The CBN recently issued a disclaimer in respect of the so called wonder banks. Some of them have been in existence for about four years and now a lot of people have lost money. Why did it take so long to take action against these companies?

Lemo, CBN deputy governor

We have been doing something about it before we started to issue disclaimers in newspapers. First, we didn’t know until about eight months ago that those things were happening. No one reported to us. When they did, the first thing we did was to freeze the accounts of those companies. We got in touch with the banks where they operated accounts and said those accounts should be frozen. We also sought legal advice. Don’t forget that the Central bank is not a law enforcement agency, we don’t have power of arrest unlike the EFCC or the Police, so we went to the Corporate Affairs Commission to check that they were actually registered. We engaged them in discussions and they told us that they were not taking deposits but only inviting people into business partnerships. And we have to look closely at the mandate of the CBN.We supervise banking and non-bank financial institutions that conduct the business of commercial banking, discount house, finance houses and mortgage houses, in short all institutions that take deposits.
We sought legal advice and initially it became clear that if these people were in petroleum as they claimed they were, and people were invited to subscribe to the business, we felt it was a capital market related activity. Because, for you to call for capital from the public, there is an Investment Act and the Security and Exchange Commission must be interested, you have to register with SEC. But later we got to know that the public’s interpretation of their mission was that they were deposit-taking institutions and we then said that since the public is confused about their activities, we must first issue a disclaimer. When we discovered that some were operating in Kwara State and collecting money, we instructed the bank to freeze their accounts and up till now the money remains frozen.

Their legal adviser has written us to say that we don’t have such powers, but we are engaging them. But to me the best thing is to educate the public about the risk that they are taking. Under the rule of law, if a company is not operating illegally, you cannot just go and close down the company. We must understand the realm of authority under which the CBN is operating. We have reported to the EFCC and we hope that they will step in because they have the power of coercion and they also look at financial malpractices and related offences. We are working with them and hopefully; we should be able to take them out as soon as possible.

Before the CBN stepped in, one or two banks, Zenith for example, closed the accounts of some of these companies. That appears to be part of the Know Your Customer rules, are you satisfied with the level of compliance, within the past year?

I must tell you that it has improved. The banks are bigger now and the skill pool is larger, because they can now recruit high quality people. It is because of this that Nigeria was de-listed from the FATF list, due to the anti-money laundering activities of the CBN, EFCC, Financial Intelligence Unit and the banks themselves. We have issued various circulars about KYC and the situation has improved. However, we still have some challenges. We have told the banks that they will be held responsible if they open accounts for companies that they are not sure of the sort of business they are doing. KYC means you must know the business of the customer before you allow him to run any transaction through your books, because if it then happens that that these people stole people’s money, we will look at the vehicle through which those monies were stolen and they might be held liable, if they have not done enough due diligence or did not show reasonable care to ascertain the business dynamics of those institutions affected.

Since you have frozen the accounts of these wonder banks, could you tell us what is the amount involved?

I don’t have my hand on the figure right now, but it runs into hundreds of millions of naira. One company has made a statement that they will refund the money they took, and they referred to the action we took, and we are glad that they did that and as soon as that is confirmed we will release the money through the banks to depositors.
But, we have warned the public about putting money in these sort of institutions. The rule here is caveat emptor, buyers beware. There must be an element of greed in anybody who brings money out for someone who promises twice that amount as interest. It doesn’t happen. They might give the interest initially, but it is to cajole more people to bring in their funds and by the time they have a critical mass, they will disappear with the money. I think much of what we need to do is to engage people, especially the press because even if we clear this people now, they can reappear at another time in another form. People should know that Nigerian banks are everywhere. Prior to consolidation we had 89 banks with 3,200 branches, now we have over 4,200 in spite of the fact that the banks have consolidated. They have enough funds to open branches everywhere and we have over 300 microfinance banks and we are still counting, we have over 80 primary mortgage institutions. There are enough banks to serve Nigerians, so let us stop patronising these mushroom 419 people that are promising heaven and earth.

There is this issue of bad debtors that is still of concern to the Bankers’ Committee. Some of them are called “professional borrowers” who go from one bank to the other with good proposals just to borrow without intent to repay. How is the CBN working to complement banks’ risk management apparatus to check this behaviour?

am glad that you mentioned the risk management framework. First is to say that the most potent weapon to deal with that is a strong risk management framework. We have issued circulars to banks to strengthen their risk management framework and it must be driven from the top down. Besides that what will help is a credit registry. We don’t have a very robust credit registry of international standards yet in Nigeria but, several years back the CBN realised the need for that and we came up with a Credit Risk Management System, which is an information data bank where banks are supposed to send information about any customer that borrows N1m and above. That information is to be updated regularly, so if Tunde Lemo, for instance, borrowed N1m from Bank X and I don’t service that loans very well, it will be there as not well serviced, so if I go to Bank Y, they have access to that information and they can say ‘no we will not lend you any money’. People can use different companies to approach banks but the names of the directors are there, with passport numbers and other unique identification that will enable us trace them even when they open another company. But the platform is not robust enough because banks have not complied fully. Some of them will lend money to some companies or individuals and they will not send the information to the databank. The credibility of the data bank is a function of its robustness. It is how populated the databank is that makes it useful. If it is not well populated it is not useful. But beyond that we have also been encouraging the establishment of a very big and robust credit registry. One is about now being established. They have been talking to us, we have given approval and by the time it is established it will not only be useful for banks because it is not only banks that give credit. We are turning this economy to a credit economy, like the US or Europe, where you can go to a furniture shop as a young and upcoming executive and get your furniture for N800,000 and you don’t need to pay at once. They just need to go to the databank to check if you owe anybody, if not you take the furniture and begin to pay from your salary. The data bank will be available for banks, non-bank financial institutions and all those who directly or indirectly extend credit. In fact that is the only way you encourage consumer credit, consumer credit is what can increase the buying power of individuals, which will, in turn help the real sector grow, help productivity and increase the GDP. It is a circular flow that will catalyse the economy.

