Banking Sector Reforms: A sweeping revolution with maximum results

Odidison Omankhanlen, Lagos

In the beginning
There is no gainsaying the fact that the nation’s banking landscape has recorded monumental and massive transformations since the Governor of Central Bank of Nigeria (CBN), Prof. Chukwuma Soludo, announced a 13-point agenda for the financial sector on July 6 2004.

Chukwuma Soludo Apart from becoming the fastest growing in Africa, the banking sector now yields veritable goldmine of superior returns such as: an unmatched array of financial solutions provided through a sophisticated and wide branch network through out Nigeria and other parts of the world; a banking sector with clearly defined growth strategy and expertise that offer full spectrum of financial products and services. It had also engendered economies of scale, saves cost, synergies and shareholders’ returns on a level yet unparalleled by any other financial institution in Africa.

Summarising all of these recently, the CBN Governor said the banking system he met and the banking system that exists today was like the difference between day and night; adding that the banking sector reforms was like literally knocking down the house and building a new one. “It was more like we had to knock down the existing banking system and totally rebuild it.”

Only recently, a South African analyst confessed that what it took South Africa about 20 years to accomplish has taken Nigeria less than five years to do.

According to the recent report of World Economic Forum on financial development index 2008 rankings, the Nigerian financial system was listed as one of the best in the world. It was only South Africa and Nigeria in Africa that made the list of 52 countries from all over the world.

The apex bank had, at the outset of the consolidation, hinged its objectives to include: establishing a banking system that will rapidly drive Nigeria’s economic growth and development; integrating the Nigerian banking system into the global financial system; targeting at least one Nigerian bank in the top 100 banks in the world within the next 10 years and in the long term make Nigeria Africa’s financial hub.

To achieve all of these, the apex bank came up with some key elements which had to do with minimum capitalisation raised to N25 billion on or before end of December 2005; consolidation of banks through mergers and acquisition; adoption of a risk-focused and rule-based regulatory framework; adoption of zero-tolerance in the regulatory framework, especially in the area of data/information rendition and reporting; the automation of the process of rendering returns by banks and other financial institutions through the e-FASS; and strict enforcement of the contingency planning framework for systemic banking distress.

Four years into the reforms, the industry has abundant results to show for it.

Pre Consolidation
According to The Banker, a magazine based in London, in a special report in 2004 stated that all the 100 leading banks in sub-Saharan Africa of which 26 of them were from Nigeria, did not match the strength of one of the world’s leading 25 banks, adding that the shareholders funds of all the 89 Nigerian banks put together was not up to the shareholders’ funds of the fourth largest South African bank, ABSA. As a matter of fact, none of the Nigerian banks featured in the top 10 banks in Africa and top 1000 in the world.

This clearly showed that the Nigerian Banking Sector was grossly underdeveloped, leading to so many setbacks to the Nigerian Economy. Bank loans were the predominant sources of debt financing in the economy. The statutory capitalisation requirement for Nigerian banks was N1 billion expected to rise to N2 billion by end of 2005; total capitalisation of all Nigerian banks stood at N293 million, which was just the size of the No. 4 in South Africa; no Nigerian bank could finance major transactions in the growing oil & gas and telecom sectors

Essentially, there was no defined roles in the sector that was characterised by: low aggregate banking credit to the domestic economy (18.4 per cent as percentage of GDP); systemic crisis, banks were frequently out of clearing; inadequate capital base; oligopolistic structure -10 (out of 89) banks accounted for over 50 per cent of total banking system asset; poor corporate governance; low banking/population density - 1:30,432; payment system that encouraged cash-based transactions.

Aggregate credit to the domestic economy by deposit money banks was N2, 011.1 billion. The analysis of sectoral allocation of bank’s credit showed that the less productive sectors of the economy continued to be favoured as only 37 per cent of the total credit granted in 2004 went to agriculture, solid minerals, exports’ and manufacturing.

Milestones
However, consolidation in the banking sector had assumed a complete new shape. As a result of the regulator-mandated and market driven consolidation, the banks pruned down from 89 to 24.

The consolidation had considerably modified the system of ownership structure of Nigerian banks, making it more widespread and better diversified. Asset Base grew by approx. 277 per cent between 2003 and 2007; 11 banks with over $1 billion in Tier 1 capital, by end February, 2008. 716 microfinance banks have been already licensed with more banks on the way; branch expansion 35 in Africa and 11 beyond Africa with more branches being opened on daily basis; Shares of banks in NSE rose from 30 per cent of the 20 capitalised stocks in the stock market in 2003 to 65 per cent in 2007.

