MONEY MATTERS: Laying the banking crisis to rest

In resolving the 2009 banking crisis, the government has had to deal with bad managers, bad loans, erosion of capital, weak regulators and a credit crunch. The Central Bank of Nigeria (CGN) has sacked bad managers and is prosecuting those believed to be fraudulent. It has also injected N620 billion of capital into ailing financial institutions and guaranteed inter-bank placements up till the end of March 2010 in a bid to provide stability and liquidity in that market.

These are positive steps but the government needs to do more because the size of the problem is aboutN1,500 billion and not N620 billion. This means that the industry has lost about 5% of the national wealth and requires another N900 billion to be completely out of the woods. This money is required urgently to resolve this crisis in a timely manner. This is because we need to restore confidence, protect jobs, stimulate growth and generate tax revenues for the government.

Now that the caretaker managers appointed by the CBN have taken control of these banks, they should determine the true level of capital deficiency in each bank and advise the CBN accordingly. Armed with this information, the CBN should give the existing shareholders an option to make good the lost capital within a reasonable timeframe or allow the government to take a temporary equity position in each of these banks. If the existing shareholders can make good the lost capital (which is unlikely), they should be handed back their banks provided they put together new management teams that the CBN finds acceptable.

If the current shareholders are unable to make good the lost capital, the FGN should take an equity position in each bank, owning at least 40% of shares that carry voting rights. This should be done by converting the funds already injected into these banks into ordinary shares based on independent valuation of each bank. The government should then buy back all the bad loans of the banks in which she has an equity stake at a value equal to the principal sum outstanding on each loan. In consideration for this, the FGN should issue these banks with non-interest bearing government bonds. This action cleans out the books of these banks and should make them very attractive for prospective core investors.

The FGN should then offer its equity stake in each bank to prospective core investors. This should be done by open competitive bids that will be in two stages. The first will be technical bids during which prospective core investors will be evaluated based on character and ability to run "safe and sound" banks. Those who scale this hurdle will then be allowed to make financial bids for these banks and the highest bidders get the banks.

The benefits of this approach are that It restores confidence in the banking system quickly because it takes out all the problem loans Although government bears the cost of the bail-out (i.e. cost of buying shares and cost of buying bad loans), any profit from the disposal of its equity shares is also for the government The way the bail-out will be funded (printing N620 billion and issuing FGN bonds to fund the balance) does not have any impact on the national budget and is therefore easier to sell politically The bonds to be issued will only add about 3% to the national debt and is therefore affordable because total debt to GDP ratio will still be under 17% It should lift the value of shares listed on the stock exchange because even in these difficult times, banking stocks still represent 50% of the market value of the exchange And hopefully we shall be handing the management of these banks to honest and competent people.

All these steps should be concluded within eighteen months and the caretaker managers should not be allowed to bid for any of the banks. Their reward should be a percentage of the proceeds of sale of government's equity stake.

This approach also helps us to know the true cost of bailing out the banks which will be the difference between the cost of buying the shares and bad loans and the proceeds from the sale of those shares plus what is recovered from the bad loans purchased. An account should be prepared for all these transactions, independent accountants should audit it and the reports submitted to the President and the National Assembly.