Sanusi Lamido Sanusi: Reforming Nigeria's Financial Sector

TL;DR

Nigeria stabilized eight failing banks that held 40% of total assets by fully disclosing the damage, removing entire management teams, jailing fraudulent CEOs, and injecting capital before making the banks themselves fund the cleanup. Governor Sanusi argues pretending a problem does not exist never makes it disappear, contrasting Nigeria's decisive approach with Japan's decades of denial.

Transcript

my experience of the banking crisis as affected my country and the steps that we took and the lessons that we learned um I'd like to thank you for the opportunity to speak to you and I do hope that um in the next 20 minutes or I should be through and then um take um questions so that we can um address any particular areas of interest that you may h... Read More

Key Insights

• Nigeria's banks had no first-round exposure to the 2008 crisis because they were not linked to international markets, but second-round effects hit hard when oil crashed from $147 a barrel to below $40, wiping out bank balance sheets.
• Oil plays a disproportionate role in Nigerian financial stability, accounting for about 98% of export earnings and roughly 80% of government revenues directly or indirectly, creating high correlation between asset prices and commodity prices.
• Eight major banks examined in 2009 held 30% of total deposit liabilities and 40% of total assets, meaning their collapse would have taken down the entire financial system, forcing decisive intervention.
• Full disclosure was chosen over concealment because pretending a problem does not exist does not make it go away; Nigeria followed Malaysia's decisive model rather than Japan's decades-long denial.
• Replacing entire management teams, not just injecting capital, exposed hidden fraud including loans routed to SPVs owned by CEOs and money shipped out of the country; one jailed CEO's assets included 200 real estate properties in Dubai.
• Long CEO tenure correlated strongly with weak governance, so Nigeria now bars any bank CEO from serving more than 10 years and removes non-executive directors after 12 years to prevent compromised independence.
• Banks pay their own cleanup cost through an AMCON long-term bond, with every Nigerian bank contributing to a sanction fund for 10 to 12 years rather than burdening taxpayers.
• Emerging-market central banks must go beyond traditional monetary policy to redirect banks toward real-economy lending, since agriculture is 42% of Nigerian GDP yet received under 1% of bank portfolios before the crisis.

Questions & Answers

Q: Why did Nigeria's banks survive the initial 2008 financial crisis but still fail?

Nigerian banks had no first-round effects because they were not linked in any way to international markets directly and held no subprime or toxic assets. However, they suffered second-round effects when oil prices crashed from $147 a barrel to below $40. Since banks had built huge exposures to the capital market and to oil marketers between 2004 and 2008, the oil and stock market crash wiped out their balance sheets, leaving them with bad, non-performing loans they had never disclosed.

Q: How important is oil to Nigeria's financial stability?

Oil is only about 13% of Nigeria's GDP but plays a disproportionate role in financial stability. It accounts for roughly 98% of export earnings because of a lack of diversification and focus on agricultural exports, and about 80% directly or indirectly of government revenues. Because government spending is a major part of money supply and drives the stock market, Nigeria has very high correlation between asset prices and commodity prices, so when oil crashes, reserves fall and stock markets crash with it.

Q: What made Nigeria decide to fully disclose the banking crisis?

Sanusi concluded that pretending a problem is not there does not make it go away. If the banks' true condition was not disclosed, they would collapse anyway, so it was better to come out clean, state the full extent of the problem, and explain how it would be fixed. He compared Japan, which pretended its system was fine for decades, with Malaysia, which acted decisively. Nigeria chose the Malaysian way, assessing the damage and publicly naming the eight troubled banks.

Q: How serious was the situation at the eight banks Nigeria rescued?

The eight major banks found in a grave situation in 2009 accounted for 30% of total deposit liabilities and 40% of total assets in the country. This meant that if they had gone under, the entire financial system would have collapsed with them. Because of this systemic risk, Nigeria could not simply let them fail, and had to intervene decisively by removing their management, injecting capital to keep them on life support, and guiding them toward safe harbor before the damage spread further.

Q: What fraud did regulators discover after replacing the bank CEOs?

Replacing the executive management opened the door to seeing things regulators had never seen before. A significant part of loans ostensibly given to third parties were actually given to SPVs owned by the CEOs, and some loans were literally shipped out of the country. One CEO was jailed, and authorities recovered 200 pieces of real estate in Dubai, plus property in Johannesburg and elsewhere, in addition to her holdings in Nigeria. She had been one of the richest women in Africa.

Q: Why did Nigeria limit how long bank CEOs can serve?

Regulators discovered a very strong correlation between CEOs staying for a very long time and very weak governance. Long-serving CEOs created cultures where subordinates obeyed unquestioningly. Nigeria asked every CEO who had served 10 years to leave regardless of whether their bank had problems, including Tony Elumelu of UBA and Jim Ovia. Today no one can serve as a bank CEO for more than 10 years at a stretch. Non-executive directors must leave after 12 years, before they grow too comfortable and lose independence.

Q: Who pays for the cost of cleaning up Nigeria's banks?

Rather than placing the burden on taxpayers, Nigeria structured the cleanup so the banks pay for it themselves. A long-term bond was taken by AMCON, and for the next 10 to 12 years every bank in Nigeria contributes to a sanction fund. This means the banking sector collectively funds the cost of the rescue. Sanusi suggested Europe faces the same challenge, noting that fixing banks in Italy and Spain would cost about two-thirds of the total tax revenues of Germany's government.