Several Nigerian banks have been rated high by credible local and international rating agencies like Fitch.

As at 2007, the total asset and liabilities of the industry stood at N10.5 trillion, which is 48 per cent of GDP in 2007; local currency deposits in the same period amounted to N6 trillion or 27 per cent of GDP; gross earnings was N900 billion or 4 per cent of GDP.

The Nigerian banking industry has been responsible for deepening the Nigerian capital market, with the private placements; Rights Issues and Public Offers conducted during the re-capitalisation period. The banking industry accounted for a significant proportion of Foreign Direct Investment (FDI) flows into Nigeria and the industry accounted for 60 per cent of the total market capitalisation of the Nigerian Stock Exchange (NSE) as at 31 December 2007. This is the highest contribution recorded from any single sector on the stock exchange.

The industry has remained one of the highest employers of labour as it has directly employed an average of 54,364 persons.

Consolidation has also brought revolution in the Information Communication Technology (ICT). Banking business is now being done with minimal delay.

The number of account holders has also increased astronomically. As at June this year, over 28 million people have opened accounts in various banks as against 13million prior consolidation.

Views

Cecilia Ibru Analysts across the divides and nationalities hold the view that the banking sector consolidation was impacting positively on the nation’s economy. According to the former Secretary General of Commonwealth, Emeka Anyaoku, the banking sector was about the most successful sector of the national economy. He advised the CBN not to relent in its effort at transforming the industry.

Former CBN Governor, Joseph Sanusi saluted the efforts of the CBN Governor at transforming the industry, advising him to see to the realisation of having Nigeria as the financial hub of Africa. On his part, Henry Nelson, Executive Director, EcoBank Nigeria, opined that the consolidation programme had injected best practices into the banking system and created confidence in the sector.

According to former President, Chartered Institute of Bankers of Nigeria (CIBN), Mr. Samuel Kolawole, the presence of bigger and more stable banks has restored confidence in the citizenry, thereby inculcating the banking culture in many Nigerians. The Chief Economist, African Development Bank, Louis Kasekende, said the reforms in the banking sector has reduced the role of the government and improved the financial system, adding that countries with deep financial systems grow faster.

Economy/Vision 2020
According to Soludo, the reforms in the banking sector are targeted at strengthening the economy. According to him, “If Nigeria was going to be among the leading economies of the world in the shortest possible time, we are going toward for an evolutionary process, it was going to be a revolutionary process for us to move forward.”

This informed the launching of Financial System Strategy (FSS 2020) which is clearly aimed at making the Nigerian economy the largest in Africa and one of the largest economies of the world. According to the CBN Governor, the financial system is dominated by the banks, and ‘if you get the banking system right, you could then propel the rest of the financial system.’

Also, the CBN Deputy Governor, Financial Surveillance, Mr. Tunde Lemo, said the economy has been boosted by the capacity of banks to lend to the productive sector in the post consolidation era. However, there are arguments that the banks were not supporting the other sectors, particularly the real sector. Soludo, in his defence, said currently over 90 percent of deposits mobilised by banks are short-term (0-365 days), hence they are constrained to lend.

He noted that under a liberalised regime, where market forces are at play, low inflation constitutes the key objective, while interest rates become the main policy instrument leaving prices to adjust to ensure price stability. Two customers are hardly charged the same lending rate, as it depends on a number of factors: customer’s risk assessment and information available to customer.

He suggested that the apex bank would liaise with Bankers’ Committee to rationalise the non-interest charges/commission and enforce greater transparency in their administration, stating that the bank would continue with the ongoing efforts at deepening the financial markets, especially the secondary market trading of bonds.
The apex bank, through its monetary policies, had been able to check the on-going global financial crisis. Only recently, it came up with several measures to stem the crisis.

Policies
The CBN had come out with policy of naira redenomination. The CBN said the policy was to strengthen the nation’s currency. This was greeted with hot debates and at the end, the government suspended it on the ground that there were no proper and adequate consultations before the policy was enunciated and pronounced. Soludo has however said the issue would be revisited at the appropriate time.

Also, the Bankers’ Committee meeting of January 2008 agreed to adopt December 31, 2008 as common accounting year end for banks and discount houses in Nigeria. Their argument was to align the financial accounting period to global practices. The policy had to be suspended by the CBN as a result of the observed unhealthy trend/development in the industry whereby some banks were mobilising deposits at very high interest rates that were inconsistent with economic fundamentals which was becoming a threat to market stability.

