Upload
ngotu
View
225
Download
3
Embed Size (px)
Citation preview
1
NDIC QUARTERLY
Volume 16 September/December 2006 Nos 3/4 TABLE OF CONTENTS Content Page Review of Developments in Banking and Finance in the Third and Fourth Quarters of 2006 1-12 By Research Department The third and fourth quarters of 2006 witnessed a number of developments in the nation’s banking industry. Some of these developments included the introduction of new interest rate regime and the handing over of some failed banks to new buyers in pursuant of the adopted Purchase and Assumption method of bank failure resolution. In addition, during the period under review, the Corporation organized the second edition of the Depositors Protection Week. Details of those developments and many others including changes in rates on major financial instruments, the naira exchange rate and performance of quoted banks on the Nigerian Stock Exchange are presented in this paper. Financial Condition and Performance of Insured Banks in the Third and Fourth Quarters of 2006 13-27 The overall financial condition and performance of the insured banks during the second half of 2006 were mixed. On the one hand, total assets of the industry increased during the period under review whilst there was also an improvement in asset quality; ditto for Capital to Risk-Weighted Asset and Liquidity Ratios which also experienced increases. On the other hand, there was a significant decrease in earnings and profitability. Details of these and other indicators are contained in this paper.
2
Post Consolidation Banking Era and the Nigeria Deposit Insurance Corporation: Issues and Challenges 28-38 By Mr. G. A. Ogunleye, OFR Managing Director/ Chief Executive Officer This paper which was delivered as a keynote address at the fifth NDIC-sponsored FICAN workshop looked at the expected implications of competition amongst the 25 banks following the conclusion of the consolidation exercise in the banking industry. In a broad sense, some of the implications of increased competition in the banking industry, which were examined in the paper, bordered on effective supervision, effective risk management, strong corporate governance and market discipline amongst others. Legal Issues in Bank Liquidation 39-63 By Mr. A. B. Nyako Board/ Secretary/Director, Legal Department In this paper, an attempt was made by the author to unravel the legal issues/challenges surrounding liquidation of failed banks in Nigeria. Starting with an elucidation of the principles and laws guiding bank liquidation, it delved into the liquidation process and finally examined, in details, the challenges there-from. Amongst those issues examined were the dual capacity of the Corporation, rule against preferential payment and the protection of assets of banks in liquidation. Overview of the Banking Consolidation Programme and Its Aftermath 64-92 By Dr. J. A. Afolabi, Deputy Director/Research Department This paper highlighted the outcomes of the consolidation in the banking industry. In particular, it related the aftermath of the exercise to each of the identified stakeholders vis-à-vis their mandates. Amongst the stakeholders identified were the banks, the regulatory/ supervisory bodies and the banking public. Issues in Purchase and Assumption as a Bank Failure Resolution Option: The Case of the 14 Closed Banks 93-102 By Mr. A. A. Adeleke Deputy Director, Receivership & Liquidation Department The author discussed the main options available to regulatory authorities to resolving bank failures. It went further to examine, in details, the issues and challenges of the Purchase and Assumption method which was employed by the authorities recently as a failure resolution option in Nigeria.
3
MAJOR DEVELOPMENTS IN THE BANKING SECTOR DURING THE SECOND HALF OF 2006 By RESEARCH DEPARTMENT 1.0 INTRODUCTION
A major development observed in the industry during the period under
review was the introduction of new interest rate regime by the Central Bank
of Nigeria (CBN). The new rate referred to as the Monetary Policy Rate is to
serve as the nominal anchor for all interest rates in the country. During the
same period, the Debt Management Office (DMO) launched the Primary
Dealer Market Maker System in its efforts to create a liquid and vibrant
market in the sale and purchase of FGN Bonds. In the Corporation, the
second edition of Depositors’ Protection Awareness Week was organized
towards the end of the year. Details of those developments and others
including the reports on interest rates on major instruments in the money
market, the Naira exchange rates as well as the performance of banks quoted
on the Nigerian Stock Exchange during period are presented below.
2.0 INTRODUCTION OF NEW INTEREST RATE REGIME
Towards the end of 2006, the CBN introduced a new interest rate regime in
the country with the establishment of an “operating target” interest rate as
the nominal anchor of all interest rates in the country. The apex bank stated
that the new rate, christened referred to as Monetary Policy Rate (MPR)
which became effective from December 11, 2006, was introduced in a bid to
move the economy towards a market-driven interest rate regime and enhance
its efficiency in the conduct of monetary policy. Before then, the Minimum
4
Re-discount Rate (MRR) was the nominal anchor of all interest rates in the
economy and had been the rate at which the CBN re-discount facilities for
banks and as such, influenced directly the level and direction of change in
interest rates.
According to the CBN, the ultimate goal of the new framework was to
achieve a stable value of the domestic currency through stability in short-
term interest rates around the “operating target” interest rate, which would
be determined and operated by the CBN. The “operating target” rate
otherwise called the Monetary Policy Rate (MPR) would serve as an
indicative rate for transactions in the inter-bank market, money market as
well as other Deposit Money Banks’ interest rates. In addition, the new
regime was expected to help in the control of the supply of settlement
balances of banks and motivate the banking system to target zero balances at
the CBN. That, according to the apex bank, would engender symmetric
treatment of deficits and surpluses in the settlement accounts, so that for any
bank, the cost of an overdraft at the CBN would be equal to the opportunity
cost of holding a surplus balance with the apex bank.
According to the CBN, actual and expected inflation rates would be key
considerations in the determination of the MPR. This was to ensure that
interest rates remain positive in real terms. In that respect, the MPR was
pegged at 10 percent, using the current rate of inflation and the expected
inflation rate outcome of 9 percent for 2006. A spread of 600 basis points
was built around the rate, i.e. 300 basis points below and 300 basis points
above. That translated into an upper limit of 13 percent, which would be the
5
Repo rate and a lower limit of 7 percent, representing the rate at which the
CBN would take deposits from banks.
3.0 DEBT MANAGEMENT OFFICE (DMO) LAUNCHED THE
PRIMARY DEALER MARKET MAKER (PDMM) SYSTEM IN FEDERAL GOVERNMENT OF NIGERIA (FGN) BONDS
In its attempt to build and grow a vibrant and liquid bond market, the Debt
Management Office (DMO) inaugurated the Primary Dealers and Market
Makers System in FGN Bonds with the granting of licenses to 15 Primary
Dealers and Market Makers (PDMMs) during the period under review. The
operators comprised ten banks and five discount houses. Their names were
as follows:
BANKS
v Access Bank PLC
v Fidelity Bank PLC
v First Bank PLC
v First City Monument Bank PLC
v Guaranty Trust Bank PLC
v IBTC-Chartered Bank PLC
v Nigeria International Bank
v Stanbic Bank
v Standard Chartered Bank
v United Bank of Africa PLC
DISCOUNT HOUSES
v Associated Discount House Limited
v Consolidated Discounts Limited
6
v Express Discount Limited
v First Securities Discount House Limited
v Kakawa Discount House Limited
The roles and responsibilities of PDMMs included the following:
i) Full take up of bond auctions and distribution of same to the investing
public;
ii) Making markets by facilitating active trading in FGN Bonds through
the provision of two-way price quotes; and
iii) Provision of market information.
4.0 ORGANIZATION OF THE 2ND EDITION OF THE DEPOSITORS’ PROTECTION AWARENESS WEEK BY NDIC
During the last quarter of the year, the Corporation organized the 2nd
Depositors’ Protection Awareness Week. The theme of the programme
which took place from November 20 – 24, 2006 was “Deposit Insurance
Scheme: Legal and Liquidation Challenges”. Some major activities that
took place during the Awareness Week included a Press Briefing by the
Managing Director/Chief Executive Officer (CEO) of the Corporation
NDIC, Mr G. A. Ogunleye, OFR; the presentation of the Nigerian Banking
Law Reports (NBLR) as well as a Public Lecture. There was also a
memorable novelty football match which involved both male and female
senior staff/executives of the Corporation. Finally, a gala night/dinner was
organized for staff of the Corporation to end the week.
7
5.0 TWO BANKS-IN-LIQUIDATION (LEAD AND ASSURANCE BANKS) HANDED OVER TO AFRIBANK NIGERIA PLC
During the period under review, the nation’s regulatory/supervisory
authorities formally handed over the former Lead Bank Plc (in-liquidation)
and Assurance Bank Plc (in-liquidation) to the management of Afribank
Nigeria Plc. Afribank PLC emerged the winner following a competitive bid
for the purchase of the assets of the two banks as well as the assumption of
their deposit liabilities.
The handing over, was a follow-up to the announcement made earlier in the
month of Afribank as the winner of the bid for the assets of the two banks by
the Central Bank of Nigeria (CBN) under the Purchase and Assumption (P
& A) method of failure resolution. During the handing over, the
Regulatory/Supervisory Authorities commended Afribank Nigeria Plc for its
competitive bid and business-like approach, which worked in the bank’s
favour. Accepting the offer, the bank thanked the NDIC and CBN for the
opportunity given to it to participate in the transaction and the transparency
exhibited in the whole process.
6.0 THE RELEASE OF A CIRCULAR ON WAIVER OF THE
APPLICATION, LICENSING AND CHANGE OF NAME FEES FOR EXISTING COMMUNITY BANKS CONVERTING TO MICROFINANCE BANKS BY THE CBN
In order to encourage existing Community Banks (CBs) to expeditiously
convert to Microfinance Banks (MFBs), the Central Bank of Nigeria (CBN)
approved the waiver of application fees of =N=50,000 and =N=100,000, as
well as the licensing fees of =N=100,000 and =N=250,000 for all CBs
8
converting to Unit and State MFBs, respectively. The CBN also approved a
waiver of the change of name fee of =N=5,000 for any converting CB. The
gesture as stated in the Circular Ref No: OFID/DO/CIR./Vol. 1/484 addressed
to all Chairmen, Directors and Managers of all Community Banks in the
system, was to minimize the cost of documentation and other requirements for
conversion by CBs to MFBs on or before 31st December, 2007. The
concession as indicated in the Circular would automatically lapse by December
31, 2007.
7.0 US $7 BILLION OF NIGERIA’S FOREIGN RESERVES
APPORTIONED TO 14 NIGERIAN BANKS AND THEIR FOREIGN
PARTNERS
During the period under review, the CBN disclosed that it had so far
apportioned $7 billion out of the nation’s external reserves which stood at
$38.07 billion as at the end of July 2006, to 14 global asset managers and
their 14 Nigerian local banks to manage.
The amount bequeathed to the asset managers represented 18.39 percent of
the total external reserves, which was hitherto kept with foreign banks. The
fourteen global asset managers and their local counterparts are
9
TABLE 1.1 LIST OF STRATEGIC ALLIANCES/ PARTNERSHIP BETWEEN LOCAL AND FOREIGN BANKS FOR THE MANAGEMENT OF EXTERNAL RESERVES
S/N LOCAL BANK FOREIGN PARTNER
1 Zenith International
Bank PLC
JP Morgan Chase
2 First Bank of Nigeria PLC HSBC
3 IBTC-Chartered Bank PLC Credit Sussie
4 United Bank of Africa PLC UBS AG
5 Intercontinental Bank PLC BNP Paribas of Paris
6 Oceanic Bank PLC Commerzbank AG of
Germany
7 Bank PHB PLC Fortis Group
8 Diamond Bank PLC Crown Agents Investment
Management
9 Ecobank Nigeria PLC ING Belgium Sa
10 Union Bank of Nig PLC Black Rock
12 Access Bank of PLC FMO/ABM AMRO
13 Fidelity Bank PLC Investec Asset Management
14 Stanbic Bank PLC Bank of New York
8.0 INTEREST RATES
The interest rates for major financial instruments during the second half of
2006 are presented in Table 1.2. As shown in the table, rates on most
financial instrument were on the upward movement during the period under
review following hot-up competition amongst the consolidated banks. For
10
instance, an analysis of the movement in rates indicated that Call Rate,
Savings Deposit Rates, 7-Day Deposit increased by 0.7, 0.5 and 1.8
percentage points respectively whilst 30-Day and 90-Day Rates also went
up by 1.2 and 3.0 percentage points respectively. Similar increases were
witnessed on 180-Day deposit rates and 360-Day deposit rate. Prime
Lending Rates steadily increased from 17.2 percent as at July to 17.9
percent by the end of December, 2006.
Table 1.2 Average Interest Rates from July- December 2006 Financial Instrument
Rates (%)
Increase/Decrease Between July and December 2006
July 2006
August 2006
September September September September
2007200720072007
October 2006
November 2006
December 2006
Savings
4.2 4.4 4.54.54.54.5 4.3 4.4 4.7 0.5
Call
5.3 5.6 5.95.95.95.9 5.7 5.5 6.0 0.7
7-Day
6.2 6.3 6.76.76.76.7 6.3 6.5 8.0 1.8
30-Day
11.1 11.1 11.311.311.311.3 11.2 13.6 12.3 1.2
90-Day
10.2 10.5 10.810.810.810.8 10.8 13.3 13.2 3.0
180-Day
8.4 8.5 8.8.8.8.5555 8.4 9.0 13.5 5.1
360-Day
9.0 9.0 9.09.09.09.0 9.0 9.5 10 1.0
Prime Lending
17.2 17.6 17.917.917.917.9 17.5 17.7 17.9 0.7
MPR
14.0 14.0 14.014.014.014.0 14.0 14.0 10.0 -4.0
T/Bills Rate
7.0 6.2 6.06.06.06.0 6.1 5.4 6.1 -0.9
FGN Bond
16.0 12 11.511.511.511.5 12.74 10.00 10.00 -6.0
Source: NDIC Market Survey
11
Following the introduction of new policy rate, there was a four percentage
points’ decrease in the former anchor rate, MRR, which the new rate
replaced. Rates offered on government bills and bonds also steadily
declined during the period under review obviously due to deliberate efforts
of government to continually bring down rates in the money market.
9.0 THE NAIRA EXCHANGE RATE
A review of developments in the foreign exchange market during the second
half of 2006 revealed that the market exhibited some level of stability just as
obtainable during the first half of the year. Another notable development
was the closing of gaps between the official segment of the market and the
other two segments: the bureau de change and parallel market. The reason
for that positive development could be ascribed to the increased supply of
foreign exchange to the official market and the bureaux de change relative to
the parallel market. In addition, the entry of some banks to the bureau de
change business has also increased the supply in this segment.
The average Naira exchange rate against the US Dollar during the period
under review is presented in Table 1.3. As evidenced in the table, the Naira
depreciated slightly in the Wholesale Dutch Auction Market whilst it
appreciated in the other two segments of the market during the period under
review. The Naira as shown in the table, exchanged at ₦128.295 to a US
dollar at the WDAS in December, 2006 against ₦128.184 to a US dollar in
July, 2006 showing a depreciation of 0.08 percent. In Bureaux de Change,
the Naira appreciated by 1.2 percent as it exchanged for ₦130.375 to a US
12
dollar in December, 2006 as against the ₦131.9 to a US dollar witnessed in
the month of July, 2006. At the parallel market the, Naira exchanged for
₦131.00 to one US Dollar in December, 2006, as against ₦132.8 to one US
Dollar that was reported in the month of July, 2006 depicting an appreciation
of 1.4 percent.
