Lamido Sanusi, what is he Up to? Part 1
“I think it’s also important to send very clear signals to bank executives that it’s not a crime to make a loss, but it’s criminal to lie about it,” he told the Financial Times. “If at any point in time I have reason to believe that a bank chief executive is not fit to be chief executive, I will remove him.” With this warning, Lamido Sanusi declared to Nigerian bankers that a new Sheriff is in town.
(I will present a general summary of what Lamido Sanusi said in the FT interview, In the next series, I will look critically at the not so palatable aspects of Lamido Sanusi’s intentions)
Sanusi also said:
“What banks need to understand is that banking is a business. When the stock market was going up some banks took risks and made a lot of money from the stock market. If it goes down they take the losses. As somebody once said, you cannot privatise your profits and socialise your losses. That is for me a minimum. They’ve got to take their losses, and then we will do everything we can to make sure they don’t go under”.
Such a warning will cheer analysts who argue that Nigeria’s banking sector had fallen into an “Emperor’s New Clothes” syndrome, where regulators celebrated rapid growth while refusing to acknowledge concerns about supervision and transparency. Such concerns are among the biggest obstacles to Nigeria’s 24 banks channelling the country’s oil wealth into long-term finance for African businesses.
Lamido Sanusi: In addition to the standard central bank duties of monetary policy and financial stability, I’ve set myself two primary tasks. The first one is restoring confidence in the financial system. The second one is slightly less conventional but it is actually playing an important role as an agent for development.
I think the governor of the (Nigerian) central bank cannot be the governor of the Bank of England, and just talk about money supply and interest rates and inflation. The financial system plays such a pivotal role in the economy that the governor of the central bank has to see himself, even though not a politician, as an important part of the government with a responsibility for delivering economic growth.
FT: Some people say that the level of coordination between the finance ministry and central bank has really withered recently. Would you agree with that?
Lamido Sanusi: Yes, I agree with that totally. I think the autonomy of central bank has been taken to an extreme where it’s almost an island on its own. My own idea is that the central bank governor is a part of government and I would work very closely with the finance minister. I would like to work very closely with other ministers, the Federal Executive Council. I would like to see myself very much as a part of overall government economic policy.
If we are able to work as a team I think we will be able to address some of these issues. The solution is more or less political. We’ve got our own examination teams; we’ve got our own supervision teams in the central bank and NDIC. What I would like to do is have them go into every bank, including those we don’t think have problems. I would start with First Bank
among the first batch of banks to go and actually do an asset quality audit and a capital audit and bring a report. (Ed: Mr Sanusi was formerly head of First Bank before he took up his post as central bank governor).
FT: Your predecessor was sometimes accused by his critics of having a rather cosy relationship with some senior bankers, and some people in the market believe he was compromised as a result. (Ed: Mr Soludo denies this). It sounds like, from the language you’re using, you are keen to take a much tougher line.
Lamido Sanusi: I have avoided making any comments about my predecessor that are adverse. I would rather continue like that. But I do believe that the dividing line between the regulator and the operator needs to be very clear and I need to be very clear about my role as a regulator, and that includes creating a level playing field. It also includes very clearly avoiding questions of conflict of interest. I will give you an example. I have just left First Bank, and as an employee of First Bank I had loans that were staff loans at concessionary rates. Usually, what happens in institutions like that are when you have left they leave your loans at that concessionary rate.
One of the first things I did was to call the MD and say I wanted my loans converted to a commercial rate, precisely because I am the governor of central bank. I did not take advantage of the opportunity to just leave the loans at that rate because I’ve got to set for myself standards if I intend to hold other regulators to those standards. I think we need to make that distinction clear and we also need to understand that there are certain circumstances that could lead to conflict of interest, and we need to be very explicit in our definition of those circumstances. You may not avoid everything, you may not stop people from borrowing from banks, and you may not stop people buying shares in banks, but then if they do, to what extent? What are the terms? What are
the disclosure requirements? We’ve got to look at all of those and generally improve governance.
