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At the close of banking business on Friday 15, February 2002, the Central Bank of Nigeria revoked the banking license of Savannah Bank of Nigeria Plc (“SBN”).  There was not the slightest idea to any of the investing public, depositors or any stakeholder that such an action is being contemplated.  Savannah Bank was not out […]

At the close of banking business on Friday 15, February 2002, the Central Bank of Nigeria revoked the banking license of Savannah Bank of Nigeria Plc (“SBN”).  There was not the slightest idea to any of the investing public, depositors or any stakeholder that such an action is being contemplated.  Savannah Bank was not out of the clearing house nor was it unable to meet its obligation to its depositors (signs that indicate potential trouble in a bank).  Savannah Bank took the CBN to court and finally won the case at the Court of Appeal.  After a period of seven years of anguish to depositors, staff, shareholders, the Central Bank of Nigeria on 20th February 2009 restored the operating license of SBN.

The CBN through its Financial Sector Surveillance Committee claimed its earlier revocation was in the interest of SBN depositors and the banking system in general.  It further went on and stated that “the overriding interest of the suffering depositors, whose funds have been trapped in the past seven years” is the reasons for not appealing the verdict of the Court of Appeal.  The CBN did not acknowledge responsibility for improper exercise of authority that caused the lost of interest due to depositors during the period of the closure.

The second major lesson to a federal regulator is the sacking of Professor Ndidi Okereke-Onyuike which again a court of competent jurisdiction voided last month.  Though the Securities and Exchange Commission indicated intention to appeal the judgment, one is disturbed at the conclusion of the Judge which says “the Commission was reckless, hasty and its act done in bad faith.  Her (Ndidi) right to fair hearing was breached”.  The Court fined the Commission N500 million

in damages.  Until the judgment is set aside, the Commission must report a N500 million contingent liability in its annual report to the Federal Ministry of Finance.  I pray the Commission gets the Appeal Court to vacate that conclusion of “recklessness, hasty and bad faith” even if it lost the main ground of Ndidi’s sack and the consequent damages at the end as such a conclusion is quite damaging to a Commission and the nation’s investment climate.

The CBN has to draw on the two lessons above in its planned action on the eight banks.  Any action that will not stand the test of the courts is not worth commencing at all. The CBN Governor has set 30 September 2011 deadline for the recapitalization of the rescued banks whose directors were sacked early last year.   Failure will lead to the liquidation of the banks, he said.

Any investment banker knows clearly that a credible process of recapitalization for any of the rescued banks will require the active participation of shareholders, the board of directors, the Courts (in the event of a merger scheme), the Securities and Exchange Commission, the Corporate Affairs Commission and the investing public.  Some actions such as the Extra-ordinary General Meeting (EGM), court notices, subscription periods etc must meet some minimum statutory period.  I believe the 30th September 2011 deadline is too tight not only for the board of directors but also potential investors.

From the onset, one had expected that shareholders will have inputs in the recapitalization process and address other shortcomings of the institutions that caused the sacking of the directors.  As the Banks and other Financial Institution Act removed the provision for outright acquisition of a failed Bank by the CBN, it means CBN can take on the input of shareholders in turning around a failing bank.

What is indisputable is that the eight banks are profitable and are in a viable market.  While the governor was issuing the threat of liquidation, Intercontinental Bank Plc (one of the eight) issued its annual report to the Nigerian Stock Exchange wherein it declares a profit after tax of N53.4 billion for the year ended 31 December 2011.

It is important the CBN safeguards the role and responsibilities of bank shareholders.  The shareholders of the eight banks should not be kept out of the entire problem.  They should be allowed to recapitalize the banks given a time period that will not strain the capital market.  By so doing, the CBN will avoid a situation that will give the aggrieved shareholders grounds to approach the courts to render as null and void, the entire actions of CBN.  Any new shareholder for his or her name to be added to the Register of Shareholders must meet the provisions of the laws.

Let the interim boards revert to the shareholders and put up a credible recapitalization plan.  By so doing, it enhances the image of Nigeria as an investor-friendly country where investor’s right is not easily trampled upon. Continuous neglect and total disregard of the role of equity providers will affect not only the stressed banks but banking as a whole.  An early resolution of the capital problem of the eight banks will no doubt restore the confidence in bank shares both in the primary and secondary markets of the capital market.

The Interim boards of the eight banks report to the CBN, if they fail to turn around the banks and also fail to pay off the N620 billion funds injected by the CBN, they should be shown the way out. The Intercontinental Bank result shows banking to be highly profitable and a cash cow anytime in the Nigerian economy.

The CBN should renew its game plan for the rescued bank.  Let the Interim Board engage their respective shareholders on the best way to recapitalize the banks whether by way of offering shares to a core investor or the general investing public (including existing shareholders). Let the shareholders decide on the future of their respective banks.  Where the shareholders’ decision does not go well or the banks fail in the recapitalization, then the NDIC should take up its statutory function of liquidating any failed bank.  By so doing, the CBN will avoid the shock it got from the courts in the SBN case.

In the meantime, it is important the CBN stops the system from heating up.  Any threat of bank closure can cause a run on the system as a whole and not only on the affected banks.  The run on Oceanic bank last year is still fresh and it took several interventions through costly advertorial for panicking depositors to cease withdrawing their funds from the bank.  We hope the banking system will survive this turbulent period and resume its intermediation efforts of funding the deficit units of the economy at a less costly price than it currently does (a role it abandoned at the start of this crisis)

Dodo is an investment & financial analyst/commentator, Gobe de Bege Co. Limited, D2, Lakecity Plaza, Gudu District FCT. [email protected]