This credit bureau, if it is going to be driven by the private sector alone, what roles are you going to play?

We manage the CRMS, but we won’t manage the credit bureau. We want the private sector to take ownership as it is abroad. Our role as regulator is to ensure that we add to the credibility and that nobody is cheated in term of the commission or the fees that you have to pay to access it. I am sure that if you drive the critical mass, the fee will be minuscule. Our role is just to ensure market discipline and order.

Last week the CBN said it had suspended the verification of funds related to public offers by banks. Was this decision internally driven, or did CBN succumb to pressure from investors or banks, considering that some stockbrokers blamed the CBN for the recent bear run in the market?

It is both. How did we even come about this at all? You will recall that about 10 years ago, we were not verifying such funds, but we started noticing unethical practices where people will go and borrow money from bank X and take over Bank Y, and by the time they take over, they will dip their hands into the coffers of Bank Y and repay bank X. They will run the banks aground and move on, so we decided that we will not allow people to borrow large amounts of money to invest in banks. Then most banks were not quoted on the stock exchange and their shares were not freely tradable. That scenario has changed, because the banks’ shares are now freely tradable and the minimum capital is high. How much can you borrow to control First Bank, for instance or any other big bank? Maybe the market capitalisation of N400bn, how much can you borrow? So, the risk of anyone taking over a bank for selfish reason is minimal, and two; the number of subscribers to any bank issue has also grown. I am told that for First Bank (Offer), there were over one million subscribers. How many of these could be verified manually? We are trying to change the verification process, so it will not affect the time the share allotment is made so that the capital market transactions are not distorted. Most of these offers now are large, two or three can suck up N1tn from the market, so if you wait until you conduct verification which can take months, you are starving the capital market of the needed liquidity to propel it forward. So, we are going back to the drawing board to see how to deal with the anti money laundering issues and all the other checks that we have to make to ensure the financial soundness. We said to SEC and the Stock Exchange that we are having a rethink but you have to run the Exchange and the capital market in a seamless manner, and in such a way that the CBN will no longer be castigated as causing the delay in issuance of shares of bank offer subscribers.

There are also some concerns about the entry of foreign entities, especially into the banking sector as core investors. Some are major shareholders. In the overall national interest, is this helping Nigeria or are these concerns justified?

The Governor of the CBN, Prof Chukwuma Soludo has spoken on that and I stand by what he said, which is patriotic. One, we welcome foreign investors to Nigeria, it is expected because now that the economy is well conducted and everything is looking up, the best destination is Nigeria. If you don’t have Nigerian projects as part of your portfolio then you don’t have any credible project. We know they will come. However, we don’t want anybody to stampede us, particularly in owning Nigerian banks because of the nature of Nigerian banks. Our banks are not just business enterprises but are also at the heat of development of the Nigerian economy, so we see some of them as national assets.

We are using the Singaporean model. In Singapore the market is structured in a way that there are local banks, about three of them that very large and account for most of the market share. Foreign banks are welcome to Singapore to the extent that they don’t touch any of the three banks. They can set up or buy into other banks, except those three banks. We are applying the same principle in Nigeria. The top 10 banks are regarded as purely Nigerian banks, foreign investors can buy the shares but they cannot buy to the extent that they will control such banks, so that they remain Nigerian banks. This is because if they suddenly became foreign bank, their business interest will be as it is at headquarters. The patriotic interest as local banks will no longer be there. We saw the example in Mexico, which opened up and many foreign banks came. It got to a point that a large proportion of bank in that country were foreign banks, they were transacting business and making money, but the critical sectors of the economy were left unattended to.

The thing is, yes, you can come with N25bn, we give you a license to open a bank or your can have controlling shares in any of the other 25 banks except the top 10.

Does this not pose a problem because the top 10 position appears a bit fluid with banks coming up with public offers every now and again?

We have our own list of the top 10 banks. I agree that it is fluid but this is because as soon as you become part of the top 10, you become a bank that cannot be acquired by foreign interests.

Still on this top 10 issue, you find virtually all the banks now want to be top 10 and you find them measuring themselves with all sorts of indices such as Tier 1 capital, balance sheet size, turnover, profit before tax etc. How does CBN rate the banks?

Let me put it this way. We have rating agencies that rate banks and individuals must also have a way they rate banks. In some cases, if I am to do business with a particular bank, the size might not be the issue. The issue might be how responsive they are, or how friendly or how technology savvy they are. I could be looking at how cheap they are relative to other banks, so individuals should have they own way of rating banks and this could be assisted by the different rating agencies. But we have our own way, there is the prudential rating, which we call CAMEL, which is the acronym for Capital adequacy, Asset quality, Management, Earnings and Liquidity and we have five boxes by which they are rated – very sound, sound, satisfactory, marginal and unsound – and we update this yearly. It is not based on size but on prudential, safety and soundness principles. But we notice nowadays that everybody talks in the superlative, some will say |I am the fastest growing bank”, others will say “I am the biggest in terms of branch network” or “my total asset is the biggest” or “my asset is the biggest” and so on. We are going to warn them to say look - “stop saying how big you are, let others say it” and we are going to tell them to stop using superlatives, because if I say I am number one in terms of friendliness then we start having claim and counter claims. You should not be talking about whether you are the biggest or not, let others judge you.