Wednesday, August 29, 2007

Soludo Again!!…Well?

Part 2-The Naira Agenda

The second Soludo Big Bang has become somewhat of a whimper with the suspension (or cancellation?) of the redenomination agenda on the ground that Section 19 of the CBN Act 2007 requires the approval of the President for currency redenomination. Nevertheless I believe discussions on the proposals should continue until an intelligent consensus is reached. There were four elements of the now stalled Soludo agenda-the proposal to re-denominate the Naira by dropping two zeros or moving two decimal points to the left with effect from August 2008; the adoption of inflation targeting for conduct of monetary policy from January 1 2009; sharing part of the Federation Account to the States and the Federal Government in US Dollars with effect from September 2007; and current account liberalisation/convertibility to commence January 2009.

The attempt by the governor to present these reforms as an extension of prior reforms in the banking sector and currency management were obviously very weak, the CBN having just introduced new N200, N500 and N1,000 currency notes as against N20 which would be the highest note in the new framework. It is apparent that the redenomination agenda emerged quite recently. Perhaps more tenable anchors for the governor’s proposals can be found in the autonomy over monetary policy which the bank has been granted, the bank’s legal mandate purportedly in the new CBN Act 2007 to ensure price stability, preparations by the bank for hosting the headquarters of the African Central Bank and most importantly the desire to become the reference currency in West Africa and Africa as a whole. It is in the context of these considerations, and the intent to be an international financial centre under the Financial System Strategy (FSS) 2020 that some sense can be made of the proposals. Some also insinuate that the measures had something to do with tenure and succession politics at the CBN.

The Governor premised currency redenomination on the need to better anchor inflation expectations; strengthen confidence in the Naira and on the experience in other countries such as Ghana, Afghanistan, Brazil and others. All things considered, the case for Naira redenomination is in my view not very strong. It is a purely arithmetic change that in no way affects the economic fundamentals, amounting to no more than psychological boost to the egos of Nigerians. The point has already been made that Nigeria’s currency is quite unlike that in Ghana or any of the other countries mentioned where the currency was unmanageable and simple transactions required thousands or millions of notes. In addition the example of the Japanese Yen confirms that it is possible to manage inflation and a strong economy even when your currency equivalence to the US Dollar is in the region of N128 to one Dollar.

The Governor says he has not made “an explicit commitment to revalue” the Naira. Reading his lips, the converse of this statement is perhaps that there is an implicit intention to revalue the Naira. If this were the case it is doubtful if such a policy-driven revaluation in the absence of stronger economic fundamentals and a diversified export base is even in the interest of the economy. On the other hand, the policy is not without costs-direct costs to the CBN in terms of logistics, public education, currency printing, and many system-wide costs. Like I mentioned on a Silverbird TV (STV) news interview some days after the policy was announced the banking and payments systems will have to bear some software and programming costs, and all businesses and firms will bear accounting and transaction costs directly attributable to the currency change. Weighed against the economy-neutral impact of the change, perhaps this cost was needless. On the other hand, perhaps re-denomination may aid the desire to be a regional or continental reference currency, but even this is not very clear.

I do not have any problem with the proposal to adopt an inflation targeting framework for the conduct of monetary policy. It is in line with the bank’s duty to pursue price stability, and re-enforces the desire to achieve lower levels of inflation which has been official policy for several years. It is also consistent with the practice of central banks in stable economies and is squarely within the province of monetary policy in which the bank ought to have autonomy. It is important to note also that inflation-targeting can stand on its own without the other accompanying policies.

It is doubtful if the CBN has the exclusive legal power to decide that part of the Federation Account will be shared to the States and Federal Government in US Dollars, in the absence of the agreement of the Federal Ministry of Finance, the Accountant-General of the Federation, the State Governments and the President of the Federal Republic. I mentioned in the STV news interview referred to above that autonomy (even where it is confirmed to have been legally granted) is not inconsistent with consultation, especially in matters of the significance of the measures proposed by the governor. It is surprising that the governor indicated that such a measure would take effect the very next month. With proper consultation, this policy can be reconsidered, but the views of the EFCC (regarding the impact on corruption in the states) should be obtained. On the positive side, the proposal may liberalize access to foreign currency, strengthen the US Dollar balance sheets of local banks and strengthen the Naira in a manner consistent with management of a market-determined exchange rate. It may also free the CBN from selling US Dollars to the banks through the DAS.

