By Lawrie Holmes | 20 November 2012
Charles Soludo’s thorough reforms of Nigeria’s financial infrastructure, underpinned by a reliable accounting and reporting framework, have given his country the means to become a top 20 economy. He tells Lawrie Holmes how he did it
Professor Charles Chukwuma Soludo has received 21 death threats in a relatively short period of time. The reason? His unrelenting determination to destroy the fraudulent and underperforming culture of Nigeria’s financial sector and create a robust governance structure. With this financial discipline, allied to its huge oil reserves, the West African nation now has the potential to become one of the world’s most dynamic economies.
Soludo’s reforms started soon after he was appointed Governor of the Central Bank of Nigeria in May 2004, when he moved to consolidate the country’s creaking banking system. Widely recognized as being unfit to finance the country’s desired transformation into a leading economy, the banking sector was an obvious place to begin his reforms.
“Confidence in the system was very low,” Soludo recalls. “All the banks put together were smaller than the fourth-largest bank in South Africa, and none of them was in the top 1,000 banks in the world.1 If any private sector entity needed a loan of US$500m, it had to syndicate it from all the banks put together – or go abroad.”
In fact, Nigeria’s total banking sector assets amounted to less than 20% of GDP at the time, and bank loans were about 4% of the country’s GDP. “Talk about a private sector-led economy was simply a slogan, as there was no financial system to power that,” says Soludo. “We came to the conclusion that the system needed to be brought down and recreated from scratch.”
Creative destruction
The result was a huge practical exercise in creative destruction. On 6 July 2004, barely a month after he had assumed office, Soludo announced a 13-point agenda to commence the banking revolution. The agenda included raising banks’ total capitalization from about $15m to $200m. This was to be completed within 18 months for both foreign and domestic banks in Nigeria. The plan was ultimately to unlock huge deposits trapped in insolvent banks.
The reforms targeted 89 fragile, largely family-owned banks, of which 16 were in a precarious state. The consolidation of the banks through a process of mergers and acquisitions involved risk management and risk-based supervision, as well as new corporate governance standards, and featured zero tolerance for any violations of the process.
“Nigeria had never experienced a policy revolution of that magnitude,” says Soludo. “There was uproar, and the opposition by vested interests was gargantuan. Even an arm of the national Parliament, the Senate, passed two laws to scuttle the consolidation, and I received 21 written threats to my life and the lives of my family.
“You can imagine the political pressures,” he continues. “Banks are not owned by the poor people in the street. Their owners are some of the most politically connected and powerful people in society. Some of my close friends also had significant stakes in the banks. The pressures were immense and intense, but we had a job to do.” In a country such as Nigeria, this commitment to seeing the job through required extraordinary courage.
Support from the President, the House of Representatives and the public was critical to the project’s success, and Soludo says the staff of the Central Bank, especially those in banking supervision, worked in a way they had never done before. In order to get all the approvals required for the various takeovers that were a central feature of the consolidation of the banking sector, Soludo set up a “war room” where all the necessary government officials, bankers, lawyers and accountants were in one place, and created an operational structure that collapsed the huge bureaucratic chains and bottlenecks into a single stage. A process that used to take three to six months was completed within 48 hours.
Even so, “human issues were tricky and strenuous, especially in managing the mergers of hitherto rival entities,” says Soludo, adding that the project also benefited from the cooperation and collaboration of other agencies of government, such as the Securities & Exchange Commission, the Federal Inland Revenue Service, the Corporate Affairs Commission and the Nigeria Deposit Insurance Corporation.
A clear message
By the end of December 2005, the entire system had been consolidated into 25 banks, and the licenses of 14 insolvent banks were revoked in January 2006. It was the first time in Nigeria that a major policy had been announced and clinically concluded on deadline.
“We also held the world record for achieving, for the first time, a consolidation of such magnitude without recourse to the public treasury – it cost the Nigerian Government nothing,” says Soludo proudly. “It sent a clear and unmistakable message to the rest of the banking sector that ours was a no-nonsense regime, and that the rules would be applied, no matter whose ox was gored.”
Barely a year after the consolidation, 14 Nigerian banks were ranked among the top 1,000 in the world, and in 2008, two of them were in the top 300. The banks were now in a position to fund projects worth billions of dollars in oil and gas, manufacturing and infrastructure.
“It was a new dawn for the banking system,” says Soludo. “The public offers by the banks in order to recapitalize also revolutionized public awareness of the capital market. The sector boomed in subsequent years and rose to a capitalization of nearly $100b before the global financial crisis.”
But while a wholesale capitalization through mergers was taking place in the banking sector, pervasive problems of fraud and weak governance still needed to be tackled. In 2006, the Code of Corporate Governance in banks in Nigeria was issued, seeking to eclipse one-man or family banks, and to get Government out of the banking system.
