A money dealer counts the Nigerian naira on a machine in his office in the commercial capital of Lagos, Jan. 13, 2009, when the country's central bank moved to reassure investors following sharp falls in the currency. They said that the depreciation had protected its foreign reserves and the exchange rate would soon stabilize. (Akintunde Akinleye/Reuters)

Nigeria's banking crisis

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Problems from big loans with little collateral. Sound familiar?

By Drew Hinshaw — Special to GlobalPost

Published: October 15, 2009 05:56 ET

LAGOS, Nigeria — When Nigerian Central Bank Governor Sanusi Lamido Sanusi took office in June, he certainly had a hunch about how deeply distressed his nation's banking sector was.

Foreign risk management analysts had been issuing warnings about Nigerian banks and their toxic assets since January, and oil prices were down — always a harbinger of hard times coming for Africa's top oil producer.

What he may not have known is that he would soon have a genuine banking crisis raining down — something a lot like the larger banking crises in the U.S. and Europe.

Nigeria's central bank has had to inject 620 billion naira ($4.2 billion) to keep the country's banks afloat, and some analysts say the bailout may top one trillion naira. However high the price tag soars, the money hasn't yet staved off the credit crunch facing ordinary Nigerians and the businesses they'd like to launch — which is why their president is proposing a $2 billion stimulus package to reinvigorate Africa's number two economy.

It is an achingly familiar vocabulary for the global recession — bailout, credit crunch, stimulus — except that Nigeria's banking crisis has little to do with credit default swaps or subprime mortgages.

In terms of the global financial system, the collapse of Nigeria's top lending institutions might be taking place on a separate universe, but it is strangely parallel, both in its timing, and in the cavalier attitude of its lenders towards debt repayment.

Major Nigerian banks are in ruins, responsible for an estimated $10 billion in bad debt, according to financial analysts at New York's Eurasia Group. So far, Sanusi has fired the leaders of eight banks, including three banks last week.

The government may nationalize the least solvent banks, and will certainly investigate the leaders responsible for the situation — hundreds of bankers, investors and highly indebted people are already under the anti-corruption police's microscope. The CEOs of three banks are under 24-hour surveillance. A fourth fled the country last month.

The public saga marks a messy end to an all-too-prosperous growth cycle in Nigerian finance, the shaky and perhaps even criminal underpinnings of which are evermore visible with each government audit.

Comments:

3 Comments.

Posted by david wayne osedach on October 15, 2009 08:26 ET

It sounds like Nigeria inflected itself with its own version of the Nigerian scam.

Posted by jacob taylor on October 15, 2009 08:51 ET

i wonder if bernie madoff is a nigerian..afterall he is american

Posted by Nirano on October 16, 2009 09:57 ET

The problem with financial services in Nigeria is that it is under-developed - Nigerian banks, for example, are not really offering banking facilities and so have had to come up with scams to support their communications' spin leaving Nigerians unserved. Previously they operated as licensed deposit takers, and now they operate as debt collectors in the main.

The regulatory framework has been lacking and accounting has been false translating to current crisis.

Changes in the banking sector would have to include a root and branch review to start with and banks should be required to perform banking services which remains lacking.