Q: How does Sanusi think central banks should support real-economy lending?

Sanusi argues emerging-market central banks need a role beyond traditional monetary policy, pointing to the UK's funding for lending program that gives banks low-interest funds to lend to SMEs. The core problem is banks moving away from intermediating savings into the real economy. Agriculture is 42% of Nigerian GDP yet received under 1% of bank lending before the crisis. He stresses addressing real productivity issues, like raising rice yields from 2 metric tons per hectare, so agricultural lending becomes commercially viable rather than just preaching to banks.

Summary

In this video, the speaker discusses the experiences and lessons learned from the banking crisis in Nigeria. He talks about the impact of the global financial crisis on Nigeria, the factors that led to the crisis, and the steps taken to address it. He emphasizes the importance of holding individuals accountable for their actions and the need for strong institutions and coordination among regulatory bodies. He also addresses the role of the sovereign wealth fund in promoting fiscal discipline and long-lasting reforms.

Questions & Answers

Q: What were the second-round effects of the global financial crisis on Nigeria?

While Nigeria's banks were not linked to the international markets directly, the country suffered from the crash in oil prices, which led to a decline in government revenues, stock market crashes, and a decrease in financial stability. These effects were due to Nigeria's heavy reliance on oil as a major source of export earnings and government revenues.

Q: What were the major failures in corporate governance and regulation that contributed to the crisis in Nigeria?

The crisis in Nigeria was caused by several factors, including macroeconomic instability, major failures in corporate governance in banks, lack of investment consumer sophistication, inadequate disclosure and transparency about financial position of banks, critical gaps in regulation and the framework, universal banking, and internal weaknesses in the central bank and business environment. These factors led to poor risk management, excessive lending, and lack of oversight.

Q: What steps were taken to address the banking crisis in Nigeria?

When the crisis hit, the government had to make a decision on whether to disclose the full extent of the problem or continue pretending that the system was fine. They chose to come out clean and disclose the extent of the problem, remove the management of the troubled banks, inject money into the banks to keep them afloat, and later restructure and recapitalize the banks. They also implemented reforms to address governance issues, strengthen coordination among regulatory bodies, hold individuals accountable for their actions, and break up the universal banking model.

Q: How were banks held accountable for their actions during the crisis in Nigeria?

Individuals responsible for the crisis, including bank CEOs and management, were held accountable for their actions. The central bank published the names of all those who owed banks significant amounts of money and prevented them from traveling out of the country. Those who failed to cooperate and negotiate loan restructures were prosecuted and faced legal consequences. In addition, rules were put in place to limit the tenure of CEOs and non-executive directors and prevent conflicts of interest.

Q: How were reforms institutionalized in Nigeria to ensure their long-lasting impact?

Reforms have been institutionalized through existing laws and regulations, such as the Central Bank Act, which grants the central bank the necessary powers to implement the reforms. It is important to select the right people for key positions in public offices who can continue the reforms and maintain the integrity and independence of institutions. The involvement of the bankers committee, which includes bank CEOs, has also helped to ensure the continuation of progress made in governance and risk management.

Q: What are the challenges in implementing the sovereign wealth fund in Nigeria?

The sovereign wealth fund in Nigeria faces a constitutional challenge because government revenues have to be shared among the federal, state, and local governments. This means that the federal government cannot save on behalf of the states and local governments without their consent. It has been a struggle to convince the governors to save and allow the federal government to do the same. However, a one billion dollar sovereign wealth fund has been agreed upon, with three components: a stabilization fund, an intergenerational fund, and an infrastructure fund.

Takeaways

The banking crisis in Nigeria was caused by various factors, including poor corporate governance, lack of regulation and supervision, and excessive risk taking. The Nigerian government took decisive actions to address the crisis, including the removal of bank management, injection of funds, and implementation of reforms. Holding individuals accountable for their actions played a crucial role in restoring trust and stability in the banking sector. Strong institutions and coordination among regulatory bodies were also key to ensuring long-lasting reforms. The sovereign wealth fund has been a challenge to implement due to constitutional constraints, but steps have been taken to start a fund and promote fiscal discipline. Overall, the experience in Nigeria highlights the importance of proactive measures, accountability, and strong institutions in addressing and preventing financial crises.

Summary & Key Takeaways

• Nigeria escaped direct exposure to the 2008 global crisis because its banks had no links to international markets, but suffered severe second-round effects. Oil, roughly 13% of GDP yet about 98% of exports and 80% of government revenue, crashed from $147 to below $40 a barrel, collapsing bank balance sheets tied to capital markets and oil marketers.

• When Sanusi became Governor in 2009, examiners found eight banks holding 40% of total assets in grave condition. Rather than concealing the problem as Japan did, Nigeria disclosed the full extent, removed entire management teams, injected emergency capital to keep banks on life support, and moved them toward safe harbor following Malaysia's decisive approach.

• New management uncovered fraud, including loans to CEO-owned SPVs and funds shipped abroad; one jailed CEO held 200 Dubai properties. Nigeria capped CEO tenure at 10 years, made banks fund their own cleanup via an AMCON bond, and pushed central banking beyond tradition to redirect lending toward agriculture and the real economy.