Banking Crisis: The Failure of Leadership

Would it be asking too much for Nigerians to expect their legislators to cut short their vacation and hold a special session on the banking crisis and what it needs in terms of monies, possible new policies and known or amended legislation? What policy brief has the President set to the legislature on the banking crisis? Leadership! Leadership! Leadership!!!


Banking Reforms? The Concept of the Six FailuresWRITTEN BY EZE ONYEKPERE ESQ 

Summary: Let us have a comprehensive understanding of banking reforms so as to tackle the challenges of the six failures – political/leadership, regulatory, managerial, professional, individual/moral and due process and its ripple effects. 

 1. Political And Leadership Failure: After consolidation, banks that hitherto had access to a few hundreds of millions suddenly had bourses running into hundreds of billions. However, the banks were without clear policy directions from the political leadership as to leadership’s vision of the preferred destination for the economy. The volume of money lent to importers of petroleum products by banks could have completed a couple of refineries. But there was no policy direction to indicate government’s and indeed society’s developmental priorities using the convergence of monetary and fiscal policy to encourage entrepreneurs, investors and bankers to move in the preferred direction that would have led Nigeria to its preferred developmental destination.

The large amount of custom duty waivers granted under Obasanjo’sregime could have been granted to entrepreneurs who imported machinery for refineries, who competitively added value locally, and those who earned foreign exchange through export of goods and services. Incentives could have been directed at agriculture, processing of its products, labor intensive industries that could regenerate the economy whilst massively creating jobs. The National Economic Empowerment and Development Strategy (NEEDS) talked about creating seven million jobs but there was no road map to that destination. If the right policy mix was in place, a legal, profit and developmental obligation would have created for banks to lend to the preferred sectors.

What was the Central Bank of Nigeria’s (CBN) official policy on margin loans – that simply meant trading on paper instead of banking?  Did it bar the loans? Did it stipulate a maximum exposure for banks – may be as a percentage of total lending portfolio? Beyond the prudential guidelines, I am yet to hear in any official discourse about extant policies that regulated margin lending which were violated by our bankers.  Margin lending added no value, was purely speculative and discouraged hard work.

Having failed to give policy direction before the crisis, how has the political leadership reacted to the crisis?

On the over N400 billion injected into the five banks by the CBN, a number of issues are thrown up – whose money? Who has the power to approve the disbursement of such huge sum of money? It is imperative to review the laws governing this situation. The Fiscal Responsibility Act (FRA) and the Central Bank of Nigeria Act (CBN Act) come in handy. In section 21 of the FRA, the CBN is supposed to prepare its annual budget, submit it to the Minister of Finance who will lay it before the National Assembly for the Assembly’s information. The Central Bank of Nigeria Act vests the power to consider and approve CBN budgets in the Board of Directors of the Bank. Pray, did the CBN provide thisN400 billion in their 2009 budget? If the answer is in the affirmative, then it means CBN anticipated the crisis. But if the answer is in the negative, spending such a huge sum of money without appropriation cannot be justified. At the best, the CBN Governor spent the money and sought approval of the Board later or the CBN Board was convened to hurriedly approve the expenditure.

Section 22 of the FRA headed “Operating Surplus and General Reserve Fund”, it states as follows:

(1) Notwithstanding the provisions of any written law governing the corporation, each corporation shall establish a general reserve fund and shall allocate thereto at the end of each financial year, one-fifth of its operating surplus for the year.  
(2) The balance of the operating surplus shall be paid to the Consolidated Revenue Fund of the Federal Government, not later than one month following the statutory dead line for publishing each corporation’s accounts. 
However, the CBN Act by section 5 mandates the CBN to retain 25% of its operating surplus and pay only 75% to the Treasury. Assuming without conceding that the N400b is CBN’s retained revenue, would the injection of such a huge bailout sum not require public consensus and legislative approval? – The example of the bailouts in the United States of America refers. Today, because of the comprehensive plans and strategies, the United States Government’s intervention in Citibank has yielded over $10 billion profit for their Public Treasury.  Any financial system that allows a board of unelected men and women (the CBN Board) to take decisions on how to spend over 20%
of the national budget without the authorization of the legislature should be in dire need of reform. Some of the new managing directors appointed by CBN have stated that they need larger sums of money by aggregate, running into trillions of naira to reposition the banks –would the CBN simply raise the money equivalent to the 2009 budget and by its authority disburse it? 
Would it be asking too much for Nigerians to expect their legislators to cut short their vacation and hold a special session on the banking crisis and what it needs in terms of monies, possible new policies and knew or amended legislation? What policy brief has the President set to the legislature on the banking crisis? Leadership! Leadership! Leadership!!!

