The banking consolidation fiasco (2)

OTUNBA Adenuga changed positions quite often, which I found out too late. I saw his ingenious design to side-track his promise on my future role in Equitorial Trust Bank. He complained that the CBN governor was reluctant to grant him approval to change the Managing Director of the bank. He wanted me to revert to the position of executive director in the bank for the time being which he had previously offered me at the very beginning of the engagement discussions. I rejected the entrapment. In the morning of January 31, 2006, Otunba Adenuga called me to say he wanted me to disengage from the group. I told him he should tell me when he wanted it done. He threw it back at me that anytime that was good for me was fine by him. We then agreed that I would disengage by end of February 2006. The next morning, I submitted a letter of resignation to the Managing Director of Conoil who begged me not to burden him with that kind of letter, preferring that I took it to Otunba Adenuga. I was able to persuade him to accept the letter, assuring that it would not have any negative consequence on him. I began to wind down my activities at Conoil. By February 14, 2006, I returned my official car, a Mercedes Benz 320 to Otunba Adenuga’s office. I bought a flight ticket to London, applying my two weeks accumulated leave to cover the remaining days of my notice period. Although I spent a few months in Conoil Plc, I learnt the business of oil and gas trading which I have found extremely useful till date. For this reason, I remain eternally grateful to Otunba Adenuga. By the time I returned from my one-month vacation in London, my wife had converted the guest room in our home at 12A Oko-awo Street, Victoria Island, Lagos into my office. Incidentally, Otunba Adenuga lived and had his office at the other end of the same street. On Karimu Kotun Street, Victoria Island, a road adjoining Okoawo Street, Victoria Island, was the residence of Alhaji Aliko Dangote, Africa’s richest man. Indeed, at 53 years of age, I was a retired man, with limited means but full of contentment, yet hemmed in by great men of immense wealth. My observations on the banking consolidation comedy will be useful to economic historians.

The confusion that followed the unveiling of Prof. Soludo’s banking consolidation agenda is better imagined than described. As a participant observer, I wondered how the CBN would be allowed by the country’s President to push an industry into such a confused state. Sources had it that a few commercial banks had confidential tip offs on the steps the CBN planned to take on the consolidation exercise. These privileged banks understandably used the early information available to them to their advantage. A few weeks after the consolidation announcement, three banks, namely, Zenith, Oceanic, and Standard Trust Bank were in the market to raise equity capital to meet the new capital requirement. These moves were suspected to be a confirmation of early advantage suggestive of a possible leak of the consolidation programme. Others followed in a frenzy. In a dramatic twist of fate, Standard Trust Bank in mid-2005 audaciously took over ownership of one of the four Nigerian banking giants, United Bank of Africa (UBA). Initially, the merger of Standard Trust and UBA was perceived to be friendly but the developments that ensued showed that Standard Trust Bank had acquired UBA. Once the CBN approved the merger deal, the senior management staff of UBA were shown the way out while Standard Trust senior executives took over their positions, including those of the chairman and Managing Director.

Other banks continued to struggle to meet the consolidation deadline as the signal for crisis had already been given. With the astronomical rise in approved shareholders’ funds of existing banks, the scramble for capital had begun. Banks became desperate. Accounting records of banks were no longer reliable as books were forged to enable individual banks show some strength that could lead them through the consolidation tunnel. High-value deposits by individuals and corporates were converted to equity at very high repurchase (repo) rates to enable the banks to recapitalise. Even when the CBN became aware of the falsification of accounting records, it looked the other way. Too many banks were not prepared for the shock. The consequences of these deleterious practices revealed themselves soon after the recapitalisation cut off date. By the end of Prof. Soludo’s recapitalisation deadline, 69 banks had merged into 19 consolidated banks and six banks stood on their own having been able to successfully raise their capital to N25 billion. In summary, the following banks successfully navigated the banking consolidation pathway: First Bank Plc, UBA Plc, Union Bank Plc, Afribank Plc, Zenith Bank Plc, Access Bank Plc, Oceanic Bank Plc, Intercontinental Bank Plc, First City Monument Bank Plc, Guaranty Trust Bank Plc, Unity Bank Plc, Diamond Bank Plc, Ecobank Plc, Stanbic-ibtc Plc, Sterling Bank Plc, Bank PHB Plc, First Inland Bank Plc, Spring Bank Plc, Standard Chartered Bank Plc, Skye Bank Plc, WEMA Bank Plc, Citi-bank, Fidelity Bank Plc and Equitorial Trust Bank Plc. The place of one new bank in 2005 called Jaiz Bank Limited in the consolidation exercise remains a mystery. Jaiz was to return to the market some years later.