Ironically the least discussed of Soludo’s proposals was the one which in my view may have the most significant economic effects-full current account liberalisation and currency convertibility by January 1, 2009. This would entail the country eliminating all restrictions on current accounts and accession to Article VIII of the IMF. The Governor argues that 167 out of the 185 member countries of the IMF have acceded to the Article and that “the conditions are right for Nigeria to now join the world league”. I honestly do not think so. I think we have done well with macro-economic and banking reforms, but I think we are both over-celebrating and doing so too early! A large part of the macro-economic success has been “wind-assisted”, aided by extra-ordinarily high oil prices. We remain dependent on oil for export earnings, the economy is still import-dependent, infrastructure is still decrepit and domestic productivity is still weak.

In my view Nigeria is not yet ready for currency convertibility because our economy is still highly susceptible to internal and external shocks-stock market bubbles and high oil prices being my biggest concerns. But a timetable for currency convertibility is still imperative-with a target date somewhere around 2014-2015, well within FSS 2020 timelines.

Wednesday, August 22, 2007

Soludo Again!
Part 1-Reflections

There is something about Professor Chukwuma Soludo and Tuesdays. The first time Soludo imposed himself on the nation’s consciousness, it was Tuesday 6th July 2004. Personally I can never forget that day because of the remarkable confluence of circumstances-personal, professional, career, spiritual-that came together in that day.

The story did not start with anything to do with Soludo. In January 2001, I joined a one-branch merchant bank with less than N5billion balance sheet as General Manager as the institution prepared for universal banking. I understood the nature of the professional challenge I was accepting when I agreed to join that institution. I had for several years been something of a close observer and analyst of the financial services industry. I had worked for several years as relationship manager and later group head in charge of financial institutions in a bank that held over 75-90 percent market share of financial institutions business in the banking industry, at a time providing services to over 40 merchant banks, some discount houses and numerous other financial institutions. It was inherent in my job to anticipate issues of strategy, structure and evolution of the industry in addition to acquisition of generalist banking skills.

Later that year in November 2001, I had an opportunity to share my thoughts on the structure and evolution of the Nigerian Financial Services Industry as a guest speaker at the Lagos Business School Annual Banking Conference. I argued that eight strategic groups were discernible in the industry. I named the groups (based on what I considered their dominant attributes) legacy, global, entrepreneurial, regional, contender, careful, emerging and marginal category. In the emerging bank category I included four banks, three of whom are main constituents of some of today’s post consolidation banks-Prudent, First Atlantic and Platinum. The bank for which I worked was the other institution I put in that category. I later added a fifth bank-Access to that category when its ownership and management changed hands.

The more interesting insight I offered on that day however was not necessarily the strategic group an institution belonged to at any particular point in time, but the volatility of industry positions. I recall demonstrating with several examples institutions that had moved rapidly in either direction from one group to another. One remarkable example was Standard Trust Bank (STB) which had emerged out of the ashes of the defunct Crystal Bank as a marginal player, had become a major industry contender and by the time of the discussion was on course to entrepreneurial status. It is remarkable that STB subsequently moved to the core of the entrepreneurial group and is now a legacy player with its UBA acquisition. Another example of high volatility upward movement I discussed was Oceanic. On the other hand, I questioned one particular bank’s continued status as a legacy institution and another’s continued position as a successful entrepreneurial player.

By December 2003, I noticed subtle changes. While the characteristics upon which I had demarcated the banks remained as firm attributes, on an industry basis size was becoming the over-riding basis of industry demarcation. I was by then an Executive Director and the bank had grown to over 25 branches and more than N25billion balance sheet. I constituted a strategy team of seven or eight middle-level managers under my leadership to review the industry. Looking at all indices, it was very quickly clear to us that the industry was separating into two classes on the basis of size-the top ten (we included Ecobank based on its supra-Nigeria characteristics as an eleventh) and the rest. A strategy retreat of the most senior managers in the bank and representatives of junior officers was immediately convened that held at Akodo Beach that December. Remarkably that retreat based on my presentation of our team’s findings concluded that the Nigerian banking industry would consolidate within a few years (we actually said two years!) and articulated a two-year plan of action to build 48 branches and raise capital to at least N5billion.

