Skye Bank Overhauls Management Team- The Reason

Fashion home!
The panic out there has been overwhelming since the news of a change in the management Board of Skye Bank Plc. “Once bitten, twice shy” will probably be the mindset of many customers that were affected in the past with the case of liquidating banks.

However, what has just happened was only an indicator that the Central Bank of Nigeria was being proactive and also learnt from past mistakes and experience with banks. Apparently, so many customers lost their monies with some banks that liquidated while some others had to go through hell to get theirs back. In a recent tweet by CBN, they made it clear that the move to change the management Board of Skye Bank was taken in view of persistent failure of the bank to meet minimum thresholds in critical prudential and adequacy ratios. I will explain but before I do, it is worthy of note that gone are those days when customers will lose their funds when banks are troubled. All deposits in Nigerian Banks are fully insured by the Nigerian Deposit Insurance Corporation (NDIC).

As far as I am concerned, everyone would love to own a bank. I can bet you that so many of our Nigerian Big Men have in one time or the other made moves towards owing a bank in Nigeria but just like using a wrong pin to an ATM card, it keeps bouncing them. Until you get it right you can’t get it! Right?

For one to operate a bank, there are certain requirements that must be met. These requirements however vary depending on the kind of bank you wish to operate (Micro-finance, Regional or Commercial). The Capital adequacy ratio and deposit-asset ratio are one of such requirements regulated by the Central Bank of any country. For me, I consider this as the most important policy or concept in banking. It is an important measure of safety and soundness for banks as it cushions against loses.
Sharpe (1977) defined capital as a difference between assets and deposits, so the larger the ratio of capital to assets (or the ratio of capital to deposit) the safer the deposits. As capital was adequate, deposits were “safe enough”. His idea was that if the value of an institution’s assets may decline in the future, its’ deposits will generally be safer, the larger the current value of assets in relation to the value of deposits.

Dowd (1999) found in his study that the imposition by regulators of minimum capital standards on financial institutions can be seen as a means of strengthening the safety of deposits and soundness of the banking system. He also suggested that an information asymmetry between bank managers and depositors could produce market failure that provides a rationale for government intervention in the financial system. This intervention would take the form of capital adequacy regulation to force banks to maintain a stronger capital position.

In the case of Nigeria, the CBN increased the minimum capital base requirements of banks to twenty-five billion naira in 2005 and this increase separated the “boys from the men” in the industry. Meaning that for you to play in this industry, you must first and foremost to able to meet up with that.

Secondly, the CBN who are the regulators of banking in Nigeria have a policy called the Cash Reserved Ratio (CRR). This policy ensures that a portion of any banks total deposit is reserved with the CBN either in form of cash or its equivalent. What this means is that while your money is deposited in your bank, the CBN does not allow your bank full access or control of that your money; 22.5% of total deposits in every bank are further deposited with CBN and this ensures that banks do not run out of cash to meet payment demands with depositors.

The liquidity ratio on the other hand measures the ability to meet short term obligations. It measures how quickly a business can pay off its short term borrowings. It is also a very vital measurement tool as it shows whether or not the business will be able continue as a going concern. In the case of Banks, liquidity refers to a bank’s ability to meet its savings deposits, current deposits and time deposits withdrawals as and when such deposits are demanded it also includes the bank’s ability to meet loan requests that have been considered profitable and safe. In Nigeria, the liquidity ratio is 30% and the higher the ratio, the better it is for the bank.

Having understood these few policies, let us go back briefly to the tweet by CBN “Skye Bank’s Liquidity, Non-performing loan Ratios have been below and above the required thresholds, respectively for a while”. This means that their ability to meet up with withdrawal demands have fluctuated for a while and also, a large percentage of the bank’s loans are bad. As a result of this, the corrective measure however deployed by CBN was to change the management team.

While I use this opportunity to give kudos to the CBN for this tactical move, I would like to believe that in a couple of months the result of this decision will be evident in Skye Bank.