and African International Bank (AIB) which were already too sick to be covered under the NDIC banking industry review.

Banking colleagues wondered about the need for this wholesale disruption of a system that needed encouraging and strengthening. Furthermore, the 25 marginal and unsound banks accounted for 19.2% of the total banking assets, 17.2% of total liabilities and 19.5% of the industry’s non-performing loans. In truth, the banking industry was doing quite well.

To understand the disruption that Prof. Soludo introduced into the Nigerian banking industry, it is necessary to recall certain existing stabilising developments that helped the growth of the industry. The banking sector on the eve of the consolidation exercise largely reflected the stage of the nation’s economic development. It should be noted that in 2004 the capital sum required to set up a bank in the United Kingdom was six million pounds Sterling (which was the equivalent of N1.5 billion in 2004). Nigerian banks were just at par with that. Four banks were already very big in the country, namely, First Bank, UBA, Union Bank, and Afribank. Another ten banks were ready to achieve more greatness under the proper incentive system without disrupting the sector as it was. These banks at the ready were Allstates Trust Bank, Zenith Bank, Guaranty Trust bank, Intercontinental Bank, Citibank, Fidelity bank, Ecobank, Access Bank, Stanbic Bank and WEMA

Bank. The industry guaranteed stable employment. Even though salaries were not too generous, they were enough to assure a good standard of living. Many trained hands were in the industry and were particularly skilled because they all generally moved from the manual banking era to computer-based banking. They knew the genesis of banking transactions from the roots. These staff had spent several years in training schools, worked steadily and consistently and became remarkably experienced. The system appreciated them. Many of these staff considered their employment problems solved and focused on providing for their nuclear and extended families in a society that is known to be poor. They paid their rent and kept landlords happy. Service providers like lawyers, medical doctors, real estate agents and suppliers were happy to do business with different banks. If the big ones did not listen to them, the smaller ones accepted their proposals. The staff constituted the core of the middle class and the much lower cadre like security staff, messengers, cash counters, clerks, drivers, despatch staff and cleaners were useful to themselves and their families as staff in the banking industry.

The industry was moving on and, as more branches were established by the banks, more staff were being employed and prosperity extended to others. With queues disappearing from banks, quick, easy, and efficient services became the hallmark of Nigerian banks. The CBN rural banking scheme had ensured that bank branches were readily sited in the rural areas to ensure financial inclusion. No bank was permitted to close any rural branch without CBN approval and for good reasons. It is an accepted fact that developing economies do not grow based on profit maximisation motives without a measure of government intervention. Sectoral allocation of credit remained on the books, though not fully enforced, and no bank could shut out the small and medium-sized industries by denying them financing, on account of size. The push into agricultural lending was taking roots and application of the small and medium industries equity investment scheme (SMIEIS) in the development of the smallscale industries’ sub-sector had begun in earnest.

SMIEIS was the compulsory accumulation of a percentage of bank’s earnings

set aside for equity investment in small and mediumsized industries. Many firms were already being set up under the scheme and exit strategies were in place for such investments. Banks cooperated between themselves not only in interbank money market activities but in loan syndication. Several banks often came together to fund big sized projects and safely shared the risk. Recklessness in lending was controlled and low non-performing loans in the industry was an indication of the caution applied under strict CBN controls. New products were developed by different banks to acquire one competitive edge or the other and it made for a healthy industry. The cheque clearing system had just been revamped such that only banks with investment in Treasury bills of over one billion Naira could be in the clearing house. All other banks had their cheques and drafts cleared through these high street banks. Investors and managers of community banks were perfecting their operations. When the CBN asked that the community banks be converted to micro-finance banks, more disruptions followed. But the Ngerian business environment was big enough for both community banks and microfinance banks to exist side by side for greater prosperity. The biggest question was whether all banks should have the same capital base and why it should be N25 billion in an economy where people lived from hand to mouth.