By February 2004, I had come to the personal conclusion that the plan of action was not going to happen, for a variety of firm-specific reasons. Any doubts I had were extinguished that February as several officers responsible for delivering on our first quarter target of 6 branches (which they accomplished) were almost fired by the bank’s board for some procedural infractions! Other information I began to receive from within and outside the bank and avoidable stresses convinced me to seek new directions. I painfully turned my mind to the question-what next? Having lost all desire for employment, I began to think about the emerging pension sector and my interests in strategy and consulting. My decision-making was going to have to draw on inner strength and faith as contrary to the national stereotype, I had only legitimate earnings, savings and investments to draw on. But I had also received clear instructions to “come out from among them…” By April 2004, (at which time Chief J.O Sanusi was still Central Bank Governor) I informed the CEO and Chairman that I would be leaving.

In the nature of resignations at that level, the discussions were at first confidential and had to be allowed to resemble a consultation. At some point to force my own hand, I disclosed my intention to some staff, and before long the whole bank was awash with rumours of my impending exit. This was the scenario until June 28, 2004 when I categorically confirmed to an informal exco meeting I summoned (with only the CEO not present) that I was leaving. I proceeded immediately to the CEO’s office to convey this final decision to him, in order that he would not hear from third parties. On the morning of July 6, 2004 I woke up believing I had gotten a final vivid directive to proceed. At 8.30am or thereabout before Soludo’s meeting commences, I submit my written letter of resignation in Lagos. At 10am or thereafter Soludo starts his first meeting with bank executives in Abuja and conveys the news about N25billion capital requirement.

That morning feeling melancholic, I walk next street to Adeola Hopewell to a nearby bank where two friends-a General Manager and Executive Director are the first to hear of my action. We discuss my options and consider possible areas of cooperation-three of us blissfully ignorant of the bombshell being dropped in Abuja. When I receive the first phone call intimating me about Soludo’s N25billion agenda, my first emotion is shock…then panic… then calm.

Tuesday, August 21, 2007

Can Companies Do Good?

Why is it that when people are angry with America, as they often are, they stone, write graffiti on or picket McDonalds, Citibank or Coca Cola offices all over the world? Those angry protesters are often educated people-social and environmental activists, undergraduates, trade unionists for instance-who know that the United States Government does not own these companies. Well in spite of that knowledge, in the minds of such people, those companies are somewhat synonymous with or at least representative of whatever it is America represents to them.

I read somewhere that if you wanted to study the history and evolution of management science and practices, it was sufficient to read the history and evolution of General Electric, a company which symbolised management best practices of the day from the 1930s. Whether it was decentralisation, centralised strategic planning with large corporate headquarters staff, delegation and empowerment, the conglomerate wave, acquisitions, restructuring and re-engineering, de-layering etc, GE symbolised and led the field and became synonymous at times with the development of those aspects of the field of management.

In the same way as the GE example above, if one wanted to study Nigeria’s political, economic and social development, you might just as well read the corporate profile and evolution of UAC of Nigeria Plc. If you wanted to research into the advent and impact of colonialism in Nigeria, the amalgamation of the Northern and Southern Protectorates, the River Niger trade and development of commerce and industry, the shift from subsistence to cash crop and export farming in Nigeria, just read accounts of UAC’s development and it mirrors those events and issues. When oil came, and we decided to seize the “commanding heights” of our economy through indigenization and nationalisation, UAC would be a useful case study.

When the oil money ran out and we began to ration scarce foreign currency through low profile, austerity measures, import licenses, “Form M”, and counter trade it reflected in the status and performance of UAC. The advent of the Structural Adjustment Programme and the need for new business models in the manufacturing sector is discernible from how the company has discarded its technical lines of business which became unsustainable in the light of devaluation and in which the company did not have competitive advantage. Indeed at some points in Nigeria’s history Frederick Lugard was in effect both CEO of UAC and Head of State of Nigeria. It is remarkable that in more recent history, another UAC CEO, Chief Earnest Shonekan also briefly became Head of Nigeria’s Interim Government in the wake of the 1993 election crisis.