Table 3 Average Naira Exchange Rate From July- December 2006
Source
Exchange Rate (x to $1)
% Change in the value of ₦ per US dollar between July and December 2006
July 2006
August 2006
September September September September
2007200720072007
October 2006
November 2006
December 2006
WDAS
128.184
128.475
128.36128.36128.36128.36 128.32
128.29
128.2951
(0.08)
Bureaux De Change
131.9
130.125
129.3129.3129.3129.3 129.00
129.625
130.375
1.2
Parallel Market (PM)
132.8
130.625
129.8129.8129.8129.8 129.8
130.75
131.00
1.4
Source: NDIC Market Survey 10.0 PERFORMANCE OF BANKS QUOTED ON THE NIGERIAN
STOCK EXCHANGE (NSE)
During the period under review, the nation’s capital market recorded the
commencement of trading of Spring Bank Plc’s Shares on the floor of the
Nigerian Stock Exchange (NSE). The listing of the bank on the floor of the
NSE followed the completion of all the necessary integration processes
13
among the six (6) merging banks that combined to form Spring Bank PLC.
Those banks included Guardian Express Bank Plc, Omega Bank Plc, Trans
International Bank Plc, Citizens Bank, Fountain Trust Bank and ACB
International Bank Plc.
Presented in Table 1.4 is the performance of the shares of quoted banks on
the floor of NSE as at December 18, 2006 with a comparison of the
previous position as at the end of July. As can be seen in the table, First
Bank of Nigeria Plc still maintained the price leadership position among
quoted banks on the floor of the stock exchange with a quoted share price of
3,200 kobo. United Bank for Africa Plc also occupied the second position
with a quoted price of 2,530 kobo. Other banks that trailed behind included
Zenith Bank Plc, Union Bank of Nigeria Plc, Guaranty Trust Bank Plc,
Intercontinental Bank Plc, Oceanic Bank International Plc and Afribank Nig.
Plc with quoted prices of 2,350kobo, 2,349kobo, 1,835kobo, 1,390kobo,
1,385kobo and 1,151kobo respectively.
Activities at the beginning and end of the period under review showed that
thirteen (13) had upward movements in their share prices as against five(5)
banks that experienced declines in their share prices during same period.
Also, as shown in Table 1.4, 3 out of the 21 banks retained their share prices
on the floor of the NSE. These banks were Spring Bank PLC, Sterling
Bank PLC and Unity Bank PLC. At the close of business on December 18,
2006, Twelve (12) banks closed on bid while three (3) banks closed on offer.
14
Table 1.4 Performance of Insured Banks’ Shares on the Nigerian Stock
Exchange (NSE) As At December 18, 2006
BANK
Par value (k)
July, Quotation (k)
December, Quotation (k)
Year=s High (k)
Year=s Low (k)
Earnings P/share (k)
Price/Earning Ratio (%)
ACCESS BANK NIGERIA PLC
50
250 670 -
598
222
0.13
46.00
AFRIBANK NIGERIA PLC
50
698 1151
1151
645
0.51
22.57
DIAMOND BANK NIGERIA PLC
50
471 745
775
432
0.57
10.35
ECOBANK NIGERIA PLC 50 557 499 + 1165 500 0.15 36.73
FIDELITY BANK PLC
50
293 250 +
293
205
0.11
19.18
FIRST BANK OF NIG. PLC
50
6320 3200 +
72.76
3200
1.83
20.21
FIRST CITY MONUMENT BANK PLC
50
427 403 +
548
350
0.30
13.67
FIRSTINLAND BANK PLC 50 516 313 - 7.00 320 0.00 0.00
GUARANTY TRUST BANK PLC
50
1400 1835 +
1900
1193
1.31
13.32
IBTC – Chartered Bank Plc 50 485 710+ 699 431 0.38 18.20
INTERCONTINENTAL BANK PLC
50
1240 1390 +
1613
837
0.99
16.20
OCEANIC BANK PLC
50
949 1385
1590
560
0.65
23.1
PLATINUMHABIB BANK PLC 50 211 322+ 292 189 0.11 21.60
SKYE BANK PLC 50 306 456 306 306 0.06 51.00
SPRING BANK PLC 50 - 716 802 600 - -
STERLING BANK PLC
50
- 490 -
750
280
0.38
16.90
UBA PLC
50
1401 2530 +
2866
1145
1.05
26.10
UNION BANK NIG. PLC
50
2811 2349 +
3250
2390
1.12
21.4
UNITY BANK PLC 50 250 250 262 218 0 0
WEMA BANK PLC
50
209 299+
374
209
0.10
29.50
ZENITH BANK PLC
50
2155 2350 +
2688
1650
1.43
17.10
Source: The Nigerian Stock Exchange, Lagos Key: - = Supply (Offer) + = Demand (Bid)
15
FINANCIAL CONDITION AND PERFORMANCE OF INSURED
BANKS IN THE THIRD AND FOURTH QUARTERS OF 2006
BY
RESEARCH & OFF-SITE SUPERVISION DEPARTMENTS
1.0 INTRODUCTION
The condition and performance of the insured banks were mixed during the
period under review. The total assets of the banks increased from N6.23
trillion as at the end of the third quarter to N6.83 trillion as at the end of the
fourth quarter of 2006, representing an increase of 9.63 percent. The
industry’s total loans and advances increased significantly from N1.88
trillion as at the end of September 2006 to N2.08 trillion as at the end of
December 2006. On a similar note, asset quality experienced a slight
appreciation as the proportion of non-performing loans to total credit
declined from 11.73 percent as at the end of the third quarter to 8.07 percent
as at the end of the fourth quarter of 2006. Ditto for, Capital to Risk-
Weighted Asset Ratio which increased marginally by 1.62 percentage points
from 20.95 percent as at the end of September 2006 to 22.57 percent as at
the end of December 2006. The industry’s average liquidity ratio also
increased by 8.63 percentage points from 53.09 percent as at the end of
September to 61.72 percent as at the end of December 2006. However, there
was a decline in the overall profitability of the industry during the period
under review as profit before tax (PBT) which amounted to N41.85 billion
16
as at the end of the September 2006 declined appreciably by 40.11 percent to
N29.87 billion as at the end of December 2006.
Apart from this introduction, the rest of the paper is divided into three
sections. Section Two presents the structure of assets and liabilities of the
banking industry, while Section Three examines the financial condition of
insured banks. Section Four concludes the paper.
2.0 STRUCTURE OF ASSETS AND LIABILITIES
The total assets of the banking industry increased from N6.23 trillion as at
the end of third quarter of 2006 to N6.83 trillion as at the end of the fourth
quarter of 2006. The structure of banks’ total assets and liabilities as at the
end of the third and fourth quarters of 2006 are presented in table 1 and
further illustrated by Charts 1 (a) and 1 (b).
17
TABLE 1 STRUCTURE OF BANKS’ ASSETS AND LIABILITIES AS AT THE END OF SEPTEMBER AND DECMBER 2006 Assets (%)
3rd Quarter
4th Quarter
Liabilities (%)
3rd
Quarter
4th Quarter
Cash & Due from Other Banks
25.18
31.56
Deposits
61.58
50.52
Inter-bank Placement 4.01 1.98 Inter-bank Takings
1.11
0.83
Government Securities
17.76
15.36
CBN Overdraft
0.00
0.78
Other Short-term Funds
4.77
3.85
Due to Other Banks
1.00
9.23
Loans & Advances
30.20
30.48
Other Borrowed Funds
0.89
0.00
Investments 7.22 6.31 Other Liabilities 19.25 21.33 Other Assets 6.94 6.59 Long-term Loans 0.86 0.96 Fixed Assets
3.92
3.88
Shareholders’ Funds (Unadjusted)
2.64
3.57
Reserves 12.67
12.78
Total 100.00 100.00 Total 100.00 100.00* Source: Bank Returns NOTE: TOTAL ASSETS (=N= TRILLION) 3RD QUARTER OF 2006 6.23 4TH QUARTER OF 2006 6.83 OFF-BALANCE SHEET (As a Proportion of Balance Sheet Items) 22.23% 19.23%
18
0
5
10
15
20
25
30
35
3rd Quarter 4th Quarter
CHART 1 A: STRUCTURE OF BANKS' ASSETS FOR THE 3RD AND 4TH QUARTERS OF 2006
Cash & Due from Other Banks Interbank Placements Government SecuritiesOther Short-term Funds Loans & Advances/Leases InvestmentsOther Assets Fixed Assets
19
0
10
20
30
40
50
60
70
3rd Quarter 4th Quarter
CHART 1 B: STRUCTURE OF BANKS' LIABILITIES FOR 3RD AND 4TH QUARTERS OF 2006
Total Deposits Interbank Takings CBN OverdraftsDue to Other Banks Other Borrowed Funds Other LiabilitiesLong-term Loans Shareholders' Funds (Unadjusted) Reserves
The largest proportion of total assets during the period under review was
Loans & Advances; in the third quarter it accounted for 30.20 percent but
increased only marginally by 0.28 percentage points to 30.48 percent as at
20
the end of the fourth quarter. The relative share of Cash & Due from Other
Banks increased from 25.18 percent as at the end of September 2006 to
31.56 percent as at the end of December 2006, which represented an
increase of 6.38 percentage points. Thus, it retained its position as the
second largest component of total assets. Government Securities which
constituted 17.76 percent of total assets in the third quarter of 2006
maintained its third position on the log. However, its relative contribution
declined by 2.40 percentage points to 15.36 percent in the fourth quarter but
still maintained its position as the third largest component of total assets.
Other components of the banking industry’s assets whose relative
contributions declined in the fourth quarter of 2006 compared to the
situation in the third quarter of 2006 were Inter-Bank Placements which
declined from 4.01 percent in the third quarter to 1.98 percent in the fourth
quarter; Other Short-term Funds declined from 4.77 percent in the third
quarter to 3.85 in the fourth quarter and similarly Investments also declined
from 7.22 percent in the third quarter to 6.31 percent in the fourth quarter. In
the same vein, Other Assets declined from 6.94 percent in the third quarter
to 6.59 percent in the fourth quarter and so also Fixed Assets which
decreased from 3.92 percent in the third quarter to 3.88 percent in the fourth
quarter.
On the liabilities side of the balance sheet, Deposits which accounted for
61.58 percent of the total as at the end of September 2006 experienced a
significant decline of 11.06 percentage points as at the end of December,
2006. Thus, as at the end of the period under review, deposit liabilities
accounted for about half of the total liabilities of the banking system. The
second largest liability of the banking industry as at the end of December
21
2006 was Other Liabilities which accounted for 21.33 percent. A
significant development on the liability side of banks’ balance sheet during
the period under review was the pronounced increase in Due From Other
Banks which jumped from 1 percent as at the end of third quarter to 9.23
percent as at the end of the fourth quarter. That development showed that
banks are beginning to rely on borrowed funds as a reliable source of funds.
That was 2.08 percentage points higher than its contribution in the third
quarter. Other sources of funding in the industry during the fourth quarter of
2006 included the following: Inter-bank Takings (0.83%); Long-term
Loans (0.96%); Shareholders’ Funds (3.57%) and Reserves (12.78%).
3.0 ASSESSMENT OF THE FINANCIAL CONDITION OF INSURED
BANKS
3.1 Asset Quality
During the period under review, the quality of banks’ assets experienced a
slight increase. Table 2 and Chart 2 present the indicators of insured banks’
asset quality for the third and fourth quarters of 2006. Non-performing
Loans declined by 5.96 percent from N239.34 billion in the third quarter to
N225.08 billion in the fourth quarter of 2006. Thus, the proportion of Non-
performing Credit to Total Credit also decreased from 11.73 percent at the
September 2006 to 8.07 percent at the end of December 2006. In addition,
the proportion of Non-performing Loans to Shareholders’ Funds also
declined from 28.59 percent as at the end of the third quarter to 22.81
percent as at the end of the fourth quarter of 2006.
22
TABLE 2
INDICATORS OF INSURED BANKS’ ASSET QUALITY FOR THE THIRD AND FOURTH QUARTERS OF 2006
Asset Quality Indicator (%)
Industry 3rd Quarter of 2006
4th Quarter of 2006
Non-performing Credit to Total Credit
11.73
8.07
Provision for Non-performing Loans to Total Non-performing Credit
82.89
103.15
Non-performing Credit to Shareholders’ Funds
28.59
22.81
Source: Bank Returns
23
0
20
40
60
80
100
120
3rd Quarter 4th Quarter
CHART 2: INSURED BANKS' ASSET QUALITY FOR THE 3RD AND 4TH QUARTERS OF 2006
Non-performing Credit to total CreditProvision for Non-performing Loans to non-performing CreditNon-performing Credit to Shareholders' Funds
3.2 Earnings and Profitability
The banking industry recorded a decline of 11.9 percent in Interest Income
from N129.71 billion at the end of third quarter to N114.27 billion in the
fourth quarter of 2006. Non-Interest Income, however, increased slightly
from N58.92 billion in the third quarter to N59.29 billion in the fourth
quarter of 2006. During the same period, Operating Expenses declined
from N101.18 billion to N95.85 billion. In spite of the decline in cost, total
24
profit before tax (PBT) of the banking industry declined significantly from
N41.85 billion as at September 2006 to N29.87 billion as at end of the fourth
quarter of the same year due partly to the reduced interest income. Table 3
and Chart 3 present the Earnings and Profitability Indicators for the third
and fourth quarters of 2006.
TABLE 3 EARNINGS AND PROFITABILITY INDICATORS FOR THE THIRD AND FOURTH QUARTERS OF 2006 Earnings/Profitability Indicator
Industry 3rd Quarter
4th Quarter
Return on Assets (%)
0.67
0.44
Return on Equity
5.00
3.03
Yield on Earning Assets (%)
3.17
4.17
Profit Before Tax (=N= Billion)
41.85
29.87
Interest Income (=N= Billion)
129.71
114.27
Operating Expenses (=N= Billion)
101.18
95.85
Non-Interest Income (=N= Billion)
58.92
59.29
Source: Bank Returns
25
0
10
20
30
40
50
60
3rd Quarter 4th Quarter
CHART 3: INSURED BANKS' EARNINGS AND PROFITABILITY FOR 3RD AND 4TH QUARTERS OF
2006
Return on Assets Return on Equity
Yield on Earning Assets Net Interest Margin
As shown in the table, the industry Return on Assets (ROA) declined by 23
basis points from 0.67 percent in September to 0.44 percent in December
2006. Similarly, Return on Equity (ROE) also declined from 5.00 percent
as at the end of September to 3.03 percent as at end of December 2006.
However, Yield on Earning Assets (YEA) witnessed an appreciation of
1.00 percentage point from 3.17 percent as at the quarter to 4.17 percent as
at fourth quarter of 2006.
3.3 Liquidity Profile
26
The industry average liquidity ratio for the industry was far higher than the
40 percent minimum regulatory requirement during the period under review.