2.  Regulatory Failure: The CBN has a battery of examiners who together with Nigeria Deposit Insurance Corporation (NDIC) regularly examine banks and report on the state of their health. Section 31 of the Banks and Other Financial Institutions Act (BOFIA) established the Director of Banking Supervision and other examinees. Their powers are so extensive and it includes the power to examine periodically the books and affairs of each bank, with a right of access to the books, accounts and vouchers of the banks. It also has the power to compel information at the pain of punishment from directors, managers and officers of banks. BOFIAin sections 32 and 33 provide for two types of examination – the routine and special examinations. The former is to be carried out by the Director of Banking Supervision and examiners whilst the latter is carried out on the orders of the CBN Governor.  The CBN Act in section43 even establishes the Financial Services Regulation Coordination Committee with membership from the CBN, NDIC, Securities and Exchange Commission, National Insurance Commission, Corporate Affairs Commission and Federal Ministry of Finance. 
The Nigeria Deposit Insurance Corporation has powers to require information from insured institutions at the pain of punishment. It further has powers to order general and special examinations and to order the management of banks to take corrective measures if violations of the law have been identified.

The oversight duties of the Banking and Finance Committees of the House of Representatives and the Senate also come under the searchlight. What actually were they overseeing? From all the fat allowances and pesticides collected, did they see and hear of no evil? With enormous powers to summon, take testimonies and demand for documents, why did they not have information about the impending doom? Did they have information and decide to cover it up? 
If as we are being made to believe, the liquidity and solvency situation of these banks had gotten so precarious, a couple of interpretations are open as possibilities.  Either the regulators were incompetent that they could not discover the malfeasance or they discovered it and decided to cover it up – may be after being compromised by the management of banks. Alternatively, they discovered the malfeasance and decided to do nothing! However it is interpreted, it is an indictment on the regulatory authorities.

3. Managerial Failure: The banks have been given a trust by the public and the government. It is quite simple – keep people’s monies in return for your profits but ensure that no one who places money with you will come back and hear stories about it mismanagement. Follow the rules and Prudential Guidelines; obey the laws of the land  (the Companies and Allied Matters Act (CAMA), the Banks and Other Financial Institutions Act(BOFIA, etc) and it shall be well with you.  This did not appear to be the case.

 4. Professional Failure: It is the contention of this discourse that auditors should be beyond reproach at all times and in all circumstances. Any deficiency in their professional conduct or any improper conduct in their personal life places the integrity, the quality and validity of their audit in an unfavorable light, and may raise doubts about the reliability and competence of their audit and their professional institution and regulations. The adoption and application of a code of ethics for auditors in the private sector promotes trust and confidence in the auditors and their work. It is imperative that the position of an auditor is looked upon with trust, confidence and credibility. The auditor promotes this by adopting and applying the ethical requirements of the concepts embodied in the key words integrity, independence, objectivity, confidentiality and competence.

From the CBN action, it appears that the auditors of the five banks, failed, neglected and refused to perform their statutory duties. BOFIAprovides as follows in section 29 on the duties and processes of approved auditors:
(6) The report of the approved auditor shall be read together with the report of the board of directors at the annual general meeting of the shareholders of the bank and two copies of each report together with the auditor’s analysis of bad and doubtful advances in a form specified, from to time, by the Bank shall be sent to the Bank.
(Underlining added for emphasis)

(7) If an auditor appointed under this section, in the course of his duties as an auditor of a bank, is satisfied that –

(a) There has been a contravention of this Act, or that an offence under any other law has been committed by the bank or any other person; or

(b) Losses have been incurred by the bank which substantially reduce its capital funds; or

(c) Any irregularity which jeopardizes the interest of depositors or creditors of the bank, or any other irregularity has occurred; or

(d) He is unable to confirm that the claims of depositors or creditors are covered by the assets of the bank, he shall immediately report the matter to the Bank.

(8) The approved auditor shall forward to the Bank two copies of the domestic reports on the bank’s activities not later than three months after the end of the bank’s financial year.

(9) Any approved auditor under this section who acts in contravention of or fails deliberately or negligently to comply with any of the provisions of this section of this Act is guilty of an offence and liable on conviction to a fine not exceeding N500, 000 and where the approved auditor is a firm, the individual partner or partners shall in addition be liable on conviction to imprisonment for a term not exceeding five years and to the fine required to be paid by the firm under this subsection. 
It is the view of author of this discourse that auditors both in public and private corporations should serve for no more than a couple of years – three or four years and move on. This is to avoid collusion and rigging of the books, which comes with a lot of familiarity and endless auditing of a particular company year after year. If it is found that the auditors failed to exercise the standard of care and due diligence expected under the rules of professional conduct of the accounting or auditing profession, then a duty is placed on their respective professional associations, the CBN, EFCC, etc to move the courts to sanction them.