These were some of the issues I reflected on last Wednesday as I observed UAC’s new logo launch. The company predates “Nigeria” with its history traceable to between 1672 and 1750 when the Royal Niger Company administered the territory that would later be known as Nigeria under a royal charter. The entity now known as UAC was formally created 128 years ago in 1879, following the merger of four companies trading up the River Niger. In 1974, forty percent of the company’s equity was acquired by Nigerians in compliance with the Nigerian Enterprises Promotion Act (NEP) 1972 and in 1977 the local equity holding was raised to 60 percent in accordance with NEP 1977. From 2000 UAC has been in a transition of sorts-business restructuring, change to value-adding businesses (as opposed to simply distribution for offshore producers) and focus on foods, real estate, logistics and automobile. More recently a sharper strategy as a food-focused conglomerate is discernible in UAC. The group also reflects renewed foreign investor interest in Nigeria with the acquisition by Actis of 20 per cent of the company’s equity. In 2007, both UAC and Nigeria have had new, younger leadership-Larry Ettah took over in January at UAC and Umaru Yar’adua took over in Nigeria in May. Both studied Chemistry at Nigerian Universities!

I find UAC’s strategic and leadership transition very interesting-a young man in his early forties taking control of Nigeria’s oldest and (previously perhaps most conservative) conglomerate; the new leader coming to the job with a clear strategy as a food-focused conglomerate, while diversifying the revenue base within the food business by creating different business units for its restaurants, foods, franchising and dairies businesses in addition to its existing water businesses; simultaneously improving value from its non-foods businesses in real estate, paints, logistics and automobiles; culminating in a strategic image change-all within his first year in office. But it is the fact that UAC under Larry Ettah seeks to combine re-invigorating the business with “doing good” that I find more interesting.

The company claims to have been “doing good, since 1879”-training managers and entrepreneurs; bringing goods and services to the people; providing vacation jobs and industrial attachments for students; providing stable, fulfilling careers for generations of Nigerian workers; and providing scholarships for children of serving and retired employees since 1948. Now UAC seeks to extend its “goodness” by instituting a scheme it calls the “Goodness League”, under which it would invest in financial and infrastructural support to legacy secondary schools in Nigeria. Managers and officers of UAC will also donate their time and knowledge in support of such schools. The company has already extended such support to two Lagos schools-St Finbarr’s College and CMS Grammar School.

A Reverend Father testifying on behalf of St Finbarrs thanked UAC for providing a 150 KVA generator for the school and fully equipping the physics laboratory. In CMS, the company is about to renovate and equip a technical block and they promise to extend the “league” to other legacy schools in Lagos and all over Nigeria. Hopefully soon they’ll get to my alma mater-Igbobi College! Many firms talk about Corporate Social Responsibility, but you get the feeling that for many of them, it simply is a cliché, that they regard as part of “looking good” rather than actually “doing good”. Listening to the passion in Larry Ettah’s voice and demeanour as he spoke about how it was education that gave someone like him the opportunity of becoming CEO of UAC, and how today’s decayed public educational infrastructure threatens to build dynasties of wealth and power on one hand and dynasties of poverty on the other, I suspect he is putting his money where his heart lies. Interestingly as Larry Ettah talks about “doing good”, Umaru Yar’adua speaks about being a “servant leader”. Hmmm.

Wednesday, August 8, 2007

Industry Transformation

Two weeks ago, we discussed FSS 2020 and its ambitious goals of utilising the Nigeria Financial Services Industry (FSI) as the “driver and catalyst” of Nigeria’s dream of being one of the top-twenty global economies by year 2020, while turning the Lekki corridor of Lagos into an international financial centre. We also raised strategic questions about the industry-is there still scope for differentiation in the industry? Are unique competitive positions valuable or indeed possible in the industry, or is competition now solely on the basis of size and perhaps execution? We attempted to answer these and other questions last week, and my personal conclusion was that the increasing homogeneity actually creates room for firms with that intent to differentiate themselves from the rest of the industry.

Actually a few banks already appear determined to remain differentiated-GTBank for instance, with its unique branch designs and ambience, its pioneering successful Eurobond and GDR issues and continuous pursuit of innovation; Ecobank’s transition from seeking to be “the West African Bank” towards a Pan-African vision, its rapid network expansion within and outside Nigeria and its listing on several bourses across West Africa suggest clear strategic intent and intrinsic strengths that may one day prove to be of value; Diamond Bank is in the early stages of carefully creating a unique positioning as SME-friendly, creative and ideas-driven; of course the entity that will emerge out of the merger of IBTC Chartered and Stanbic will have unique strengths both of size and scale-its ability to leverage a large South African balance sheet, and competences-strong investment banking, project finance and retail financial services skills. But as at today, these institutions are not the industry leaders so the value, if any, of their emerging unique positions remain to be seen.