In fact as shown Table 4, it increased from 53.09 percent during the third
quarter to 61.72 in the fourth quarter of the year.
TABLE 4 INDICATORS OF INSURED BANKS’ LIQUIDITY PROFILE FOR THE THIRD AND FOURTH QUARTERS OF 2006 Liquidity
Period 3rd Quarter of 2006
4thQuarter of 2006
Average Liquidity Ratio (%)
53.09
61.72
Net Loans to Deposit Ratio (%)
49.05
74.10
Inter-bank Takings to Deposit Ratio (%)
1.61
1.28
No. of Banks with Liquidity Ratio of Less than the prescribed 40%
5
3
Source: Bank Returns From Table 4, it can be observed that the industry slightly increased its
dependence on inter-bank takings as the ratio of Inter-bank Takings to
Deposits declined by 0.33 percentage points from 1.28 percent as at
September to 1.61 percent at the end of December 2006. The number of
banks that could not meet up with the liquidity ratio of 40 percent prescribed
27
by the regulatory authorities increased from 3 in the third quarter to 5 as at
the end of December 2006.
3.4 CAPITAL ADEQUACY
On the aggregate, the banking industry remained adequately capitalized as at
the end of the fourth quarter of 2006. The average Capital to Risk Weighted
Assets Ratio far exceeded the required minimum of 10 percent. Thus, the
industry required no additional capital. Table 5 and Chart 4 below show
insured banks’ capital adequacy positions as at the end of September and
December 2006.
TABLE 5
INDICATORS OF INSURED BANKS’ CAPITAL ADEQUACY POSITION FOR THE THIRD AND FOURTH QUARTERS OF 2006. Capital Adequacy Indicator
Period 3rd Quarter of 2006
4th Quarter of 2006
Capital to Risk weighted Asset Ratio (%)
20.95
22.57
Capital to Total Asset Ratio (%)
14.73
14.94
Adjusted Capital to Loan Ratio (%)
49.11
38.08
Source: Bank Returns
28
0
10
20
30
40
50
3rdQuarter
4thQuarter
CHART 4: INSURED BANKS' CAPITAL ADEQUACY FOR 3RD AND 4TH QUARTERS OF 2006
Capital to Risk Weighted Asset RatioCapital to total Asset RatioAdjusted Capital to Loan Ratio
The Capital to Risk Assets Ratio increased from 22.05 percent as at the
end of September to 22.57 percent as at the end of December 2006.
Similarly, the Ratio of Capital to Total Assets for the industry increased
slightly from 14.73 percent in September to 14.94 percent in December
2006. However, the Adjusted Capital to Loan Ratio declined too 49.11
percent as at the end of the third quarter to 38.08 percent as at the end of the
fourth quarter of 2006.
29
4.0 CONCLUSION
The overall financial condition and performance of the insured banks during
the second half of 2006 were mixed. The total assets of the industry
increased during the period under review, while there was a significant
decrease in earnings and profitability.
30
POST-CONSOLIDATION BANKING ERA AND THE NIGERIA
DEPOSIT INSURANCE CORPORATION: ISSUES AND
CHALLENGES****
BY
MR. G.A. OGUNLEYE, OFR,
MANAGING DIRECTOR/CHIEF EXECUTIVE OFFICER, NDIC
This year’s workshop is the fifth in the series organized for members of the
Financial Correspondents Association of Nigeria (FICAN) and their
business editors by the Nigeria Deposit Insurance Corporation (NDIC). The
workshop is an assurance of the fact that the Corporation remains resolutely
committed to the goal of further enriching and enhancing the capacity of
financial reporters to enable them adequately cope with the ever increasing
challenges of their profession.
The theme for this year’s workshop - “Post-Consolidation Banking Era and
the Nigeria Deposit Insurance Corporation”- is considered apt in view of the
peculiar role of the NDIC in contributing to banking system stability.
Gentlemen of the press, let me take this opportunity to make some
comments on deposit insurance system (DIS). DISs are set up in many
jurisdictions mainly to enhance macro-economic and financial stability by
minimising or preventing incidences of bank runs. This is done through an
up-front promise to pay depositors a guaranteed sum should a bank fail. The
* Original version of this paper was delivered as a Keynote Address at the fifth NDIC- sponsored FICAN Workshop which was held from 28th to 30th November, 2006 in Benin City, Edo State.
31
primary objective of such promise is to build confidence in the banking
system. The actual pay-out to depositors in the event of bank failure is a
secondary objective which serves to reinforce the primary objective of
building confidence. As long as the public believes in the ability and
capability of the deposit insurer to fulfill its promise, the financial stability
objective is met.
Basically, there are three models of the DIS namely the pay-box, least-cost
and risk minimiser. The pay-box is saddled with payout to depositors of
failed banks while the least-cost DIS seeks to minimise the cost of bank
resolution. In the case of a risk minimiser DIS, a continuous assessment of
insured institutions is made in order to monitor the risk exposure of the
deposit insurer. In this regard, it should be noted that the Nigerian DIS was
designed as a risk minimiser. Hence, its enabling Act gave it the power to
supervise insured institutions. It is widely acknowledged that NDIC’s
supervisory activities have effectively complemented the regulatory function
of the CBN.
Distinguished audience, you will recall that two major products of the bank
consolidation programme were the emergence of 25 bigger banks and the
revocation of the operating licences of 14 technically insovent banks that
could neither raise the minimum capitalization requirement of N25 billion
nor find merger partners/acquirers. In order to minimize the sufferings of
innocent depositors of the 14 failed banks and boost confidence in the
banking system, the Regulatory Authorities (i.e. CBN and NDIC), adopted
the Purchase and Assumption (P & A) failure resolution option as against
the pay-out option which the Corporation had adopted over the years. Under
32
the new option, the depositors, particularly the private sector depositors are
guaranteed full recovery of their deposits and would enjoy continuity of
banking services as the acquiring banks of the closed banks would meet the
banking obligations of the affected depositors as and when due.
The emergence of 25 banks of more comparable sizes than the 89 banks that
hitherto existed at the commencement of the reform agenda in July 2004 has
created a level playing field for keen competition amongst market
participants.
Whereas, competition is good for individual banks, the customers, and the
banking system, increased competition has implications which should be
carefully identified and accorded the necessary attention. In a broad sense,
some of the implications of increased competition in the banking industry,
which have direct bearing on the system’s stability include the following,
among others:
Ø Effective supervision;
Ø Effective risk management;
Ø Strong corporate governance;
Ø Market discipline;
Ø Self-regulation; and
Ø Enabling legal and judicial environment.
Each of these implications is briefly discussed hereunder.
33
Effective Supervision
The current supervisory approach in Nigeria which is transaction- and
compliance-based is narrow in scope and uniformly applied to all supervised
institutions. With consolidation, there is the need to adopt a robust,
proactive and sophisticated supervisory process that should essentially be
based on risk profiling of the emerging big banks. In other words, the
adoption of an appropriate risk-based supervisory approach is imperative
with consolidation. The approach entails the design of a customized
supervisory programme for each bank and it should focus more attention on
banks that are considered to have potentially high systemic impact. The
approach should enable the supervisory authorities to optimize the utilization
of supervisory resources. That necessarily requires that supervisors should
have a clear understanding of the risk profile of the emerging big, and
sometimes, complex banks. There is therefore, the need for capacity
building in this area.
Furthermore, consolidation has, no doubt, brought to the fore the need for
consolidated supervision that requires more regular consultation and closer
cooperation amongst the various regulatory/supervisory institutions in the
financial system. This is because the larger banks are going to be more
complex as they are likely to engage in non-traditional activities that are
permissible under universal banking. It is equally imperative that the present
reporting format of banks be reviewed so as to incorporate all possible
activities that banks would undertake under after the consolidation. This
will make it possible for supervisors to obtain a global view of the bank’s
operations. The current efforts of the CBN/NDIC in the development of an
34
electronic Financial Analysis Surveillance System (e-FASS) and the
activities of the Financial Services Regulation Coordinating Committee
(FSRCC) would go a long way to assist in this regard.
Effective Risk Management Systems
Although effective risk management has always been central to safe and
sound banking practices, it has become even more important in the post
consolidation banking era than hitherto as a result of the on-going bank
consolidation programme. It is important to indicate that the ability of a
bank to identity, measure, monitor and control risks under the emerging
banking environment can make the critical difference between its survival
and collapse. For a bank to efficiently and effectively play its role under the
emerging dispensation therefore, the deployment of an effective risk-
management system with the following key elements is imperative:
o Active board and senior management oversight:
o Adequate risk-management policies, procedures and exposure limits;
o Effective risk identification, measurement, monitoring and control
framework;
o Comprehensive management information system; and
o Efficient internal controls.
It is on the basis of the foregoing that the Regulatory Authorities recently
issued guidelines for the development of risk management systems by banks.
The adequacy or otherwise of the developed risk management systems will
be assessed on an on-going basis by the Regulatory Authorities (i.e. CBN
and NDIC).
35
Strong Corporate Governance
While good corporate governance has remained imperative in the banking
system, its importance in our nation’s emerging banking environment is
based on the fact that managements of most of the ‘new’ banks would be
insulated from abusive ownership. Besides, there are many other
stakeholders with goals, interests and expectations that do not necessarily
coincide, and as a result, they constitute major areas of frictions. A bank is
therefore expected to put in place a governance structure that will seek to
balance all stakeholders’ interest, goals and expectations. This is the essence
of a good corporate governance.
Corporate governance is about building credibility, ensuring transparency
and accountability as well as maintaining an effective channel of
information disclosure that would foster good corporate performance. It is
also about how to build trust and sustain confidence among the various
interest groups that make up an organization. Indeed, the outcome of a
survey by Mckinsey and Company in collaboration with the World Bank in
June 2000 attested to the strong link between corporate governance and
investors’ confidence. In fact, it has been amply demonstrated that, with the
possible exception of massive macroeconomic instability, no one single
factor contributes more to institutional problems than poor corporate
governance.
Disclosure and transparency are key pillars of a corporate governance
framework, because they provide all the stakeholders with the information
necessary to judge whether or not their interests are being served. I see
transparency and disclosure as an important adjunct to the governance
36
process in banks as they facilitate banking sector market discipline. For
transparency to be meaningful, information should be reliable, accessible,
timely, relevant and qualitative.
With the emergence of bigger banks in Nigeria, weak or poor corporate
governance become more serious issues as the failure of large banks could
cause systemic problems while posing operational difficulties to the
supervisory authorities in resolving them. In view of the fact that the
systemic repercussion of the failure of a big banking institution is grievous,
the Regulatory Authorities recently issued a new code of corporate
governance tagged “Code of Corporate Governance for Banks in Nigeria:
Post Consolidation”. The new code was developed to compliment the
earlier ones and ensure the enthronement of responsive corporate
governance in the banking industry.
Market Discipline
The current information disclosure requirements in the industry are grossly
inadequate to effectively bridge the information asymmetry between banks
and investing public that consolidation has inevitably created. Under the
consolidated banking environment, it is important that the accounting as well
as disclosure requirements of the consolidated banks be reviewed. In that
regard, the Regulatory Authorities are currently reviewing information
disclosure requirements so as to minimize information asymmetry between
banks and investing public. This has become necessary to ensure that
business decisions by the investing public are well informed under the new
dispensation. Adequate information disclosure requirement will make banks
37
to pay greater attention to reputational risk that could result in loss of
confidence as well as patronage. As a necessary step to promote market
discipline, it is important to indicate that the full weight of the provisions of
relevant laws would be brought to bear on erring operators in order to help
promote safe and sound banking practices under the consolidated banking
environment. The policy of zero-tolerance against unethical behaviour
would be strictly applied.
Self-Regulation and Self-Discipline
Given the size and the envisaged complexity of operations of the emerging
banks post-consolidation, regulation and supervision of banks have been
made the joint responsibility of both the Regulators and operators. That is,
statutory regulation has been complemented by self-regulation through
strong corporate governance arrangement. This development has become
necessary in view of the realization that self-regulation and self-discipline
are critical to the promotion of a sound, transparent, accountable and
efficient financial market.
Given our conviction on the efficacy of self-regulation, the Regulatory
Authorities will continue to encourage banking institutions in a consolidated
banking environment to draw up and bind all their staff to a code of ethical
and professional practices. Effective self-regulation requires probity,
transparency and accountability, which are yet to be fully entrenched in the
system. Necessary steps are being taken by the regulatory/supervisory
authorities to encourage these virtues and operators have also appreciated
the need for compliance with rules and regulations to promote healthy
competition since self-regulation does not amount to elimination of
38
regulatory controls and supervision. It only confers some measure of
confidence and trust in the ability of organizations to regulate themselves in
the public interest. In this regard, it is noteworthy that the Bankers’
Committee had issued a code of Ethics and Professionalism to guide their
officers and employees in discharging their duties. Also, Committees such
as Board of Ethics and Good Governance are becoming a regular feature of
the Board Structure of Nigerian Banks.
Responsive Legal and Judicial Environment
Ladies and gentlemen, without an effective legal and judicial process, the
effectiveness of the Corporation in its bid to contribute to the banking
system stability would be severely impaired. As the deposit insurer, NDIC
requires a responsive legal and judicial system to enhance its effectiveness.
Adequate legal powers for the Corporation will facilitate prompt payment of
insured depositors and guarantee speedy debt recovery and realisation of
assets in the event of bank failure as well as minimize losses to the Deposit
Insurance Fund (DIF). In this regard, I am happy to indicate that the
Corporation’s proposed amendments to its enabling Act have been passed by
the National Assembly and it is awaiting Presidential assent. It is my belief
that the new Bill, when signed into law, will enhance the Corporation’s
ability to execute its mandate.
With regard to the judicial environment, it is on record that most lawyers
exploit the subsisting judicial processes and procedures to cause undue delay
in the dispensation of justice when they know they have bad cases. Most of
the times you witness lawyers obtain ex-parte orders from courts, these are
39
orders sought without putting the other party on notice for frivolous reasons.
In most instances, interim and interlocutory injunctions, stay of proceedings
are obtained only to stall proceedings. Also, frivolous appeals and other
forms of abuse of court processes are some of the tactics employed by
lawyers to pervert the cause of justice. A good example of abuse of judicial
process is the Savannah Bank’s case, where the plaintiff who went to court
to stop the liquidation of the bank after the Central Bank of Nigeria (CBN)
had revoked its operating licence in 2002 had kept prolonging or delaying
the proceedings through various types of applications in court. It was only
in September this year that the Federal High Court dismissed the case
against the plaintiffs who have again filed an appeal in the Appeal Court.
The litigation instituted by the erstwhile owners of the failed Lead bank
whose licence was revoked in 2003 also still remains in court.
Again, out of the 14 banks whose licenses were revoked in January 2006,
following the bank consolidation programme of the Federal Government, the
Corporation has to date been appointed liquidator of only 8 of the banks and
provisional liquidator of 3. The owners of the remaining 3 closed banks are
currently challenging the revocation of their licenses in court, thereby
frustrating the process of paying the affected depositors by the Corporation.
