1 THE FAILURE OF NIGERIA MERCHANT BANK PLC 1.0 INTRODUCTION The collapse of Nigeria Merchant Bank never came to the Nigeria Deposit Insurance Corporation (NDIC) as a surprise. That was because the bank was comatose for some time before the eventual revocation of its license by the Central Bank of Nigeria (CBN) in 1998 and subsequent handover to the NDIC for liquidation. The resolution of the bank, which began in 1998 along with 25 other distressed banks served as an acid test and a challenge on the capacity of the NDIC to undertake multiple liquidation of banks. The failure of 26 banks at the same time in the system, resulted in the overstretching of the Corporation’s manpower to the extent that it had to seek for the assistance of the CBN, in addition to having to firm out part of the closing assignment to some reputable accounting firms in the country. The license of Nigeria Merchant Bank was revoked on January 16, 1998 and as at that date, it had N68,979,981.33 in deposits and N2,037,866,325.93 in loans and advances. Out of the bank’s total deposits of N68,979,981.33 as at the time of closing, only N4,847,130.12 was insured. The gap between insured and uninsured deposits of the bank at the time of liquidation could be explained by the fact that the bank was involved in wholesale banking (Merchant Banking), dealing mainly with high net-worth individuals and corporate bodies while the maximum insured amounts at that time was N50,000.00.
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THE FAILURE OF NIGERIA MERCHANT BANK PLC
1.0 INTRODUCTION
The collapse of Nigeria Merchant Bank never came to the Nigeria Deposit
Insurance Corporation (NDIC) as a surprise. That was because the bank was
comatose for some time before the eventual revocation of its license by the
Central Bank of Nigeria (CBN) in 1998 and subsequent handover to the NDIC
for liquidation. The resolution of the bank, which began in 1998 along with
25 other distressed banks served as an acid test and a challenge on the
capacity of the NDIC to undertake multiple liquidation of banks. The failure
of 26 banks at the same time in the system, resulted in the overstretching
of the Corporation’s manpower to the extent that it had to seek for the
assistance of the CBN, in addition to having to firm out part of the closing
assignment to some reputable accounting firms in the country.
The license of Nigeria Merchant Bank was revoked on January 16, 1998 and
as at that date, it had N68,979,981.33 in deposits and N2,037,866,325.93 in
loans and advances. Out of the bank’s total deposits of N68,979,981.33 as
at the time of closing, only N4,847,130.12 was insured. The gap between
insured and uninsured deposits of the bank at the time of liquidation could
be explained by the fact that the bank was involved in wholesale banking
(Merchant Banking), dealing mainly with high net-worth individuals and
corporate bodies while the maximum insured amounts at that time was
N50,000.00.
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The size of the bank in terms of deposits, loans and advances and branch
network informed the NDIC’s choice of pay-out option in winding its affairs
at least cost to the deposit insurance fund (DIF). The same resolution option
was used in winding the affairs of other 25 banks that were put into
liquidation at that time.
The aim of this case study is to review the circumstances surrounding the
failure of the bank, examine the measures taken by the
regulatory/supervisory authorities to avert the failure, what issues arose in
the course of winding up the affairs of the bank and the lessons to be learnt
from the failure of the bank.
2.0 Historical Background of the Bank
The Nigeria Merchant Bank Ltd could be considered to have belonged to the
first generation banks in Nigeria, as it was incorporated as a company in
1960 but could not commence operation as a Merchant Bank until 1973. It
was a wholly indigenous bank that was owned by the Federal Ministry of
Finance and United Bank for Africa (UBA) Limited in the ratio of 60:40
respectively. It had its head office in Lagos and had a financial year end of
March 31. The bank was bedeviled with the problem of high and sticky
nonperforming loans over time, with the figure peaking to
N1,804,469,637.34 out of a total loans and advances of N2,037,866,325.93.
Majority of the credits were granted since 1982 and many of the accounts
became court cases while some of the debtors were either deceased or
untraceable. That led to the accumulation of interest charges on the
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accounts, which amounted to about 84.2% of the total loans portfolio while
the principal granted amounted to only 15.8% of the total exposure. The
unwillingness of the debtors of the bank to service their loans could partly
be explained by the fact that the bank was seen to be a government owned
bank and therefore money taken from it was seen as a share of the “national
cake”. In addition, there were no proper documentations done in most cases.