Actually the Nigerian FSI is a classic example of an industry in transformation in which competitive positions at the end may be very different from those at the beginning. Professors Michael E Porter and Jan W Rivkin in their Harvard Business School Technical Note on “Industry Transformation” (9-701-008) assert that “Periods of industry transformation pose great threats and major opportunities to companies. Industry leaders risk being unseated, replaced by underdogs and entrants. Conversely, periods of transformation provide the sparks that launch new companies to leadership status…”

Industry change is usually evolutionary and gradual rather than revolutionary or transformative. As Porter and Rivkin point out, because “An industry is an intricate web of relationships among companies, customers, suppliers, and providers of substitute and complementary goods. Industry structure normally changes relatively slowly. Relationships reinforce one another, and efforts to change any single thing too much meets with resistance from other parties. Power relationships and patterns of rivalry are stable…Change is incremental”. Occasionally however industries transform when “many, related elements of industry structure change simultaneously. Industry structure comes “unfrozen” and relative positions within an industry are shuffled. After the period of transformation, competitive forces may bear little resemblance to those that held sway before.”
The first stage in industry transformation is the Trigger. These can include technology changes; changes in buyer needs, wants or values; or changes in regulation. Of course the transformation of Nigeria’s banking industry is a clear example of one induced by regulation. The transformation of our telecommunications sector was also triggered by a series of regulatory actions-the principal one being the Digital Mobile Licence (DML) auctions of 2001 and subsequently the appointment of a second national operator, the end of GSM exclusivity and the dawn of unified licensing. The trigger for the transformation of football into a big-money business with a global audience was technology-satellite broadcasting and buyer values-a global lifestyle.

The Experimentation stage follows the trigger-a period when “companies engage in a trial-and-error search for a winning formula” not knowing what in the end will prove critical. If we apply this to the banking industry-players build more branches, buy ATMs and invest in cards and electronic commerce, launch new consumer finance products, new technology, expand into Africa, raise additional capital etc-without assurance that those investments will prove profitable. According to Porter and Rivkin, “Risk and lack of information characterize this stage of industry transformation” and alliances and capital are critical in minimizing the risks and shaping the outcomes.

The final stage is Convergence-when many experiments have failed, “dominant designs” (“a handful of successful ways of doing business in the transformed industry”) have emerged, a shake-out occurs and some certainty and stability in industry structure returns. And then the industry returns to normal, slow, incremental, evolutionary change. The practical problem Managers face during periods of industry transformation is what to do about strategy. Isn’t it pointless (or dangerous) adopting strategy when everything is in a state of flux? Isn’t it safer to join in every on-going industry “experiment” rather than betting on the direction of change? Or perhaps shouldn’t the firm just wait and do nothing until it is clear which designs will be dominant instead of risking capital on designs which may later prove to be failures. It is indeed these unspoken dilemmas which may have driven the standardization and homogeneity this article and the two previous ones have alluded to.

I believe the appropriate response to industry change is not less, but more strategy, even though of the tentative, flexible type. Internal strategic capabilities remain important, but the ability to view strategy in an evolutionary rather than static mindset becomes more useful. The focus shifts from current industry conditions to trends, discontinuities and changes. Scenario planning and thinking become more critical and investments in competences rather than just products become more sensible. At times like that, because no one knows for certain which products or services will win in the long run, competences which can be leveraged across product and industry boundaries may prove decisive. Such competences may provide firms the strategic flexibility required to understand emerging patterns, and to respond instinctively and proactively. The firm’s culture and internal configuration also acquire heightened importance in such contexts. In stable industries, advantages to participants from having a culture of teamwork, internal entrepreneurship and resourcefulness may be marginal, but when the industry is rapidly changing, those advantages become significant and their absence, potentially fatal.

Friday, August 3, 2007

Nigerian Banking: Differentiating or Commoditising?

