by Chris Enyinnaya
Professor Charles Chukwuma Soludo’s era as Governor of Central Bank of Nigeria (CBN) could be said to be a mixed grill of the good, the bad and the ugly. Soludo assumed office in 2005 when the banking industry was undergoing re-capitalization to minimum N2 billion set by erstwhile Governor, Dr. J.O Sanusi. Many banks were still struggling to meet that capital requirement considered steep at the time when Soludo took over and further increased it to what many bankers considered as crazy: N25 billon with an equally crazy compliance time of 18 months terminating on December 31, 2005.
There were 89 (eighty nine) licensed banks at that time. On the due date, Soludo made good his promise as the operating licences of 14 (fourteen)banks were revoked and 25 (twenty-five) new banks emerged mostly by forced merger, acquisition or consolidation of their operations.
Like all policies, not the least banking policy, all cannot be said to be well thought out or perfect until it is put to test. In the case of N25 billion capitalization requirement, professionally speaking, all was not well with Soludo’s concept of huge bank capital as guarantor of bank’s strength and stability. Even at that, his definition of bank capital as shareholder’s funds was a negative paradigm shift because previous policies were hinged on injection of raw cash to beef up equity capital. Dr. J.O. Sanusi’s N2 billion minimum capital demanded injection of cash and the capital was minimum for all banks.
Soludo came up with N25 billion shareholder’s funds which are a combination of cash and non-cash capital comprising equity (EQ) revenue reserves (RR) and profit and loss (P&L) balances. This requirement, to say the least cannot be uniform for all banks. Thus, if Bank A has N2 billion EQ , N23 billion RR and P&L , it met the requirement. If Bank B has N10 billion EQ and N15 billion RR and P&L, it also met it. And so does Bank C with N15 billion EQ AND N10 billion RR and P&L.
As can be seen that from regulatory point of view, Soludo’s capital criteria was faulty ab initio. It posed regulatory problem for CBN because it will be difficult to determine weak and strong banks based on a uniform criteria. That was what Sanusi Lamido Sanusi saw when he took over and garrulously declared that most banks had bubble capital. He was right. Many banks had to make quick adjustments through very tight credit policy and aggressive loan recovery; otherwise multiple bank failures would have occurred after Soludo’s tenure.
An empirical evidence in 2006 assessing two sampled banks, will sustain the foregoing argument. In the abstract to her degree thesis, Glory Amara Enyinnaya (Bsc Accountancy, First Class, University of Nigeria 2006) in her degree thesis (unpublished) titled: “Re-positioning The Nigerian Banking Industry Through Recapitalization (the Intercontinental and Access Bank Experience”) after comparing 2005 and 2006 audited published results using the CAMEL approach concluded as follows, followed by my comment:
The capital adequacy position of the sampled banks worsened. This is the antithesis of what the pundits predicted. (Fault number one)
The quality and level of loans and advances improved after re-capitalization . This has favourable connotation for the economy. (Excellent)
The management and administrative ability of the sampled banks improved after re-capitalization. (Excellent)
The level and quality of earnings of sampled banks declined after re-capitalization (Fault number two)
The liquidity profile of the sampled banks worsened after re-capitalization ( Fault number three).
To Soludo, huge bank capital seems to be the panacea for bank stability and lending ability. He was wrong because banking is a highly leveraged business. A bank does not derive its strength and ability to lend from its capital but from its deposit base. The more stable the deposit base and the longer the tenure, the more stable the bank is and the better is its position to lend because it must match the maturity of its deposit liabilities and its loans.
Thus a bank with long-term deposit is in an excellent position to lend. The problem with Nigerian banks in lending is the paucity of huge long-term deposits not necessarily capital. A bank cannot use short-term funds to create long term loans. At best, bank capital is a hedge against losses. The management of bank capital and the measurement of the adequacy of same are among the most complex issues confronting bank management, investors and regulators.
According to Professor W. Okefie Uzoaga (1971): “An important corollary to the problem of capital adequacy is the moral bankruptcy of bank managers. Bank failures in Nigeria have been largely associated with defalcation, incompetent accounting, and incautious credit policies. Unless management is honest, competent and cautious, large capital resources in the long run are not safe from erosion.”
Apart from the foregoing position, many banks were worse off in terms of capital adequacy after merger or consolidation in 2006. The empirical study above highlighted the cases of Access Bank and Intercontinental Bank in 2006. A copy each of this study was deposited with the office of the Managing Directors of these banks at that time and they did not contest it or call the researcher to order.
The merger or acquisition of Universal Trust Bank by Union Bank in 2005 resulted in huge capital reserve (capital loss). Without merging with Universal Trust Bank, Union Bank met the N25 Billion capital requirement on its own. But the bank was ruined by the forced merger or expansion by the regulators which also led to marriage of strange bedfellows in many cases. For instance, Spring Bank, a merger of Guardian Express Bank, ACB International Bank, Owena Bank and Citizens Bank (I hope I am correct) was a theatre of boardroom and management war until CBN took it over.
Soludo, a trained economist, not a trained banker, was looking at economies of scale as if banking business is manufacturing business. He did not look at returns on capital employed, which deteriorated practically for all banks in 2006 after consolidation. It is instructive that the prospect of higher returns on capital employed is the chief driver of additional investment in most corporate decisions. Investments from N2 billion to N25 billion were blind investments because they were not driven by the desire to take advantage of new business opportunities in the banking market. In fact, Soludo failed to see that right from 1960 to 2005 when he took over as CBN Governor, legislating capital for banks by CBN forced many banks into liquidation beginning with Merchants Bank, a subsidiary of Odua Group that liquidated in 1961 because of failure to meet 500,000 pounds capital requirement for indigenous banks. In the case of Soludo, 14 (fourteen) banks had their operating licences revoked in one day.
Nevertheless, all was not bad and ugly during Soludo era as CBN Governor as he scored 100% in exchange rate management. He succeeded in killing the speculative foreign exchange market by making the official rate and parallel market rate of Naira to U.S. Dollar to converge. Even where gap occurred, it was less than N2 (two Naira) or nil in real terms when you take transaction costs into account. Give it to him, he brought to bear his training as an economist in monetary and exchange rate management but he scored very low in banking regulation and supervision.
However, his efficiency in monetary and exchange rate management was as a result of robust foreign exchange earnings with oil price above $100 per barrel mark on the average throughout his tenure which helped in his regime to accumulate peak $62 billion in foreign reserves. He did not create a robust global favourable crude oil price to Nigeria. Why glorify self instead of God Almighty for His grace during his tenure?
Finally, no amount of self glory will make Nigerians to forget quickly his desperation for a second term, his failed attempt at re-denomination of the Naira, his failed ambition to become Anambra State Governor under PDP and later APGA, particularly his public behaviour during the burial of his mother in-law. A man who cannot manage his private problem cannot manage public problem. This writer passionately appeals to Professor Soludo to follow peace, and adhere to the wise counsel of John Billings: “The best time to hold your tongue is the time you must say something or burst.”
Chris Enyinnaya, a chartered banker, wrote from Ikeja, Lagos State
The opinions expressed in this article are solely those of the author.