It is in recognition of the importance of an effective legal and judicial
environment to its activities that the Corporation’s 20006 Depositors’
Awareness Week, which took place last week, focused on legal and judicial
issues as they affect the Corporation. There is therefore an urgent need to
ensure smooth administration of justice through the reform of judicial
process in order to enhance the effectiveness and relevance of the DIS in
40
Nigeria.
Ladies and gentlemen, the issues to be addressed in this workshop by the
various resource persons and our honourable selves attest to the timeliness of
the workshop. Together with other stakeholders like you, we shall continue
to be proactive and react to new challenges in the banking sector and
regulatory environment as they unfold. As a safety net player in the
international financial system, the Corporation will continue to collaborate
with the Central Bank of Nigeria and other stakeholders in ensuring the
safety and soundness of the nation’s banking system.
Finally, as we look forward to stimulating deliberations over the next two
days, I urge all participants and resource persons to give their best in
addressing the various topics listed for consideration. The success of this
workshop will, no doubt, depend on the constructive contributions of all. It
is my sincere hope that you will find your stay with us worthwhile and
enjoyable.
Thank you for your kind attention.
41
LEGAL ISSUES IN BANK LIQUIDATION****
Mr. A. B. Nyako
Board Secretary/Director, Legal Department
INTRODUCTION
The topic for discussion – Legal Issues in Bank Liquidation- is indeed a very
relevant one, not only because bank liquidation is one of the major
operational pre-occupation of the Corporation today, but more importantly
because the performance of the liquidation functions is fraught with a
number of legal issues and challenges some of which we would discuss
shortly.
As you may be aware, as at today, there are about 50 banks at various stages
of liquidation. More than 50% of the banks concerned challenged the
liquidation process ab initio, while 10 of them are still in Court challenging
the revocation of their banking licenses and the liquidation process.
Meanwhile, even with regard to the banks where full liquidation had
commenced, there are over 2000 legal cases which had been referred to
Solicitors for necessary action, most of which relate to the recovery of debts.
Over 1000 of the cases are already a subject of litigation. No wonder then
that liquidation was described as being synonymous with litigation. As you
would observe, the liquidation process commences and terminated through
litigation process.
* Original version of this paper was delivered at the Fifth NDIC-sponsored FICAN Workshop held from 28th to 30th November, 2006 in Benin City, Edo State
42
A workshop like this therefore, would provide the opportunity to explain the
bank liquidation process and the legal issues involved, with the view to
appreciating why there are usually delays in the process. These delays and
other bottlenecks quite often frustrate the objective of the Corporation to
settle claims of depositors and other creditors of failed banks promptly. This
workshop is a very important for stakeholders with critical role to play in
terms of enlightening the public about the liquidation process. It would also
enable the participants appreciate the constraints and challenges faced as
well as the tremendous efforts being made by the Corporation to discharge
its functions effectively notwithstanding the challenges. No doubt, NDIC
perceives you as worthy partners in progress: a partnership that is
continuously being strengthened by the annual FICAN workshops that has
brought us here today.
The presentation has been structured into the following five sections: the
introduction (Section 1), definition, principles and the law (Section 2), the
liquidation process (Section 3), legal issues (Section 4) and conclusion
(Section 5).
2.0 DEFINITION, PRINCIPLES AND LAW
The Black’s Law Dictionary defines liquidation as “winding up or settling
with creditors and debtors”. On the other hand Webster’s encyclopedia
dictionary of the English Language defined liquidation as “the process of
realizing upon assets and discharging liabilities in concluding the affairs of a
business, etc”. Following from the above therefore, in the case of a bank,
liquidation describes the process of realization of assets (conversion to cash)
43
and the distribution of same to those who are entitled to receive them,
namely; the depositors, other creditors and possibly the shareholders.
The foundation of the principles governing liquidation is traced to the
concept of corporate personality. The principle of corporate personality had
established that once a company was incorporated either by statute or
through registration with the Corporate Affairs Commission (CAC) pursuant
to the provisions of the Companies and Allied Matters Act, it acquires a
separate and distinct legal personality. Being a juristic person, it enjoys
almost all the benefits accruable to a natural person, including the right to
own properties, incur liabilities, sue and be sued in its corporate name before
a court of law. Therefore, just as the life given to a natural person by God is
protected by the Constitution from extermination except through due process
of law, the life given to the company or corporation cannot be extinguished
except in accordance with due legal process. To do otherwise would amount
to “corporate homicide”.
Consequently, since a bank must first be incorporated as a corporate entity
through registration with the CAC, before seeking for a banking license
(permit to carry on banking business) it enjoys all the attributes of a
corporate entity. Therefore, the mere revocation of the banking license,
while it terminates the bank’s ability to carry on any banking business, it
does not per se extinguish the life of the bank as a corporate person.
Furthermore, it does not automatically remove the Board and Management
of the bank from office or affect the status of employment of the staff. It is
for the above reasons that the process of liquidation (also known as winding
44
up) which is the appropriate mechanism prescribed by law for bringing the
affairs of the bank to an end must be followed.
In Nigeria, the applicable laws regulating the process of liquidation of a
Bank are:
· the Banks and Other Financial Institutions Act (BOFIA) 1991 (as
amended);
· the Nigeria Deposit Insurance Corporation Act 1988 (NDIC Act),
· the CAMA 1990 (as amended) and the Winding Up Rules, and:
· the Failed Banks Act 1994 (as amended),
With the above background in mind, it would now be quite appropriate to
examine the bank liquidation process in Nigeria and as much as possible
highlight the significant legal issues involved.
3.0 LIQUIDATION PROCESS
For convenience of discussion, the liquidation process could be classified
into the following three flexible stages: Pre-closing, Closing and Post
Closing processes.
3.1 Pre-Closing Process
The Pre-closing process describes the range of activities and decisions
that take place prior to the closure of a bank for the purpose of
liquidation. The major event at this stage is the revocation of the
banking license of a bank. However, prior to the revocation of a
bank’s license there would have been sequence of events including the
occurrence of ground(s) of revocation, the discovery of same by the
45
regulatory authorities, adoption of various regulatory measures to
address the problem and non responsiveness of the target bank(s).
The power to revoke the license of a bank is vested in the Central
Bank of Nigeria by the BOFIA. The power is, however, not absolute
as the enabling statute had prescribed the grounds upon which the
power could be exercised, as well as the procedure for exercising
same. Section 12 of the Act listed the grounds on which the CBN
may revoke a bank’s license as follows:
i) Ceasing to carry on in Nigeria the type of banking business for
which it was licensed for any continuous period of 6 months or
any period aggregating 6 months during a continuous period of
12 months
ii) Going into liquidation or is wound up or dissolved
iii) Failure to fulfill or comply with any condition subject to which
the license was granted
iv) Insufficient assets to meet the liabilities (insolvency)
v) Failure to comply with any obligation imposed upon it by or
under the Act or the CBN Act.
Section 9 of the BOFIA provides that the Central Bank of Nigeria
(CBN) shall from time to time determine the minimum paid up share
capital requirement of licensed banks and any failure to comply within
the specified period shall be a ground for the revocation of the bank’s
license. In addition, under Section 14 of the Act, non compliance
with the prescribed capital ratio is a ground for revocation of the
46
license of a bank. In this case however, the CBN is required to give
30 days notice of its intention to revoke the license of the bank.
Furthermore, Sections 33 – 35 of the BOFIA provide series of steps to
be taken by the CBN and NDIC to address the problems of a failing
bank. These steps range from imposition of holding actions by the
governor of the CBN to the handing over of the bank to the
Corporation for closure, supervision and management (intensive care).
However, in the event that the failing bank over which the
Corporation may recommend amongst other resolution measures that
the bank’s license be revoked (Section 36 of BOFIA).
For the revocation of a bank’s license to be effective under Section 12
of the BOFIA it must receive the approval of the Board of Directors
of the CBN, it must be by way of an order in writing, and the notice of
the revocation must be published in the Official Gazette of the Federal
Republic of Nigeria. Failure to fulfill the above requirements could
provide grounds for challenging CBN’s action.
It is significant to note that despite the multiplicity of the grounds for
the revocation of the license of a bank, the dominant basis for the
revocation of the licenses of the 50 closed banks was insolvency.
This underscores the fact that the resort to revocation of license is
usually a last resort distress resolution measure. It is adopted where
the shareholders and boards of the banks concerned fails to adhere to
persistent calls for the recapitalization of their banks.
47
Be that as it may, the revocation of the license of a bank disqualifies it
from carrying on banking business and effectively terminates the
object of its incorporation and business substratum. In other words,
the basis of its existence has been extinguished hence the natural
consequence would be to close the bank preparatory to its winding up.
3.2 Closing Exercise
Where the decision to close a bank has been taken, necessary
approvals for the action obtained and documentary instruments have
been prepared, the process of carrying out an orderly closure of the
bank would be put in place by the Corporation. There are three main
activities that are of great legal significance, namely: the filing of a
petition for winding up, appointment of liquidator and the closing
exercise.
a) Filing of Winding Up Petition
Immediately after the revocation of a bank’s license, a winding up
petition must be filed before the Federal High Court for a winding up
order. Section 38 of BOFIA provides that where the license of a bank
has been revoked the NDIC shall apply to the Federal High Court
(FHC) for a winding up Order of the affairs of the bank.
In the past, there was a doubt as to whether; the Corporation had the
power to file a petition for winding up in view of the provisions of
CAMA which prohibits a corporate body from acting as liquidator.
With the clear provisions of Section 38 of BOFIA which enjoys
48
supremacy over the CAMA in case of any inconsistency, it is beyond
doubt that the Corporation is empowered to file a petition for winding
up a bank whose license has been revoked. In any case the NDIC
Bill, this had been passed by the National Assembly and awaiting the
President’s assent, has even put the matter beyond any shadow of
doubt.
It is significant to note that once the petition for winding up had been
filed, the liquidation process is deemed to have commenced with the
attendant consequences which would be discussed shortly.
b) Appointment of NDIC as Liquidator
Prior to the amendment of the BOFIA in 1998 and 1999, the principal
Act (BOFIA 1991) had empowered the Governor of the CBN to
appoint the Corporation as the Provisional Liquidator of a bank whose
license had been revoked, if he considered it in the public interest to
do so. Such appointment was deemed to have been made by the
Federal High Court. Consequently, whenever the Governor revoked a
bank’s license, he invariably also appointed the Corporation as the
Provisional Liquidator enabled it to immediately take over the control
of the target bank and organize its closure even before filing a petition
to formally obtain a winding up order and confirm its status as the
Liquidator rather than the provisional status conferred by the CBN.
Under the provisions of the CAMA, until the Court grants a winding
up order, the status of the liquidator would remain as provisional.
Nevertheless, the appointment of the Corporation as Provisional
Liquidator by the CBN was very instrumental to the ability of the
49
Corporation to take control and expeditiously organize the bank’s
closing exercise.
However, the power given to the Governor of CBN to appoint the
Corporation as Provisional Liquidator was removed inadvertently
during the amendment of the BOFIA in 1999. The current provisions
of the BOFIA merely stated that the Corporation should file a petition
for winding up of a bank whose license had been revoked and made
no provision with regard to the appointment of a provisional
liquidator. The unfortunate implication of this inadequacy is that the
Corporation would have filed a specific application before the Federal
High Court for its appointment as provisional liquidator.
Furthermore, since the application is entirely regulated by the
provisions of CAMA, all the detailed procedure guidelines prescribed
by the Winding Up rules designed for ordinary trading companies
must be followed. For example, one of such rules provides that an
application for appointment as Provisional Liquidator would be filed
only after the advertisement of the Winding up petition. In other
words, once the banking license is revoked and the Corporation files a
petition for the bank’s winding up, the Corporation is required to wait
until it had obtained the order to advertise the petition, and actually
advertise the petition before it could be eligible to file the application
for appointment as Provisional Liquidator. The question then is who
takes charge of the bank during the long interval between the time of
the revocation of the bank’s license and the time the Corporation’s
application for appointment as provisional liquidator was heard and
granted?
50
This problem was practically demonstrated in the case of Savannah
Bank where the Court of Appeal quashed the appointment of the
Corporation as Provisional Liquidator of the bank which was made by
the Federal High Court on Monday February 18, 2002 following the
revocation of the bank’s license on Friday 15, February 2002. In the
considered opinion of the court of Appeal, the appointment of the
Corporation should not have been made earlier than in March 2002,
by which time the petition for the winding up of the bank had been
advertised. Ironically, by the time the Court of appeal was setting
aside the appointment of the Corporation (sometime in 2003) the
advert of the winding up petition which was the sole ground of its
decision had already been done one year earlier. It is significant to
note that the fresh application made by the Corporation for
appointment as Provisional Liquidator of Savannah Bank has been
pending at the Federal High Court since 2003. That is why as at
today, the bank is practically under the custody and care of the Police
and not the regulatory agencies. The same position applied in the case
of the defunct Peak Merchant Bank Limited where the Corporation’s
application for appointment as liquidator has been pending in Court
since February 2003.
The good news, however, is that the NDIC Bill has made provisions
which addressed the above concerns. The objective of the amendment
was to enable the Corporation assume immediate control of a bank
whose license had been revoked and thereby organize its orderly
closure and subsequent liquidation. However, while a waiting the
51
coming into effect of the proposed amendments, the regulatory
authorities have adopted other remedial measures to mitigate the
effect of the current inadequacies in the law. For instance, the
Corporation could rely on its power of bank examination to access
records of closed banks. Furthermore, CBN and NDIC could rely on
their powers to change or take over the management of distressed
banks prior to the revocation their licenses as was the case for the 14
banks whose licenses were revoked pursuant to the consolidation
programme. The Boards of the 14 banks had been removed and
Interim Management Committees (IMCs) were appointed to take over
from them before their license were revoked.
c) The Closing Exercise
The closing exercise represents the process of the physical takeover of
control of the affairs of a bank whose license had been revoked;
securing its premises, assets and records; the preparation of the
statement of affairs and drawing up of a closing report which contains
the details of the position of the assets and liabilities of the closed
bank as at the closing date. It is during this period that the deposit
register is compiled (details of depositors and the amounts due to
them including the insured portion), the list of debtors and their
liabilities including investments are ascertained. In short, the essence
of the closing exercise is to determine the banks net worth with
supporting details that would form the basis of post closing liquidation
activities.
52
The closing date is a very significant deadline because it becomes the
cut off or reference period for the entire liquidation operation. The
closing date represents the final date for determination of what is due
to depositors and other creditors and what is due from debtors. Any
liability that accrues against the closed bank after the closing date is
deemed to be post closing expenditure and treated as liquidation
expense payable from available funds. On the other hand, liabilities
of the closed bank that had accrued prior to the closing date are
deemed as pre-liquidation claims which would only be settled through
the liquidation claim process. These entail filing of claim, due
verification and settlement in accordance with the rules governing
priority of claims. It is also the closing date that determines the status
of banks; employees. In a liquidation scenario, the closing date is
taken as the date when the contract of employment of the closed
bank’s staff is deemed to have come to an end and their severance
benefits are determined as at that date. Therefore, any work done
after the closing date is deemed as services performed for the
Corporation on temporary contract basis.
