NATIONALISATION OF FAILED BANKS

On August 5, the Central Bank of Nigeria (CBN) intervened yet again in the banking sector of the economy. The intervention could go for a quake of some sorts, as its effects are still ricocheting across the country. The apex regulatory bank, on that date, revoked the licences of three commercial banks - Afribank, Bank PHB and Spring Bank.

The government handed the institutions to the Nigeria Deposit Insurance Corporation (NDIC), which created three bridge banks called Mainstreet Bank, Keystone Bank and Enterprise Bank, respectively, to assume their assets and liabilities.

The Assets Management Company of Nigeria (AMCON), set up by government to absorb toxic loans of banks, acquired the new banks via a subscription agreement that enabled it to inject N679 billion stimulus package into them. New CEOs have since been appointed to run the banks for a maximum of three years, when new investors would have been found for them.

The three banks were among the eight that were declared insolvent two years ago by CBN. This approach, called bridge banking, permits the NDIC to take over the failed banks and keep them in business until it hands them over to new buyers.

Justifying its action, CBN said the three banks 'have not shown the necessary capacity and ability to beat the September 30 recapitalization deadline' given to the eight insolvent banks to shore up their capital base.

The action of the CBN has, however, dampened confidence, which is critical in the banking sector. Panic has already choked the capital market. Stocks prices have been on a free-fall. The all share index, which measures the volume of trading, has been on a bearish retreat. NDIC has advised shareholders of the acquired banks to regard their shares as 'worthless.' Both big time and small shareholders are groaning, just as panic withdrawals are going on in branches of the three banks across the country. The damage to the economy may be incalculable in real terms. The losses could be much higher than the regulatory authorities anticipated before the nationalisation.

We have always supported reforms that could deepen the fortunes of the banking sector and save it from turbulence. Our position has not changed. Without a doubt, the banking sector occupies premium position in our economy. With its stocks constituting about 60 percent of all equities in the Stock Exchange, it is expected that any decision on this sector must be well thought through before implementation. Anything contrary to this will be counter-productive. We want to believe that whatever informed the CBN's action, the banks and their customers and shareholders' interests must be taken into consideration.

It makes sense that the leadership of CBN should make this a priority at all times. In this case, the decision of the apex bank may have been well intentioned to save terminally ill institutions, which the banks were alleged to be. Nonetheless, the fate of the shareholders should been have factored in.

The regulatory authority, NDIC, has hinted that the shareholders should bear their losses as the price they have to pay for investing in distressed financial institutions. That is not comforting at all. We think the CBN, NDIC and AMCON should do more than they are currently doing to douse anxiety in the aftermath of government acquisition of the failed banks.

Mature handling of this crisis will go a long way in restoring investors' confidence, not only in the failed banks, but also in the banking sector as a whole. At the moment, confidence is abysmally low, and Foreign Direct Investment (FDI), which indicates level of interest of foreign investors in the economy of a country, is equally very low. This is largely due to the current mixed signals from the CBN.

The regulatory authorities need to inject optimism and confidence into our economic outlook, which is yet to recover from the after-shock of the financial crisis that bruised and battered many economies of the world.

If our banks are to play a leading role in galvanizing the economy, CBN should watch its back, especially on its policies in the sector. This is the time for CBN to renew confidence in our banks.