Central Bank audits commercial banks

Finance experts have commended the move by the Central Bank of Nigeria (CBN) to unravel the actual exposure of Nigerian banks to the equity market, adding that the action would lay to rest the uncertainties of bad loans facing the banks.

Jibril Aku, an Executive Director of Ecobank Nigeria Plc, a bank with branches in a number of African countries including Ghana and Cameroon, told journalists in Lagos yesterday that the move would help clear the wave of speculations once and for all.

According to him, "the CBN Governor has directed an audit of the banks to ascertain their actual exposure to margin loans. Some people say it is N784 billion. If it was, we shouldn't be having so much problems. This move would put to rest all the speculations in the Industry", he said.

The CBN governor, Lamido Sanusi, in an interview with The Financial Times of London published on Monday, stated that he would not hesitate to remove any erring bank CEO after the ongoing audit.

According to a story by a Nigerian newspaper published on Tuesday, June 23, Sanusi said "I have launched it, (The bank audit). What I would like to do is to have the CBN and NDIC (Nigeria Deposit Insurance Corporation) go into every bank including those we don't think have problems".

One of the major direct effects of the global economic crisis on the Nigerian banking industry, as identified by the International Monetary Fund and other financial bodies is the exposure of the banking industry to margin lending.

The inability of many banks to actually state their levels of exposure to margin loans has left a wave of doubts in the hearts of customers and shareholders who sensed the impact of huge losses but do not have the figures to confirm or dispel their fears.

Margin lending is a flexible investment loan that can be used for investment purposes such as investment in shares and managed funds. A customer is required to provide existing approved shares, managed funds or cash as security for the loan.

Industry observers have explained that Nigerian banks engaged in margin lending for several reasons including excess liquidity, a search for higher returns on capital invested and lax rules and regulations, both in the money and capital market, that made it easy for speculative buying and outright share price manipulation to flourish. The thirst to make quick and easy money drove margin lending.

The loans went bad following a drop in demand, precipitated by foreign speculative investors pulling out their capital, and a fall in the price of previously over-inflated stock at the Nigerian Stock Exchange. Loans that had been secured on the basis of over-valued shares could not be paid back once those shares lost much of their value.

A report by Renaissance Capital, an investment bank, in January this year indicated that the problems of margin lending would continue to overshadow the performance of the market in 2009 until the Central Bank of Nigeria move to resolve margin lending issues in the banking system.

According to RenCap, "Our core view is that a solution to the banks' margin exposure (which we estimate at more than 1 trillion) will be resolved in 2H 2009, triggering an increased risk appetite for Nigerian banks at distressed valuations and spurring a rally in the equity market".

The recent moves by the Central Bank may yet bring relief according to this timeline.