3.3 Post Closing Activities
In our earlier definition of liquidation, it was stated that it was the
process of realization of the assets of a business entity and the
distribution of the proceeds to those entitled to same. Consequently,
whenever the Corporation was appointed as the liquidator of a closed
bank, it acquires this new role which is separate and distinct from its
routine function as deposit insurer. Although there are provisions in
the NDIC Act which relate to its role as receiver/liquidator, the
53
Corporation is primarily guided by the provision of CAMA and the
BOFIA.
Section 25 of the NDIC Act conferred on the Corporation when
appointed as Receiver/Liquidator of a closed bank the following
powers:
i] to realize the assets of the failed bank,
ii] to enforce the individual liabilities of the shareholders and
directors,
iii] to wind up the affairs of the failed bank.
The powers given to the Corporation under Section 25 of the NDIC
Act are complementary to those under Sections 423,424 and 425 of
the CAMA. The essence of these powers is basically to enable the
Corporation to effectively conduct the winding up process in a manner
fair to all creditors and other stakeholders.
As stated earlier, the powers of the Corporation when appointed as
liquidator of a closed bank are separate from its statutory function of
providing insurance cover to depositors. As Insurer, the Corporation
is mandated to pay insured claims to the depositors of closed banks
subject to the statutory maximum provided in the NDIC Act or as may
be reviewed. Although the current insured limit is ₦50,000, the
NDIC Bill already passed by the National Assembly had reviewed the
54
amount to ₦200,000. Moreover, unlike the situation where the
Corporation could not increase the insured amount even if it wants to
do so, due to the rigid provisions in the current Act, the new
amendment has given the Corporation the power to increase the
amount from time to time without having to amend the Act.
As liquidator, the Corporation would be paying additional amounts to
the depositors and other creditors over and above the insured claims
through the declaration of liquidation dividends from the proceeds of
assets realization from time to time.
3.3.1 Realization of Assets
The bulk of the assets of banks in liquidation comprised physical
assets, risk assets and investments. Physical assets are usually valued,
advertised and disposed through sales agents.
Realization of risk assets (debts) however, involves a number of legal
issues which the liquidator has to contend with. Debts owed to banks
in liquidation are classified into secured and unsecured. Secured
debts are those that are secured either by legal mortgage, debenture
etc. A legal mortgage is a demise of property made by the borrower
to the lender for a term of years absolute, subject to a provision (right
of redemption) that the term shall cease if repayment is made within
the agreed period. The term legal mortgage implies that the deed has
been perfected by registration at the appropriate Lands Registry.
Registration makes the deed admissible in Court to proof the debt. A
55
legal mortgage usually contain a foreclosure clause which enables the
lender to proceed against the mortgaged property, on default without
recourse to the borrower provided the required notice as stipulated in
the deed is complied with. Where a mortgage is created but not
perfected, it becomes an equitable mortgage. An equitable mortgage
is also created by the deposit of title document of an asset
accompanied with a memorandum of deposit signifying intention to
create a mortgage.
Differential consequences apply depending on whether it is a legal or
an equitable mortgage. In respect of a legal mortgage if there is
default in making payment by the borrower and the required notice
has been given the lender can proceed to realize the collateral without
further recourse to the borrower. However, where the mortgage is
merely equitable, upon default by the borrower, the lender can only
enforce his security through redress in the court of law.
Recovery of debts owed to closed banks are usually farmed out to
external Solicitors for necessary action, usually through litigation and
their fee paid on commission basis calculated as a percentage of
amount recovered. There are approximately 2000 debt recovery briefs
assigned to solicitors in respect of the banks that currently undergoing
liquidation. More than 1000 of the cases are currently the subject of
pending litigation in various Courts. These cases are moving very
slowly due to the well known lapses in the judicial process.
56
The Failed Banks Act was enacted in 1994 to facilitate the recovery of
debts owed to distressed banks. The Act also established the Failed
Banks Tribunals which was conferred with jurisdiction to handle
cases of recovery of debts owed to failed banks and the trial of cases
of financial malpractices in banks for which stiff penalties were
prescribed. It introduced summary procedures for both debt recovery
and criminal prosecution so as to dispose of the cases timely.
Records have shown that during the lifetime of the Tribunals from
1995 to 1999, tremendous results were achieved in the area of debt
recovery as loans that were otherwise considered uncollectible were
recovered. However, following the restoration of democratic
government in May 1999, the Failed Banks Tribunal was scrapped
and its jurisdiction was transferred to the Federal High Court. This
marked the resurgence of the ear of endless adjournments, undue
reliance on legal technicalities, frivolous interlocutory appeals and
other cases of outright abuse of Court processes. Consequently, the
rate of recovery has gone down and necessitating the need for new
initiatives to address the problem. Although the emergence of
Economic and Financial Crimes Commission (EFFC) has brought
some fresh goad to the debt recovery process, the slow pace of
judicial process has continued to compromise the Commission’
effectiveness.
57
3.3.2 Settlement of Claims
It is also the responsibility of the Corporation as liquidator to settle the
claims of depositors and other creditors of a closed bank from the
proceeds of assets realization. Since the main ground for bank closure
and liquidation has been insolvency, it follows that there is usually
insufficient cash to settle all the claims of depositors. Consequently,
the rules of priority of claims would guide the liquidator in the
distribution of the proceeds of assets realization. Section 494 of
CAMA has set out the order of priority of claims which placed taxes,
rates, wages of staff, etc as preferred claims followed by secured
creditors and lastly, the general or unsecured creditors.
However, the order of priority of claims under CAMA was modified
by the provisions of Section 50 of BOFIA which as stated earlier
enjoys supremacy over CAMA wherever there is any inconsistency
between the two statutes. Section 50 of BOFIA, provides that where a
bank is unable to meet its obligations or suspends payment, the assets
of the bank in the Federation shall be available to meet all the deposit
liabilities of the bank and such deposit liabilities shall have priority
over all other liabilities of the bank. Consequently, the current
position is that the depositors enjoy the highest priority in the
settlement of claims. In other words, the depositors must be paid in
full before settling other categories of creditors. In practical terms, as
soon as the depositors are fully paid, the order of priorities established
by CAMA would be followed. Shareholders are entitled to the
residual estate after all creditors have been fully settled.
58
For the avoidance of doubt, the insured deposit claims paid by the
Corporation as Insurer is outside the rules on priority of claims since
the funds for the payment of insured claims are not from the proceeds
of assets realization, but from the Corporation’s deposit insurance
funds (DIF) which is funded by the premium collected from insured
banks. However, where the Corporation settles the insured depositors,
it steps into their shoes by virtue of the principle of subrogation. This
would enable the Corporation to participate in the distribution of
liquidation dividend due depositors. In other words, the liquidation
dividend due to the insured depositors in respect of the insured portion
earlier paid by the Corporation would be collected by NDIC since the
depositor cannot receive double payment.
3.3.3 Termination of Liquidation
Bank liquidation cannot continue for ever and so must at a certain
stage come to an end through a process known as termination.
Termination is initiated when ever all creditors have been fully settled
and the surplus if any paid to the shareholders, or all available assets
have been fully realized or where the cost of further realization is
perceived to be more than the expected proceeds.
If the liquidator makes a determination to terminate the liquidation, a
notice of (30) days would be given to all claimants and shareholders
that final dividend distribution has been made and that the remaining
assets if any, are not realizable for future distribution and that an
59
application for termination of liquidation would be presented in court.
The liquidator is required to file an application to the Federal High
Court, pursuant to Section 454 of CAMA requesting an order
terminating the liquidation and for the dissolution of the bank.
The court after due consideration of application could make an Order
for the termination of liquidation and the dissolution of the bank after
which the bank stands dissolved from the date of the order. A copy of
application for termination including the liquidator’s report is filed
with the Corporate Affairs Commission (CAC). The dissolution order
is the final death sentence that is pronounced on the life of the bank as
a corporate legal entity. Thereafter, the name of the bank is removed
from the list of existing companies maintained by the CAC. The
Liquidator would thereafter apply for a formal discharge or release
from the responsibilities of a liquidator.
Under the Winding Up Rules, the Liquidator is required to give notice
of his intention to apply for release, to creditors who proved their
debts and the contributories. The notice will include a summary of
receipts and payments in the winding up. The Commission shall
cause a report to be prepared on the audit of the Liquidator’s account
after which it may release the liquidator accordingly.
It is significant to note that any unclaimed funds or undistributed
assets after termination would be vested in the state as “bona
vacantia” (vacant property).
60
4.0 LEGAL ISSUES
Bank Liquidation is a very complex process that is characterized by a
number of legal issues. Indeed virtually every process involved in
bank liquidation has legal implications, hence it is difficult to define
the precise scope of legal issues that is worthy of mention.
Fortunately quite a number of the legal issues have already been
discussed in the course of the presentation. Nevertheless, there are a
new other legal issues that would be highlighted below, at least for
emphasis.
4.1 Legal Effect of Appointment of Liquidator
The appointment of a liquidator including a provisional one has the
effect of immediately terminating all the powers of the Board of
Directors of the closed bank according in accordance with Section
422(9) of CAMA. The liquidator steps into the shoes of the erstwhile
board and assumes full responsibility for the affairs of the closed bank
and can execute all the powers of the bank either in the name of the
bank or in the name of the liquidator.
Furthermore, the employment of the entire personnel of the target
bank comes to an end upon the appointment of a liquidator,
notwithstanding the terms of the contract of employment between the
staff and the bank. This is based on the fact that one of the parties
(the Bank) is no longer in a position to comply with the contract. It is
like the contract has been frustrated. It is for the above reason that the
61
staff of a closed bank who work with the liquidator after the date of
appointment of a liquidator are regarded as temporary staff engaged
by the liquidator.
4.2 The Dual Capacity of the Corporation
Statutorily, the Corporation is a deposit insurer and as such it is
mandated to pay insured claims whenever there is a bank failure. As a
supervisory institution, it also performs some related functions like
bank supervision and distress resolution as stipulated by its enabling
Act and the BOFIA. However, when the Corporation is appointed as
a liquidator of a closed bank, it is a completely separate role. In that
capacity, it acts as a trustee with mandate to wind up the affairs of a
separate legal entity. Its role as a liquidator is regulated primarily by
the CAMA. It is therefore, clear that the affairs of a bank being
liquidated by the Corporation should not mixed up with its own
affairs. Its duty as a liquidator is to identify, recover and convert to
cash all known assets of the closed bank and apply the funds to settle
the proved liabilities of the same bank. Unfortunately, there has been
considerable misconception even among judges on the dual roles of
the Corporation. There had been cases where the physical assets of
the Corporation were attached on account of the liabilities of a closed
bank. In other instances, the bank accounts of the Corporation were
garnisheed to satisfy the claims against a bank in liquidation. In all
the examples given, the transactions were consummated long before
the closure of the banks and the appointment of the Corporation as
Liquidator. Extensive public enlightenment is therefore required on
62
this issue and the FICAN members here present have a great role to
play in that regard.
4.3 Rule Against Preferential Payment
Further to the rules on priority of claims earlier discussed, it should be
emphasized that no single creditor even among the group that enjoys
priority should have his claims settled ahead of other members of the
same class. In other words, payment of claims must be made pro rata
to all claimants of the same class. Furthermore, all members of a
priority group must be paid in full before members of another inferior
class could be considered for payment.
4.4 Protection of Assets of banks in liquidation
In order to reinforce the rule against preferential payment, legal
protection has been provided for closed banks’ assets against creditors
who may wish to levy execution on them. Section 500 of CAMA
provides that where a creditor issues execution against any goods or
land of a company or attaches any debt due to the company and the
company is subsequently wound up, the creditor shall not be entitled
to retain the benefit of the execution or attachment against the
liquidator in the winding up of the company unless he had completed
the execution or attachment before the commencement of winding up.
Similarly, Section 414 of CAMA provides that where a company is
being wound up by the Court, any attachment, sequestration, distress
63
or execution put in force against the estate or effects of the company
after the commencement of winding up shall be void.
It is also noteworthy that the proposed amendment to the NDIC Act
had addressed some of the weaknesses in the current Act and had
therefore made a number of provisions aimed at providing more
protection to the closed banks’ assets as well as that of the
Corporation. Provisions were also made to facilitate a more
expeditious liquidation process. One of the new provisions in the
proposed amendment has placed some restrictions on the grant of
injunctive reliefs against the Corporation while performing its
function as liquidator of a closed bank. If the proposal comes into
effect, injunctions against the Corporation could only be granted by
the Court of Appeal.
5.0 CONCLUSION
In the above presentation an attempt had been made to take the
participants through the legal issues in bank liquidation that are
noteworthy, taking into account the time frame available for the
discussion. We have certainly not covered the whole of the legal
issues involved given my earlier statement that the entire liquidation
process is dominated by legal issues.
It is quite evident that the Corporation has been contending with a lot
of challenges in the course of performing its role as liquidator for
closed banks and most of these challenges relate to legal issues.
64
There is no doubt that the existing legal framework for bank
liquidation is not adequate and has to be improved upon. The
proposed amendments to the NDIC Act have gone a way in this
regard, except that it had not been signed into law by Mr. President
yet. Furthermore, it has been observed that no matter how robust the
legislative framework might be, the slow and cumbersome judicial
process could reduce it to “toothless bull statute”. Consequently,
there must be corresponding reforms in the judicial process, the
details of which should be a subject matter of another discussion.
However, as significant increase in the number of judicial officers,
improvement in court infrastructures, review of Court rules and
procedures, increased conditions of service for judicial officers and
improved training are some of the measures that could be considered
in the reform agenda.
It is my sincere hope that I have been able to sensitize the participants
to some of the legal issues involved in bank liquidation albeit
admittedly in general terms. The question and answer session may
also provide yet another opportunity for further clarification on issues
mentioned or omitted.
65
6.0 REFERENCES
Black, H. C. (1990), Black’s Law Dictionary, West Publishing
Company
Federal Government of Nigeria (FGN) (1988), Nigeria Deposit
Insurance Act No 22 (as amended)
------------------------------------------------- (1990), Companies and
Allied Matters Act No. 1 (as amended)
------------------------------------------------- (1991), Banks and Other
Financial Institutions Act No. 25 (as amended)
--------------------------------------------------- (1994) Failed Banks
(Recovery of Debts) and Financial Malpractices in Banks Act No. 18
66
OVERVIEW OF THE BANKING CONSOLIDATION PROGRAMME
AND ITS AFTERMATH****
By
Dr. J. Ade Afolabi, Deputy Director, Research Department, NDIC.
1.0 INTRODUCTION
In July 2004, the Central Bank of Nigeria (CBN) unfolded a 13-Point
Agenda as components of an elaborate Banking Sector Reform Programme.
