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As the Central Bank of Nigeria wields the big stick

By Boniface Chizea
11 July 2016   |   6:57 am
First, I have to make a confession that the above title was from a report I read online regarding the recent sack of the management of Skye Bank by the Central Bank of Nigeria (CBN).
Central Bank of Nigeria's (CBN) governor Godwin Emefiele. / AFP PHOTO / PHILIP OJISUA

Central Bank of Nigeria’s (CBN) governor Godwin Emefiele.<br />/ AFP PHOTO / PHILIP OJISUA

First, I have to make a confession that the above title was from a report I read online regarding the recent sack of the management of Skye Bank by the Central Bank of Nigeria (CBN). I decided to use this caption not because I consider it the correct depiction of what had happened but because it would seem to represent popular sentiments or popular reading of what had transpired.

The only problem I have with the caption, however, is that it makes it portrays what happened as a sort of punitive action but what the Central Bank has done is in keeping with its avowed mandate to maintain stability of the financial sector and was essentially a preemptive action to prevent a Domestic Systematically Important Bank (SIB) from failure with the potential for precipitating a domino effect that could undermine the entire financial system.

You might wish to recall that Skye Bank in 2004 bought over Mainstreet Bank under circumstances which were criticized and in popular opinion were believed to have contributed to its present misfortune. The Central Bank took its time to explain in the release following the change in management of the Bank which it announced on July 4, 2016 that despite the fact that it engaged with the management of the Bank over a long period of time, the management did not show evidence that it had the capacity to turn the bad situation around.

It is also imperative to observe the subdued nuances that surrounded this development. The management it was asked to throw in the towel and there was no drama attending this development except a rather sober press conference by the Central Bank during which the reasons behind the steps taken were dutifully explained to all stakeholders and this is after the management of the Bank itself had released a statement to the effect that it voluntarily retired to enable new hands continue to redirect the policy thrust of the Bank towards the end already mapped out for it.

The Central Bank dutifully explained that Skye Bank kept its prudential guidelines as well as capital adequacy ratios in the breach and depended on the lending window provided by the Central Bank for a long time to remain in business which essential connotes that the Bank was really on life support. Its stock of bad debt stood at an estimated whopping 700 billion Naira mostly insider related, and to the oil sector depicting the extent of the erosion of the capital base of the bank. This compelled the erstwhile managing director have observed publicly that the Bank was putting credit extension to the oil sector on hold.

The Bank was still in default regarding the publication of its audited financial report for the year 2015 which statutorily should have been published not later than four months after the end of the financial year end as well as the reports for the first quarter of the year 2016. It is also on record that the Bank was one of the banks that embarked on the sacking of their staff which was decried by the Federal Government as it was considered ill-advised as it worsened the albatross of unemployment which had been a major concern to all stakeholders in the country as the bank offloaded a total of 175 staff on June 7, 2016.

It will be unfair not to observe that some of the problems encountered by the bank was also due to the lack- luster performance of the Nigerian economy which to all intents and purposes is reported to have gone into recession following negative growth rates in GDP for two successive quarters with all the implications of this development for the sustenance of viable productivity.

It is also a fact that some of the fiscal policies had impacted bank operations negatively such as the Treasury Single Account amongst other sundry measures which drained the financial system of liquidity which is the veritable life blood of banks and inadvertently undermined their profitability. The delay in kick starting fiscal policy as budget implementation was unusually delayed as it is now almost becoming routine impeded productivity in the economy and must also be counted as a contributing factor.

The likely implications of this action as the Central Bank explained will be to affect negatively the performance of the shares of the bank at the Stock Exchange. The stock price of the bank was already headed southwards as the Central Bank reported that the stock of the bank on the day which the change was effected lost 9.52% to close at 0.95 Kobo.

What was even surprising was that despite the fact that the Central Bank had engaged with the Bank following its deteriorating performance and had given it one year notice terminating on June, 2016 to recapitalize, investors did not take heed but continued to deal in the shares of the bank regardless. It has been reported that for the week ended July 01, 2016 about 47 million units of the stocks of the bank amounting to N 40 million exchanged hands in 443 deals while the price was down by 4.55 per cent.

The fact remains that the jury is still out regarding the fate of the existing shareholders who no matter how it all pans out would not have their current level of interest in the bank guaranteed. The other likely consequence which could be devastating is having a run on the bank. This is where the Central Bank would have to demonstrate fidelity to its promise to work with the transitional management to stabilise the bank in the shortest possible time by being a source of ready liquidity to sustain confidence in the going concern concept of the bank.

It would therefore, appear that the Central Bank has its job cut out for it if it must keep fidelity to its promise to proactively manage potential risks, maintain zero tolerance for practices that have the potential to undermine the health of the financial system and to foster a strong corporate governance regime consistent with the imperatives for robust financial intermediation, innovative finance and inclusiveness.
Chizea lives in Lagos.