Nigerian banks under siege -the inside storyA Central Bank audit has uncovered evidence of fraud and mismanagement which implicates some leading politicians and their business partners

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Like a family of latter day Medicis, Nigeria's top bankers have been prospering thanks to their acute political instincts and abilities to exploit their dominance in a tightly controlled market; now it seems that some, again like the Medicis, have overreached themselves.

The unruly political system they tried to influence has at last turned on them.

The consequences for Nigeria's economy and politics will extend far beyond the careers of the half-dozen bankers helping police with their inquiries and the multi-billion dollar institutions they helped create.

This month's purge by the reforming governor of the Central Bank of Nigeria (CBN), Sanusi Lamido Sanusi (AC Vol 50 No 14), appointed in June, has exposed the venal business practices of many in the corporate elite and how their political connections have protected them. Corrupt politicians looted state treasuries, then set up front companies and contracted billions of naira in loans from banks to buy local assets; but despite their wealth, these politicians and their front companies have neglected to service the loans. Bankers and their political affiliates lived in a rarefied world of luxury property holdings, helicopter rides into the city and weekend jaunts to South Africa on company jets.

As those caught in Sanusi's net try to fight back using their political protectors, the stage is set for the most important battle of Umaru Musa Yar'Adua's presidency: if he backs Sanusi, then some of the key financiers of the ruling People's Democratic Party could fall from grace.

If Yar'Adua jibs at the prospect of the messy political battles ahead, he risks the collective resignation of technocrats such as Governor Sanusi, Finance Minister Mansur Muhtar and the new head of the Securities and Exchange Commission, Arunma Oteh. Yar'Adua and his advisors had recruited these professionals to push through unpalatable reforms, and they have all made clear their independence from party political pressures.

In spite of that non-partisanship, Sanusi argues that central bank governors in developing economies have to develop a bigger vision beyond determining money supply and interest rates, given that the health of the financial system is fundamental to a country's economic growth. He saw a special set of risks for Nigerian banks beyond the effects of the global slowdown.

The Nigerian Stock Exchange lost 65% of its value between March 2008 and March 2009, due to massive withdrawals of portfolio investments, according to Lagos-based analysts Afrinvest.

Over the same period, the banks lost 67% of their value on the NSE in naira terms. So along with the pressures from the economic slowdown and their shaky risk management procedures, Nigeria's banks were badly exposed to margin lending, that is by lending to stockbrokers investing on the NSE and lending to retail stock market investors - some of whom used bank credit to buy shares in the institutions extending the loan, a risky transaction at a time of tumbling markets.

Sanusi's revolution started auspiciously with an emergency meeting of the Bankers Committee at the Central Bank of Nigeria on 14 August. The committee had just received the first results of an audit that Sanusi had commissioned two months earlier. The first alarming figure presented was that out of the banking system's total loan exposure of N2.4 trillion (US$15.6 bn.), some N1.2 trn. of the loans were non-performing; the second disturbing figure was that this crisis would require the CBN to inject about $2.6 bn. into five of the worst run banks to make good its assurance that no bank would be allowed to collapse.

Then came the purge. That day, Sanusi announced that five of Nigeria's super-bankers would be dismissed from their chief executive positions with immediate effect and replaced by his nominees, adding that the dismissed executives should stand ready to help Central Bank auditors and the police with further investigations.

The purged five were on Nigeria's banking A-list: Erastus Akingbola (Intercontinental Bank), Cecilia Ibru (Oceanic Bank), Okey Nwosu (Finbank), Sebastian Adigwe (Afribank) and Bartholomew Ebong (Union Bank).

For other Nigerians, the good news is that the five rescued banks had about 90% of the most questionable loans on their books, and CBN officials reckon that subsequent audits and investigations are unlikely to uncover a similar level of risk.

The five banks had made a disproportionate amount of loans to the capital market and to local oil marketing companies, both areas of the economy that had sustained huge losses.

On 27 August, Ibru surrendered herself for questioning by officials from the Economic and Financial Crimes Commission (EFCC), which had sent 100 of its agents to deal with the fall-out from the banking crisis in Lagos.

