US embassy cable - 03LAGOS2144

UNCLAS SECTION 01 OF 02 LAGOS 002144 
 
SIPDIS 
 
 
STATE PLEASE PASS TO EX-IM 
 
 
E.O. 12958: N/A 
TAGS: EFIN, EINV, ECON, PINR, NI 
SUBJECT: NIGERIAN BANKS: LARGELY HEALTHY BUT HARDLY 
CONSUMER-ORIENTED 
 
 
1. (U) Summary: Rumors of distress have whispered 
through Nigeria's financial sector since mid-August, 
fueled in part by the suspension of two banks from the 
industry's clearinghouse and in part by investigations 
of ten or twelve others said to be facing temporary 
liquidity problems.  Some banks may indeed be troubled, 
but these represent only a small proportion of total 
deposits; as such, rumors of widespread distress are 
exaggerated.  The country's largest banks are healthy, 
and industry insiders insist that the sector is set for 
continued growth.  This may be the case, but growth 
will likely be limited unless Nigerian banks begin to 
meet the needs of consumers and small and medium 
enterprises.  End summary. 
 
 
------------------------------ 
TROUBLED BANKS OUT IN THE OPEN 
------------------------------ 
 
 
2. (U) The Central Bank of Nigeria (CBN) suspended two 
banks, Societe Generale Bank of Nigeria and African 
International Bank, from its clearinghouse in mid- 
August for consistently overdrawing their CBN accounts. 
Both had long been suspected of having serious 
capitalization or liquidity problems, and both are 
attempting to re-capitalize and re-enter the 
clearinghouse.  Another troubled institution, the Bank 
of the North, has similar problems, but these have not 
been severe enough to warrant suspension from the 
industry's clearinghouse.  The CBN replaced the bank's 
board of governors in mid-August (the new board is 
charged with restructuring and re-capitalizing the 
bank), and the 19 northern states that own the bank 
have since committed to fresh injections of funds. 
Given its unique ownership structure and the political 
ramifications of failure, the bank will likely remain 
operational. 
 
 
------------------------ 
OF LISTS AND LIABILITIES 
------------------------ 
 
 
3. (U) Ten or twelve other banks are reportedly facing 
temporary liquidity problems.  Speculation regarding 
the nature of a so-called "list" of distressed banks is 
rife and made worse by the CBN's reluctance to publicly 
identify any banks under investigation.  The CBN's 
refusal to name names casts a pall of suspicion over 
the entire industry and frustrates banks and consumers 
alike: the former find their credibility questioned by 
foreign partners and investors, and the latter worry 
about doing business with banks that could be on the 
verge of failing.  Even so, consumers continue to make 
deposits, and a large-scale run on Nigerian banks is 
unlikely. 
 
 
4. (U) If banks are indeed having liquidity problems, 
the CBN may ask them to restructure, re-capitalize or 
improve corporate governance practices.  Banks with 
severe problems could eventually be closed, but this 
would not be unprecedented: since 1994, the CBN has 
closed or liquidated 35 banks.  Industry insiders point 
out that the elimination of unhealthy banks is, on the 
whole, a good thing and note that the failure of a few 
small banks is unlikely to generate widespread 
distress, particularly when the banks' deposits account 
for only a small proportion of the industry's total. 
Bismarck Rewane, Managing Director of Financial 
Derivates Company Limited, a leading Lagos-based 
economic think tank, points out that Nigeria's top 
twenty banks account for approximately 60 percent of 
the sector's total assets; the failure of a few small 
banks is therefore unlikely to have a significant 
impact on the industry as a whole. 
 
 
--------------------------------------------- -- 
CONTINUED GROWTH... IF CUSTOMERS' NEEDS ARE MET 
--------------------------------------------- -- 
 
 
5. (U) Many analysts argue, in fact, that Nigeria's 
banking sector has too many banks: ninety-odd banks 
crowd the field, but twenty or thirty might be 
sufficient, particularly when only forty or so conduct 
significant operations in the inter-bank market. 
Rewane believes that the sector will undergo rapid 
consolidation in the near future, predicting that only 
thirty banks will survive the next two years; he 
expects another ten to disappear shortly thereafter. 
The Managing Director of the Nigeria Inter-Bank 
Settlement System, Paul Lawal, shares Rewane's 
expectations but believes that consolidation will occur 
more slowly: he expects to see 65 banks two years from 
now.  Lawal reports that the management of several 
smaller banks may be turned over to larger 
institutions, but even with consolidation, he expects 
the banking sector's overall capitalization to remain 
the same. 
 
 
6. (U) Consolidation may be driven in part by banks' 
competition (perhaps with some foreign participation) 
to enter potentially lucrative retail and consumer 
markets.  Retail expansion would be welcome, as banks 
cater almost exclusively to state and local 
governments, oil companies, and large, established 
clients.  Ado Wanka, Executive Director of Corporate 
and Investment Banking at First Bank, Nigeria's largest 
and oldest bank, reports that nearly 70 percent of the 
bank's income is derived from interest on corporate 
loans; like its competitors, First Bank concentrates on 
securing large corporate clients.  According to Wanka, 
extending credit to the "common man" is simply not 
profitable enough to make it worthwhile - and in 
Nigeria's uncertain investment climate, high risks of 
default make loans to individuals, entrepreneurs and 
small businesses especially unattractive.  As it is, 
interest rates are so high (at de facto rates of 29 to 
30 percent) that none but the largest and most credible 
clients can afford loans.  Average Nigerians find even 
revolving credit largely inaccessible: the inordinately 
high risk of fraud makes credit card use unwise, and 
revolving credit is not widely offered by banks. 
 
 
7. (U) Small and medium enterprises find it equally 
difficult to obtain credit.  The CBN requires Nigerian 
banks to set aside ten percent of before-tax profits 
for equity investments in industrial enterprises under 
its Small and Medium Industries Equity Investment 
Scheme, but only a small proportion of available funds 
has been distributed.  Banks are often reluctant to 
loan money to businesses with short track records, and 
many claim that entrepreneurs lack "discipline," or the 
ability to ensure that funds are used exclusively for 
investment purposes.  The deputy director of the 
Nigeria Deposit Insurance Corporation's bank 
examination department argues, in fact, that funds 
loaned to small and medium enterprises often end up in 
the personal bank accounts of their owners.  Added to 
these constraints is many entrepreneurs' wariness of 
equity financing.  Lawal notes that many businessmen 
are reluctant to share control of their enterprises and 
adds that they fear an eventual take-over by equity 
investors. 
 
 
8. (U) Comment: Economic observers generally consider 
the financial sector one of the Nigerian economy's 
bright spots.  Banks have enjoyed sustained growth over 
the last few years, and the trend looks set to 
continue, assuming, of course, that consumers ignore 
rumors of distress and continue to make deposits. 
Unfortunately, with so few people having access to 
credit, banks are failing to fulfill one of their 
primary functions: making sure that money goes to those 
who need it.  In many cases, banks simply accept 
government deposits and use them to purchase treasury 
bills or extend loans to federal, state and local 
governments and their parastatals.  As such, banks make 
money but contribute little to productive economic 
activity.  Until this changes, interest rates come down 
and Nigeria's investment climate improves, economic 
growth will likely remain less than buoyant.  End 
comment. 
 
 
GREGOIRE