The consolidation exercise was set to disrupt these building blocks of development. And it did. For us at Liberty Bank Plc, the end of the road had come. There was no way on earth that we could come up with N25 billion, particularly as the bank had negative capital as at the date of the CBN governor’s address. Though Liberty Bank was one of the marginal banks, a strategic restructuring programme to bring it back to vitality had been developed and approved by the CBN. We had full confidence that Liberty Bank would be back and sailing within one year. But this was no longer tenable. Banks began the search for consolidation partners and bankers continued to keep an eye on viable banking operations to avoid bigger operational problems and a run on them. Several banking groups emerged for exploratory discussions. Three objectives guided most of the banking groups. The first was to maintain the shareholder value in their banks at the end of the consolidation exercise; the second was to keep as many of their staff in gainful employment at the end of the exercise; and the third was that depositors’ funds were not jeopardised if the bank’s consolidation agenda ended in a chaotic manner. Many bankers joined groups where their friends and associates congregated. A number of strong banks were too glad to go it alone and closed their doors from the outset. Liberty Bank approached Union Bank Plc for accommodation as one of its consolidation partners. Gladly for Liberty Bank, Union Bank gave a conditional approval. This approval kept Liberty Bank’s operations alive and stemmed the deposits’ run that was gathering storm around the bank.

Liberty Bank reached out to Otunba Mike Adenuga to have a consolidation partnership with its banking group consisting of Devcom Bank Limited and Equitorial Trust Bank but the discussions were shortlived. Liberty Bank pushed on and joined the Unity Bank group in-consolidation. It had comfort in this group. The lead bank in the group was the Kaduna-based Inter-city Bank Plc which had my friend, Lamis Dikko, as the Managing Director. The second most important member of the group was Interstate Bank and its Managing Director, Kayode Pitan, was very receptive. Liberty Bank attended the preparatory meetings held by this group and participated in the prescribed due diligence exercise. The time for action came and the Unity Bank group in-consolidation group set a deadline for participating banks to come under the wings of Inter-city Bank by way of acquisition. Each of the smaller partners were to be acquired by Inter-city Bank before being absorbed under the bigger umbrella of Unity Bank. At this point, the chief executives of participating banks had been briefed that the behemoth, Bank of the North (BON), was waiting in the wings to join the Unity Bank consolidation group. Even though BON was not known for its operational efficiency, it had size and reach and could make a difference in a merger discussion. Thus, the Unity Bank group was confident that it would meet the consolidation deadline.

On August 11, 2005, Liberty Bank wrote to Inter-city Bank under the acquisition framework within the agenda of Unity Bank-in-consolidation. This was the only viable option left for Liberty Bank. Inter-city Bank and other members of the group were happy that Liberty Bank met the deadline as prescribed. Pacific Bank soon after also met the deadline and celebrated its acceptance into the consolidation group. Meanwhile, at Liberty Bank, all approvals had been secured to raise N3 billion in new capital, so that by October 31, 2005, Liberty Bank would have a positive shareholders’ fund of approximately N2.2 billion. However, the Chairman of Liberty Bank, Chief Victor Odili, was worried about his place in a consolidation group. He would have wanted his bank to be the one leading a consortium to acquire other banks. He once boasted loudly: “Nobody can acquire me. Instead, I will acquire others.” He imagined that the sale of part of his shareholding in the telecommunications giant MTN would raise for him enough funds to meet the new capital base. At the time, Chief Odili was the biggest single Nigerian shareholder in MTN. He had the shares to sell but time was of the essence. He discounted the time factor and insisted that Liberty Bank could not be acquired. Therefore, the Board of Directors of Liberty Bank objected to the application made to Inter-city Bank to come under the wings of the bigger bank. The application was withdrawn but the Chief Odili’s funds did not come.