The issue that also came up was that of the CBN’s $462million investment in Africa Finance Corporation (AFC). The Federal Government set up a probe panel which had since submitted its report. In a nutshell, the money had been recovered.

Foreign Interests
According to the Managing Director/Chief Executive, Skye Bank, Mr. Akinsola Akinfemiwa, pre consolidation, foreign financial institutions avoided any business discussion with Nigerian banks, stressing that the tide has changed post consolidation. This is evident on the numbers of enquiries that are being made at the CBN by foreign investors.

Erastus AkingbolaOnly recently, there were reports that South African investors have invaded the country with a view of either to acquiring or setting up new banks.

According to David Cowan, Senior Economist and African Editor, The Economist, the international financial community is now taking note of developments in the Nigerian financial market, obviously impressed with what has happened in the last five years. The hesitance of international investors to come to Nigeria will disappear over the next few years.

Offshore Subsidiaries
Most Nigerian banks have established several banking subsidiaries outside the shores to explore emerging business opportunities. Ten top Nigerian banks now have banking subsidiaries outside the country as far as in European countries. However, majority of them are located in the West African sub-region. By this development, Nigeria dominates the sub-region’s economy, accounting for about 61 per cent of the GDP of the 16 member Economic Community of West African States (ECOWAS).

Recently, Ghana’s Deputy High Commissioner to Nigeria, Mr. Mr. Kwame Tanko Rang, confessed that Nigerian banks in his country have taught them how to do business. According to him, prior the arrival of Nigerian banks, banks in Ghana were satisfied with selling treasury bills and staying back at their offices waiting for business, stating that Nigerian banks brought aggressiveness especially in marketing and professionalism.

He linked the development of the Ghanaian banking system to Nigeria.

According to Mr. Earnest Ebi, a Deputy Director at the CBN, offshore banking is topical and quite important, stressing that it plays crucial roles in the shift of economic power among countries and regions.

Challenges
It will be recalled that the issue of banks setting unrealistic targets with stiff deadlines have reduced drastically. The banks were accused of forcing female staff into prostitution in the course of mobilising deposits to meet targets. Banks have become considerate in this regard.

Of late, some allegations ranging from: different audited accounts for different regulatory bodies; credit facility fraud and fees; excessive charges; commission on turn over (COT); cooked books and prudential guidelines, among others, had been levelled against the industry. Defending all of these recently, the Association of Corporate Affairs Managers of Banks (ACAMB), said most of them were not only baseless but clearly unfounded.

According to its president, Eddy Ademosu, the criticisms were the handiwork of some paid consultants who are bent on destroying the gains of the consolidated sector. On the charges, he stated that the banks were adhering strictly to the CBN Guide on Bank Charges, stressing that every hand must be on deck to sustain the gains of reforms in the sector.

Also, to make consolidation achieve the desired objectives, the challenge of Corporate Governance in banks must be addressed: This essentially has to do with technical incompetence of board and management; relationships among directors; relationship between management and staff; increased levels of risks: ineffective integration of entities, and poor integration and development of information technology, among others

Enforcement
The Nigerian Deposit Insurance Commission (NDIC) in concert with relevant state security apparatus is introducing sanity into the system. It will be recalled that the NDIC is now training their in-house lawyers to represent them in courts in line with the new Act. This is expected to facilitate the quick recovery of depositors fund trapped in the hands of individuals and corporate organisations. Also, the Economic and Financial Crimes Commission (EFCC) and Nigerian Financial Intelligence Unit (NFIU) are monitoring money laundering and high volume cash transactions are working to sanitise the industry.

Future
The future is very bright for the industry. To maximise the consolidation gains, the apex bank must emphasis on risk-based supervision; greater emphasis on CBN’s use of discretion and judgement as opposed to rigid rule-based regulatory framework.

It must also enforce strict corporate governance regime; international benchmarking of supervisory oversight activities; supervision of the international subsidiaries of Nigerian banks; implementing Basel II provisions.

It should assiduously move towards making Nigeria the Africa’s financial hub; creating an International Financial Centre; unleashing the mortgage revolution, boosting Pension (with the Defined Contribution, N800 billion; already generated in pension assets); Reforming Insurance – ongoing reforms in line with banking and deepening the capital.