Peterside, IBTC chief, queries N25b capital base, proffers new options
By Joshua Nse
MORE voices of opposition have continued to trail the recently-announced requirement of N25 billion capital base for banks in the country as Atedo Peterside, Chief Executive Officer of the Investment Banking & Trust Company (IBTC) Limited has queried the policy.
In an open letter to the Central Bank of Nigeria (CBN) Governor, Prof. Charles Soludo, published as an advertorial today, Atedo Peterside said that there was an urgent need to provide explanations to the industry or allow a healthy dialogue on some of the issues he has raised.
He said: "Because Central Banking is not an exact-science, many of us still question how you arrived at the figure of N25 billion. Why not N10 billion or N20 billion or even N30 billion We would appreciate an insight into the methodology that was used to arrive at N25 billion. The methodology I would have used would have been one based on the average return on equity that was fair for a bank in Nigeria to expect to earn and then work backwards to see the implied level of return that the bank would have achieved if it operated with an equity base of N25 billion, N10 billion, N15 billion."
Besides, he queried the reasons for the 18-month deadline to meet the requirement. "With respect to the 18 month deadline, why not 24 months, 12 months or even 36 months Again, we would like to know the methodology used to arrive at a period of 18 months. As you may be aware, IBTC is arguably the most experienced bank in the country today in relation to M&A; (Mergers and Acquisition) activities. We have advised several multinationals in this regard. More importantly, we have experience of multiple merger we have merged three companies into one (Crown Cork, Carnaud Metal Box and Canmakers in 1997). We also merged four companies into one (PZ Industries Plc, PZ Nigeria Limited, EkoPak Nigeria Limited and Grove Properties Limited in 2001)
"In spite of IBTC's substantial experience in structuring M&A; transactions, we are reluctant to mention a time-frame below 30 months for the type of transactions you now envisage for virtually all but a few Nigerian banks to undertake at the same time. Who advised this 18-month deadline What experience does the person have in structuring double, triple or quadruple mergers in Nigeria".
Peterside also warned that the application of the Malaysian solution could end up causing a bigger banking crisis in Nigeria.
His words: "With due respect, a few of us in the industry believe that the application of the Malaysian solution in the way and manner you propose, (that is N25 billion, 18 months, and phased withdrawal of public sector funds etc) could end up causing a bigger banking crisis than the one CBN is trying to solve".
He said that "Malaysia had a commercial banking crisis. Nigeria appears to have a combination of a commercial banking, an investment banking and a central banking crises".
According to him: "The media hound us with questions arising from your speech, which we are still not able to answer. High quality Nigerian bank managers working with foreign banks in Nigeria are calling to ask if they can apply to IBTC. They fear that the foreign banks may prefer to divest if Nigeria does not allow them to continue to operate in their chosen niche".
The bank chief explained in the letter that Nigeria's problem is a commercial banking, an investment banking and a central banking crises rolled into one. "There are some commercial banks that have a negative net worth. What is CBN's plan for them Who is going to merge with a negative net worth under your N25 billion scenario Is this a disguised way of putting them out of business by December 31, 2005 Why would the Central Bank of a country watch commercial banks keep their doors open to the public, when they have negative capital."
"The investment banking crisis is so obvious that I will not waste time dwelling on it. The introduction of the Universal banking regime ushered in a regulatory environment that was geared towards pure retail banking operations and CBN then foisted these regulations on investment banking."
Peterside said: "Sometime ago, your predecessor, Joseph Sanusi closed down Savannah Bank because their capital had been completely eroded. In the speech you made on 'Black Tuesday', you made several bold pronouncements, but you stopped short of committing yourself to any form of swift and prompt action on the terrible commercial banking cases you inherited."
He then proposed what he called a 'Lebanon model' and said: "The Lebanon model I proposed and summarised earlier contained a clear and sensible solution for addressing this type of situation and it was backed by law.
"Although the Lebanon model was not a fantastic success, my personal opinion is that a modified version of the Lebanon model may actually be preferable for Nigeria at this time. Our goal must be to achieve bank consolidation, but with minimum collateral damage."
"The main thrust of the Lebanon approach was essentially based on a law change. Unfortunately on the basis of the N25 billion figure which you announced during your address, the entire Nigerian banking industry is trying to structure speedy merger transactions, without an appropriate and detailed legal backing for some of their desperate actions," he added.
"What did the Lebanese do he continued: "In summary, they introduced Decree Law No. 192 dated 4 January 1993, which aimed to facilitate bank mergers and was initially valid for five years, until Decree Law No. 679 extended its validity for an additional period. The major highlights of Law No. 192 were as follows:
1. Banks willing to merge their operations were given the right to exchange information on customer accounts, while being granted some form of immunity in the event that customers sued the banks for breach of confidentiality.
2. The Central Bank was given the right to absolve the merging bank from income tax at a rate equal to a portion of the tax on their profits. In addition, all procedures required to complete bank mergers were absolved from stamp duty, registration fees etc.
3. The banks had permission to terminate the merged bank employee contracts, after providing employees with benefits and legal indemnities. An additional end-of-service indemnity was included with the proviso that it must provide compensation of no less than a -month's salary and not in excess of a total of three years income.
4. The Central Bank was authorised to give merging banks the necessary loans based on certain conditions to be agreed upon by contract. The law did not specify a ceiling or the average interest rate of the loans.
The IBTC's chief added that even before promulgating Law No. 192, the Lebanese made sure that Law No. 110 dated 17 November 1991 was in existence and it related to the reform of the banking situation. This earlier law was first put in place and it dealt with the following issues:
1. It granted banks that had suffered losses greater than one quarter of their capital a one-year grace period within which to recapitalise or lose their licences.
2. It gave the Higher Banking Committee substantial authority to liquidate precarious banks.
3. The National Institute of Deposit Guarantee undertook to guarantee the deposits of the relevant banks.
Said Peterside: "Even if our own legislators no longer stand in the way of the Presidency because we are running a democracy without any effective opposition, I honestly think that the Executive itself should, in the national interest, actually sponsor or originate a bill that will ensure that the collateral damage arising from the CBN bank consolidation programme is minimised.
