BANKING SECTOR CONSOLIDATION AND THE FUTURE OF EMERGING BANKS IN NIGERIA

BANKING SECTOR CONSOLIDATION AND THE FUTURE

OF EMERGING BANKS IN NIGERIA

By

Mustapha Muktar, Ph.D

(muktaronline@gmail.com)

Department Of Economics, Bayero University Kano-Nigeria

A Lecture Delivered @ Bankers’ Day Symposium

Centre for Democratic Research and Training,

Mambayya House, Kano

August 19, 2006

Introduction

Banking sector consolidation has been an ongoing phenomenon that has been intensified due to the forces of globalization which are guiding the regulation of the world’s financial markets and economies. Consolidation simply means the reduction in the number of banks and other deposit taking institutions with a simultaneous increase in size and concentration of consolidated entities in the sector.

Banks consolidation is motivated by technological innovations, deregulation of financial services, enhancing intermediation, increased emphasis on share holder value as well as privatization and international competition (Berger and etal1999, IMF 2001). Capitalization is an important term that is achieved through consolidation this is so due to the fact that a bank with a strong capital base has the ability to absolve losses from non performing liabilities (NPL)

Overview of the Banking sector in Nigeria                         

Modern form of banking in Nigeria started in 1892 when the African banking Corporation (ABC) commenced formal banking business. ABC was later taken by the Bank of British West Africa which metamorphosed to the present day First Bank of Nigeria Plc. Between 1927 – 1951 there were 25 indigenous Banks out of which 23 failed leaving only 2. The failure was due to the absence of banking regulation, inadequate capital, shortage of qualified personnel and other factors. The banking ordinance of 12952 was then enacted to regulate the banking environment. Subsequent efforts at strengthening the regulatory framework resulted in the enactment of the CBN act 1958, the NDIC act 1988, the CBN act 1991, and the banks and other financial institutions act of 1991. Nigerian banks were however characterized by large number of small banks with few branches, poor rating of a number of banks (as at December 2004, out of 89 banks no bank was rated very sound, only 10 were rated as sound, 51 were rated satisfactory, 16 were rated marginal and 10 unsound). The sector was also characterized by weak corporate governance, negative capital adequacy ratio, over dependence on public sector   deposits and eroded share holders funds caused by operating losses.

The Current Banking Sector Reform

Since Nigerian Banking sector is characterized by problems, then there is the need to restructure the system. Restructuring becomes necessary so as to create a strong and reliable banking sector which will play active developmental roles in the Nigerian economy and the world financial system at large.

On July 6, 2004 the CBN governor enunciated the thrust of the banking system reform program in his 13 point reform agenda. Two major elements of the reform agenda are the requirement of the Nigerian banks to increase their share holders’ funds to a minimum of N25 billion by the end of December 2005, and consolidation through mergers and acquisition.

The objectives of the reform are as follows;

1. Minimum capitalization of N25 billion before end of December 2005.

2. Phased withdrawal of public sector funds from banks

3. Consolidation through mergers and acquisition

4.  Adoption of risk focused and rule based regulatory framework

5. Adoption of zero tolerance in the regulatory framework.

6. The automation process for rendition of returns by banks through the electronic and financial analysis surveillance system (e - FASS)

7. Establishment of hotline confidential internet address (governor @ cenbank.org) for Nigerians wishing to share any confidential information with the CBN governor on banking operations.

8. Strict enforcement of the contingency planning framework for systematic banking distress

9. Establishment of an assets management company as an important element of distress resolution.

10. Promotion of the enforcement of dormant laws especially those relating to the issuance of dud cheques and the law relating to the vicarious liability of the board of banks in cases of failing by the banks

11. Revision and updating of the relevant laws and drafting of new ones on banking operation

12. Closer collaboration with the economic and financial crimes commission (EFCC) in the establishment of the financial intelligence unit and enforcement of anti money laundering and other economic measures.

13. Rehabilitation and effective management of the mint to meet the security printing needs of Nigeria.

The future of Emerging Banks

Banks in Nigeria have face a lot of challenges which includes inadequate experience and technical knowledge on large scale consolidation, huge cost associated with consolidation, problems of non performing loans, operational challenges arising from information communication technologies (ICT) system and supervision / regulation of mega banks.

One of the main effects of consolidation in Nigeria is the reduction in the number of banks in the system. But the emerging ones are better capitalized and bigger, this is because the minimum N25 BILLION induces growth.

The mega banks that have also emerged may have stronger capacity to take big risks and thus be better able to finance key growth sectors of the economy.

The weak banks are also out of the industry in an orderly manner, while some have merged together, others have been acquired by bigger banks and those that have no suitors have been forced into a “marriage of convenience”

Good corporate governance is also a feature of the emerging banks; since the share holding base of the banks’ is increased thus, family owned banks are eliminated.

Merger and acquisition that resulted due to consolidation will improve the the profitability of the emerging banks as well as operational efficiency.

One of the negative effects of the reform is the retrenchment of workers in the banking industry; this is more pronounced in the weak banks that are acquired by strong ones

Conclusion

Banks consolidation brought about a lot of benefits to the stake holders in the industry. The current banking sector reform if well implemented will cleanse the industry so that a stricter and more professional supervision and regulation could be achieved. The Central Bank of Nigeria should however need the cooperation and support of the stake holders for a successful implementation of the reform.

Thank you for listening.