“The focus of the code was to enthrone the principles of international corporate governance, especially those proposed by the Basel Committee on Banking Supervision,” Soludo explains. “This was to be achieved through greater transparency and disclosure; a strengthening of the Board of Directors; and elimination of the Executive Chairman role in favor of a non-executive position.”
As part of the banking revolution, new technology – especially the Electronic Financial Analysis and Surveillance System (e-FASS) – was put in place to ensure timely returns by banks to the Central Bank. To strengthen corporate governance, the Central Bank organized mandatory annual training programs for all bank directors.
A reliable framework
Underpinning the reform process was a requirement for a reliable accounting and reporting framework, says Soludo, and Nigeria is now in the process of adopting IFRS. “You can only improve what you can measure. IFRS is a good framework, albeit not necessarily the best. However, being ‘international’ allows for comparability across geographic boundaries, and adopting IFRS signals that the banking jurisdiction is complying with international best practice.”
While Soludo’s banking reforms could not be stopped by Parliament, his plan for an Asset Management Company of Nigeria (AMCON) was stalled by the Senate. A draft bill sent to the national Parliament in November 2004 was never considered by Parliament. “The Senate was not ready to touch anything that would help consolidation, and because it required the backing of both houses of Parliament to pass, it stalled,” says Soludo. However, AMCON was eventually established in July 2010.
Dealing with the crisis
Three years after the banking consolidation, the global financial crisis hit Nigeria’s financial sector as hard as the rest of the world. “We took a number of actions to rescue the entire financial system from collapse,” explains Soludo. “We did not allow any bank to fail, because we knew that the Government could not bail out banks. We also took a series of measures to strengthen regulation and supervision.”
Those measures included a stricter enforcement of the code of corporate governance; resident examiners posted to banks; and a review of the contingency planning framework for systemic distress. Standby teams of target examiners were deployed to any bank showing signs of distress, in order to ensure timely regulatory actions if necessary.
Some of the policies Soludo introduced only took full effect after his tenure as Governor of the Central Bank ended in May 2009. For example, the adoption of consolidated and risk-based supervision and examination of all banks took place before the end of 2009. Also, the adoption of a common accounting year end for all banks came into effect from the end of December 2009, with the aim of improving data integrity and comparability, and the decision made in 2008 to adopt IFRS was fully implemented.
Continuous discovery
Reflecting on his experiences, Soludo says that regulation is an exercise in continuous discovery. “New rules emerge out of new occurrences or experiences. The next crisis will also reveal lapses in the current practices. There can be no end to the strengthening of regulation.”
The timing and content of any response must depend on the objectives, he adds. “My focus was always on the general financial system and the economy. Three questions shaped every intervention. How will it affect the economy? How will it affect the financial system? How will it make the specific bank better? It is a judgment call, and we made such judgments in the best way possible.”
Since standing down from the role of Governor of the Central Bank, Soludo has spent time in high-profile academic posts around the world. He has also been appointed to the Commission of Experts of the United Nations General Assembly on Reforms of the International Monetary and Financial System, in which capacity he has been frequently asked for his view on critical issues in other financial systems.
“The first lesson is that there are no universal lessons,” he insists. “While we all read the same principles laid down by the Basel Committee and the Financial Stability Board, and aspire to adopt one international ‘best practice’ or another, the truth is that specific contexts are different and matter greatly.
“The structures of the economies and institutions are different. I would sum up my lessons for other countries in the following words: know your economy and your financial system! Most regulations are a response to known problems, but for many regulators – especially those in developing countries – the issue may be a search for a regulatory regime to create new vistas of opportunities.”
1. The Banker Top 1000 World Banks survey, where banks are ranked by Tier 1 capital.
Career in brief
• Born 28 July 1960 in Aguata, Nigeria
• Educated at the university of Nigeria, where he gained a first-class honors degree, an Msc in economics and a phd
• Appointed professor of economics at the university of Nigeria in 1998
• Became a visiting professor at Swarthmore college, Pennsylvania, USA in 1999
• Visiting scholar at the international Monetary Fund (IMF), the universities of Cambridge, Oxford and Warwick in the UK, and the Brookings Institution in Washington DC, USA
• Worked as a consultant to 18 international organizations including the World Bank, IMF, African Development Bank and various agencies of the United Nations
• Joined the federal government in 2003 as chief economic adviser to president Obasanjo and chief executive of the national planning commission of Nigeria
• Served as Governor of the Central Bank of Nigeria from May 2004 to May 2009
• Since leaving office, has served as a member of the chief economist advisory council of the World Bank and as a member of the IMF external advisory group
• Currently chairman of the Board of the African Heritage Institution; member of the Board of the South Centre, Geneva; consultant/adviser to several institutional investors; and chair/member of boards of several private companies
This article first appeared in the November Issue of Ernst & Young's Reporting magazine