I would personally say senior regulators shouldn’t be shareholders in the institutions that they regulate. I personally would sell any shares I own in any banks.
Lamido Sanusi said Nigeria is to lift a ban on foreign takeovers of its banks, breaking a decades-old legacy of protectionism to open Africa’s biggest untapped market for financial services to international competition. He said he would break with his predecessor’s aversion to foreign ownership by encouraging international banks to make acquisitions as part of a wider plan to bolster confidence in Nigeria’s financial system.
The move raises the possibility that international banks, most of whom fled after nationalisations under military rule in the 1970s, may return to snap up Nigerian banks with networks across West Africa as a bridgehead for wider expansion. “We would try to encourage foreign banks that are coming, not just with money, but with management and systems, to come in and acquire,” he said. “Why wouldn’t I be comfortable with a bank owned by a Barclays, or HSBC or China Construction Bank, who I know? For me it’s a no-brainer.”
He pledged to impose tougher disclosure standards and move to quantify then tackle the sector’s exposure to share-related loans, the biggest source of uncertainty for investors.
Mr Sanusi said he would review a cap the central bank imposed on foreign ownership in local banks at 10 per cent following a 2007 merger deal that handed control of IBTC Chartered Bank in Lagos to Standard Bank of South Africa.
From the Financial Times:
Not long ago, Nigeria’s banks seemed to be enjoying an almost miraculous renaissance. Once perceived as a swamp of currency scams and money-laundering, the sector had given birth to national champions with plans to march across Africa. In gleaming towers in Lagos, chief executives plotted to go global. In the past year, the miracle has begun to look more like a mirage. Stock prices for Nigerian banks crashed, eroding confidence throughout the system. Rumours swirled that a bank – or banks – might be at risk of insolvency.
This month, President Umaru Yar’Adua replaced Chukwuma Soludo, the architect of the transformation, with Lamido Sanusi as central bank governor. Respected both for his risk management skills and heritage as a grandson of the 11th emir of the ancient city of Kano, the new governor has a stark message: the days of loose accounting and cosy relations with regulators are over.
Mr Sanusi, said his long experience in the banking sector, latterly as chief executive of First Bank, Nigeria’s biggest by market capitalisation, had equipped him to diagnose and treat such problems.
His plans to enforce greater disclosure may place him in conflict with politically connected banking magnates who lobbied to retain Mr Soludo. Nigerian oligarchs have mounted stiff defences of the status quo in troubled sectors such as oil and power.
But Mr Sanusi has some strong cards to play. In his most significant step, the new governor said he would allow takeovers by foreign banks, breaking a long resistance to outside control.
He hopes international acquisitions will spur a second round of consolidation among banks that may otherwise struggle to cope with bad debts from share-related loans. “I wouldn’t force any consolidation, but I think it’s important to send out signals to the banks that may have difficulties that merging with stronger banks is certainly a very good possibility for saving themselves,” he said. “My sense is that we might end up with 15 banks.”
It is unclear how long – or short – the queue of foreign suitors might be. In 2007, hedge funds rushed into Nigerian banking stocks, and Actis, the private equity fund, took a stake in Diamond Bank. Standard Bank of South Africa acquired IBTC in a merger deal before Mr Soludo barred outsiders from taking controlling stakes.
South African banks such as FirstRand and Nedbank are now seen as among the most likely contenders, while HSBC and Barclays have long been viewed as other possibles. Yet the global financial crisis and the breakdown in trust among Nigeria’s own banks may blunt foreign appetite. Much will depend on how quickly Mr Sanusi can implement his pledge to tackle the overhang of bad loans. Banks are wary of lending. Interbank rates are at 17-18 per cent, while 90-day Treasury bills trade at 4-5 per cent.
Mr Sanusi said he had begun a two-month audit process to ascertain the size of the bad debts before deciding on the best option to tackle them, perhaps by creating a state-backed asset management company. “What banks need to understand is that banking is a business,” he said. “They’ve got to take their losses, and then we will do everything we can to make sure they don’t go under.”
In the next series, I will look critically at the not so palatable aspects of Lamido Sanusi’s intentions.