Banking sector feels pinch of CBN action.

Author:Thompson, Jato
Position:Central Bank of Nigeria

That Nigeria's banking sector was under stress was common knowledge. And, expectedly, analysts looked to the Central Bank of Nigeria (CBN) to act to safeguard the industry from a further downward slide.

But when it finally acted, the CBN took all by surprise, both by the sweeping nature of its action and by the severity of its effect.

In late January, it revoked the operational licences of two merchant banks - namely, Financial Merchant Bank and Kapital Merchant Bank.

Therapeutic measures

The CBN hitherto had only threatened to descend on ailing banks, while at the same time rolling out several therapeutic measures to bail out the banks. For the affected banks, the bail-out came too late. The CBN, officials explained, was left no option but to liquidate the two banks.

It noted, for instance, that the move followed the "serious deterioration in the financial conditions of the banks, culminating in the total erosion of their capital bases and the dissipation of the depositors'funds, resulting in the inability of the two banks to meet their obligations to depositors and creditors".

It added that "the various actions by the regulatory authorities to halt further deterioration of the grave financial conditions of the two banks, including calls on the shareholders to recapitalise them, have failed. Indeed, the two banks have failed beyond resuscitation" The CBN vowed to take similar measures to cleanse the banking sector. Three weeks after the liquidation of the two merchant banks, the CBN struck again, this time suspending the operational licences of two commercial banks. The two were Republic Bank Limited and Broad Bank of Nigeria Limited. The suspensions, although for an initial period of three months, fell short of outright liquidation.

But apart from barring them from carrying out any business, the CBN ordered that their respective premises remain shut. According to the CBN officials, the two banks were suspended because of the "persistent and flagrant violations of the provisions of the Banks and Other Financial Institutions Decree (Bofid) No 25 of 1991 and the rules, regulations and directives made by the CBN pursuant thereto, especially the infractions on the rules for the smooth operations of the clearing system".

Specifically, it was learnt that the two suspended banks were indebted to the CBN to the tune of N338m (now $15.36m). Besides, it was gathered that they were suspended for many months from taking part in the clearing house and...

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