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Cablegate: Nigerian Banking Reform - Cbn Encourages

This record is a partial extract of the original cable. The full text of the original cable is not available.

171354Z Aug 04

UNCLAS SECTION 01 OF 03 ABUJA 001405

SIPDIS

E.O. 12958: N/A
TAGS: EFIN NI
SUBJECT: Nigerian Banking Reform - CBN Encourages
Acquisition of Nigerian Banks


1. Summary. On July 6 the governor of the Central Bank of
Nigeria (CBN), Charles Soludo, proposed several reforms to
the banking sector, the most important of which is raising
the capital requirement of banks from naira 2 billion (USD
15 million) to naira 25 billion (USD 189 million) effective
December 31, 2005. While his proposal has generated mixed
reactions in financial circles and among the public, the CBN
is seeking support from the banking community and
multilateral financial and donor agencies. The CBN is also
encouraging the foreign banks operating in the country to
acquire banks that are up for acquisition. It is not clear
which, if any, banks will take up this challenge. End
summary.

-----------------------------------
CBN Meets With Diplomatic Community
-----------------------------------

2. On August 11 the CBN, led by its governor, Professor
Charles Soludo, briefed heads of diplomatic missions, and
representatives of multilateral financial and donor agencies
on proposed reforms in the Nigerian banking sector. Soludo
asserted that the overall health of the Nigerian banking
system is generally satisfactory, but the state of some
banks is cause for concern. Specifically, as of April 2004,
the CBN's ratings of Nigeria's 89 banks classified sixty-two
as sound, fourteen as marginal, eleven as unsound (and two
as dormant). He affirmed that the CBN is pursuing the
reforms to prevent the boom and bust cycle of the banking
sector characteristic of Nigeria's banking history.

-------------------------
Background to the Reforms
-------------------------

3. Ignatius Imala, Director of Banking Supervision,
confirmed that the Nigerian banking sector needs reform. He
said that while the top ten banks account for 50 percent of
the industry's assets and liabilities, the end of March 2004
review had revealed that 17.6 percent of total bank deposits
were at risk and 19.6 percent of total bank assets were
equally so. CBN's total exposure to the banks was naira
71.366 billion (USD 537 million) as of July 2004.

4. The Nigeria Deposit Insurance Corporation (NDIC) 2003
review of the banking industry also revealed a deteriorating
trend in the quality of risk assets of insured banks. Non-
performing loans and advances had totaled naira 135.7
billion in 2001 and naira 199.6 billion in 2002, but the
volume rose to naira 260.2 billion by the end of 2003. The
ratio of non-performing loans to total loans had been 16.9
percent in 2001, 21.3 percent in 2002, and further increased
to 21.6 percent in 2003. The ratio of non-performing loans
to shareholders' funds had been 77.1 percent in 2001, 85.9
percent in 2002, and further deteriorated to 89.7 percent in
2003.

5. Imala had noted that most of Nigeria's banks are small,
their capital base averaging naira 1.3 billion (USD 10
million). Insolvency, poor credit policies and
administration including excessive risk taking, weak
corporate governance and ethical misconduct, and closed
ownership structure characterize the unsound banks.

6. Imala also confirmed that the CBN hopes that its proposed
reform measures will help create a sound banking system that
depositors can trust, create banks that are investor
friendly and can finance capital intensive projects, enhance
corporate governance and accountability, drive down the cost
structure of banks, and help banks meet the challenges of
globalization, all of which could prevent a systemic crisis.

-----------------
The Reform Agenda
-----------------

7. Imala confirmed that the reform program is anchored on
thirteen points, among which are:

- a minimum capital base requirement of naira 25 billion
to be met by December 31, 2005. The capital base is defined
as paid-up capital and reserves unimpaired by losses. The
reserves must exclude asset revaluation surpluses resulting
from revaluation in the course of consolidation, while paid-
up capital is defined as ordinary shares plus non-redeemable
preference shares;

- consolidation of banks through mergers and
acquisitions;

- adoption of a risk-focused and rules-based regulatory
framework;

- zero tolerance for weak corporate governance,
misconduct and lack of transparency;

