"He looks the whole world in the face for he owes not any man." - Henry Wadsworth Longfellow
As the week drew to a close on Friday April 29 2011, the thoughts on our minds at Proshare was on how to speed up the new 5.0 website and reconstruction work going on in the office in preparation for the unveiling of a new Proshare service aptly themed “a different kind of thinking for a different kind of market”.
One of the ways in which we sought to do this was to publish a well researched report on two of the most topical issues in the financial market – ‘Debtors, Non Performing Loans and Financial Health of Nigerian Banks’ and ‘The Changing Landscape of Banking through M&A’s’. We were running behind schedule and everyone was stretched and needed a break, so some workers took some time off that day.
At about 8.43am, the call came in that four officers of the Nigerian Police Force were in our offices to execute an arrest based on a petition from billionaire Mr. Femi Otedola over an injurious publication. I spoke with the team leader through our staff’s phone that we had visited their Force headquarters as requested of us through an anonymous text message (for which the sender never responded to our calls) two days back as their own register would show. He replied that they have a job to do.
The Police invitation to Proshare was a proposition for which we sought the counsel of Messrs Bisi Iyaniwura, our legal advisers on and they insisted I stayed away till we were sure that there were ‘real policemen’ and that this was not a ploy like similar actions taken by the petitioner on previous incidents. For whatever purposes, we noted that these same Policemen returned back from Femi Falana’s chambers and proceeded to remove desktops, laptops, files and two members of Proshare Staff. I was to later learn that one of the staff was slapped repeatedly for not responding fast enough to the police’s orders to remove the accounts units’ desktop and take into our Honda Odyssey which they used in carting away all items and persons taken. The Proshare Staff members were made to write statements under duress and later in the night released to family members with an instruction that they report to Abuja on Wednesday. A journalist with Business Hallmark and a photo Journalist however had a much more unsavory tale to share.
The publications on the subject of recalcitrant debtors started in 2009 with the publication of the list of bank debtors by the Central Bank of Nigeria – a move we initially had concerns with as detailed on pages 23 to 25 of the 91 pages “The Bull in the China Shop - Proshare ” Report (Issued on August 22, 2009, ISSN 1597 – 8842 Vol.1 No. 21).
The concerns over debtors is an economic and social issue for which most media houses in the country have had cause to publish features and editorials on, some as recent as the last three months; and cannot be claimed to have been of our making. The credit for not making the issue go away belongs to the regulators of the financial system as our yet to be published ‘injurious publication’ reveals.
It is difficult for people in high positions to admit they were wrong. But when it comes to this debt issue and its impact on the financial system and reforms, the consequences of not doing so could be high.
At the very core of our research is what we have termed the ‘Otedola Phenomenon’ – a descriptive term for the potential or significant threat to financial stability in the management of non performing loans portfolio of banks.
The opportunity to use the court documents of his case against the banks was too compelling as it puts into perspective arguments around the issue of how we got here, the questions over banking practices with regards to perfection of collaterals, multiple collateral situation and possible systemic fraud, the challenges before AMCON and the impact of such huge and un-serviced debt on the portfolio quality of the entire industry.
The phenomenon enquires as to how many more Otedolas is the public unaware of as he may not be the only one with such concentrated debt exposure to the industry; and similar exposures need to be identified and proactive steps taken to ensure that his situation must not be replicated in other bank(s).
The analysis places the risk management framework the industry is running under the spotlight and its focus on the banks individually rather than collectively, because Femi Otedola’s debt to each bank may not pose a risk individually but collectively it poses a serious systemic risk. It disturbingly questions the perception and distinction between performing banks and rescued banks as revealed in the adjustments made for the loans under different scenarios.
In one of such scenarios, we assumed that the debt has not been provisioned for 100% and we used this to re-compute the portfolio quality of each bank mentioned; aggregated them as a group as a percentage of the industry and generated numbers to adjust for the percentage of performing loans to total loans; and their respective capitals with implications for shareholders.
We equally identified learning opportunities for the industry over a practice of avoiding the huge cost of perfecting loan collaterals by merely putting them in a ‘perfectable state’ until it becomes an issue and a mad scramble to the registry ensues, where it is discovered to everyone’s horror, that more than one bank is holding on to the same documents/collaterals as is the case currently with this debtor. How was it possible for one corporate borrower to use the same collateral twice with different lenders? Where a bank does an all-asset debenture, it can only stamp up to the extent of their exposure but where a debtor willfully pledges the same assets/stocks to different banks then a threat to the system becomes real as AMCON can only redeem funds for one bank.
This potential instability to the system is what AMCON was designed to address and its work would appear well cut out for it in this case. If AMCON has to take the responsibility as it is tending towards; it would have to take all the collaterals by the debtor but some challenges may arise in the resolution of multiple collaterals and the value payable to each bank. This is the crux of the matter because depending on the state of the banks, it is anyone’s guess what would happen (as the figures outstanding against Otedola in some banks are higher than their total NPL as at December 2010) and potentially may place AMCON’s funds at risk (or it will take the path of least resistance in applying rates to otherwise ‘secured’ debts).
In spite of the fact that there are shortcomings in the practices that created the debts, there are responsibilities on the part of the borrower to do three things – show good faith and address the motive behind presenting multiple documents to the banks; and in the event of dispute over the exact amount owed, the borrower has to clearly state on the record how much it owes the bank; and demonstrate how the sums add up by his own accounting standards and, finally; he must demonstrate, in good faith, the willingness to pay or restructure the facilities. This is the way some of the world’s best companies operate and relate to their banks who have in recent past had to swallow the humble pie as regards their previous practices – globally.
As market analysts and business information providers, it is Proshare’s role to enhance market efficiency by presenting this business information to the financial markets as a matter of public interest. Proshare will live up to its market responsibility by presenting its views to enable market players make the right investment and policy decisions.
Had this report being allowed to be published, it would have been clear whose side we were on – the ordinary tax payer funding this bail-outs; people like me and you. This is what should occupy our minds and not the resort to ‘power flexing’ and descent to anarchy.
Olufemi Awoyemi, FCA