The Phase I of the reform programme was aimed at consolidating and
strengthening the banks while phase II would encourage the emergence of
regional and specialized banks. Prior to the introduction of the bank
consolidation programme, statistics as at the end of 2003 reveal that 69 out
of 89 licensed banks in the system operated as marginal players. In addition,
the banking industry exhibited the following fundamental problems, among
others:
¡ Poor asset quality;
¡ Undercapitalization;
¡ Poor corporate governance;
¡ Late or non-publication of annual accounts;
¡ Over-dependence on public sector deposits (accounting for over 20
percent of total deposit liabilities of deposit money banks and over 50
percent in some banks). The implications were that the resource base of
* Original version of this paper was delivered at the Fifth NDIC-sponsored FICAN Workshop held from 28th to 30th November, 2006 in Benin City, Edo State
67
such banks were weak and volatile, rendering their operations highly
vulnerable to swings in government revenue, which in turn was equally
plagued by uncertainties of the international oil market;
¡ Inadequate risk management practices; and
¡ Neglect of small and medium scale enterprises by the system.
Also, the examination results of banks, as at the end of year 2003 revealed
that pockets of distress still persisted in spite of the numerous efforts made
by the regulatory/supervisory authorities. What is more, an assessment of
the nation’s banking industry financial condition and performance against its
expected role in the nation and/or against those of its counterparts in
emerging economies showed that the Nigeria banking system could be
described as fragile, poorly developed and extremely small.
The reform programme of the banking system through consolidation
introduced by the CBN could therefore be seen as an attempt to promote
banking system stability and make the industry to operate more efficiently so
as to enable the banks perform their catalytic role of financial intermediation
to enhance the growth of the Nigerian economy. The specific reasons for
the reform included the following:
– To halt the incessant bouts of distress
– To prevent imminent systemic distress
– To promote competitiveness and transparency in the sector;
– To enable the sector effectively play its developmental role in the
economy;
68
– To strengthen the sector to become an active participant in the
regional and global financial system; and
– To enhance public confidence in the banking system
The Key Agenda item in the first phase of the reform programme was the
prescription of minimum capitalisation requirement of N25 billion for each
bank which should be met by 31st December 2005. The requirement was to
be met by each bank through:
Ø Recapitalisation via rights issues to existing shareholders, private
placement and public offers for subscription in the capital market; and
Ø Consolidation of banking institutions through mergers & acquisitions.
By December 31, 2005, twenty-five (25) bigger banks emerged from
hitherto 89 banks in the system through recapitalization and
mergers/acquisition. However, the operating licences of 14 technically
insolvent banks that could neither raise their capitalisation to N25 billion nor
get merger partners/acquirers were revoked.
The purpose of this paper is to highlight the outcome of the banking
consolidation exercise in terms of its effects on the key stakeholders and
their responses (if any) to such effects. In that regard, the rest of the paper is
organized into three sections. In Section 2, we enumerate and briefly
discuss each of the key stakeholders. Section 3 enumerates the outcome of
the consolidation programme and its effects on each of the key stakeholders
as well as their (stakeholders’) responses to such effects. The last section
summarises and concludes the paper.
69
2.0 BANKING SECTOR KEY STAKEHOLDERS
While the stakeholders of the banking sector are numerous, within the
context of this paper, the key stakeholders have been identified as the twenty
– five emerging banks, the regulatory/supervisory authorities (mainly, the
CBN and NDIC), the Banking Public, especially the depositors and other
customers of banks as well as the economy. Each of these stakeholders is
examined below.
2.1 The Banks
At the end of the bank consolidation exercise, 25 banks emerged. These
banks are predominantly retail banking institutions that accept deposits from
one set of the banking public (the surplus-spending public, depositors) and
make short-term loans to another set of the banking public (the deficit-
spending public, borrowers). The banks and the constituent banks that made
the emerging twenty – five banks are as listed in Table 1.
TABLE 1
LIST OF EMERGING BANKS AFTER THE BANK CONSOLIDATION EXERCISE
S/N Bank Name Members of the Group 1 Access Bank Plc
Marina Bank Capital Bank International Access Bank
2 Afribank Plc
Afribank Plc Afrimerchant Bank
3 Diamond Bank Plc
Diamond Bank Lion Bank African International Bank (AIB)
4 EcoBank EcoBank 5 ETB Plc
Equatorial Trust Bank (ETB) Devcom
6 FCMB Plc
FCMB Co-operative Development Bank Nig-American Bank Midas Bank
7 Fidelity Bank Plc
Fidelity Bank FSB Manny Bank
70
8 First Bank Plc
FBN plc FBN Merchant Bank MBC
9 FirstInland Bank Plc
IMB Inland Bank First Atlantic Bank NUB
10 GT Bank Plc Guaranty Trust Bank 11 IBTC-Chartered Bank Plc*
Regent Chartered IBTC
12 Intercontinental Bank Plc
Global Equity Gateway Intercontinental
13 Nigeria International Bank Ltd Nigeria International Bank Ltd 14 Oceanic Bank Plc
Oceanic Bank In't Trust Bank
15 Platinum-Habib Bank Plc
Platinum Bank Habib Bank
16 Skye Bank Plc
Prudent Bank Bond Bank Coop Bank Reliance Bank EIB
17 Springbank Bank Plc
Guardian Express Bank Citizens Bank Fountain Trust Bank Omega Bank TransInternational Bank ACB
18 Stanbic Bank Ltd* Stanbic Bank 19 Standard Chartered Bank Ltd Standard Chartered Bank Ltd 20 Sterling Bank Plc
Magnum Trust Bank NBM Bank NAL Bank INMB Trust Bank of Africa
21 UBA Plc
STB UBA CTB
22 Union Bank Plc
Union Bank Union Merchant Bank Universal Trust Bank Broad Bank
23 Unity Bank Plc
New Africa Bank, Tropical Commercial Bank, Centre-Point Bank, Bank of the North NNB, First Interstate Bank Intercity Bank, Societe Bancaire Pacific Bank
24 Wema Bank Plc
Wema Bank National Bank
25 Zenith International Bank Plc Zenith International Bank Plc Source: NDIC 2005 Annual Report
71
Table 1 shows that out of the 25 banks, six banks, namely: Ecobank Plc; GT
Bank Plc; Nigeria International Bank Ltd.; Stanbic Bank Ltd.; Standard
Chartered Bank Ltd.; and Zenith International Bank Plc. made the N25
billion capitalisation without any merger/acquisition. It is instructive to note
that out of the six banks that made the N25 billion capitalisation without any
merger/acquisition, four of them, namely: Ecobank Plc; Nigeria
International Bank Ltd.; Stanbic Bank Ltd.; and Standard Chartered Bank
Ltd were affiliates of foreign banks. The table further reveals that on the
average, about four banks came together to form one new bank for the rest
nineteen banks that met the N25 billion minimum capitalization requirement
through mergers/acquisition. Out of these nineteen banks, Unity Bank Plc
had nine constituent banks, indicating that it had the highest number of
banks that came together, followed by Spring Bank Plc with six constituent
banks and Sky Bank Plc as well as Sterling Bank Plc with five constituent
banks each. The table also shows that each of the following five banks,
namely: Afrbank Plc, Equitorial Trust Bank Plc, Oceanic Bank Plc, Bank
PHB and Wema Bank Plc, had two constituent banks.
The pre-occupation of the banks at the end of the bank consolidation
exercise would be to survive and maximize value addition to its
shareholders, depositors and the economy.
2.2 The Regulatory/Supervisory Authorities
In order to prevent the collapse of the payments mechanism in the economy,
ensure monetary stability, encourage efficient and competitive banking
system, protect consumers’ interest and ensure safe and sound financial
system, adequate regulation and supervision of banking institutions is a ‘sine
72
qua non’. The Central Bank of Nigeria (CBN) is the apex regulatory agency
for money and banking in Nigeria. The CBN is responsible for licensing
financial institutions in the system. The Nigeria Deposit Insurance
Corporation (NDIC), often provides inputs in the licensing process in the
area of ascertaining the ‘fitness and properness’ of promoters as well as
members of management of banks. As an integral part of the nation’s safety
net, the NDIC operates as a risk minimiser. It has powers to insure licensed
banks, monitor their health status through supervision as well as provide
mechanism for orderly resolution of failure including bank liquidation.
Banking supervision is therefore, a joint responsibility of the CBN and the
NDIC. The responsibility is carried out through on-site examination and
off-site surveillance.
The CBN’s main focus is to promote the stability of the banking system,
foster smoother monetary policy transmission mechanism and engender the
required confidence in the nation’s banking system (in collaboration with the
NDIC) particularly after the consolidation exercise in view of the fact that
the exercise is policy-induced. In particular, consolidation could, at least in
theory alter the credit channels of monetary policy. In that regard, Ferguson
R. G, in his Keynote Address presented at the Conference on The Impact of
Financial Innovation organized by the Federal Reserve Bank of New York in
May 2002, opines that since consolidation fosters the creation of larger
banks which have better access to markets for managed liabilities, it could
affect the way that the availability and pricing of bank loans adjust in
response to changes in the stance of monetary policy. It may be however,
hazy to assess the impact of consolidation on the transmission mechanism of
monetary policies or even its impact on the conduct of monetary policy.
73
In the case of the NDIC, its primary mandate is to protect the depositors
especially of the failed banks by paying their insured deposits and of the
surviving banks by ensuring safe and sound banking practices of the
institutions.
2.3 The Banking Public
The banking public is made up of the private business enterprises, other
corporate bodies, government and private individuals. Usually, a complex
set of contracts emerges from the intermediation role of banks. One of such
contracts is civil contract between the depositor and the bank in which the
bank borrows fund from the depositor and pledges to pay the nominal value
of the deposit plus interest at the due date. This is often referred to as a
liability – side liquidity promising contract of unconditional withdrawal right
to depositors. The second set of contracts is that which exists between the
borrower and the bank on a loan in which the bank deploys depositors’ fund
(also referred to as asset – side loan contract). Yet another set of contracts is
a social contract that the citizens expect that the state will protect individual
property rights by enforcing the civil contracts through regulatory agencies,
in the same way as an impartial judiciary does.
With the completion of the bank consolidation exercise, the expectation of
the banking public is that they would be served better by the emerging
bigger banks either as depositors or borrowers. Also they expect the
relevant regulatory/supervisory authorities to protect their (particularly, the
depositors) individual property rights by reducing their burden of loss
74
arising from the failure of the 14 banks that could not make the minimum
capitalization requirement.
2.4 The Economy
A symbiotic relationship exists between the banking sector and the
economy. A developing economy like Nigeria requires a strong and stable
banking sector that will support the real sector. With the bank consolidation
exercise, the economy expects enhanced support from the emerging banking
system.
3.0 THE OUTCOME OF THE CONSOLIDATION PROGRAMME
AND ITS EFFECTS ON EACH OF THE KEY
STAKEHOLDERS
The issues that are examined in this section include the following: What are
the specific outcomes of bank consolidation programme to each key
stakeholder and how are these key stakeholders affected by the outcome of
the Bank Consolidation Programme? How do they (i.e. the key
stakeholders) respond to the effects? These issues are examined for each of
the identified stakeholders.
3.1 The Banks
3.1.1 Enhanced Capital Base for Banks
The immediate impact of the consolidation programme is the increase in the
capital base of banks. Primarily, bank capital is expected to serve as a
cushion for absorbing operational losses. The funding of acquisition of
banks’ physical assets by bank capital is regarded as a secondary function.
75
This position on the role of bank capital is in sharp contrast to its role in the
case of say, manufacturing and other concerns that are not financial
intermediaries. Capital for these concerns is primarily needed to finance
their acquisition of fixed assets and to a reasonable extent their working
capital.
The operational losses of banking firms arise from the way they manage
their assets and liabilities. In particular, both the liabilities and assets are
subjected to certain risks like interest rate, exchange rate and credit risks
(among others), which could result in financial losses to a bank. These
losses are of two main categories, those that are reasonably expected, that is,
identified deficiencies, and those that are unexpected. Provisions are
explicitly made for the former while capital cushion is the prudential
approach often used to absorb the latter.
Adequate capital is therefore necessary in banks to ensure their safety,
soundness and stability as inadequate capital enhances the potential for
failure. In that regard, the regulatory framework should contain meaningful
minimum capital adequacy guidelines. It is instructive to note that prior to
the introduction of the new capitalization requirement, many of the banking
institutions were suffering from capital inadequacy and that situation made
another round of mass bank failure more likely than ever. The result of the
consolidation exercise was the astronomical increase in the banking industry
capital base. In the process of complying with the minimum capitalization
requirement, about N406 billion was raised by banks from the capital
market. As at the end of October 2006, the industry shareholders’ fund,
(unimpaired by losses) stood at about N970.77 billion as against its level of
76
N333.17 billion and N768.0 billion in December 2004 and 2005
respectively. The enhanced capital base, all things being equal, implies
increased ability of the banking industry to absorb shocks thereby ensuring
the stability of the system.
3.1.2 Keener competition among operators
Contrary to predictions that the reduction in the number of players in the
banking industry was going to lead to a concomitant reduction in the
intensity of competition, the reverse has actually been the case. Competition
in the industry has heightened with the market becoming more demanding
and sophisticated, notwithstanding the reduction in the number of banks. In
fact, the competition went beyond the shores of the country. Prior to
consolidation, there were a few Nigerian banks with branches located
outside the country. However, as at the end of October 2006, several
Nigerian banks had opened branches in a number of African countries and
some are even planning to open branches in the Middle East, Europe and
America.
3.1.2 Reconstitution of New Board and Management
The Board of Directors constitute the highest policy making organ of a bank
and what happens at the Board of Directors’ level impacts fundamentally on
the management of the institution. Experience has shown that no matter how
effective statutory regulation is, it does not substitute for the role of active
and efficient boards of directors in banks. Hence, it remains the duty of bank
directors to ensure that there is sound management in their banks. Insured
banks’ directors are expected to formulate policies for sound operations of
77
their banks, as well as undertake other responsibilities that serve the best
interest of stakeholders. The Organization for Economic Co-operation and
Development (OECD) principles emphasize the criticality of the board in
corporate governance especially its composition, leadership, integrity and
independence.
In spite of their initial misgivings, banks Board and management have come
to accept the bank reform programme. They have agreed, in the process, to
share the fortunes of their banks with other Nigerians by going to the capital
market to look for new investors.
It would be recalled that prior to the consolidation programme there existed
a ‘concentrated ownership’ structure in Nigerian banks, whereby several
small banks were owned almost exclusively by a single individual or
members of the same family. With the dilution in shareholding there arose
the need for a re-constitution of new Board and Management and
appointment of new board members with diverse background. These
developments had no doubt, enriched the quality of board deliberations and
strengthened corporate governance practices in insured banks.
3.1.3 People, Culture, Data and System Integration
The on-going banking industry consolidation is likely to pose additional
corporate governance challenges arising from integration of people,
processes, IT and culture. Research had shown that two-thirds of mergers,
worldwide, fail due to inability to integrate personnel and systems as well as
78
due to irreconcilable differences in corporate culture and management,
resulting in Board and Management squabbles.
The emergence of mega banks in the post-consolidation era is bound to task
the skills and competencies of Boards and Managements in improving
shareholder values and balance same against other stakeholder interests in a
competitive environment.