This column proclaims to be about our economy, polity and society, but its centre of gravity has tended to be economics. Last week we returned to that preferred habitat-economy, business and strategy with the article on the Financial Sector Strategy (FSS) 2020. Since November 2006, we have focused largely on politics and governance in recognition of the make or break transition Nigeria was passing through. Business ignores politics at its peril, more so in an ethnic-based, under-developed transition economy like Nigeria. But with Nigeria having negotiated some berthing (admittedly imperfectly) with the election of Yar’adua and various state governors; and with this column having discharged its responsibility-to provide input to policy formulation for the new regime and a “closing report card” for the old-it is time to shift the centre of gravity back to economic issues, for a season.

Last week we closed with posers on the Nigerian Banking sector-“…it does appear that most of the strategic thinking in Nigeria’s financial services is been done not by the operators, but by the regulator while the banks are carrying out homogenous activities dictated by regulator-designed strategies and competing on quantum of capital and execution. Didn’t Michael Porter say that strategy is essentially about uniqueness? Or is the industry passing through a standardization phase in which it is more important strategically to be compatible and compliant rather than differentiated?” I proceed this week to examine these questions and probe issues around on-going developments in Nigerian financial services, from the standpoint of strategy.

The basic premise is that since July 6, 2004 when Professor Charles Soludo launched the ambitious banking consolidation programme, banks in Nigeria appear to have been forced to abandon unique strategic positions in favour of measures designed to secure regulatory compliance and survival. As someone who has closely tracked the evolution of strategic groups in Nigerian banking since 2001, I observed several distinct categories of banks with differing attributes and competitive features. In November 2001 for instance, at a presentation at the Lagos Business School’s Annual Banking Conference I recognized eight active groups which I characterized as legacy, global, entrepreneurial, regional, contender, “careful”, emerging and marginal. By December 2003 however I observed size becoming the predominant measure of competitive demarcation, the industry having appeared to be dividing between two broad categories of institutions-the top-ten (or eleven or twelve) and the rest.

Beyond broad categorizations however there were some institutions who successfully staked out profitable niche positions within the industry. The then IBTC and to a lesser extent FCMB and Lead Merchant Bank had developed strong investment banking competences and reputations. IBTC in particular was a focused and differentiated player who had after over one decade of dogged commitment to its chosen market become accepted as the undisputed leader in its segment and showed no inclination to compete in the broader commercial banking market. Even though it competed in the broader market spectrum, Guaranty Trust Bank on the other hand was also very differentiated. It had (and still has) a strong reputation and brand and was regularly a step ahead of the industry, even though its differential premium was beginning to erode as competition intensified in the industry.

Among the non-indigenous players, Citibank was in a unique competition position. Unlike other foreign-owned banks which were recent entrants, Citi had local knowledge at least in corporate banking where it chose to compete. Its attempt to enter the local commercial market segment had been disastrous and the bank had retreated back to its corporate niche. The legacy banks-First Bank, UBA and Union Bank competed largely on their network, size, relatively low cost deposit structure, perception of safety and their institutional strengths and linkages. In classic Porter analysis of competitive strategy, they were cost leaders and enjoyed scale advantages.

The consolidation exercise appears to have largely eroded these and other distinct competitive positions in Nigerian banking. Since July 2004, most Nigerian Banks have done largely the same things-raise capital, merge with or acquire other institutions, change names, logos or colours, build many branches, buy ATMs and build e-commerce capabilities, increase retail market penetration, establish subsidiaries, go back to raise more money and open branches in West Africa and beyond-such that unique competitive positions are more difficult to sustain. Of course it is simplistic and false to argue that after consolidation, 25 “mega banks” with similar attributes emerged in the industry. The truth is that stronger and weaker institutions remain, but the basis of strength or weakness appears increasingly not to depend on unique or differentiated strategic positions but size-of capital, branch network and balance sheets.

If the above analysis is correct, then it suggests a trend towards homogenization (and perhaps attendant commoditization) in Nigerian banking. IBTC became more of a mainstream commercial bank after merging with Chartered Bank, and is about to be acquired by South Africa’s Standard Bank. The size advantages of the legacy banks have been eroded as others became better capitalized and embarked on rapid branch expansion. GTBank seeks to appeal to a retail audience discarding its previous wholesale commercial banking approach. Across the landscape, differentiation strategies are being abandoned in favour of size. Since everyone is doing the same things, execution and (in the context of a distributive economy like Nigeria), closeness to the political authorities become critical sources of competitive advantage.

