Nigeria's banking crisis

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.

According to Nigerian business journalist, Dayo Coker: “It was simply greed and destructive capitalism.”

He continued: “There was a chance to make millions and people seized it. The regulators failed the people.”

Long before they failed the people, however, Nigeria's regulators inspired them with a plan to overhaul their convoluted banking system, and open Nigerian finance to the world. In 2005, then-Central Bank Governor Chukwuma Soludo whittled down Nigeria's 89 small-scale banks to a handy 25. The new banks born of Soludo's consolidation were bigger, broader in scope and had much more credit to lend — but fewer checks on how to lend it. That's where the problems began.

“The people trying to do that process didn't realize they were creating mammoth institutions without really taking the time to double check the new freedoms offered to those in charge,” said economist Adama Gaye, chairman of Newforce Africa consultants in Senegal.

Soludo's consolidation worked, at first. The simplified financial structure encouraged more foreign investment into the national stock market. So, too, did soaring oil revenue. Nigeria evolved from an unmentionable place for an American hedge fund operator to park his portfolio, to a merely daring one, and, for a time, the bet paid off: Equities grew 13-fold between 2000 and 2008, according to estimates from the Bank of America.

To benefit from the blossoming market, major banks extended tantalizingly easy, no-collateral-required margin loans to local stockbrokers. That's where the problems became larger.

“Poor people left their business and put everything in the market,” said Coker. “It was crazy. Nobody thought about a correction.” Only after the end of 2008, when that correction came and Nigeria's market fell by 46 percent, did hints emerge about how poorly the banks managed many of those margin loans — holding onto shares longer than banks had agreed was advisable, for example, or simply providing too much money to small investors.

But poor management may have been the least of their transgressions. The Economic and Financial Crimes Commission says, in many instances, banks asked borrowers of margin loans to invest in particular stocks — an illegal way of artificially inflating the stock's price.

Meanwhile, while their companies accrued unsustainable debt, anti-corruption police say top leaders at major banks extended loans to friends and non-existent companies without ever expecting to see the loans payed back.

Keeping it all afloat was the previous Central Bank Governor Soludo. He created a mechanism through which banks could quietly loan money from the government, to borrowers presenting less and less collateral each time.

“He knew if any of the 25 banks failed it would leave a black mark on his legacy,” said Coker.

Eventually, the banks accrued more debt than either they or the central bank could hide; investors fled and analysts watched what was, to many, a predictable end unfold.

“There was mixture of really what seemed to be poor professionalism with a lot of cronyism and the outcome is not surprising,” said Gaye. “I think anytime you have this cozy relationship between banking executives, regulatory leaders, central bank bodies and political leaders at the government level you are doomed to have an explosive cocktail.”