One of the impacts of the consolidation programme was the integration of
ICT to have a unified single information processing platform. A serious
concern was how to deal with the cut-over/transition from legacy operating
platforms to a single platform in a prompt and seamless manner with
minimal disruption of customer service.
Arising from the deployment of a single operating platform was the need to
embark on the harmonization of processes and procedures across the bank.
Some of the issues in this area include:
· development and deployment of new operations manual
· issuance of unified cheque and passbooks to customers;
· unification of clearing system;
· rationalization of correspondent banks-local and foreign;
· consolidation of customers’ accounts; and deployment of harmonized
operation-related forms and documents
· Harmonization of Customer Account Numbers
79
Another critical integration challenge was that of people and culture of the
merging banks which included synchronization of staff grading and structure
as well as ensuring the right mix of staff in terms of quality and quantity.
Other challenges included developing a human capital management policy
and change management issues.
The post-consolidation challenges arising from integration are fairly
common amongst the merged institutions. However, integration of banking
activities is considered a gradual process which cannot be achieved
immediately in one fell swoop. In the long run however, consolidation is
expected to lead to the deployment of highly sophisticated IT systems that
would be of immense advantage to the industry in particular and the
economy in general, particularly since each bank has an enhanced financial
muscle to acquire the needed IT infrastructure.
3.1.4 Branch consolidation/rationalization
Consolidation particularly where the merging institutions have branches in
the same location, may lead to a reduction in the number of branches, and
hence, a reduction in the provision of banking services in the short-run. But
in the long run, because the merger will translate into, among other things,
bigger capital, the new bank will have the capacity to open more branches
beyond what the individual banks could have opened before the merger and
this would lead to the extension of banking services to more parts of the
country. The actual experience of bank consolidation in Nigeria has shown
that there has not been any decline in the total number of insured bank
branches despite the revocation of operating licenses of 14 banks by the
80
CBN. For instance, as at the end of December 2005, there were a total of
3,535 branches/offices operated by all the insured banks in the country.
Between 2005 and 2006, the total number of bank branches increased by 300
or 8.5% to 3,835. The reason for the high growth in the number of bank
branches was increased competition in the industry as a result of banks
operating with a higher capital base, higher expectation of shareholders of
increased profitability and the adoption of Purchase and Assumption as a
failure resolution model by the regulatory authorities which had made the
acquiring banks to retain most branches of the failed banks.
3.1.5 Staff rationalization
In a service industry such as banking, motivation of staff is a key factor in
ensuring that efficiency is maintained. When banks consolidate, there is the
tendency that jobs might be lost as part of the repositioning strategies the
new management may want to undertake. Apart from the adverse impact on
employment level, the development could also impact negatively on the
morale of the remaining workforce. This situation was witnessed, at least
initially. However, appropriate strategies were put in place by the new
managements of the emerging banks to address the dwindling morale of the
remaining staff. In addition, adequate attention was given to trade unions in
the industry in order to minimize disruptions from their activities arising
from staff rationalization exercise.
The adverse effects on employment had since waned with time as individual
banking institutions embarked on massive recruitment of staff to cope with
the challenges posed by rapid growth and expansion in their operations.
81
Currently, the banking industry has become the largest employer of labour,
net of attrition.
3.2 The Regulatory/Supervisory Authorities (NDIC and CBN)
3.2.1 Call on NDIC to play its role as deposit insurer and liquidator
As at December 31, 2005, when the first phase of the banking sector reform
programme ended, 14 of the former 89 banks were unable to either
consolidate or raise their capitalization to the required minimum of N25
billion. Consequently, the CBN revoked their operating licences on January
16, 2006 and appointed NDIC as the official liquidator. The NDIC in
accordance with the provisions of its Act, proceeded to the courts to obtain
winding-up orders, prior to the commencement of the liquidation process.
The winding up procedure requires that the NDIC would first apply to the
Federal High Court for Provisional and Final Orders of court to commence
the liquidation of the closed banks.
Therefore the NDIC promptly filed the necessary applications whereby it
sought the order of the Federal High Court to commence the winding up
process of the failed banks in accordance with the law. However, the action
of the Corporation was immediately challenged in court by some of the
former owners and directors of the closed banks. The counter suits filed by
these owner-directors unduly delayed the liquidation time frame.
Notwithstanding the above hurdles, the Corporation and CBN had through
dogged determination, obtained Final Court Orders to liquidate 9 of the 14
82
defunct banks and as provisional liquidator for 2 of the banks as at the end of
October, 2006. The banks for which the Corporation had obtained final
court orders as liquidator were:
– Allstates Trust Bank;
– Lead Bank;
– Trade Bank;
– Assurance Bank;
– City Express Bank;
– Metropolitan Bank;
– Hallmark Bank;
– African Express Bank; and
– Gulf Bank.
The two banks for which the Corporation had been appointed provisional
liquidator were:
o Fortune International Bank; and
o Eagle Bank.
It is instructive to note that as a deposit protection agency, NDIC out of its
concern about the likelihood of a shake-out in the banking industry
following the policy shift, had put in place appropriate strategies to ensure
adequate depositor protection under a consolidated banking environment.
83
3.2.2 Closing exercise, deposit and fixed assets verification were carried
out on all the 14 banks whose operating licenses were withdrawn
The NDIC is responsible for the orderly and efficient closure of failed
institutions. The closures are done with minimal disruption to the banking
system. After closure, the assets of the failed institutions are realized in the
most cost-effective manner and the proceeds appropriated among the various
claimants in accordance with relevant laws. The laws give depositors
seniority of claim on a failed bank’s assets over and above other
stakeholders such as preferred creditors, general creditors, and shareholders.
A major objective of the Corporation as an insurer under the Deposit
Insurance Scheme (DIS) is to discharge its obligation to depositors when a
bank is closed. The guarantee given under the nation’s DIS to pay each
depositor up to the maximum insured sum when a bank is closed can only
be discharged if the identity of the depositor is known, his/her claims
verified with the records kept by the bank and a credible deposit register
generated.
As a prelude to the commencement of full payment of private sector
depositors in the 14 banks whose operating licenses were revoked by the
CBN at the end of the first phase of the consolidation programme, the NDIC
had to initiate orderly bank closure processes. This entailed ascertaining the
total and actual values of assets and liabilities in the banks as at the date of
revocation of their operating licenses.
84
3.2.3 Failure Resolution Through Purchase and Assumption (P & A)
Transactions
The choice of a resolution option to address bank distress should take
cognizance of the peculiar environment of the country. This is particularly
important as a risk minimizing deposit insurance scheme is established to
among other things, handle bank distress and liquidate distressed banks in an
orderly, cost-effective and non-disruptive manner. The appropriate option
should therefore ensure stability in the banking system and minimize
economic disruption.
In consideration of a resolution approach that would be in the best interest of
depositors of the failed banks and to enhance public confidence in the
banking system, the regulatory authorities provided a blanket guarantee for
private sector depositors of the 14 banks that were closed in January, 2006.
To fulfill that objective, and to ensure access to banking services in
communities where the failed banks were located, the CBN/NDIC adopted a
modified variant of the (P&A) resolution method. Under the P&A
arrangement, interested consolidated banks were encouraged to purchase
some or all the assets of the failed banks and also to assume the liabilities
especially private-sector deposits. In order to facilitate the process and in
pursuance of its responsibility of promoting and sustaining public
confidence in the banking system, the CBN guaranteed the portion of the
deposits assumed by issuing Promissory Notes (PNs) while the NDIC
would transfer the value of the insured deposits to the acquiring bank(s).
In line with the above, the NDIC invited operating banks to assume the
private sector deposits and, in return, acquire either all or part of the assets
85
of the failed banks for which it had obtained final court orders to liquidate.
By the end of October 2006, the deposits of all private sector depositors of
the defunct Allstate Trust Bank Plc had been transferred to Ecobank Plc that
assumed the deposit liabilities and acquired some of the closed bank’s
assets. Similarly, as at the same date indicated above, the deposits of all
private sector depositors of the defunct Lead and Assurance banks had been
fully transferred to Afribank Nigeria Plc that succeeded in the P & A
transactions of the closed banks.
Following the above arrangement, a number of successes have been
recorded. However, legal issues and challenges attendant to the resolution of
the failed banks had slowed down the process. Nevertheless concerted
efforts are being made to speedily resolve all outstanding legal issues and
litigation with a view to fast-tracking the liquidation process.
3.2.4 Corporate Governance Issues
Responsive corporate governance is always an aspect that is closely
monitored by the regulatory authority in order to ensure the transparency and
accountability of management of banking institutions and the curtailment of
their risk appetite.
Responsive corporate governance involves the enthronement of
mechanisms, processes and systems for ensuring that:
· there is appropriate direction and oversight by directors and senior
managers
86
· there is transparency and accountability to the various stakeholders;
· the organisation complies with the applicable legal and regulatory
requirements;
· there is disclosure of all material information to stakeholders such as
investors, depositors, regulatory authorities, etc; and
· the organisation’s viability and solvency is sustainable through
adequate internal controls and audits as well as appropriate risk
management framework.
There is no doubt that responsive corporate governance remains a critical
success factor for the viability and survival of banking institutions. The
consolidation programme ha no doubt expanded the complexity of risks
undertaken by banks. The need for comprehensive and effective risk
management is therefore most imperative. This has become a challenge that
should be addressed in order to ensure effective and efficient regulation and
supervision thereby promoting banking system stability.
The recently introduced Code of Corporate Governance which was issued on
March 1, 2006 by the CBN is therefore a welcome development. The main
aim of the code was to address the observed lingering poor corporate
governance practices by Nigerian banks. The Code covers such critical areas
as Equity ownership; Organizational Structure; Quality of Board
Membership; Board Performance Appraisal; Quality of Management and
Reporting Relationship, among others. For the financial industry, the
87
retention of public confidence through the enthronement of good corporate
governance remains of utmost importance given the role of the industry in
the mobilization of funds, the allocation of credit to the needy sectors of the
economy, the payment and settlement system and the implementation of
monetary policy.
3.2.5 Increased Agitation By Banks for Premium Burden Reduction
A notable development arising from the consolidation programme is
increased agitation by consolidated banks for a reduction in premium
burden. As expected, the consolidation programme led to the emergence of
relatively stronger and larger banks. As a consequence, depositors’
confidence in the nation’s banking industry received a big boost. In addition,
innovative and aggressive deposit mobilization techniques adopted by banks
led to a significant growth in deposit liabilities generated by banks. For
instance, deposit liabilities generated by insured banks increased by N0.94
trillion from N2.47 trillion as at December 2005 to N3.41 trillion as at the
end of October 2006, representing an increase of 37.63 percent. It was on the
basis of such significant growth in deposit liabilities, which had invariably
increased premium payable by banks that the agitation for a reduction in
premium burden heightened. Of course, with the current premium rate of 94
basis points, such agitation could not be dismissed with a wave of the hand.
As a responsible corporate citizen, the Corporation, following the approval
of the Board of Directors, removed Inter-bank takings from the premium
assessment base.
88
Furthermore, the Corporation has put in place a process for the adoption of
the differential premium assessment system in its bid to introduce fairness
into the deposit insurance pricing system, promote sound risk management
systems in banks as well as reduce the burden of premium payment by
banks.
3.2.6 Capacity Building Including Putting in Place an Effective Risk
Management System
Bank consolidation has given rise to an enormous increase in both the size of
banks and their volume of operation. This has made capacity building in the
CBN and the Corporation more compelling. In that regard, staff of the
Regulatory/Supervisory institutions should be exposed to more focused
training, to enable them understand the risk profile of the banking
institutions as well as the various risk management models developed and
adopted by individual banks in order to ensure thorough supervision. Both
the CBN and NDIC should develop the capacity to implement the developed
framework for risk-based supervision. In addition, the two institutions
should procure relevant tools in Information and Communication
Technology (ICT) and upgrade existing ones in order to facilitate the
execution of its mandate. It was in recognition of this need that the Central
Bank of Nigeria (CBN) and NDIC developed a web-based information
system, otherwise known as electronic Financial Analysis and Surveillance
System (e-FASS). This tool enables the supervisory authorities to access to
banking information on an on-line, real time basis. Furthermore, the two
institutions have also made appreciable efforts in exposing staff to new
techniques of banking supervision at both local and foreign institutions.
89
In the same vein, consolidation has brought to the fore the need for
consolidated supervision that requires consultation and cooperation amongst
the various regulatory/supervisory agencies in the system. The activities of
the Financial Services Regulation Coordinating Committee (FSRCC) should
be strengthened to ensure that supervisors obtain a global view of banks’
operations.
3.2.7 Poor/Inadequate Risk Management Systems
Prior to the consolidation exercise, Nigerian banking institutions had a
history of Poor/Inadequate Risk Management practices, which often resulted
in large quantum of non-performing loans and advances. Due to poor risk
management practices, Board members could advance huge sums of
depositors’ funds to themselves, their relations and/or to companies in which
they had interest. As a matter of fact, one of the major causes of distress in
some banks in the early 1990s was huge non-performing insider credits. In
some banks, internal controls were either very weak or completely non-
existent.
The comprehensive Risk Management Systems for Nigerian banks issued by
the CBN is designed to address risk management problems that had plagued
banks in the past.
90
3.3 Effects on the Expectation of the Banking Public
Banking consolidation should potentially be in the public interest,
particularly in the area of service delivery as consolidation is expected to
add some depth to the local banking sector and make a worthwhile
contribution to banking services and the banking industry.
A frequent factor in motivating mergers is the possibility of scope
efficiencies. The pursuit of these efficiencies often results in the product
lines of the two entities being rationalized, with consequent cost benefits,
since a single delivery system is used to sell a “better’ (bigger) range of
products. This often increases the options that consumers have and enhances
the utility of these options.
Furthermore, economies of scale are fairly likely to improve after
consolidation. Larger transaction volumes and larger asset positions,
through a rationalized delivery system, mean that unit costs can be reduced.
When such cost reductions are passed on to the consumers, this may be
regarded as a public interest benefit. In Nigeria, most banks have had to
confront the challenge of harmonizing their products. In most cases, best
features/practices from similar products offered by the merged institutions
have had to be extracted and re-branded to depict the identity of the new
organization. This has seen the industry witnessing an unprecedented
launch/re-launch of an array of products, most of which were targeted
essentially at deposit mobilization. However, the nation is yet to witness any
noticeable reduction in transaction costs.
91
In addition to the above, bank customers now have access to a higher
volume of facilities due to increased single obligor limit. Without any
shadow of doubt, consolidation has instilled greater confidence in the
banking industry due to the emergence of relatively stronger and bigger
banks. There has also been a remarkable improvement in service delivery
due to increased competition among banks.
3.4 Effects on the Economy
At the beginning of the bank consolidation programme there were doubts in
several quarters as to whether the Nigerian capital market had the necessary
depth, breadth and resilience to absorb the many bank issues that were to
enter the market. However, about 10 months after the end of the first phase
of the consolidation programme it has become apparent that the banking
consolidation programme has encouraged the development of the Nigerian
capital markets, with the attendant benefits for financial stability. This is
because since the introduction of the programme, banking institutions, in
order to comply with the minimum capital requirement and remain
competitive, have been compelled to raise funds from the capital market.
