Governor Lamido Sanusi said Afribank, Finbank, Intercontinental Bank, Oceanic Bank and Union Bank would be run as going concerns until new investors were found to recapitalise them.
The move by Sanusi, who took over at the helm of the central bank just over two months ago pledging to sanitise the banking system, sent shockwaves through the financial establishment.
Between them the institutions account for 40 percent of banking sector credit in Africa's most populous nation and the executives removed included members of Nigeria's corporate aristocracy, long seen as almost untouchable.
"The banks have lost their money in bad loans. We have put in money. We have questions about the management, so we have put in new management," Sanusi told a news conference in Lagos.
"We assure every depositor that no-one will lose money and we will continue to support the banks and all Nigerian banks," he said, as armed police secured the premises of the five institutions in an effort to ensure their assets were protected.
Nigeria's financial sector has become the key driver of sub-Saharan Africa's second biggest economy and a systemic banking crisis would be disastrous.
Private sector credit outstripped the entire spending of the country's federal, state and local governments last year and this year banks are expected to provide much of the government's estimated 1.6 trillion naira ($10.6 billion) borrowing needs.
"The banking sector is a critical part of any economic system and we believe the steps being taken will deliver an effective solution to a very serious set of challenges," Michael Hugman, Emerging Markets Strategist at Standard Bank, said.
"In the long run it can only be positive for confidence in the Nigerian currency, equity and debt, both corporate and sovereign," he told Reuters.
But the naira tumbled close to 2 percent on the interbank market on Friday, closing at 156.90 to the dollar, as traders took the view that the crackdown on the banking sector could destabilise Nigerian financial markets and prompt capital flight in the short term.
The stock market had closed before the announcement.
Lax Risk Management
Nigeria's banks saw explosive balance sheet growth in the wake of consolidation four years ago, going on massive capital raising sprees which increased their capacity to lend to companies and individuals. Risk management did not keep pace.
The loans included credit to speculators on the stock market , down more than 60 percent from its peak in March 2008.
They also including unsecured financing to fuel importers who have had to contend with a sharp fall in global oil prices from above $140 a barrel last year to half that level.
Sanusi said the five banks had accounted for almost 90 percent of exposure to the central bank's discount window, a facility which allows financial institutions to meet their short-term obligations by borrowing central bank funds.
Their liquidity ratios ranged from 17.6 percent to 24 as at the end of May, below the 25 percent regulatory minimum.
He said the impact of the problems at the five institutions had pushed up deposit rates across the financial sector and destabilised the interbank market as competitors were unwilling to take unsecured risk lending to them.
Only a central bank guarantee of the interbank market had prevented four of the five from collapsing, he said.
"The excessively high level of non-performing loans in the five banks ... was attributable to poor corporate governance practices, lax credit administration processes and the absence or non-adherence to credit risk management practices," he said.
Fallout Expected
Sanusi said the Nigerian government had no intention of nationalising the five banks and that the capital injection was a temporary measure sufficient to stabilise them and enable them to continue normal business while new investors were sought.
Foreign and local investors were welcome to enter discussions with the central bank's financial advisors, he said.
The central bank has completed audits of ten banks, including the five being rescued, and the probe will now be widened to include all of the country's 24 banks, Sanusi said.
"This isn't even the tip of the iceberg. There'll be senior management resignations, non-executive directors will start to leave," said one Nigerian analyst who asked not to be named.
The other five banks already audited are Diamond Bank, First Bank, UBA, Guaranty Trust Bank and Sterling Bank.
Standard Bank's Hugman said the fact that the regulator appeared to be comfortable with the reporting and balance sheets of First Bank and Guaranty Trust Bank would be viewed positively by holders of their outstanding dollar-denominated debt.
Ratings agency Fitch on Friday downgraded Intercontinental Bank's long-term issuer default rating to 'B' from 'B+', citing liquidity pressures faced by the bank since 2008.
