Nigeria: Are the banks as shiny as they look?

Are the banks as shiny as they look?
Aug 21st 2008 | LAGOS
From The Economist print edition

Doubts persist about Nigeria’s banks


THE bright logos of Nigeria’s financial institutions adorn the tallest and poshest office blocks in central Lagos, the country’s commercial capital, testimony to years of impressive growth in banking. But now, after a rocky year, there are worries that some of the optimism may have been overblown.




The reform of Nigeria’s creaking, corrupt banking system was one of the big achievements of President Olusegun Obasanjo in his second term in office (2003-07). As part of a policy to squeeze weak or failing banks out of business, in 2005 the Central Bank of Nigeria raised banks’ capital requirements. In a hectic round of consolidation, the number of banks dropped from 89 to 24. Those that remained have had a very good few years, with local expansion and sometimes triple-digit growth in their share prices. And with less than a fifth of Nigerians keeping their money in banks and with fast growth led by private companies, there still seems to be plenty of potential for more business. Banks surveyed by a Lagos-based stockbroker, Afrinvest, showed that median before-tax earnings had risen by 141% year-on-year by June.


Yet share prices have been dropping throughout 2008, suggesting a lack of confidence. Would-be investors have started to eye Nigeria’s banks, in particular their regulatory practices, more warily. Some wonder whether the apparent gains of the past few years are all they seem. “The foundation is not there, it’s weak,” says an analyst, Osaruyi Orobosa-Ogbeide, of a Lagos-based firm, Financial Derivatives.

Though banking standards have certainly risen a lot in recent years, they still lag behind those of America and the European Union, particularly in terms of transparency. In April, United Bank for Africa, one of the country’s biggest, fell foul of American regulators who served the bank with a $15m fine for ignoring anti-money-launderi ng regulations despite several warnings. “There’s no resemblance at all between operating in Britain or America and operating in Nigeria,” says Fola Fagbule, a research analyst with Afrinvest. “It’s light years apart, and it’s an issue [the banks] need to address”.




The top seven Nigerian banks, with a combined market value of almost $40 billion, are overvalued by as much as 56%, according to a report published in May by JPMorgan, an American financial-services company. Part of the problem is that banks have used their own money to push up their stock prices by engaging in risky lending to corporations and individuals who invest in the banks’ own shares.

Those in charge of imposing some order on the sector have also been found wanting. After share prices began to fall earlier this year, the central bank set a floor on trading in a bid to buoy the market. Investors were left with no choice but to hold on to stocks; that unnerved many of them. Bismarck Rewane of Financial Derivatives described the action as “a disorderly intervention in a chaotic market.”

Lamido Sanusi, a risk-control officer who will take over next January as the head of Nigeria’s oldest bank, First Bank, is disappointed that regulators are not tougher in insisting on transparency and disclosure of information. Foreign investors demand open banking procedures, he says, yet banks are not now obliged to open their books to scrutiny. “Are these banks being properly managed? Are these assets being properly deployed?” asks Mr Sanusi. “We don’t know the reality.”




Nigeria is sub-Saharan Africa’s second-biggest economy after South Africa’s and the world’s eighth-largest oil exporter, yet the continent’s most populous country (with 140m-plus citizens) has yet to fulfil its economic potential. A robust banking sector that everyone can have confidence in is essential; the country’s reformers and regulators cannot rest on their laurels.

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