The chicken has come home to roost. This is a common phrase heard from commentators following the recent bombshell from the Central Bank of Nigeria that led to the sacking of the CEOs of five commercial banks. Banks are rated as financially unhealthy. The Nigerian banking and finance industry has for some time been awash with rumors of ill health, unfair demarketing practices and the need for a comprehensive overhaul of the system.
Although some knowledgeable commentators have argued that this is a welcome development that is long overdue, it is my humble opinion that there may be more serious issues that need to be addressed beyond the changing of the guard at the top of these institutions. It is the only bold step that signifies that proactive risk management has taken center stage in the Nigerian banking industry.
First of all, the action clearly confirms that the stories about the liquidity crisis faced by certain banks are true. If out of the ten (10) banks surveyed so far, five (5) had to receive the hammer, then we have a serious problem because that represents fifty percent (50%) of the sample size covered. What happens when the examination of the remaining fourteen (14) banks is completed?
One can only imagine the decline the industry will face after these revelations. The CBN Governor’s assurance that no bank will be allowed to fail is a strong reassuring measure. However, when it comes to money matters, I’m sure the average individual will not want to take the risk.
Another worrying development is the main reason cited by the CBN as the basis for the dismissal, which can be summed up as poor corporate governance practices. In short, the global financial crisis has just managed to expose very poor corporate governance practices in our banking industry. I want to say categorically that no institution anywhere in the world, with or without a financial crisis, can survive for long with poor corporate governance practices. Bad corporate governance is reflected in weaknesses in internal controls, so the institution’s assets are not protected from abuse. And when the safety of depositors and shareholders’ funds is threatened, any system, no matter how big and attractive it looks, can eventually fail.
This brings to mind a very vital lesson in business/corporate failure as it relates to financial management. Businesses usually fail not because of a lack of profitability, but more because of a lack of liquidity. The lesson here is simple; Cash flow is as important as profit. Understanding this sacred canon is at the heart of successful business management. It does not matter whether it is a company from the public or private sector. The rule is universally applicable.
Other questions that require answers include:
1. What is the level of involvement of non-executive directors, subsidiaries and other key actors in the financial positions of these banks?
2. Since shareholders’ funds are significantly reduced, to what extent is the impairment and how long will it take to fully recapitalize the institutions to the appropriate status after the CBN takeover?
3. What are the new corporate governance rules for the new management teams of these banks entrusted with public and private financial resources?
4. What collection mechanisms are being put in place to ensure that the authorities fully recover all monies owed to these sick institutions?
5. For all financial institutions in Nigeria, what is the ratio of total marginal loans to total deposits, the ratio of total marginal loans to shareholders’ funds and also the ratio of total marginal loans to total loan portfolio?
6. What is the structure of their marginal loans? There is a need for a detailed review based on industry, age and loan servicing history.
7. If the affected institutions were net borrowers of funds from the industry, how long has this been going on and what corrective actions have been taken by those responsible so far?
8. What actions are necessary to prevent further decline in bank share prices in the Nigerian capital market as the industry prepares for another round of share price crisis?
9. What is the legal, administrative and operational framework of these institutions after the takeover of the CBN?
10. Who takes ultimate responsibility and for what and to what extent, if these institutions do not continue to operate in the near or distant future under the supervision of the CBN?
It is my opinion that finding concrete and valid answers in detailed terms to the above questions will help to allay the fears of depositors, build investor confidence and ultimately protect the Nigerian national economy.