A mixture of politics, economics in Nigeria bank recapitalisation  

The actions and pronouncements of the Central Bank of Nigeria (CBN) since the commencement of the ongoing recapitalisation by banks in April 2024, vividly show an admixture of politics and economics in the policies of the apex bank. This interplay of politics and economics is best illustrated by the CBN’s revocation of the operating licence of Heritage Bank Limited and taking a different line of action to ensure the continued operation of another distressed bank, Unity Bank Plc — including directly supporting the bank with a loan of N700 billion. 

The apex bank withdrew the operating licence of Heritage Bank after the commencement of the ongoing recapitalisation exercise in April 2024. Specifically, in announcing and justifying the revocation of the operating licence of Heritage Bank, the CBN said in a statement on June 3, 2024 that the measure was necessary due to the bank’s violation of Section 12(1) of Banks and Other Financial Institutions Act (BOFIA) 2020.

The statement highlighted that the bank’s board and management failed to improve its financial performance, “posing threat to financial stability.” The CBN emphasised that the revocation of Heritage Bank’s licence is intended “to strengthen public confidence in the banking system and ensure the soundness of the financial system is not compromised.” Thus, the liquidation of Heritage Bank became the only one in a long while, since the CBN, prior to Olayemi Cardoso’s leadership, only arranged bailout deals for identified distressed banks.

But on Tuesday, August 6, 2024, the CBN in a statement signed by its acting director, Corporate Communications, Hakama Sidi Ali, announced the approval of the merger of Providus Bank and Unity Bank, stating that the action was following the provisions of Section 42 (2) of CBN Act, 2007. The apex bank also announced the approval of N700 billion support for the proposed merger between the two banks. According to a circular by the CBN regarding this move, “the financial support would be necessary to strengthen the stability of Nigeria’s financial system and avoid potential systemic risks.”

Not a few stakeholders of the Nigerian banking system were shocked by the latest volte face of the CBN in not only tolerating an obviously distressed Unity Bank, but also injecting fresh funds into it. This is the scenario, because according to reports, Unity Bank sought N700 billion in financial support as well as approval for a merger with Providus Bank from the apex bank in late July. In less than one month after Unity Bank’s appeal, the financial support and merger requests were approved by the CBN on August 6, 2024.

Available reports show that the N700 billion loan is a 20-year tenured facility with a floating interest rate, which will be the MPR (Monetary Policy Rate) minus eleven percent, with the minimum interest rate at six percent. There is also a five-year moratorium on the loan; and interest payments would be semi-annual, while the principal payment will be over the remaining 15 years. Further reports show that of the N700 billion, about N303.7 billion would be utilised in settling Unity Bank’s obligations, including its N92 billion liability said to be owed First Bank of Nigeria.

Also, N51.7 billion of the loan would be used to settle the bank’s liability due to the CBN itself from the Anchor Borrowers Scheme (ABS) as well as N135 billion due to NIRSAL (Nigeria Incentive-Based Risk Sharing System for Agricultural Lending). It is also reported that N392.3 billion of the CBN facility to Unity Bank would be invested in a 20-year FGN bond and would qualify as tier-2 capital for the bank. All these would be pulling up Unity Bank’s shareholders’ fund which was negative (-N190.2 billion) as of September 30, 2023.

However, it should be noted that the latest gambit of the CBN is not the first time that Unity Bank would be preferentially treated with kid gloves by the monetary authorities. In 2009, the apex bank carried out a ‘special examination’ of the 25 recapitalised banks (then) and reported that Unity Bank “was adjudged to have insufficient capital but not in grave situation because it has a healthy liquidity position.” The bank was however eventually bailed out by the apex bank with an unspecified loan facility.

It is against this background that the latest controversial action of the CBN in arranging a so-called merger should be seen as just an effort to ensure the continued existence of Unity Bank. While the apex bank clearly stated the available options for banks in the guidelines for the ongoing bank recapitalisation, there was no provision for bailout package for any distressed bank from the CBN.

If the liquidation of the Heritage Bank by the CBN after the commencement of the recapitalisation exercise was a shocker to many, the latest lifeline for Unity Bank from the same apex bank is bizarre, to say the least. All stakeholders — operators and general public — were taken aback.

In fact, as reported by one national newspaper, President of the Noble Shareholders’ Solidarity Association, Matthew Akinlade, said Unity Bank was being treated as a sacred cow by the regulator. According to him: “I think the approval of the merger between Providus Bank and Unity Bank by the CBN was just to rescue Unity Bank from liquidation. Unity Bank appears to me as a sacred cow that must be saved.

“I believe that if the same treatment was applied to Heritage Bank, it would have been saved. Going forward, CBN has to apply equity and fairness in their decision-making process,” he said. Truly, this singular preferential treatment for Unity Bank renders suspect the ongoing recapitalisation exercise by banks. While practically all the banks are combing all nooks and crannies, looking for fresh funds, the CBN chose to pick one of them to give a cheap lifeline.

Had the apex bank indicated in its guidelines for recapitalisation that there could be resort to its loans, not a few banks would have opted for such a window. So, now that Unity Bank has been saved, will it be an indication that other banks could still alter their strategies to include seeking ‘support’ from the CBN? It is now barely five months into the recapitalisation timeline; the exercise lasts till March 31, 2026.

Obviously, coming this early in the recapitalisation journey of the banks, the CBN’s rescue of Unity Bank sends a confusing and dangerous signal. Must a bank opt for a merger to attract the CBN’s financial support? Or, after all fund-raising efforts — probably marked by gross under-subscription — can a bank or group of such banks resort to seeking financial support from the apex bank? Or, will all merging banks (if distressed) seek financial support from the CBN? Can they?

What the CBN has just done for Unity Bank does not seem to have any antecedents nor does it fit into the stated format for the ongoing bank recapitalisation in Nigeria. Indeed, when the CBN opted to withdraw the operating licence of Heritage Bank, names of a few other banks — including Unity Bank — were bandied as likely next in line for possible liquidation. Now, those banks, except Unity Bank, are left in the lurch, to keep struggling to survive.

In the end, the CBN’s arbitrary action in giving Unity Bank a kid gloves treatment reeks of purely political expediency over economic reasoning. But the treatment has again unleashed uncertainty and mutual suspicion in the banking sector. On one hand, who knows what next the apex bank would do, even outside its stated guidelines? On the other hand, who knows what alterations the CBN could still effect in the course of the two-year timeline for the recapitalisation?

All said, the CBN should have maintained a level playing field for all the banks, having laid out all the rules and guidelines. Packaging and offering of huge loans to any otherwise distressed bank is not part of the bargain. And whether the apex bank admits it or not, this singular capricious initiative (bailing out Unity Bank) portends danger with unfathomable ripples in the Nigerian banking system. It also questions the leadership, ethical and professional standard of the apex bank.

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