A number of these banks were not as well capitalised as they advertised themselves to be. Creative accounting made them look good and time was pregnant with the truth. At the end of the exercise, 14 banks which could not secure any consolidation partner were liquidated which was a course of action that was not anticipated. Some of the shareholders of the liquidated banks headed to the courts to challenge the exercise but others allowed both the CBN and NDIC to have their way. Fortunately, choice assets and staff of six of the liquidated banks were later acquired by some of the more gracious consolidated banks within the context of another curious arrangement called ‘P&A’ (Purchase and Assumption). Liberty Bank was acquired by UBA Plc under the P&A scheme but the shareholders completely lost their investments. The private sector deposits were expected to have been repaid but different tales were told subsequently as deposits in closing registers of acquired banks disappeared when some deposit owners sought to withdraw their deposits. The deposits of ministries, departments and agencies of government (MDAS) were also lost to consolidation. The saddest aspect was that many of the liquidated banks whose major debtors were ready to pay up their negotiated debt, based on the repayment pressure mounted on them, simply melted away as the banks themselves were liquidated. The forfeiture of the licences of the 14 liquidated banks was not contemplated under the consolidation agenda. It became the typical Nigerian exercise where rules are changed during the game. In Nigeria, impunity reigns in all ramifications. This played out fully in the banking consolidation programme.

The lessons of the banking consolidation programme should serve as an input into future policy design in the financial services industry. A clear lesson is that experience and open-mindedness always produce better results. An academic in search of glory, in the seat of the CBN Governor, without being guided by practical experience, would produce a disastrous outcome. For example, the huge financial losses suffered by the Nigerian tax payers in view of billions of naira in bank deposits forfeited by the Federal Government of Nigeria were unnecessary. The CBN was reckless in pursuing a consolidation programme that could have been better managed. The huge deposit losses contrasted sharply with the falsehood repeatedly told to the Nigerian public by the CBN governor that no deposits or money would be lost to the programme. In truth, a few strong and enabled banks emerged from the consolidation programme. The new strong banks were expected to be the anchor of a newly industrialising Nigeria. But ten of these banks were already on their way to greatness and if Prof. Soludo had allowed his banking consolidation framework to be discussed robustly, a refined outcome would have ensued. But his proposal was quickly transmuted into an immutable law without discussions or refinement. The consequences, which were initially outlined for banks that failed to meet the new capital base, were replaced with more draconian measures that rendered investors dumbfounded. The initial consequences of failing to meet the consolidation target date were that such banks would neither participate in the Cbnregulated official foreign exchange market nor would they be allowed to hold deposits from the MDAS. However, when the consolidation programme ended on December 31, 2005, the 14 banks that could not cross the hurdle were simply and callously liquidated, thereby flushing jobs, deposits, shareholders’ funds and other financial assets down the drain. The new socalled bigger and consolidated banks were also expected to lend at highly reduced interest rates. However, within the first 18 months of the concluded consolidation agenda, interest rates in these banks remained as high as 22% per annum and more than 15 years after the consolidation exercise interest rates have continued to hover around 25% pa.

Based on the assessment of interest rate movement, the consolidation programme brought no relief to banks’ customers. Indeed, in early 2004, following a programme of moral suasion initiated by the then CBN governor Joseph Sanusi, bank lending rates had in fact come down to 17.5% per annum. However, whether now or in the past the existence of high interest rates in Nigeria has never been the fault of the banks. The country had remained shamefully deficient in the provision of basic infrastructure that banks require to enable them provide the efficient services that customers continue to clamour for. Banks have had to be involved in providing certain basic infrastructure they need for their survival. With the cost incurred by banks in acquisition of power generators, construction of boreholes, operation of water treatment plants, security, internet services, telecommu

nications, road construction, and maintenance ever rising, bank customers have been made to contribute to paying for these costs through high interest rates.