This has contributed in no small way towards increasing the tempo of
activities in the capital market. For instance, in the process of complying
with the minimum capitalization requirement, about N406 billion was raised
by banks from the capital market in addition to total Foreign Direct
Investment of US$652million and GBP162,000. Since the beginning of the
banking consolidation programme the market capitalization of quoted stocks
has grown astronomically as a result of the fund raising activities of banks.
There has also been a dilution in the ownership of banks in the country. A
92
widespread ownership of banks has the potential benefit of reducing the
possibility of abuse by owners of banks, for instance, the owners using
banks to fund other activities. The ultimate effect of this development is a
stable banking system which has the ability to support the real sector of the
economy.
Another resultant effect of consolidation on the economy is the injection of
liquidity occasioned by increased minimum recapitalization requirement, a
situation that has given rise to a downward trend in interest rate movement.
Table 2 presents the trend of average interest rates for various types of
deposit accounts as well as the prime lending rate.
TABLE 2
AVBRAGE INTEREST RATE (%) BETWEEN 2004 AND 2006
YEAR SAVINGS TIME DEPOSITS PRIME
LENDING
RATE
7-
DAY
1 -
MONTH
3 -
MONTH
6 -
MONTH
12 -
MONTH
2004 4.9 7.3 13.3 14.3 12.3 10.8 20.0
2005 4.5 6.6 12.3 12.8 10.7 10.8 18.8
2006 4.5 6.4 11.7 11.3 8.9 9.3 17.5
Source: NDIC Data Bank
While the table still reveals a wide spread between lending and savings rates,
it nevertheless shows that interest rates on different classes of deposits as
well as the prime lending rate experienced downward trend between 2004
and 2006. This development could be attributed to the injection of liquidity
93
into the banking system arising from capitalization drive as well as intensive
marketing devices for deposit, among other factors. That implies that the
cost of fund and cost of doing business had taken a downward trend
indicating a positive impact for the customers of banks, particularly the
deficit-spending members of the public.
Besides, more banks now have a higher capacity to support the real sector of
the economy. That assertion can be illustrated by the expression of the
Capital to Risk Weighted Asset Ratio, which the Regulatory Authority has
indicated to be at least 10% and which is given in its simplest form as:
Sharehoders’ Fund (Unimpaired by Losses) > 10%
SSSSWiAi
Where Wi is the risk weight of Ai (Risk Asset i)
From the expression above, if the numerator (Shareholders’ Fund,
unimpaired by losses) has been enhanced by the stipulated minimum
capitalization requirement of the consolidation exercise, it then implies that
the banks have expanded capacity to increase the denominator which
constitutes their risk assets (loans) to the economy without violating the
regulatory stipulation, all things being equal. Given that the real sector is the
engine of growth of any economy, it is heart warming that the real sector
which had suffered paucity of investible funds in the past now has
opportunity of having access to funds.
It is equally important to point out that banks are currently not only under
the regulatory oversight of CBN and NDIC but also that of the Securities
and Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE)
94
as almost all the banks are now publicly quoted. This has surely increased
the level of transparency, stronger information disclosure regime and
enhanced market discipline.
4.0 SUMMARY AND CONCLUSION
An attempt has been made in this paper to highlight some of the major
outcomes of the Banking consolidation programme. In particular, the
aftermath of the consolidation exercise has been related to each of the
identified key stakeholders vis-à-vis their mandates. While it may be
premature to be categorical about the impact on each of the stakeholders, it
will suffice to say that the programme has been offering the entire economy
with a lot of opportunities. However, there remain a number of challenges
that require attention in order to derive maximum benefits from the exercise.
5.0 REFERENCES
Afolabi J. A. (2004), “Implications of the Consolidation of Banks for the
Nigerian Banking System”, NDIC Quarterly Vol 14, No. 4 Fergurson R. W. (2002), “Understanding Financial Consolidation” Federal
Reserve Bank of New York Economic Policy Review. Ogunleye G. A. (2005), “Regulatory Challenges in a Consolidated Nigerian
Banking System – NDIC Perspective”, NDIC Quarterly Vol 15, No 1. Soludo, C. C. (2006), Being Press Release on “The Outcome of the Banking
Sector Recapitalization and the Way Forward for the Undercapitalized Banks”, Abuja, Nigeria
95
ISSUES IN PURCHASE AND ASSUMPTION AS A BANK FAILURE
RESOLUTION OPTION: THE CASE OF THE 14 CLOSED BANKS****
By
A. A. Adeleke, Deputy Director,
Receivership & Liquidation Department, NDIC
1.0 INTRODUCTION
Towards the end of the first phase of the banking reforms programme, it
became obvious that a number of banks would not be able to meet the
prescription of a minimum shareholder’s fund of N25 billion for a
Nigerian deposit money bank by December 13, 2005 nor secure a
merging partner for this purpose. The regulatory authorities therefore
gave the affected banks the opportunity to voluntarily surrender their
licences or have them revoked.
It is now history that 14 out of the then existing 89 banks fell by the
wayside while the rest emerged as the 25 banking institutions we find
today. The banks that failed and had their licences revoked on 16th
January, 2006 include African Express Bank Plc, Allstates Trust Bank
Plc, Assurance Bank Limited, City Express Bank Limited, Eagle Bank
Limited, Fortune Bank International Limited, Gulf Bank of Nigeria Plc,
Hallmark Bank Plc, Lead Bank Limited, Liberty Bank Plc, Metropolitan
* Original version of this paper was delivered at the Fifth NDIC-sponsored FICAN Workshop held from 28th to 30th November, 2006 in Benin City, Edo State
96
Bank Limited, Societe Generale Bank Nigeria Limited, Trade Bank Plc
and Triumph Bank Plc.
It is well known that one of the functions of the Nigeria Deposit
Insurance Corporation (the Corporation) is guaranteeing payments to
depositors in the event of imminent or actual suspension of payments by
insured banks or financial institutions up to the maximum provided in its
enabling law. In order to achieve this objective, the Corporation has the
onerous task of ensuring orderly closure and liquidation of failed banks.
This paper appraises the handling of the failure of the 14 banks.
Apart from this introduction, Section Two reviews the failure resolution
options available to the regulatory authorities while Section Three
examines the reasons why the Purchase and Assumption option was
adopted. We conclude in Section Four by highlighting the outcome of
the implementation of that option and consider the issues and challenges
thrown up by its adoption.
2.0 FAILURE RESOLUTION OPTIONS
Prior to the deadline set for recapitalization, the regulatory authorities
had indicated that banks that failed to meet the deadline would have their
licences revoked. That decision limited the failure resolution options that
could be considered to the following:
a) Deposits Pay-Out
The option involves the winding-up of a failed bank and payment of
the insured deposits up to the insurable limit to its depositors. The
97
Corporation usually acts as liquidator of the closed bank. Depositors
with uninsured funds and other general creditors of the failed bank do
not receive either immediate or full reimbursement; instead they are
issued Liquidator’s Certificates. The certificate entitles its holder to a
portion of the dividend declared by the Liquidator from the failed
bank’s assets after all depositors have fully received payment.
Deposits Pay-Out include costs that cannot be easily estimated such as
administrative costs, staff salaries and other personnel emoluments of
the Liquidator. Other operational costs involve hiring of debt
collectors, lawyers, estate agents, security firms et cetera.
A clear advantage of this option is its ability to instill market
discipline in the banking system. Negative consequences include;
likely denial of banking services in the area where the failed bank
operates and loss of public confidence in the banking system.
Liquidation of assets could extend for many years. Consequently,
uninsured depositors, other creditors and shareholders could wait for
many years before being paid.
b) Insured Deposits Transfer
This entails the transfer of insured deposits of the failed bank to
another bank preferably within the same locality. The acquiring bank
will be given enough cash and/or risk-less assets to cover the insured
deposits transferred from the failed bank. The Corporation acting as
Liquidator takes over the assets of the failed bank which it realizes to
98
settle claims of uninsured depositors, other creditors and liquidation
expenses.
Insured deposits transfer will ensure continuity of banking services
since the insured depositors could operate their accounts through the
acquiring bank. The option would hence be less disruptive to the
economy than pay-out. It would also promote market discipline as it
does not protect management and owners of the failed bank.
However, the Liquidator will still be saddled with the tedious work of
realizing the assets of the failed bank. This may take time and require
technical expertise. Uninsured depositors may not recover their funds
if the assets are not sufficient to pay their claim.
c) Purchase and Assumption (P&A)
This is a resolution transaction in which a healthy bank purchase some
or all the assets of a failed bank and assumes some or all the
liabilities, including all insured deposits. P&As are less disruptive to
communities than deposits pay-out. Acquirers may assume all
deposits, thereby providing 100 percent protection to all depositors.
Some categories of assets never pass to the acquirer, they remain with
the Liquidator. These include claims against former directors and
officers. Additionally, a standard P&A provision allows the assuming
bank to require the Liquidator to repurchase any acquired loan that
has forged or stolen instruments.
99
The potential benefit associated with this option includes;
i. Customers with insured deposits have new accounts with new
bank (acquiring bank).
ii. Acquiring bank has the opportunity for new customers.
iii. Fewer assets are retained by the Liquidator, thereby reducing
cost of realization.
iv. It improves marketability of loans as they are being handled by
professional bankers in the services of the acquiring bank.
v. Loan customers continue to be served by acquiring bank.
The negative consequence of a P&A transaction according to FDIC
(1998) is that it seldom proves to be the least cost method in
comparison to other types of resolutions. It also requires much pre-
closing work for the staff of the Corporation. In addition, assuming
banks may also be reluctant to purchase some loans even if the assets
are offered at a discount.
d) Bridge Bank
A situation whereby the failed bank is turned over to a new bank
specifically set up to assume its assets and liabilities with little or no
compensation to the shareholders of the failed bank is known as
bridge bank. The bridge bank can be established and managed by the
Corporation for about 2 to 3 years. The bridge bank will retain the
failed bank’s license but operate under a different name preferably in
the same premises used by the failed bank.
100
The bridge bank would permit continuity of banking services to all
customers and fully protect the depositors and creditors of the failed
bank. There would be no mass retrenchment of staff and this will
reduce social costs of liquidation through pay-out. It is therefore less
disruptive to banking services and would engender confidence in the
banking system.
The bridge bank may be costly and setting it up will take much time
and effort. Furthermore, the Corporation becomes responsible for the
operation of the bridge bank. It may also be difficult to retain the key
employees of the bank during the transition period while some of the
best customers may also leave the closed bank for stable banks. The
bridge bank could fail thus aggravating the cost of resolution. Besides,
there is no provision for bridge bank in existing laws.
3.0 RATIONALE FOR THE CHOICE OF P&A
In choosing the P&A as the resolution option to apply to the 14 failed
banks, the regulatory authorities were guided by the following public
policy objectives:
a) Private sector depositors are immune to the negative consequences
of the failure of the banks to meet the recapitalization level
required under the banking reform programme.
101
b) Private sector depositors will not lose any of their deposits thus
engendering public confidence in the banking system thereby
encouraging savings.
c) Most of the assets of the failed banks are kept within the banking
system through their acquisition by the 25 banks that survived the
banking reforms programme.
d) Quicker payment to the depositors and afford them the opportunity
to continue banking relationships with the assuming banks if so
desired.
4.0 ISSUES & CHALLENGES
In executing the P&A transaction, the regulatory authorities
provided full coverage to private sector depositors thus limiting
public sector depositors to the insured portion. Assuming banks
were left to choose the assets they wish to purchase while the
Central Bank was to issue promissory notes for the deficit between
the private sector deposits assumed and the assets acquired.
So far P&A transactions with respect to 3 of the closed banks have
been concluded. Ecobank Plc acquired Allstates Trust Bank while
Afribank Plc acquired Assurance Bank Limited and LeadBank Plc.
However, the Corporation has encountered certain challenges in
the course of the exercise thus far. A few of these are considered
below.
102
a) Legal Impediment
The law provides that the Corporation shall apply to the Federal High
Court for an order to wind up the affairs of a failed bank and for its
appointment as the official liquidator. This process gives shareholders
and other affected parties the opportunity to interrupt the process by
challenging the application for the winding-up order. Consequently,
out of the 14 banks whose licenses were revoked in January 2006 the
Corporation has been able to obtain winding-up orders for only 8 of
them. Furthermore, the owners of 2 of the banks for which winding-
up orders have been obtained have appealed against the order. The
Corporation cannot conclude P&A transaction in respect of banks in
these situations.
b) Depositors’ Protection
The current arrangement allows for full payment to private sector
depositors while public sector depositors receive only insured deposits
in the first instance. Further payment to public depositors depends on
the recoverability of the outstanding loans of the failed banks.
However, the definition of what constitutes private and public
deposits can be problematic. For instance school fees accounts opened
by public schools may be considered to be private deposits by some
people and public deposits by others.
c) Assets Stripping
Prior notice of impending closure of banks that fail to recapitalize
provided bank staff the opportunity to strip bank assets by
103
appropriating vehicles and also swapping deposits with debtor
customers.
d) Poor Record Keeping
Much of the records of the failed banks are incomplete due to
sabotage or resignation of competent staff. In some cases problematic
IT systems and software prevented the Corporation from having
access to records.
e) Recovery of Bad Loans
So far, assuming banks have purchased only the physical assets and
unexpired leases of the failed banks leaving loan assets. As a result of
this the Corporation is saddled with the recovery of non-performing
loans.
f) Escalation in Bank Closing and Related Costs
The delay in obtaining winding-up order and the challenge of those
obtained has led to increase in the costs related to bank closure. Such
costs include salaries of members of the Interim Management
Committees (IMCs) appointed to superintend the affairs of failed
banks before the winding-up order is obtained, and of bank and
auxiliary staff. Rent is also paid for over-stay period in leasehold
premises. In some cases chattels have to be moved from premises
where the lease has expired with the attendant evacuation and
warehousing costs. Furthermore, legal expense is incurred defending
landlords’, depositors’ and other creditors’ claims against the failed
banks.
104
5.0 CONCLUSION
In this paper, we have examined the basic options available to regulatory
authorities to deal with failed banks. Given the recent consolidation
exercise and the fall-out there from in which the licences of fourteen
were revoked, the P&A was adopted as the key option to deal with these
failed banks. Hence, we examined in details the rationale, benefits and
demerits of such option. We conclude by acknowledging that even
though the P&A option seems to be working under the present
dispensation, there are obvious outstanding issues and challenges which
needs to be tackled. Amongst others, those issues included assets
stipping, poor record keeping and escalation in bank closing and related
costs.
6.0 REFERENCES
Federal Deposit Insurance Corporation (1998), Managing the Crisis:
The FDIC and RTC Experience 1980-1994, FDIC Washington D. C.
Nigeria Deposit Insurance Corporation (2005), Bank Liquidation in
Nigeria (1994-2005), edited by P.N. Umoh, N.D.I.C Abuja, F.C.T