The Central Bank of Nigeria has moved to inject N400 billion(about $2.5Bn) into five banks in the country following the decision to remove the CEOs and executive directors of the affected banks. The affected institutions are Intercontinental Bank Plc, Union Bank of Nigeria Plc, OceanicInternational Bank Plc, Finbank Plc and Afribank Plc.

The CEOs that have been sacked by the CBN are Erastus Akingbola(Intercontinental Bank); Okey Nwosu (Finbank); Sebastian Adigwe(Afribank); Mrs Cecelia Ibru (Oceanic Bank); and Bartholomew Ebong(Union Bank). The CBN governor, Sanusi Lamido Sanusi, who made this decision known this morning at the Emergency Bankers’ Committee convened by the CBN in Lagos, explained exclusively to THISDAY that the decision was being taken to safeguard the financial sector from systemic collapse.He said following the audit exercise conducted by CBN’s examiners it was discovered that five of the banks had accumulated margin loans of N500billion, among other loans, that had gone bad and eroded their shareholders’ funds.

“Some of these banks are quite large institutions and they have been mismanaged, so we had to move in to send a strong signal that such recklessness on the part of bank executives will no longer be tolerated.”He said the CBN had obtained the approval of the President to inject N400 billion into the affected banks to shore up their tier 2 capital to minimum acceptable levels.
Sanusi added that the funds being injected by the CBN was just temporary and does not translate to the government taking a stake in the five banks, as the interim management will be given a period to recapitalise the affected institutions, following which the N400 billion will be paid back to the CBN.
On how the CBN will prevent a run on the banks and create panic in the economy, Sanusi said the CBN intends to make it clear that the money being injected by the reserve bank as well as the decision to guarantee interbank placement should allay depositors’ concerns.The CBN, he stated, stands ready to ensure that no bank collapses in the country, but will encourage them to seek for funds to raise fresh capital and merge with stronger banks.He said an interim management and board for the affected banks will be put in place to run the institutions until they are taken over by new management teams and owners.

The Riba Take:
Margin Loans: Are loans given to investors to buy shares in the stock market, the shares act as collateral for the money borrowed. What went wrong in Nigeria is that the market which 2 years(or about that) back was among the best performing globally in terms of returns collapsed and at some point the govt even had to intervene by putting interim measure preventing shares from depreciating by a certain percentage within a day, almost similar to the margins we have in Kenya, but these were more stringent due to the nature of the collapse and the fact a very huge number of Nigerians were investing heavily in the market especially after the famous bank mergers and reorganization.

When the banks called on these loans people started defaulting and this downward spiral has taken its toll on these five institutions, but rest assured this is just the first group of banks, more will be disclosed.

A weird step the Nigerian govt had taken was to prevent banks from disclosing how much of margin loans they had on their books, thus further putting away investors especially in bank stocks and thus further depressing their prices downwards, and in turn more margin loans being defaulted on.

This step will definitely lead to a run on some of these banks, and a further downward spiral of banking stocks in particular which were the star performers in the boom times.

Lets wait as this story develops further………