The expectation by CBN that the Soludo banking consolidation exercise would force banks to lend at an interest rate of less than 10% was akin to ‘‘living in a fool’s paradise.’’ Several years after the consolidation agenda, the interest rate regime has hardly changed. In the days and weeks of the consolidation programme, the CBN perfected the art of making promises it never intended to keep and so deceived a number of sector participants. The CBN promised to create a help desk to provide technical assistance to banks that required help. CBN boasted that their consultants would be available to man the help desks to be set up and visit banks as advisers when required. However, the CBN help desks were helpless in themselves as telephone calls made to the desks were often unanswered and thereafter the help desks simply faded away. Senior banking executives made repeated visits to the CBN head office in Abuja for help but returned without finding the needed help. When I visited a number of departments at the CBN, including offices of the governor, legal adviser and banking supervision, many of the staff were barely aware of the implementation of the consolidation exercise, which they saw as the creation of a new CBN governor who had hardly studied the banking terrain before lurching himself into a complicated programme of reforms. The CBN also promised that for staff who would lose their jobs in the course of the consolidation programme, it would approach banks to help such disengaged staff with funds from the small and medium industries equity investment scheme (SMIEIS). That empty boast also disappeared as the CBN could not mobilise enough influence amongst the consolidated banks to channel any SMIEIS resources to any group of disengaged bank staff. The truth was that if the CBN governor had consulted widely enough such wild and baseless promises would never have been made. Till date some ex-bank staff are still in court in pursuit of fair compensation and remedies.

Prof. Soludo made other promises, including ensuring the reduction of statutory fees charged by the corporate affairs commission (CAC), securities and exchange commission (SEC), Nigerian Stock Exchange (NSE), and appealing for tax breaks from the Federal Inland Revenue Service (FIRS) for merging banks. The CBN governor failed to realise that he did not have the statutory powers to cause these changes to take place. He was a poor policy implementor. These promises were designs to deceive the unsuspecting public. But more worrisome was the promise that Prof. Soludo made to the banking system when he announced to the world that an asset management company would be set up and banks would be required to transfer at a discount their properly collateralised but non-performing loans to that company for management. Many bankers, who took the CBN on its face value as a credible partner and hoped that it would fulfil its promises, were roundly disappointed. It took the CBN another five years to set up the Assets management company of Nigeria (AMCON) and, for those years, the consolidated banks were simply left with their problems of bad loans without any help from the regulatory authority. Even in Malaysia where Prof. Soludo got his inspiration to undertake the banking consolidation programme, the Malaysian government spent a fortune to set up an asset management company. But the Nigerian government and its agencies regard its people as disposable and their comfort a despicable affair and, since the people are considered to be used to pains, public officials necessarily take draconian action against them so as to please the masters at the Presidential Villa. The Nigerian government prefers to perform surgeries on its people without anaesthesia. The consolidation programme was one of such surgeries.

The CBN consolidation programme as ordered by Prof. Soludo compromised a fundamental kernel of industrialisation. In building a sustainable economy in any country, three categories of enterprises or industries are encouraged to co-exist; the same way that the poor, the middle class, and the rich must co-exist in every society. The small, medium, and large-scale enterprises, companies, banks, and industries must be allowed to grow and the regulatory agencies must develop the robust capacity to supervise them. The small becomes big, the mediumsized becomes large and new small-sized ones are born to subsequently grow to sustain humanity. It is antithetical to growth and development for every organisation to be big but if market dynamics reward size the competing companies would refocus but not through the imposition of unnatural and destabilising measures by any regulator. But for Prof. Soludo, all Nigerian banks had to be big, of equal size and of similar complexities. This was a travesty and a major failing of the consolidation programme. It was totally incomprehensible that efficiently-run but small-sized niche banks like Nigerian-american Bank, Chartered Bank, Fountain Trust Bank, Habib Bank, IBTC, Commercial Bank Credit Lyonnais Bank, Equity Bank, Inland Bank, New Nigeria Bank, NAL, First Atlantic Bank, and a host of others, had to be decreed out of existence in order to take a new life form. At the end of the Soludo consolidation exercise, all Nigerian banks became just like the others because of the absence of product differentiation, lack of specialisation, and the existence of the one-size- fits-all syndrome. The financial services profile of a country that is serious about development must not be so strait-jacketed. Prof. Soludo turned a deaf ear to the strident calls for the categorisation of Nigerian banks into small, medium, and large with varying authorised capital and shareholders’ funds. But as an academic in pursuit of research honours, the CBN Governor stuck tenaciously to a text book whose author was unknown.

