This record is a partial extract of the original cable. The full text of the original cable is not available.

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. 
 
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25 Bank Groups Emerge--But Where is AIB? 
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¶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. 
 
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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. 
 
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Invest Where? 
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¶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. 
 
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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. 
 
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Comment 
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¶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