Chief Odili then arm-twisted Liberty Bank to engage one

Nnamdi Anamah, an ex-banker to act both as consultant to the bank and a private adviser to him. Anamah put Odili in contact with a group in Italy that promised to provide the N25 billion that Liberty Bank needed to meet the new capital requirement. I reviewed the documents Chief Odili sent to me and told him it was a bad deal and the consolidation deadline was too close for further experimentation. I refused to accompany the group to Italy because I believed I would be in danger. The group visited the Italian contact and Chief Odili and the staff who went with him were too lucky to return to Nigeria in one piece. No money came with them. I then visited the Managing Director of IBTC, Atedo Peterside, with Gbero Avwunufe to see if Liberty Bank could come with them on the consolidation journey. I arranged a meeting between him and Chief Odili while both of them were in London. The result was negative. I later realised that it was an error for me to have been away from that meeting of two contrasting Rivers State indigenes. I realised that if I had been with them in London as an honest broker and tabled a proposal for a forward sale of part of the MTN shareholding of Chief Odili to Mr. Peterside, may be, just maybe, the situation could have been salvaged. However, that opportunity was lost. At this point, the fate of Liberty Bank Plc was beginning to hang in the balance. There was no other way out. The best bet was the Unity Bank group in-consolidation but the board and its chairman could not see beyond the immediate bank premises. Even when the Liberty Board was informed of the interest of BON in joining the Unity Bank Group it mattered little. I had four million shares in Liberty Bank and I could see them going down the drain. I never wanted the bank to collapse with me holding the keys to the Chief Executive’s office. I would have been devastated.

On August 1, 2005, I served a notice of resignation to the chairman of the board. I formally relinquished my appointment as Managing Director of Liberty Bank Plc on August 31, 2005. The next day, on September 1, 2005, I assumed duty at Conoil Plc, owned by Otunba Mike Adenuga, as group sales executive director on a consolidated mouth-watering salary. The understanding between Otunba Adenuga and I was that I would be in Conoil from September 1, 2005 for three months and thereafter I would be announced as Managing Director of the consolidated Equitorial Trust Bank. Adenuga’s initial proposal was that I would be made executive director at Equitorial Trust Bank in the interim until the big appointment would be made. I rejected that proposal and opted for Conoil and to remain there as the bank’s chief executive in waiting.

Meanwhile, I was watching the banking industry from Conoil Plc. I had done all that was professionally required to anchor Liberty Bank within the Unity Bank Group in-consolidation where six other banks found a home and solace. My stay at Conoil was brief. From September 2005 to February 2006 was all that I needed to understand my unusual environment. Conoil was a one-man show. It was Mike Adenuga Nigeria Limited. There were no management meetings except the ones called by him. He would dominate the discussions to give instructions. There were no formal board meetings. He called meetings when an idea tickled him. When meetings were held, they hardly had stated agenda. They were held in his expansive office, adorned with a majestic conference table in a building next door to his residence on Oko-awo Street, Victoria Island, with him presiding. He respected my views. Although he spoke the way he wanted to his staff, he never did that to me. I thank him for that quantum of respect he had for me.

Otunba Adenuga was always alert and discerning in his role as the chairman of Conoil. He is a blessed man and feeds thousands of families on a daily basis. He regaled at gathering his executives across the various companies together for a one-way meeting, where he dictated the agenda known only to him, and acted as the only speaker, with no questions asked. Such meetings were always held for all senior executives of his banking, telecommunications, and oil companies. Issues were discussed simultaneously across companies. When he had any issues to discuss, he would call me at 1.00 am, 3.00 am, 5.00 am, at any time of the day or night, from any part of the world. Holding meetings at 11 pm, 12 midnight or 2.00 am was normal for him. An approval to fix a broken pipe or a fallen wall or service a car in Conoil had to be given by Otunba Adenuga himself. Not even the then Managing Director of Conoil, Mr. Shina Tychus, could take that initiative. Conoil had no holidays. There was work, even on Christmas day. This was probably because of the nature of the business. All staff had to take dictates from Otunba Adenuga. He was very hardworking. Day and night met him at his desk. He rarely socialised and was seldomly seen in public. He was all pervasive and could get his intelligence from a security man, a driver, a manager, director or the chief executive as he chose.