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Problems from big loans with little collateral. Sound familiar?
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.”