- establishment of an asset management company to manage
the CBN's exposure to the banking sector;

- accelerated completion of the electronic Financial
Analysis and Surveillance System (e-FASS), to ease the
submission of returns by banks and enhance CBN's
surveillance capacity;

- strict enforcement of contingency planning for systemic
bank distress;

- revision and update of relevant laws and drafting of
new ones;

- closer collaboration with the Economic and Financial
Crimes Commission's (EFCC) Fraud Investigation Unit and
enforcement of the anti-money laundering and other economic
crimes measures;

- enforcement of dormant laws, such as the Dud Checks
Act;

- review of monetary policy; and

- reorganization of the Nigerian Security Minting and
Printing Company (the Mint), to meet the nation's security
printing needs as well as those of the west-African sub-
region.

--------------------------------------------- --------
Guidelines, Incentives & Modalities For Consolidation
--------------------------------------------- --------

8. The guidelines announced by the CBN indicate that:

- only mergers and outright acquisitions or takeovers are
acceptable. Mere interlinking group arrangements are not
allowed. Banks coming together as a group cannot retain
their individual brand names, but have to merge under a
single brand name.

- All monies toward re-capitalization must be denominated
in naira, but can include both ordinary and preferred
shares.

- Consideration must be by exchange of shares and not
monetary payments, except by dissenting shareholders and
provided that payments do not impair the financial condition
of the new entity.

9. The modalities for consolidation approved by the CBN
further stipulate that:

- each party must have a different advisor except where
the acquired bank is a wholly-owned subsidiary;

- the board of directors must not exceed 20 members for
the consolidated entity; and

- co-chairmen or co-chief executive positions will not be
allowed.

10. The incentives for mergers announced by the CBN include:

- CBN to provide technical assistance to consolidating
banks at no cost;

- possible write-down of CBN's exposure to the acquired
unsound bank to make it more attractive;

- tax incentives like capital allowances, companies
income tax, stamp duties, etc;

- reduced transaction fees payable to the Securities and
Exchange Commission, the Corporate Affairs Commission, the
Nigerian Stock Exchange (NSE), and other similar
institutions; and

- amnesty for previous misreporting detected in the
course of consolidation.

11. Banks that attain the new minimum capital base within
the stipulated period will be authorized to deal in foreign
exchange, granted permission to take public sector deposits
and recommended to the fiscal authorities for the collection
of public sector revenue, and allowed to manage part of
Nigeria's external reserves, subject to prevailing
guidelines.

-------------------------
Foreign Banks Should Come
-------------------------

12. Soludo invited foreign banks to avail themselves of the
opportunities of the reforms by acquiring Nigerian banks. He
said the time is right and the startup costs are minimal,
because the banks to be acquired already have a countrywide
network of branches.

--------------------------------------------- ---------
What Happens To Banks That Do Not Meet the New Capital
Requirement?
--------------------------------------------- ---------
13. Soludo said the CBN will publish the names of healthy
banks on December 31, 2005. Those that do not make the list,
because they cannot meet the new recapitalization
requirement and are not suitable for mergers or
acquisitions, will cease to exist as a result of the
public's shunning them. Soludo asserted that he small banks
unable to meet the capitalization directive may apply for
community bank licenses to serve clients in a limited
geographic area.

--------------------------
Is The Reform Sustainable?
--------------------------

14. Soludo said the sustainability of the proposed reforms
will depend on the level of success achieved. If they s
succeed, the public will support them irrespective of the
government in power. Soludo is convinced that the reforms
will stand the test of time.

-------
Comment
-------

15. The CBN's incentives for consolidating the banking
sector show that it took some of the earlier criticism of
the reform measures into consideration. But the Senate
Committee on Finance has expressed reservation and intends
to hold hearings, after which it may propose a bill to amend
the act of 1991 that governs the Central Bank. Meanwhile,
it remains to be seen whether its proposed incentives will
induce foreign banks to invest in Nigeria, a country
characterized by macroeconomic instability and frequent
policy reversals, though opportunities for high returns
abound. End comment.

CAMPBELL

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