MANY adult Nigerians still remember Allstates Trust Bank, which was once loved by the people, particularly those from southern part of the nation. The bank ceased existing after the 2005/2006 banking consolidation led by former Central Bank of Nigeria (CBN) Governor, Prof Chukwuma Soludo, who is now the governor of Anambra State.

Many adults have not ceased asking why their beloved bank failed. But here is why. Allstates Trust Bank was founded in 1988 by a group of investors led by Mr Ebitimi E. Banigo, who had served as the Managing Director of International Merchant Bank from 1981 to 1986 as a Federal Government appointee. Mr Banigo is now a monarch in Bayelsa State.

The bank set up 64 branches across 18 states of Nigeria. According to the Nigeria Deposit Insurance Corporation (NDIC) report, the business model of the bank created more problems for it than anything else.

“The business model for the bank whereby its financial resources were being deployed to create unmerited benefits for associated companies was one of the major causes of the bank’s liquidity problems and its eventual failure. Ever before the new capital requirement of N25billion for banks was announced by CBN in July 2004, the bank was already in crisis as reflected by deterioration of various performance,” NDIC said.

NDIC examiners and bank recapitalisation

As early as 1994, NDIC examiners had expressed concern over the deterioration in the bank’s risk assets and advised strict monitoring and control of unauthorised lending. In an effort to strengthen its capital base, the bank increased its authorised share capital to N2.10 billion in 2003 and subsequently undertook a rights issue, through which its paid-up capital rose to N1.53 billion. This figure, however, remained unchanged until the bank’s operating licence was revoked on in January 2006. By that date, accumulated losses had climbed to N7.42 billion.

Mr Ebitimi E. Banigo, former Chairman, Allstates Trust Bank

Meanwhile, on July 6, 2004, the Central Bank of Nigeria (CBN) announced a new minimum capital requirement of N25 billion for all banks, with a compliance deadline of December 31, 2005. In response, the bank entered into merger discussions with Hallmark Bank Plc, Lion Bank Plc and Universal Trust Bank Plc, with the aim of forming a new entity, First Consolidated Bank.

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The proposed merger ultimately collapsed due to the weak financial positions of all four institutions. The bank also explored the possibility of attracting foreign investors from South Africa and the United States to shore up its capital base, but this option failed as a result of its fragile financial condition.

As a last resort, its management launched an Initial Public Offer (IPO) in 2005, seeking to raise N20 billion through the sale of 10 billion ordinary shares at N2.00 per share. At the close of the offer, only N2.44 billion, which represented about 12.5 percent of the target. The offer was therefore unsuccessful, as it fell below the minimum 25 percent subscription threshold prescribed by the Securities and Exchange Commission (SEC), and the IPO was aborted.

In line with SEC directives, all funds raised for bank consolidation were to be warehoused in an escrow account at the CBN. Accordingly, FBN Capital Limited and BGL Securities Limited, which acted as issuing houses to the IPO, remitted N45.94 million collected by them into the CBN escrow account.

However, the sum of N2.39 billion paid directly by subscribers to Allstates Trust Bank, acting as the receiving bank, was not remitted to the escrow account, in violation of SEC guidelines. The bank also failed to properly account for the IPO proceeds in its custody, later attributing the loss to a severe liquidity crisis. Similarly, N893.14 million, being proceeds from an IPO conducted by Linkage Assurance Company Plc, which was an associated company, was trapped in the bank in 2005 and never recovered.

Investors’ outcry

Following public outcry by affected investors, the House of Representatives mandated its Joint Committee on Capital Market and Institutions and Banking and Currency to investigate trapped IPO funds in three failed banks: Allstates Trust Bank, Assurance Bank Limited and Trade Bank Plc. At the investigative hearing held in May 2008, the bank was unable to provide any credible explanation for its failure to remit IPO proceeds to the CBN escrow account, leaving the prospects of recovering subscribers’ funds bleak.

Non-performing, insider loans

CBN and NDIC examination reports over the years consistently highlighted weaknesses in the bank’s credit administration processes and a steady decline in asset quality. In 2004, non-performing loans (NPLs) rose by 114.88 percent to N3.7 billion. By 2005, delinquent insider-related loans alone had reached N12 billion. At the point of licence revocation on January 16, 2006, the bank’s largely NPLs and advances stood at N21.08 billion, accounting for 69.96 percent of total assets of N34.68 billion.

In October 2005, the CBN dissolved the bank’s board and management due to gross mismanagement and unethical practices, and referred the matter to the Economic and Financial Crimes Commission (EFCC) for investigation. One director was arrested, and EFCC investigations confirmed widespread unethical practices in credit administration, as well as money laundering. Before his release, the director accepted responsibility for debts of N13 billion owed by companies related to him and undertook to enter into a debt liquidation agreement with the bank.

From inception, the bank’s governance structure concentrated excessive powers in the hands of its chairman, who was also the chief promoter, a major shareholder and, at one point, the chief executive officer. This executive duality significantly undermined corporate governance. By 2003, he was the single largest shareholder, holding 12.11 percent of the bank’s equity, and effectively operated as an owner-manager throughout most of the bank’s existence, the report alleged.

The bank’s business model largely revolved around serving the interests of related companies. Key services, including information technology, security and catering, were provided by affiliated firms, making it impossible to maintain arm’s-length relationships. Bank examiners had criticised this practice as far back as 1997. In addition to related-party transaction abuses, the bank developed a culture of persistent non-compliance with regulatory requirements. These included failure to constitute board committees in line with the Companies and Allied Matters Act (CAMA), operating with a board not approved by the CBN as required under BOFIA, and weak internal controls on money laundering.

Link with Alamieyeseigha

Unsurprisingly, EFCC investigations in 2005 revealed that the bank had assisted a former Bayelsa State governor, late Mr Diepreye Alamieyeseigha, to launder funds abroad. Earlier, in 2002, the bank’s foreign exchange dealership licence had been suspended for foreign exchange malpractices, a sanction that lasted 13 months and severely impaired deposit mobilisation and liquidity.

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The bank also experienced frequent management turnover. The Managing Director, two Executive Directors and four Senior Management Staff resigned, prompting the appointment of Mr Ebibomo Timitimi as Managing Director/CEO on 5 August 2003. He led a five-member board chaired by Ebitimi E. Banigo.

Persistent liquidity problems plagued the bank, driven by delinquent loans, the locking up of deposits in long-term property leases with related companies, and the foreign exchange market suspension. The bank routinely failed to meet prescribed liquidity ratios, its CBN account remained overdrawn from 2003, and it suffered deposit withdrawals by major clients, including N4 billion from the Federal Ministry of Works and N2 billion from the Police Service Commission. Deposit liabilities declined from N31.18 billion in June 2004 to N28.83 billion by January 2006, underscoring the severity of its liquidity crisis.

Bank’s liquidation

Given the bank’s illiquidity, insolvency and failure to attain the new minimum capital requirement of N25billion, its banking license was revoked on January 16, 2006 by the CBN. In keeping with the legal requirements, NDIC applied to the Federal High Court for a winding-up order which was granted on February 24, 2006.

“Thereafter, NDIC (as Liquidator) commenced the liquidation processes which included preparation of Statement of Assets and Liabilities, preparation of deposit, debtors and fixed asset registers as well as professional valuation of fixed assets. The exercise revealed that about 93 percent of the bank’ depositors had balances of N50,000 and below as at the date of closure, which was the insurance cut-off limit as at the date of closure,” the report noted.