5. Individual/Moral Failure: Society is run on the understanding of collective interests and enlightened self-interest of its elite. Beyond legalism, there are moral and conscience issues, which should nag all who sucked their mother’s breasts or have a little human DNA in their veins. Banks lend money to businesses and in return, businesses grow and make money for their owners, create jobs, etc while bank managers and owners receive good returns as fees, salaries and returns on investment. Thus, it is a win-win game in which ideally, there should be no losers. Anyone who breaks the chain by collecting money and refusing to pay back creates a huge moral hazard and attacks the very foundation of the society. It simply means you take and don’t give back. Once this chain is broken, there is a crisis, and in the typical Achebe style, things will fall apart, the centre cannot not hold while the falcon will find it very difficult to hear the falconer. Capitalism cannot work on this precept.

6.  Due Process Failure And Its Ripple Effects: The concept of justice enjoins us to treat like cases alike. The banking sector is key and central to the survival of modern economies. Rushing to wield the stick after auditing ten out of twenty four banks does not give all the banks a level playing ground. The remaining fourteen may adjust and have opportunities to recover lost grounds before the auditors eventually come to them. The sacked directors complained that they were simply summoned and without a hearing, an opportunity to defend themselves, judgment was entered against them. It would have made eminent sense if they were confronted with the findings and asked to show cause why the CBN should not proceed against them in accordance with the law.

The Board of these companies could have been asked to devise a time bound work plan with milestones and benchmarks acceptable to the Canfor the recovery of these loans. If there was the need to sack the managing and executive directors of the banks, the board of the banks should have been instructed by CBN to do so within a stipulated time frame. And if the plans do not seem to work, then CBN can directly intervene as it did. This should not have attracted a media blitz, such that attended the recent CBN action. It should have been done as a routine banking supervision transaction within the parameters of good corporate governance.

The implication of the current way and manner of CBN’s intervention is that virtually all the five banks are facing massive withdrawals and diminished new deposits. This may either lead to their collapse or the need for massive infusion of public trillions of naira to sustain them. CBN is even planning a road show in London at the taxpayer’s expense to explain its action while Nigeria’s sovereign rating has been downgraded! International banks are withholding credit to Nigerian banks, etc. The procedure adopted simply appears to cut off the nose to spite the face and the entire banking industry is worse off. Specific instructions had to be given by the Federal Executive Council to stop Ministries, Departments and Agencies from withdrawing their deposits. Admitted, there was a serious banking disease, how should the doctor react? What kind of banking medicine should he prescribe?  After the ripples of this first exercise, would the CBNstill use the same method to address the same issue in the remaining fourteen banks?

7. Not Yet A Failure But It Can Fail: Recent interviews granted by the CBN Governor (London and Kigali) seem to suggest that he is very interested in selling Nigerian banks to foreign ownership. It is imperative to enter a caveat that this is a free world and everyone should be allowed to do business and set up shop in any part of the globe. But banks are part of the backbone of every economy and provide venture capital for all manner of entrepreneurs. Under the Soludo era, foreign capital was free to come with the N25 billion capital base and set up a shop but was not allowed to come and acquire already existing Nigerian banks. This makes good economic sense. Nigerian banks have started building brand names and have established a presence in many parts of Africa and even in some parts of Europe and America and a good part of their monies came from the sweat of Nigerians invested through the Nigerian Stock Exchange. Remittances from Nigerians abroad also showed their faith in Nigeria. According to General Buhari (who is cited with approval), this generation and future generations of Nigerians has no other country but Nigeria and we need to salvage it ourselves. Insisting on selling these Nigerian banks to foreign interests is like selling the family heirloom. After rescuing a Nigerian bank with Nigerian taxpayer’s money, you now sell it to a foreigner! Why the rush to “foreignise” what properly belongs to Nigerians. If the CBN does its work properly, Nigerians can still buy into these banks to retain their ownership.

8. Conclusion: The mistake of this generation would be to focus only on one of these failures and constitute a lynch mob baying after the blood of the directors of the five banks. Agreed, punishment follows a misdeed if one can be proved at law. But what happens to the actors in the other spheres identified to have failed? How soon and expeditiously we move to correct the other failures would to a great extent determine our economic future.