There is an apparent downturn in the banking industry in present day Nigeria. This poses a great challenge to the new dictate called change management. The only saving grace is that the Central Bank of Nigeria (CBN) has been professional in its choices of the successors it has chosen to replace the erstwhile bank executives who were swept in what has come to be known as banking reforms. This is the only assurance for a possible rebound of the banking brands that are involved – specifically eight in number. There are clear indications that the banks shall return.

August 14, 2009 came as a surprise and shock to the Nigerian banking industry. It was a surprise because nobody least expected or saw it coming. It was a shock because of its devastating impact on the careers of certain bank executives who became victims to the intervention of the Central Bank of Nigeria in the affairs of those banks concerned.

The CBN had embarked on a sweeping reform that had claimed Chief Executive Officers, Executive Officers and a Non-Executive Directors in eight banks in two rounds of its audit aimed at promoting transparency, good corporate and risk management practices in the banking sector.

According to the CBN, the actions, including the injection ofUSD 2.8bn in the first round, and USD1.3bn in the second round, were taken to rescue the affected banks from going under, having been identified to be significantly weighed down by huge non-performing loans, poor credit management, significant capital erosion and poor corporate governance amongst others. This is why August 14, 2009 has been referred to as “Black Friday” for the Nigerian banking industry in its contemporary history.

A careful strategic analysis of the content of the intervention would reveal that it was never a well thought-out policy reform designed to correct the observable problems in the banking industry just five years after consolidation exercise of 2004. There are two immediate implications of this intervention by the CBN that continue to be controversial. First, it was after the intervention that the press started referring to the event as a “policy reform” to prevent “systemic failure” of the banks. Second the confusion as to the real motive of the intervention has drawn flak from industry watchers revealing incoherence on the part of the CBN.

At the economic plane, the intervention sent shivers down the spine of the banking industry. Credit lines gradually began to grow thinner and shorter as the banks closed their doors to would-be borrowers/loan seekers as the banks are currently pre-occupied with external debt recovery and internal re-engineering of certain structures. No more credits from the banks to the business magnates. The lending situation became critical as the banks became wary of lending money out on short and long term basis. Businesses have been silently suffering this paucity of funds from the banks. The run-on effects of this are most telling on those businesses, for instance, oil and gas marketing firms, which have daily contacts with the banks for financial support to grow their businesses.

The question to ask here is: where lies the strength of the Nigerian Banks within and outside the country? The answer to this is simple: it lies in the intermediation roles of the banks as the clearing house for the entire economy. Despite the criticisms of the banks for their lapses (for instance, lack of appropriate investment in real, small and medium scale enterprises sectors-allegations which are largely valid on the strength of evidences on ground) the banking industry cannot be denied of their role in helping to stabilise the entire economy and contributing to its growth.

Unfortunately, the intervention seeks to erode all these tangible and intangible achievements of the banking sector within the short space of the consolidation. Herein lays the negative tactical impacts of the intervention. There is however strong indication that the second round of the consolidation in the banking sectors may soon begin, now that the clean-up of banks’ books has been completed.

Within the Central Bank of Nigeria and indeed amongst industry watchers there is a consensus that the clean-up of toxic assets was needed to improve credit growth in the economy and prepare the grounds for further consolidation in the industry. The CBN Governor Mr. Lamido Sanusi, had indicated, on assumption of office that some banks might eventually need to merge in a second round of consolidation to survive the shocks of the capital market meltdown and other losses. As such the ongoing clean up is designed to remove bottlenecks in the way of consolidation.

Also it is generally agreed that there is need to fast track the formation of an Asset Management Company that could potentially buy troubled assets from banks. The aim would be to improve banking sector liquidity by removing problem loans from bank balance sheets while protecting bank earnings from further erosion.

The idea behind the AMC is also important if the banking sector is to achieve a meaningful second wave of consolidation, which will allow for the emergence of healthier, better-capitalised banks overall. The fact remains that the under-capitalisation of the affected banks can be linked to the earlier acquisition of troubled institutions by them in the 2004 consolidation exercise in addition to the absence of a mechanism to achieve a more rapid workout of the problem loans that had beset Nigeria’s banking sector since the collapse of the stock market in Nigeria. As such, further consolidation in the industry, with all its attendant advantages, might be slow to take off.

Following the special investigation into all 24 banks in Nigeria, the CBN will probably have some idea of the magnitude of resources required to undertake such an exercise. The recapitalisation of the banking sector was financed through the printing of money. This happened at a time when the money supply was contracting and Nigeria could afford to indulge in this form of quantitative easing. However the present position indicates that the money supply growth had already turned positive hence developments in the broad money growth need to be watched.

While the banks rescued in mid-august were noted to have been under severe liquidity distress with concerns around systemic risk heightened just ahead of that bailout, subsequent CBN action has served to re-assure markets that risks will be ring-fenced and that both depositors and counter parties be protected, thus limiting the room for further fallout.

With more accurate disclosure of Non Performing Loans now being enforced by the CBN, and banks consequently looking to reduce their exposure to the stock market – one of the root causes of the banking sector distress having been the asset price bubble that went burst – the potentially adverse consequences of the banking sector reforms on Nigeria’s capital have been noted. It is hoped that the quick establishment of an Asset Management Company as done in some European countries would mitigate this, while also helping to ensure the restoration of credit to the real sector.

Equally important now is the institution of internal governing regime of risk management – the lack of which was one of the resounding accusations of the CBN in its intervention on August 14. The weak structure or platform of risk management within the banks has to be urgently addressed highlighting the need for Nigerian banks to come to grips with the fundamental and general principles of risk management.

There are strong indications that the decision of the CBN to intervene in the operations of the affected banks and the drafting of a time tested bunch of bank executives into the various banks that have been fingered in the various infractions is one sure reason for the unexpected stability that has existed in the industry even after the storm. This explains the solidarity of the banking public that the new appointees, given their track record have the confidence of a good segment of Nigerians. In spite of this however, the Nigerian banking sector still has a long way to go before embarking on the road to recovery considering that with the introduction of the common year end from December 2009 and the adoption of International financial reporting standards by more banks, more monetary tightening should be expected coupled with the fact that credit will remain frozen for longer than anticipated.