CBN Sack of Bank CEOs: Matters Arising

By

Shafii Abdullahi Ndanusa, MBA, ACCA, MFP

shafii@accamail.com

‘The chicken has come home to roost’. This is the common statement heard from commentators following the recent bombshell from CBN over the financial health or otherwise of five banks. For a while, the industry has been awash with rumors of ill-health, unfair de-marketing practices and the need to comprehensively sanitize the system.  

While some informed commentators argue that it is a welcome development that is long overdue, it is my modest opinion that perhaps there are more equally serious issues to deal with beyond the change of guards at the top of these institutions. It is the single bold step that signifies that proactive risk management has taken centre stage in the Nigerian banking industry.

First and foremost, the action confirms in clear terms that the stories about the liquidity crises faced by certain banks have been true. If out of ten (10) banks examined so far, five (5) had to receive the sledgehammer, then we have a serious problem at hand as this represents fifty per cent (50%) of the sample size covered. What happens when the examination of the remaining fourteen (14) banks is concluded?

One can only imagine the run down the industry will face following these revelations. The assurance of the CBN Governor that no bank will be allowed to fail, is a strong reassuring measure. However, when it comes to money matters, Nigerians certainly will not want to take chances.

Another worrisome development is the major reason advanced by the CBN as basis of the sack which may be summarized as poor corporate governance practices. In a nutshell, the global financial crisis has just succeeded in exposing the very poor corporate governance practices in our banking industry. I wish to state categorically that no institution anywhere in the world, with or without a financial crisis can survive for long with poor corporate governance practices. Poor corporate governance is reflected in weaknesses in internal controls hence the assets of institutions are not safe from abuse. And once the safety of depositor and shareholder fund is jeopardized, any system no matter how large and attractive it may look can eventually collapse.

This reminds me of a very vital lesson in business/corporate failure as it relates to financial management. Businesses do not usually fail for lack of profitability, but more as a result of lack of liquidity. The lesson here is simple; Cash Flow is as important as Profits. Understanding this sacred canon is at the heart of successful management of enterprises. It does not matter whether it is a public or private sector enterprise. The rule is universally applicable.

Other issues that beg for answers include:

1. What is the level of involvement of the non-executive directors in the financial positions of these banks?

2. Since the shareholders funds have been significantly impaired, to what extent is the impairment and how long will take for them to be fully recapitalised to the same status prior to the take-over by the CBN.

3. What are the new corporate governance rules for the new management teams of these banks who are being entrusted with both public and private financial assets?

4. What recovery mechanisms are being put in place to ensure that all monies owed to these ailing institutions are fully recovered by the authorities?

5. For all financial institutions in Nigeria, what is the ratio of total margin loans to total deposits, ratio of total margin loans to shareholder funds and also the ratio of total margin loans to the total loans portfolio?

6. What is the structure of their margin loans like?  There is need for a detailed breakdown based on industry, age and history of loan servicing.

7. If the affected institutions have been net borrowers of funds from the industry, how long has this been going on and what remedial actions were taken by those responsible prior to now?

8. What actions are necessary to forestall further crash of banks’ share prices on the Nigerian capital market as the industry prepares for yet another round of share price crisis.

9. What is the legal, administrative and operational framework of these institutions following the CBN take-over?

10. Who takes ultimate responsibility and for what and to what extent, should these institutions fail to continue as going concerns in the near or far future under CBN watch?

It is my opinion that finding specific and valid answers in detailed terms to the above questions will help to allay depositor fears, build investor confidence and ultimately protect the national economy.

Mr. Shafii Abdullahi Ndanusa is a Certified Chartered Accountant (ACCA) and Master Financial Professional (MFP) Charterholder of the American Academy of Financial Management. He works and lives in Abuja.