BANK RECAPITALIZATION AND 2007 ELECTION

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 000034

SIPDIS

DEPT PASS TO EX-IM KVRANICH AND BUBAMADU
USDOC FOR 3317/ITA/OA/KBURRESS
PASS OPIC FOR ZHAN AND MSTUCKART
PASS TDA FOR NCABOT
PASS USTR FOR ASST USTR SLISER

E.O. 12958: DECL: 01/11/2015
TAGS: EFIN ECON EINV PGOV PREL TO NI
SUBJECT: BANK RECAPITALIZATION AND 2007 ELECTION

REF: 05 LAGOS 1405

Classified By: Consul General Brian L. Browne for reasons 1.4(b)
and (d).


1. (C) Summary. 25 newly formed bank groups have met or
surpassed the Central Bank of Nigeria's (CBN) naira 25
billion capital base. According to CBN's press release, some
13 banks did not meet the requirement before December 31,

2005. Bank insiders indicate at least 15 banks may be
liquidated. Meanwhile, surviving banks face challenges of
making the new capitalization "yield" for shareholders and
investors as inflation remains in double-digits. Some experts
believe the new banks will usher in a new era of improved
banking services that will buttress the nation's financial
stability. Other experts see the "reforms" as cosmetic
widgets that do not fix the fundamental problems plaguing the
bank environment, including weak legislation, poor
management, and lack of CBN autonomy to control monetary
policy. As part of mopping up of the liquidation resulting
from the capitalization exercise, the CBN is sending a list
of major debtors to the Economic and Financial Crimes
Commission (EFCC). Many on the list are major shareholders
in the failed banks and not surprisingly, some insiders
expect the majority of names on this list are some of
President Obasanjo's more vociferous political opponents.
End Summary.

--------------
25 Bank Groups Emerge--But Where is AIB?
--------------


2. (U) According to the CBN, 25 newly formed bank groups,
made up of 76 pre-existing banks, have emerged from the naira
25 billion (USD 192 million) recapitalization exercise. The
25 "megabanks" include: United Bank for Africa, First Bank,
Union Bank, Oceanic Bank, Intercontinental Bank, Access Bank,
Afribank, IBTC-Chartered Bank, Diamond Bank, Skye Bank, Wema
Bank, First City Monument Bank, Platinum Bank, Fidelity Bank,
Sterling Bank, First Inland Band, Spring Bank, Unity Bank and
Equitorial Trust Bank all met the requirement through mergers
and acquisitions. Nigeria International Bank/Citibank,
Standard Chartered Bank, Zenith Bank, Ecobank, Stanbic Bank
and Guaranty Trust Bank all met the recapitalization
requirements individually.


3. (C) The CBN announced that some 13 banks may be liquidated
based on their inability to meet the naira 25 billion target.
These 13 banks accounted for 6.5% of total depositor funds
or naira 125 billion (USD 962 million). A bank executive
showed us a confidential January 2 CBN letter to the
megabanks encouraging the megabanks to purchase the
unfortunate 15. If there were no expression of interest in a
particular bank, the CBN would move forward with the
liquidation. These 15 banks include: Liberty Bank, Fortune
Bank, City Express Bank, Triumph Bank, Metropolitan Bank,
Gulf Bank, Afex Bank, Eagle Bank, Allstates Trust Bank,
Assurance Bank, Hallmark Bank, Trade Bank, Societe General
Bank, Lead Bank, and African Continental Bank.


4. (C) Conspicuously missing from both the CBN's list of 15
failed banks and the bank groups listed under the newly
emerged 25 megabanks was African International Bank (AIB).
Many bank insiders predicted AIB would be on the CBN's
internal list of 15 failed banks. Some believe AIB was
acquired by Diamond Bank Group, but Diamond does not
officially list it under their group, nor do any of the other
megabanks list AIB. AIB listed Komla Victor Alipui, former
Togolese Minister of Economy and Finance (1984-1991),as
President of AIB's Board of Directors.

-------------- --------------
Depositors' Money and Asset Management Corporation
-------------- --------------


5. (C) Nigeria Deposit Insurance Corporation (NDIC)
Receivership and Liquidation Department Deputy Director
Alhaji Isiaq said the NDIC would payback private sector
insured depositors within 3 months once the CBN revoked a
banks operating license. He said the Deposit Insurance Fund
(DIF) contained naira 84 billion (USD 646 million) from which
NDIC could pay private sector depositors up to naira 50,000
(USD 385),the maximum amount NDIC insures under the current
NDIC Act. If the NDIC needed more than the amount available
in the DIF, NDIC could obtain funds from CBN, Isiaq said.
Financial experts believe the process of paying back the
majority of private sector depositors and security creditors
could take more than 6 months.


6. (C) NDIC Director of Special Insured Institutions and
former Deputy Director Liquidation Department, J.I. Ahimie,
said NDIC is waiting for the CBN to make a "clear"
announcement of how CBN wants NDIC to begin disbursement of
funds. The ideal payment strategy would be through purchase
and assumption (P&A) whereby the CBN/NDIC would ask a
depositor to establish a new account at a specified bank and
funds would be electronically transferred from the
depositor's current bank to a new bank account. This would
ensure that funds remain in the banking system and would save
depositors and the NDIC time and money, Ahimie said.
However, given current institutional and IT constraints, and
lack of a clear CBN directive it is likely depositors would
be paid through the old deposit pay-off system, whereby a
depositor would be told to go to a particular bank in his
area to collect his insured amount and wait several months
(perhaps years) before collecting the uninsured sum.


