NIGERIA: CENTRAL BANK CANCELLATION OF UNIFORM

C O N F I D E N T I A L SECTION 01 OF 02 ABUJA 001735

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E.O. 12958: DECL: 08/30/2118
TAGS: EFIN ECON EINV PGOV NI
SUBJECT: NIGERIA: CENTRAL BANK CANCELLATION OF UNIFORM
ACCOUNTING YEAR RAISES DOUBTS ABOUT THE HEALTH OF BANKS

REF: A. ABUJA 1695

B. ABUJA 1599

C. ABUJA 372

D. LAGOS 290

E. LAGOS 266

F. 07 ABUJA 1865

Classified By: Economic Counselor Bob Tansey, reasons 1.4 (b) and (d)


1. (C/NF) Summary. The Central Bank of Nigeria (CBN)
recently canceled the uniform accounting year requirement for
banks and discount houses. Banks and discount houses were
expected to adopt December 31, 2008 as the common accounting
year end. CBN announced that current interest rate trends
arising from desperation of banks to shore up their deposit
base necessitated the new decision. Embassy and ConGen Lagos
contacts say that rising interest rates due to interbank
lending were not the primary reason for the CBN's reversal.
Banking industry contacts said CBN, banks, and other players
were concerned that enforcing the accounting year requirement
would lead to further bank consolidation, and specifically to
bank failures. One contact said that "Godfathers" benefiting
from zero interest rate loans did not want further CBN
scrutiny of banks, and therefore arranged the cancellation of
the common accounting year. End Summary.


2. (SBU) On August 5, CBN announced the cancellation of the
requirement of a uniform accounting year for all banks and
discount houses in Nigeria. CBN stated it predicated the
decision on the observed unhealthy trend in the industry
whereby some banks were mobilizing deposits at very high
interest rates that were inconsistent with economic
fundamentals, which was becoming a threat to market
stability. CBN stated that in order to overcome this treat
to market stability, each bank and discount house is now at
liberty to adopt it's own accounting year end as it deems
appropriate and inform the CBN accordingly. On July 23, CBN
had earlier announced a postponement of the commencement of
the policy from December 2008 to December 2009.

The Genesis of the Policy
--------------


3. (U) The requirement for a common year end was agreed by
the CBN and CEOs of banks and discount houses at the Banker's
Committee meeting of January 2008. Analysts and the public
at large welcomed the requirement as a way of determining
which bank was the actual
industry leader because a common reporting period would
provide a common yardstick to assess the strength of each of
the banks.


4. (U) Nigerian banks post-consolidation have been claiming
industry leadership on various criteria such as deposit base,
shareholders' funds, asset quality, return on equity, and a
host of other indices. It was difficult to ascertain the
genuine industry leader in any category because the banks had
different accounting year ends, and industry observers had
was alleged that some banks were able to exaggerate their
profile on the strength of borrowing from the inter-bank
market to make their books look good as their financial year
end approached.


5. (SBU) The positive response to the measure by industry
analysts and the public was actually short lived when it was
observed that in a bid to justify their books (assumed to
have been cooked historically),some banks were mobilizing
deposits at higher than market interest rates well beyond
economic fundamentals. Banks took such actions because
inter-bank borrowing would not be available to them once the
common year end commenced. The common accounting year
deadline also fueled intense competition in the industry for
banks to mobilize deposits. Some banks were offering as much
as 17 percent on time deposits and interest rates on loans
were inching close to 30 percent until the CBN announced the
policy had been canceled. The common year end policy had
unleashed frenzy for deposit mobilization by banks at very
high interest rate. Interest charged on loans had to be
increased in a bid to avoid asset-liability mismatch. This
was way out of line with fundamentals and was hurting the
real sector that was already grappling with infrastructure
challenges. The CBN said it had to wade in to ensure price
stability in the light of inflationary pressures.

ABUJA 00001735 002 OF 002



More than Meets the Eye
--------------


6. (C/NF) Industry analysts and a commercial bank official
told Lagos Econoffs August 30 that rising interest rates were
not the primary reason for the CBN policy reversal. The CBN
could have taken other measures to make funds available to
the banks without fueling inflation. Banks had been making
uneconomic moves in the spirit of "bigger is better" which
could have come to light under the common accounting year.
The greatest fear was a bank failure leading to a domino
effect. One analyst said that CBN Governor Soludo ultimately
shied from the stronger accounting oversight out of concern
that further consolidation (read failures) would add to the
already strong criticism of Soludo for other measures,
including the failure of northern banks in the earlier
consolidation. An industry analyst speaking to Abuja Econ
Deputy recently suggested the possibility of other sweetheart
deals being covered up by the cancellation decision. He
alleged that "Godfathers" benefiting from zero interest rate
loans had sent intermediaries to speak to Finance Minister
Usman and Chief Economic Advisor Yakubu about the impending
common accounting year, and those intercessions had led to
the cancellation. At least one senior CBN official told
Embassy on August 29 that he disagreed with the cancellation
decision, though he based his concern on the original goal of
judging the health of the banks by a common standard.

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


7. (C/NF) The actions by banks in response to the uniform
accounting year has led to questions being asked on the
health of the banks. Some Nigerians opine and correctly so,
that the CBN might be over-estimating the success of
consolidation, is be lax in supervising the banks. JPMorgan
sponsored a major report which came out in May and questioned
the overall health of the sector and some individual banks.
"The Economist" just had an article on the same theme.
Renaissance Capital published a rosier report on Nigeria's
banks about the same time as the JPMorgan report; local
bankers say the truth lies inbetween those two pieces. For
uniform accounting, though much needed, to jolt the industry
this much shows that some banks within the system still
render false financial reports and are not as healthy as the
public had been made to believe post-consolidation. The CBN
has announced a Resident Examiners' Program will commence
from January 2009, with CBN posting staff to each of the
banks who will monitor and supervise the activities of the
banks daily and report back to CBN headquarters. Industry
observers have expressed their concern that resident
examiners could be compromised. Certainly there is dirt
hiding under the carpet. One businessman told Econcouns
recently that government agencies were depositing very
significant program funds with commercial banks under the
excuse that rule of law and due process required a deliberate
(slow) pace of releasing such funds to their intended uses.
The businessman said that banks were able to treat these as
zero interest deposits, but in reality the official ordering
the deposit would receive 14 percent personally for providing
the funds to the commercial bank and banks would then relend
the funds at 20 percent. An important guide to nipping the
bank failures in the bud before they become systemic is to
increase the disclosure requirements needed in financial
reports. A separate decision in the August 5 CBN communique
that announced the cancellation of the common accounting year
required banks to fully disclose to the public their deposit
and base lending rates. The issue on the table now is
enforcement. Zero tolerance for false reporting and
infringement is essential, while the CBN needs to overhaul
it's supervisory capacity. Nigeria does need to try to avoid
a round of bank failures, but in the long run it is more
important that it strengthen bank supervision. That won't be
easy, both in terms of will and capacity. Industry contacts
have expressed to both Embassy and ConGen their concern that
neither the CBN nor Nigeria-based accounting firms have the
capacity to rigorously examine the commercial banks' books.
End comment.



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