The loss of jobs and associated human cost attendant to the CBN consolidation were most destructive. Thousands of bank staff lost their cherished jobs and, because they were very qualified educationally and experienced professionally, many of them had to travel abroad to seek greener pastures. Many of these disengaged staff are now working in banks in Australia, Canada, United Kingdom, and the United States. The staff who became unemployable on account of age suffered the most. As is usual in the context of mergers and acquisitions, staff of the acquired companies are always at the mercy of the acquirer. Apart from the top echelons of management and executive staff that were wiped out in the consolidating bank, several low-level staff were immediately rendered jobless. Many service providers to these banks, like external solicitors, medical doctor, clinics/hospitals, real estate agents, landlords, waste managers, lost invaluable customers. In many of the consolidating banks, staff aged 45 years and above could not be retained by the consolidated banks. Many staff in that age bracket typically had young children in good schools, lived in nice neighbourhoods and drove in nice cars. They suddenly lost their comfortable middle-class lifestyle, which they earned over several years of hard work. Many children were withdrawn from first class schools as the family bread winner struggled to survive and house rents could no longer be paid leading to relocation to ancestral villages and places of abode that were long abandoned. Many of these staff became despondent and, with help not in sight, a number of them died. The stronger and more daring of these displaced staff took to a life of crime and some of the imaginative robbery exploits by underworld men in the Niger Delta were blamed on the banking consolidation programme. Most tragically, many welltrained and experienced staff who had proven themselves on account of the excellent work they did, many of them holding such qualifications as Higher National Diploma (HND) and National Certificate of Education (NCE), were sent packing. Many of these staff were never able to get new jobs, except where the younger ones had to go back to school to take second degrees. It took the consolidated banks over a decade to realise the value of this category of staff who appeared to have had unglamorous qualifications.

It needs restating that the magnitude of financial losses suffered by the Nigerian tax payers was mind-boggling. It should be recalled that the public sector deposits in multiples of billions of naira held in the 14 liquidated banks were lost. These deposits came principally from the Niger Delta Development Commission (NDDC), Nigeria National Petroleum Corporation (NNPC), Power Holding Company of Nigeria (PHCN), Nigeria Telecommunications Company (NITEL), Nigerian Communications Commission (NCC), National Fertilizer Company of Nigeria (NAFCON), Nigeria Police Force, NPF, Nigeria Boradcasting Corporation (NBC), National Youth Service Corps (NYSC), state and federal government ministries, government-owned companies, etc. These funds, lost on account of a poorly-conceived and badly-implemented bank consolidation programme, could have built low-cost housing, schools, hospitals, roads and many more.

The shareholders of the liquidated banks also had a raw deal. They lost their investments and shareholdings running into several billions of naira. The CBN contraption called P&A (Purchase and Assumption), a mechanism by which a strong bank was able to acquire a liquidated bank for peanuts served a very selfish purpose. Under this arrangement, the Purchasing (P) bank decides which of the assets of the liquidated bank to pick and then Assumes (A) responsibility for individuals and private deposits in the liquidated bank. In this way, the private customers were supposed to be saved from losing all of their money, except for interest income over the period during which the deposits were frozen. Six banks were so acquired under the P&A model after the consolidation deadline but, in all of them, not only were the public sector deposits running into billions lost, quite a number of the private deposits were stolen. Appeals to the Nigerian Deposit Insurance Company (NDIC) to intervene and save the private depositors from the tyranny of the acquiring banks fell on deaf ears. Also lost were the investments made by Nigerian shareholders whose capital funds were now said to have dwindled to zero value. Yet, it was the consolidation programme that created deposit flight problems for many of these banks. Till date, all categories of deposits in such liquidated banks like Gulf, Eagle, AFEX, Triumph, Assurance, Fortune and others like them remain lost. None of their depositors, private or public, have had access to their funds. The funds belonging to the federal and state governments lost under the consolidation exercise should be blamed on the CBN’S policy misadventures.