7. (C) The NDIC and CBN jointly announced the proposed
creation of the Assets Management Corporation (AMC) for
handling delinquent loans for both liquidated and
non-liquidated banks. AMC is expected to receive a naira 10
billion (USD 77 million) loan from CBN to handle the
delinquent loans. The proposed company is expected to have
the power to seize and confiscate assets belonging to
borrowers, but this would require National Assembly approval.
Many bank experts and NDIC officials do not believe the AMC
will work for two reasons: 1)there is no secondary market for
bank loans in Nigeria and 2) the institutional arrangements,
particularly legal framework necessary for AMC to operate
effectively have not been established.

--------------
Invest Where?
--------------


8. (C) Surviving banks face the challenge of meeting the
profit expectations of shareholders and investors. Since the
CBN announced its Bank Reform Act in June 2004, returns on
investment, particularly in the Nigerian Stock Exchange, had
plummeted, bank experts said. IBTC Executive Director Sola
David-Borha said banks are struggling to decide where to
invest the increased capital given double-digit inflation and
lack of attractive investment vehicles. Borha said
Government issued 3-year Treasury Bonds are yielding 17%
returns, which according to her, is much more attractive for
banks and less risky than lending money to small and
medium-sized enterprises (SMEs),the portion of the economy
the CBN claims the reforms are meant to rejuvenate.


9. (C) Professor Ayodele Teriba, CEO of Economic Associates,
an economic research think-tank, said the creation of
"megabanks" does not equal a larger depositor base. If
inflation is 20%, and banks are giving 3% interest on
deposits, people rather would invest their money elsewhere,
at least to keep pace with inflation, Teriba argued. CEO of
Financial Derivatives Company, Bismarck Rewane, added that
depositor confidence in the banking system would not improve
significantly in the next several months. Both Teriba and
Rewane commented that depositors do not have viable
investment options at home, and it would not be surprising if
many depositors send money abroad as an alternative
investment strategy.
--------------
This Marriage Was Never Really For US
--------------


10. (C) Bank experts complained the capitalization exercise
was forced from "above" and many banks, despite achieving the
25 billion naira threshold, are struggling to integrate
effectively with their merger partners. Boardroom
infighting, squabbles over unemployment severance packages,
the meshing of information technology systems, reconciliation
of different corporate cultures, and determination of
staffing patterns, continue to plague many newly emerged bank
groups, they said. Borha stressed the CBN underestimated the
extent to which differences in corporate culture would
challenge the post-consolidation banking environment.

11. (C) The tax incentives and accompanying legislation
needed to strengthen the banking industry have not
materialized, bank experts said. Deputy Managing Director of
MBC International Bank, Kofo Majekodunmi, said bank reforms
have not addressed the fundamental weaknesses in the banking
system including: weak bank legislation, poor management,
lack of CBN autonomy, and ineffective monetary policy.
Inadequate distribution networks and problems with enforcing
contracts remained serious impediments to an improved banking
environment, he added.


12. (C) Majekodunmi said the CBN is not focusing on its
primary role, that of directing monetary policy and
controlling inflation. Other bank insiders added the CBN's
lack of autonomy from the executive branch of government
meant it had no true independent authority. Teriba said if
the CBN were serious about inflation, it would not have
lowered the Minimum Rediscount Rate (MRR) from 15% to 13%
when inflation was hovering at 20% or higher. Bank
executives see contradictions in CBN reform policy not only
in terms of controlling inflation, but also in its stated
reform goals of rejuvenating the agriculture, manufacturing,
and SME sectors. They are skeptical that better access to
credit for new investors in these sectors will occur anytime
soon.

--------------
Economic Watchdog for Ruling Elite
--------------


13. (C) Some experts said the CBN is acting more like an
investigative agency than an institution meant to direct
monetary policy. Borha seemed puzzled the CBN would conduct
a "post-integration verification of assets" of banks when it
had already done a similar exercise late last year. She
opined the CBN would only do this because it had not done a
proper inspection earlier, or because it was worried about
"illegal" money returning into the bank system. Others
believe this is a mechanism in which the government can
target political opponents, trace their assets, and send the
results to the Economic and Financial Crimes Commission
(EFCC) to seize an opponent's bank assets and prosecute him
for financial crimes.


14. (C) NDIC Field Examinations Deputy Director O.M. Sulaimon
said the CBN has already sent a list of significant debtors
to the EFCC for action. He said many of the individuals were
major shareholders of the failed banks and suggested arrests
and seizures of assets of prominent individuals were likely
to occur in the run-up to the 2007 election. He did not
mention names, but he echoed the opinions of several bank
insiders who believe the list targeted President Obasanjo's
opponents.

--------------
Comment
--------------


15. (C) Bank recapitalization requirements will probably not
significantly improve the bank environment for most people.
Access to affordable credit will remain problematic for the
small-scale investor. Fundamental legal and institutional
barriers will prevent the recapitalization from opening the
banking system to those who previously had little access.
More likely, the capitalization and resultant creation of
large banks will create a larger pool of funds and better
services for the larger depositors and companies, and perhaps
represent a safe bet for large-scale investors. Finally, as
with most things in Nigeria, the latest banking exercise has
political overtones. Some critics believe the reforms are
not neutral, but that the CBN is also using the exercise to
place Administration opponents under a financial microscope
in the hopes of finding financial improprieties that will
sideline these opponents during the upcoming electoral
season.


16. (C) As newly emerged megabanks face integration woes,
some are looking ahead at postal sector reform as a possible
investment avenue to increase their distribution networks and
gain a market advantage over other banks. End Comment.
HOWE