June 12, 2011 01:58AM

http://234next.com/csp/cms/sites/Next/Money/Finance/5713347-147/who_bears_the_real_cost_of.csp

The Central Bank of Nigeria (CBN) has made clear its unwavering stand to conclude the recapitalisation of the rescued banks by the end of this year. According to the regulator, its obligation to depositors and creditors remains paramount as it seeks to navigate the labyrinth towards bringing the financial institutions to solid ground.

Since the intervention two years ago, the CBN has injected about N620 billion into the rescued banks while pumping another N1.7 trillion through the Federal government-backed bond issued by the Asset Management Corporation of Nigeria (AMCON) to soak up non-performing loans in the banking system. The total indebtedness of the institutions is estimated to be N3 trillion

The tango towards recapitalisation, which began in August 2009, has been fraught with uncertainty and confusion over the manner of intervention by the Central Bank. Thus, while 10 banks were found to be in grave situation at the end of the stress test conducted in July 2009, eight had their management removed in commando style, while the other two were given soft landing, with a timeframe with which to tidy their books. As a result, Wema Bank and Unity Bank were given the laxity to negotiate their recapitalisation in their own terms, a luxury which the other banks, namely Afribank, Finbank, Intercontinental Bank, Union Bank, Bank PHB and Oceanic Bank, Spring Bank and Equitorial Trust Bank did not enjoy.

According to CBN governor, Lamido Sanusi, it took the steps because, while the two banks did not have issues of bad management and poor corporate governance, the others, in addition to insufficient capital and unacceptable levels of non-performing loans, had issues of bad corporate governance and a suspicion of fraudulent activity by the sacked management. Indeed, some of the accused persons are already facing prosecution.

"The Economic and Financial Crimes Commission and the Honourable Attorney General were also of the firm view, upon review of the reports on these banks, that what was disclosed pointed to serious economic crimes for which reason a number of persons in each of these banks have been charged for a range of crimes, including theft, fraud and money laundering..." Mr Sanusi said.

Close monitoring

This scenario, the CBN argues, made it impracticable to allow these institutions to negotiate its recapitalisation without close monitoring.

"Allowing the banks to recapitalise on their own with no oversight of the process by the regulator was unrealistic, given the state of the capital market, and would in effect be inviting the individuals and erstwhile management that mismanaged the banks in the first instance to the detriment of depositors."

Since then, the banks have entered into, and reached various stages in, negotiation with interested core investors.

However, some shareholders have obtained various court judgements stopping the CBN-appointed management from negotiating with any core investor. The legal tussles seem to be a clog in the effort by the management from achieving the sale within the timeframe of the two year mandate given them by the CBN.

This action is prompting the CBN to wield the big stick once again.

"We can always take away the banks from the shareholders and they need to understand this," Mr Sanusi said.

For him, liquidation remains an option for rescued banks that are not able to tidy up their deals before the end of the year due to undue interference by the shareholders.

Unrealistic optimism

"I remain optimistic that the shareholders will come to the table, that we will get those orders vacated and that there will be deals and these deals will be sorted out by 30th of September. But I am also unrealistic enough to make sure that there are option B and option C and I think it is only fair that everybody has a chance so that if the first option does not work, that will always be an option to use," Mr Sanusi said.

Nonah Awoh, a shareholder activist said while the action of some of the shareholders may not serve any good in the long run, the CBN should also carry all the interest groups along in order not to do more harm than what it is trying to correct.

"Some of us are not getting it right. While some actions may be out of ignorance, I also do not think that the Central Bank has handled this matter appropriately," he said.

Boniface Okezie, another shareholder, said the utterances of the CBN governor was already having negative impact on the banks.

"Since Mr Sanusi's pronouncement there is already a run on those banks as the customers do not want to be caught unaware. Maybe that is what he wants so that he can justify his decision to liquidate the banks."

Mr Okezie said liquidating the banks will come at great cost to the economy.

"The CBN governor's pronouncement is empty threat and it cannot stand," he said. "Three months is not enough for the banks to recapitalise. What happens to the N620 billion that has been injected. What about the AMCON funds that the banks now have."

Insincere negotiation

He said the CBN appointed management constituted a clog in the effort of the shareholders to recapitalise the banks as they take directive from the CBN instead of the board.

"They are not sincere because they are also scheming to bring their own friends and cronies to take over because they have seen the potential of the banks. The picture the CBN paint that the banks are not viable is not entirely true," Mr Okezie said.

The CBN insists that since taking over the banks, the institutions remain in grave situation as their existence is dependent on the CBN lifeline.

"There continues to be value attrition as the banks record operating losses, and the potential cost to the government therefore increases. The banks remain technically insolvent since all of them recorded negative net asset values as at December 2010," Mr Sanusi stated in a public statement issued at the weekend.

Currently, Oceanic bank has negative capital of N94.3 billion, Union Bank N135.9 billion, Intercontinental Bank N330.71 billion, Bank PHB N242.31 billion, Afribank N260.9 billion, Finbank N104.8 billion, Equitorial Trust Bank N27.25 billion and Spring Bank N87.9 billion.

So far, no party is ready to shift ground as shareholders have vowed to continue with their legal battle while the CBN insists on its liquidation option at the end of September. Given the huge cost which both situations pose to the economy as a whole, the expectation is that at the end, ego will be sacrificed for the greater good.