Why Banks fall and faint suddenly in Nigeria

A few hours ago, the Central Bank of Nigeria made a publication on its website on the change in key Management and Board of a new generation bank in Nigeria. I just smiled and wonder when convulsion and sudden death will come to an end in the Nigerian banking system. I wonder whether the marriage with another weak bank caused this "fainting" "sickness" or something else. In a sound business and regulatory environment, before a bank acquires another bank, it must have been healthy enough to continue effectively and profitably too. I knew something was wrong about the acquisition. When the acquirer was classified as systemically important bank, I also knew many things were wrong.

I think we should have a system where regulators are to be reprimanded for their errors and misleading the public. Many questions come to my mind on the events that unfolded today. 

1. Was due diligence done on acquiring bank before the acquisition? 

2. If due diligence was done, were potential risks not identified?

3. Was the process of acquisition clear and fraud proof?

4. What were the basis of approval of the acquisition? You do not just allow acquisition because a bank is already rated SIB.

5. What was the integration process after acquisition?

I am a risk manager of few years of experience, I can tell clearly that this problem has been in existence for over a year. Any bank that hovers within the border line of its capital adequacy is likely to have some challenges. I have delivered lectures on Risk Based Supervision (even to regulators), but this has never yielded any result because there are stick-out traditions of doing business as the spirit leads. I do quarterly review of activities in the banking sector to advice my clients on where and where it is safe to keep their money. It is purely advisory business for me, but it makes me worry most times. I can also tell you that about two other banks are standing on one leg. I hope they are rescued on time. These banks have fallen short of their required minimum standards, but I am sure that our regulators will wake up when the risks crystallize again. 

Banks in Nigeria "fall" and "faint" due to one or many of the followings:

1. Poor Corporate Governance

We have beautiful codes of corporate governance in Nigeria (even if they appear as copy and paste from other jurisdictions). These codes of corporate governance are shallow and weak. How come that Board members and MD were asked to resign their position because of lack of due care and failure in fiduciary responsibilities. Why not jail them? Corporate governance is the act that enables the managers or key stakeholders of an entity to direct its affairs in a manner that enhances continuity and supports high performance. The definition is different in act and spirit of governing banks in Nigeria. We know banks in Nigeria that the Chairmen are greater than the board in all ramifications. And the regulators keep mum until there is a crisis. Corporate governance practice in Nigeria is not effective...in my opinion. It is not effective because I do not think those charged with governance understand many provisions under the code. Section 3(i) of the code requires that the Board must maintain high ethical standards in the business of the company. I do not think this has been in practice. Also section 7.1 of SEC's code allows not more than two family members to sit on the board of company. I think that is weak. What happens if the Chairman and the MD are the related persons?

We have had situations where SEC and CBN's code of Corporate governance were at variance. You can read this up 

I sincerely want to state that only primary regulators should issue codes of Corporate governance. CBN should issue for banks, SEC for capital market operators (Fund Managers, Issuing Houses, FInancial Advisers), NSE as a Self Regulated Entity should be able to issue to Stock brokers, sub-brokers, broker-dealers, Designated Advisers (if possible). Conflict of regulatory standards create holes and manipulations.

2. Weak Risk Management 

Risk Management framework of banks in Nigeria are almost same. When I read through the frameworks of a few, I strongly assume that the consultants either copied and pasted or borrow similar knowledge. While agreeing that banks offer almost similar services, the risk management approach should be tied to risk philosophy, corporate mission, risk appetite and business model. It is possible that banks with strength in Corporate Banking will have similar framework with banks in Retail banking. This is wrong (in my opinion). 

Weak risk management stems from failure to see risk managers as strategy sharpers and key decision makers in an organization. Any organization that does not listen to its risk manager is likely to fail. We know what happened to Lehman Brothers. The risk manager shouted enough that the bank should stop digging holes so that they will not sink, but she was ignored and relegated to the background...until the obvious occur. As CBN ask the directors and key management staffs to resign, I do hope the Chief Risk Officer is also sacked! (except he/she has made efforts to checkmate the situation). The CRO should see danger ahead and advise appropriately. A good CRO should have predictive tools that will enable him or her to ascertain key risks and quickly put controls in place. It is true that you cannot see all risks, but you should see 80% of Key Risks. That is the reason why a CRO should do Key Risk Indicator assessment on frequent basis. Key Control Assessment (KCA) should also be done to ensure that the control is adequate. Before loans go bad, a good model on Probability of default, Loss given default and exposure at default should be established. Unfortunately, most risk managers are seen as show stoppers.

3. Poor Regulatory Supervision

I have know that some banks are weak since Q2 2015. I have these banks on my watch and predicted that they will have huge loan provisions. I was right eventually. Risk Based Supervision entails that indicators should be set for banks in same categories and quick interventions should be done. The Capital Adequacy Ratio of some banks do not appear strong enough (in my opinion). Risk Based supervision requires that a proactive approach with effective models like CAMEL analysis should be done. CAMEL implies Capital Adequacy, Asset Quality, Management Quality, Earning Potentials and Liquidity. High risk banks should be supervised on weekly basis while low risk banks may be supervised off-site and on a lesser frequency basis. Our regulators should not wait until there is problem before they intervene. Intervention at the point of convulsion shows lack of proactive approach to risk identification and risk management (I may be wrong). 

Apart from entity supervision, industry supervision is also key. CBN is expected to have risk management plan for the banking industry. This requires that exposures and activities of the managers should be checked. The supervision should go as far as monitoring suspicious transactions and suspicious credits. As I write, my analysis of 13 listed banks indicated exposures to the following sectors: 

The supervisors ought to look into the key sectors where there are exposures. My computation is subject to about 10%SDV. 

If these three (3) components can be looked into, I strongly believe that the banking sector in Nigeria will improve significantly.

Thank you for reading!