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CBN AND THE TROUBLED BANKS

By NBF News

Thursday, July 22, 2010
When the Central Bank of Nigeria (CBN), last year, declared some commercial banks insolvent and consequently sacked their Managing Directors and Chief Executive Officers (MD/CEOs), replacing them with new management teams, the action was hailed as a pragmatic step towards repositioning the banks and restoring the confidence which had been eroded in the financial sector.

The affected banks are Union Bank, Intercontinental Bank, Oceanic Bank, Finbank and Afribank Plc. According to the CBN, the takeover of these banks became imperative to prevent their imminent collapse, and to safeguard shareholders' funds.

Indeed, figures released by CBN in July 2009, showed a grim picture of the financial profile of the distressed banks, with their risk exposures hitting the rooftops. Their aggregate Non-Performing Loans (NPLs) was put at over N1.2 trillion.

Almost one year after the interim takeover of these banks, speculations are afoot that the CBN has perfected plans to sell them. Some foreign financial firms have been mentioned as preferred bidders for some of the institutions. But CBN Governor, Mallam Lamido Sanusi, has denied these speculations. Instead, he stated that his focus now is to salvage some value for shareholders. The constant speculations and denials of plans to sell the banks are not healthy for the sector.

What the CBN has been doing with the failed banks in the last one year falls within the financial options called Bridge Banking, in which case, it operates the troubled banks within a time frame with some injection of cash and then looks for qualified buyers. However, the alleged plan by the CBN to sell the rescued banks has raised quite a handful of legal issues, on the propriety or otherwise, of such a plan. For instance, can CBN proceed to sell any of the banks without the consent of its shareholders? This is exactly the issue at play now in the reported plan to sell Union Bank Plc.

Some of its aggrieved shareholders have instituted a legal action against the CBN. They are seeking a relief to restrain the CBN Governor, Sanusi, and the incumbent management of Union Bank, headed by Mrs. Funke Osibodu, from 'entering into any arrangement with any person, institution or authority to dispose of any share of the bank', pending an appeal against the ruling of a Federal High Court in Lagos, that is unfavourable to their position.

We support every meaningful measure aimed at saving the banks and repositioning the sector for greater challenges. We do so in the overall interest of the economy and the interest of shareholders. But, whatever measure is being contemplated by the CBN, must follow Due Process and laid down regulations in the Banks and Other Financial Institutions Act (BOFIA) and other laws regulating banking operations in the country.

In this regard, there is need for the CBN to avoid litigation.

In fact, it is necessary for CBN to thread cautiously in all matters concerning any of the troubled banks. The economy may be the worse for it if judicial pronouncements determine important matters that could have been resolved through dialogue.

It is, however, expedient for the court to determine the actual position of the law, as to whether the CBN can sell a bank without the consent of its shareholders. This, to us, is the essence of the Union Bank suit against the CBN. Investors' confidence in the banking sector is absolutely vital. Instead of resorting to selling any of the banks without carrying the shareholders along, we would prefer an option where the CBN facilitates the merger of banks that are in danger of failing with the sound ones. This avoids the closure of the distressed bank or its possible liquidation. For now, we advise that CBN concentrates on its regulatory and monitoring roles on the commercial banks.

The current reform effort in the banking sector should be tempered with dialogue with key stakeholders in the sector, particularly the shareholders of the rescued banks. The CBN Governor also needs to carefully weigh his utterances to avoid being misinterpreted.

Recent reports that he described banks as no more than 'gambling houses' and the Nigerian capital market, as nothing better than a 'friendly casino house', are inexpedient. Though Sanusi has denied that he ever made such comments, the preeminent position of the apex bank in the growth of any economy requires less talk from its chief executive. What is required in the banking sector now is concrete action. This is no time to play the blame game.