NIGERIA AFTER THE CENTRAL BANK AUDITS

UNCLAS SECTION 01 OF 02 LAGOS 000388 SENSITIVE SIPDIS DEPT PASS TO USTDA-PAUL MARTIN, EXIM-JRICHTER AND KJACKSON DEPT PASS TO USTR-AGAMA DEPT PASS TO OGIC JOHANNESBURG FOR NAGY TREASURY FOR TONY IERONIMO AND ADAM BARCAN DOC FOR 3317/ITA/OA/BURRESS AND 3130/USFC/OIO/ANESA/REED E.O. 12958: N/A TAGS: EFIN ECON PGOC NI SUBJECT: NIGERIA AFTER THE CENTRAL BANK AUDITS REF: SENSITIVE BUT UNCLASSIFIED DO NOT DISTRIBUTE OUTSIDE USG ¶1. (SBU) SUMMARY: At September 29 Bank Directors Association (BDAN) of Nigeria forum bank directors received advice from Central Bank of Nigeria (CBN) Governor Sanusi and former Chairman of Diamond Bank Pascal Dozie on how to form and run a proper board of directors. Sanusi's remarks were delivered by CBN's Deputy Governor Lemo. The CBN will appoint two independent directors to bank boards if the banks are unable to identify suitable candidates. Reaction to the now finished audits is relief. The CBN wants to encourage lending and needs a mechanism to buy up the toxic assets. END SUMMARY Bank Boards Must Be Independent -------------- ¶2. (SBU) BDAN held a forum of bank directors on September 29 and Deputy Governor Babatunde Lemo delivered a speech on behalf of CBN Governor Sanusi. Sanusi's speech stated that poor board oversight was the cause of the global financial crisis. This was borne out in the recent audits of Nigerian banks which confirmed the failure of boards to check the activities of management. Bank financial performance and solvency of the overall system relies on the board discharging its duties effectively, per Sanusi. ¶3. (SBU) Sanusi's speech offered suggestions on good board composition and responsibilities. First, the board must understand risk management. He opined that Managing Directors (MDs) of troubled banks did not know to what extent their banks had been exposed to the capital as well as oil and gas markets. There was a lack of parameters for effective reporting, leading banks to go beyond their risk tolerances. Second, a system of checks and balances between the board and management must be in place. All important issues must be brought before the board for deliberation. The board must be subservient to management and the MD, but they should still be able to voice their views. Third, those on boards must have relevant banking skills as many board members lack competence and banking experience. Boards must also have the right mix of accountants, lawyers and other professionals. Fourth, a board must be in sync with the times. Growth is good but not in excess. The board must recognize changing environments and adapt. If a bank is not able to appoint experienced, independent board members, the CBN will step in and name up to two for them. ¶4. (SBU) Former Chairman of Diamond Bank Pascal Dozie gave a similar presentation at the same September 29 event. Dozie stated that the MD is the appointee of the board, not the other way around, and that board members must not use their positions to conduct personal business with the bank. This last comment generated a good deal of debate as many thought there was no problem in leveraging their positions as board members to obtain loans for private projects. Others made the point that if other banks do not want to finance a pet project, perhaps it is not a good project. Bankers More Relaxed After Audit Results -------------- ¶5. (SBU) Pol/Econ Chief, EconOff and ConsOff attended a Deutsche Bank event October 6 to welcome the new local director. Representatives from AfriBank, Fidelity, First Bank, and PHB all seemed relieved that the CBN had finished up its audits the prior week. PHB representative Uzoma Okoro did not seem concerned at the least that his bank's MD had just been fired and new management was most likely on the way. Next Steps for the Banking Industry -------------- ¶6. (U) Financial Derivatives CEO Bismarck Rewane gave a presentation before the Lagos Business School October 6 where he made the following statements: What has happened in the Nigerian banking sector is very similar to the Southeast Asian banking crisis of 1997-1998. Banks must be wary of politicians' tendency to spend with abandon in the upcoming elections. The CBN has two options with the banks, either a controlled liquidation or a conversion where the GON acquires a majority of the equity in the banks. The CBN now wants to motivate banks to resume lending. A mechanism is needed to purchase toxic assets and free up credit. ¶7. (SBU) COMMENT: Hearing speeches by Sanusi's representative and Dozie to bank directors was like taking a class in "Banking 101." The topics covered were remedial yet necessary. Bankers, however, seemed to have a surprisingly relaxed attitude about operating in LAGOS 00000388 002 OF 002 their new environment, and there was a palpable sense that this blood letting of banking leaders was long overdue in Nigeria. ¶8. (U) This cable has been coordinated with Embassy Abuja Walsh