Akingbola is proving harder to track down with reports in Lagos suggesting he has been unavoidably detained on business in London.

He seems likely to return given his strong sense of his own reputation: 'Some are born great, some achieve greatness and some have greatness thrust upon them,' proclaims Akingbola's website.

He is also President of the Chartered Institute of Bankers, a position which he has used to attack 'mischievous' foreign critics

of Nigeria's banking practices. Neither Ibru nor Akingbola were happy about Sanusi's appointment as CBN governor. We hear they had both sent emissaries to Yar'Adua arguing that then incumbent Governor Chukwuma Soludo would be best placed to oversee the financial system.

After Soludo had raised the capital requirement rules in 2005, the country's more than 80 banks were consolidated into just 25; that attracted over $25 bn. in new capital in the next three years, confirming Soludo's popularity among the bankers.

Soludo made little secret of his close relations with the leading bank chief executives and saw nothing wrong with his launching and chairing the board of the privately owned $1 bn. Africa Finance Corporation while he was still the country's chief financial regulator.

Yar'Adua's backing of Sanusi has surprised critics who have watched the antics of Attorney General Michael Aondoakaa, who without presidential censure mounted a determined defence of some of the most corrupt politicians.

Sanusi's style is different: he told the management of First Bank, where he was formerly Chief Executive, to switch all his loans to the commercial rate from the concessional interest rates given to banking staff: he did not want anyone to accuse him of conflicts of interest. It seems Sanusi is prepared for a harsh fightback from the many enemies he has made in the past two weeks. One explanation for Yar'Adua's position is that the damage to the financial system has been so grave that Sanusi has convinced him that the government's survival - let alone Nigeria's international reputation - depends on radical surgery on the banking sector. But it is stage two of Sanusi's revolution that is causing Yar'Adua's concern: the publication of the biggest delinquent debtors in the country.

The list includes more than 200 individuals including two of Nigeria's much-fĂȘted dollar billionaires - Aliko Dangote and Femi Otedola - as well as high profile companies such as former President Olusegun Obasanjo's pet business project, Transcorp Ltd., which he had hoped would develop into a South Korean-style chaebol or mega-corporation. Dangote and Otedola, who have fallen out over an oil deal, angrily deny they owed the debts claimed by the CBN. Undaunted, the Chairwoman of the EFCC, Farida Waziri says the debtors have another week to settle their debts or they will face prosecution. One of the prickliest cases for Waziri, who has appeared close to the former Police Chief Mike Okiro and Attorney General Aondoakaa, is the appearance of former Governor of Delta State James Ibori on the debtors' list.

Ibori and an associate called Mike Orugbo, according to the list, borrowed almost $200 million from Oceanic to finance their takeover of the National Fertilizer Company of Nigeria; its factory was built in the mid-1980s by the US's Kellogg, now defending itself against allegations of multi-billion dollar corruption in the building of Nigeria's first gas export plant. Although Ibori and Orugbo's company, Notore, bought a private jet, the CBN says they have neglected to service the loan.

Similarly, Ibori borrowed another $200 mn. to finance his purchase - through Ascot Offshore - of the oil services company Willbross Nigeria from its US parent company, Willbross Inc. Willbross Inc. had to close its Nigeria operations after a federal court had found it, together with Germany's Bilfinger Berger and Anglo-Dutch Shell, guilty of fraud and corruption. So disturbed was Ibori by the CBN move, he rushed back from a holiday in South Africa to consult his lawyers.

With Sanusi returned from touring European capitals to calm investors' nerves, many of the repercussions have yet to play out.

But some of the obvious questions are already being asked: if Sanusi could see these failures of risk management and billions of dollars in non-performing loans, why did so few analysts and financial institutions sound the alarm bells?

And why did those business publications continue to hand out 'Best Bank of the Year' awards to banks in such money just seemed too good and too easy at the time.

For Ghana, which could be infected by what happened in Nigeria, the question to ask is why is Ghana going the way of Nigeria with mainly Niegrian owned publications awash with advertisments proclaiming their excellence in coloured advertising spreads with not a note of criticism.