The high quantum of nonperforming loans threw the bank into grave
financial problems of illiquidity, insolvency, leading to capital inadequacy and
operating losses. In consideration of the enormous financial difficulties faced
by the bank, the regulatory authorities took the decisive action of imposing
“Holding Actions” on it in November 1992 to forestall further deterioration of
its condition. The imposition of holding action led to the freezing of some of
the activities of the bank in terms of deposit mobilization and granting of
new loans, but allowed and encouraged the intensification of debt recoveries
and adoption of cost reducing measures, among others. By September 1995,
when the condition of the bank did not show any sign of response to the
“Holding Actions” imposed on it, the Federal Government of Nigeria, which
was the major shareholder, appointed the Bureau for Public Enterprise (BPE)
to merge/restructure it along with two (2) other distressed merchant banks
– Continental Merchant Bank Plc and Icon Ltd [Merchant Bankers] as a
precursor to the establishment of a commercial bank. Part of the measures
taken by BPE to restructure the bank was the rationalization of its workforce
including Executive Management as well as branches, leaving only the Head
Office, which was later sold in October 1997.
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Nigeria Merchant Bank was subjected to series of on-site examinations by
the supervisory authorities (CBN & NDIC) either individually or jointly as well
as off-site surveillance, which was done on a more regular basis. In 1992,
the bank was declared technically insolvent following the examination by the
CBN. The examiners made far reaching recommendations, which if
implemented could turn around the fortunes of the bank. In 1994, the CBN
also undertook a special examination of the bank and found that its
conditions rather than improving, actually deteriorated such that its adjusted
capital and capital adequacy ratio were negative, its liquidity ratio was
negative, quantum of nonperforming loans was high, which accounted for
about 94.4% of the total loans and advances of the bank, weak internal
controls and accounting system and inept Management. These conditions
even deteriorated further when the NDIC examiners visited the bank in 1995.
The crisis faced by the bank may have been partly aggravated by the review
of certain government policies, such as the transfer of government deposits
from banks to the central bank as well as the liberalization of the banking
sector, which saw a lot of new entrants into the system that heightened
unhealthy competition amongst operators. That was in addition to the
government factor, which was to have played major role in putting the bank
in the crisis situation it found itself.
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3.0 Review of Early Warning Indicators and Causes of Failure
Bank failures from the point of view of regulators have certain signs and
indicators that could point at the gravity of the problems associated with
distressed institutions and which gives warning about the condition of a bank
to both the regulatory authorities and bank’s management. The basic
indicators of distress to regulators/supervisors usually manifest through an
assessment of the banks’ asset quality, liquidity and capital adequacy against
the prudential limits. Also important is the profitability of the institution as
well as its overall management.
A review of the quality of assets of Nigeria Merchant Bank through a special
examination jointly conducted by CBN and NDIC Examiners as at 28th
February, 1994, revealed that out of a total loan portfolio of N1.88 billion
found in the books of the bank, N1.70 billion were nonperforming and were
duly classified. The examination report also revealed that the substantial
portion of the nonperforming credits comprised accrued interests on the
outstanding sticky loans and advances that accumulated and were
capitalized. The examination report also revealed that the classified loan
assets were financed by short term deposits. That mismatch in the maturity
profile of the bank’s deposits and loans and advances caused liquidity crisis,
which characterized its operations over the years. Furthermore, another
target examination conducted by the NDIC on the bank as at 30th June, 1995,
revealed that the quality of its assets was very poor as about 96% of the
total loans and advances were non-performing. Also, the examination report
revealed that the bank had high concentration of director-related loans that
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were classified nonperforming. Table 1 shows the exposure of directors and
their related parties to the bank.
TABLE 1 SCHEDULE OF DIRECTOR-RELATED FACILITIES AS AT JUNE 30, 1995
NAME OF DIRECTOR FACILITY TYPE DATE GRANTED
LIMIT (N) BALANCE (N)
Madam Omoniyi (Rio Products)
Agric. Loan Ind. Loan
08/11/1985 350,000 1,555,638
2,943,022 5,542,414 8,485,436
Mr. B. A. Ehizuenien Property Loan 09/09/1983 238,206 2,263,126