How Banks Destroyed the Stock Market, By CBN D-Gov
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- Category: Business and Economy
- Published on Thursday, 03 May 2012 18:24
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The Central Bank of Nigeria (CBN) Wednesday said the recent downturn witnessed in the Nigerian capital market was fuelled by sharp practices by some commercial banks in the country.
Moghalu said the unhealthy practices of some of the banks in the country were largely responsible for the problems in the stock market as they manipulated their share prices using depositors’ money.
He added that many of the banks were also giving out margin loans in the capital market and other sectors without due process, a situation, he said, led to huge portfolio of non-performing loans.
The apex bank deputy governor said that while the global meltdown sent shock waves across various economies, which had led to the withdrawal of about $15 billion worth of foreign investments from the stock market, the situation was worsened by the insider deals involving the banks which resulted in a huge portfolio of non-performing loans.
He said that the CBN had to step into the eight rescued banks because they were on the verge of collapse as the non-performing loans (NPLs) weighed them down.
Moghalu also said the ratio of non-performing loans were as follows: BankPHB (40.86 per cent); Oceanic Bank (44.35 per cent); Afribank (47 per cent); FinBank (47.5 per cent ); Intercontinental Bank (48per cent); ETB (57 per cent); Wema Bank (77.6 per cent ); and Spring Bank (85 per cent).
These NPLs, Moghalu said, came by way of insider abuse and flagrant disregard of best practices.
He disclosed that many of the commercial banks manipulated their shares during the process of recapitalisation using a process known as share buy-back.
The former Afribank (now Mainstreet Bank), Moghalu said, advanced credit to three stock brokerage firms whom they commissioned to buy back Afribank shares in the market in the names of 1,258 fictitious subscribers.
According to him, in August 2006, FinBank similarly instructed four stockbrokers to buy back 2.8 billion units of its own shares using depositors’ funds.
He acknowledged that the CBN or regulators in the market failed in their regulatory functions as an institution by not detecting the infractions early enough, but said the banks that went into the shady deals did so out of the greed of their managements at that time.
Moghalu declared that the eight banks would have gone down with depositors’ funds worth about N3 trillion as well as about 50,000 jobs but for the prompt intervention of the CBN which injected N680 billion into them.
He ruled out insinuations that the bank consolidation programme and the quest by the various banks to increase their share capital to N25 billion was responsible for their over-exposure to the stock market and the subsequent problems.
He said the banking sector would have been in a worse shape but for the consolidation programme executed by the CBN.
He however said going forward, the CBN, Securities and Exchange Commission (SEC) and other regulators had strengthened their regulatory frameworks and collaboration to avoid a repeat of insiders’ abuse.
On the vexed issue of nationalisation of three banks by the CBN, NDIC and AMCON, Moghalu said no bank was nationalised as widely believed but that the regulators read the handwriting on the wall and established the bridge banks in accordance with the laws.
He reiterated the position of the CBN that the shareholders of the three banks lost their investments following the failure of the banks to recapitalise within the stipulated period.
