Saving depositors from flamboyant bankers

Any sincere banker would readily tell you that the real owners of banks are not the flamboyant Chief Executive Officers or board members. Neither is it the shareholders. The real owners of banks are the depositors; unfortunately, they are the most undermined.

For most banks, the shareholders' fund is only about a quarter of the deposit liabilities. For instance, Zenith Bank with a shareholders' fund of N346 billion has a deposit liability of N1.2 trillion.

Funds are mobilised from the public and the bank is expected to generate adequate returns from this, to meet expectations of shareholders and depositors by way of interest and dividend. Many of the indicted banks' CEOs failed to exercise caution before granting loans. Intercontinental Bank granted loans to only three companies in the oil and gas sector to the tune of about N34 billion. This is without prejudice to other exposures in the capital market; and these loans are not performing.

This development, while it reflects carelessness on the part of the bankers, also reflects both regulatory and operational distortions in the system. For instance, the absence of a functional credit bureau has left the banks at the mercy of Nigerian businessmen who are sometimes not so sincere in their dealings. A situation where an individual obtains loan from Bank A, defaults on his obligations, yet approaches bank B for another facility; and the banks, in their bid to outdo each other, do not share information on the credit character of their customers.

This leaves them vulnerable to huge non performing loans, sometimes from the same set of companies and individuals. It appears the Central Bank of Nigeria is wielding the big stick rather late. What happened to the Electronic Financial Surveillance System by which the Central Bank is supposed to carry out online monitoring of banks and their activities?

If their transactions showed that the banks were unfavourably exposed to some firms, or were defaulting in the liquidity ration, why did the Central Bank not make pre-emptive move before now. In any case, it is better late than never.

The days ahead will reveal more. Also, Union Bank and Afribank have not been up to date in submitting their financial results. Both banks have still not released their nine months result which was due since December 31, 2008. This is against the CBN regulation that banks must submit their result at most four months after it is due. It is curious that the Central Bank sacked the top management of the banks without reprimanding the boards.

Did the loans which resulted in the financial mess not receive the blessing of the board? If it did, then the board members also have questions to answer. If the board were not privy to the disbursement of such huge loans, it speaks volume about the corporate governance lapses in place.

This still heaps the blame on the board for allowing such lapses. The five banks (Oceanic Bank, Afribank, Intercontinental Bank, Union Bank and Finbank) have a total loan portfolio of N2.8 trillion out of which N1.14 trillion, or 40.8 per cent was non-performing.

Margin loans amounted to N456.3 billion while exposure to oil and gas is N487.02 billion. The five banks accounted for about 89.8 per cent of the total taking at the expanded discount window, and accounted for 39.93 per cent of loans, 29.99 per cent of deposits and 31.47 per cent of total assets of the entire banking industry. With these data, it may be safe to assume that the worst of the lot have been exposed. However, among the 14 banks yet to be audited, two, namely Wema Bank and Unity bank have not disclosed their financials in the last two years. The Central Bank has been silent on this. The melt down in the capital market has no doubt taken severe toll on the fortunes of banks.

Like one banker said, the Central Bank should distinguish between genuine mistakes and that which stems from a deliberate effort by the bank management to doctor their books to hide the true state of their account.

The Central Bank has said that while the main drive is to ensure that no bank fails in order to safeguard depositors, it insists that no financial institution would receive any bailout unless it comes clean. The banks are in a dilemma. Declare false result and be punished if discovered, or come clean, be punished but the bank saved. Each option comes with its whipping.

One big lesson in this whole scenario is the need for Nigerian bankers to align the action of management to the expectation of the owners. This is a habit that is largely lacking in this jurisdiction. Ownership, in this case includes shareholders, depositors, society and government which all form an important constituency. The accountability of management to ownership remains the historical underpinning of capitalism.