If differentiated positions are disappearing and banks are adopting homogenous strategies, commoditization (or at least standardization) may develop. This trend may also be re-enforced if over capacity emerges as banks build overlapping branches, duplicate ATM locations, chase the same markets and acquire capital in excess of current requirements. The classic sequence then is for price competition to ensue, margins to drop, and in the specific context of banking, imprudent loans and transactions to be booked. These sequences will be amplified if the market is not growing or growing slower than the rate of capacity accumulation. There is nothing that suggests that Nigerian banking must follow this sequence, but nothing precludes the possibility. Is this the end of differentiation in Nigerian banking? Certainly not! Paradoxically, as institutions become more and more similar, the opportunity for differentiation increases.
Nigerian Banking: Differentiating or Commoditising?

This column proclaims to be about our economy, polity and society, but its centre of gravity has tended to be economics. Last week we returned to that preferred habitat-economy, business and strategy with the article on the Financial Sector Strategy (FSS) 2020. Since November 2006, we have focused largely on politics and governance in recognition of the make or break transition Nigeria was passing through. Business ignores politics at its peril, more so in an ethnic-based, under-developed transition economy like Nigeria. But with Nigeria having negotiated some berthing (admittedly imperfectly) with the election of Yar’adua and various state governors; and with this column having discharged its responsibility-to provide input to policy formulation for the new regime and a “closing report card” for the old-it is time to shift the centre of gravity back to economic issues, for a season.

Last week we closed with posers on the Nigerian Banking sector-“…it does appear that most of the strategic thinking in Nigeria’s financial services is been done not by the operators, but by the regulator while the banks are carrying out homogenous activities dictated by regulator-designed strategies and competing on quantum of capital and execution. Didn’t Michael Porter say that strategy is essentially about uniqueness? Or is the industry passing through a standardization phase in which it is more important strategically to be compatible and compliant rather than differentiated?” I proceed this week to examine these questions and probe issues around on-going developments in Nigerian financial services, from the standpoint of strategy.

The basic premise is that since July 6, 2004 when Professor Charles Soludo launched the ambitious banking consolidation programme, banks in Nigeria appear to have been forced to abandon unique strategic positions in favour of measures designed to secure regulatory compliance and survival. As someone who has closely tracked the evolution of strategic groups in Nigerian banking since 2001, I observed several distinct categories of banks with differing attributes and competitive features. In November 2001 for instance, at a presentation at the Lagos Business School’s Annual Banking Conference I recognized eight active groups which I characterized as legacy, global, entrepreneurial, regional, contender, “careful”, emerging and marginal. By December 2003 however I observed size becoming the predominant measure of competitive demarcation, the industry having appeared to be dividing between two broad categories of institutions-the top-ten (or eleven or twelve) and the rest.

Beyond broad categorizations however there were some institutions who successfully staked out profitable niche positions within the industry. The then IBTC and to a lesser extent FCMB and Lead Merchant Bank had developed strong investment banking competences and reputations. IBTC in particular was a focused and differentiated player who had after over one decade of dogged commitment to its chosen market become accepted as the undisputed leader in its segment and showed no inclination to compete in the broader commercial banking market. Even though it competed in the broader market spectrum, Guaranty Trust Bank on the other hand was also very differentiated. It had (and still has) a strong reputation and brand and was regularly a step ahead of the industry, even though its differential premium was beginning to erode as competition intensified in the industry.

Among the non-indigenous players, Citibank was in a unique competition position. Unlike other foreign-owned banks which were recent entrants, Citi had local knowledge at least in corporate banking where it chose to compete. Its attempt to enter the local commercial market segment had been disastrous and the bank had retreated back to its corporate niche. The legacy banks-First Bank, UBA and Union Bank competed largely on their network, size, relatively low cost deposit structure, perception of safety and their institutional strengths and linkages. In classic Porter analysis of competitive strategy, they were cost leaders and enjoyed scale advantages.

The consolidation exercise appears to have largely eroded these and other distinct competitive positions in Nigerian banking. Since July 2004, most Nigerian Banks have done largely the same things-raise capital, merge with or acquire other institutions, change names, logos or colours, build many branches, buy ATMs and build e-commerce capabilities, increase retail market penetration, establish subsidiaries, go back to raise more money and open branches in West Africa and beyond-such that unique competitive positions are more difficult to sustain. Of course it is simplistic and false to argue that after consolidation, 25 “mega banks” with similar attributes emerged in the industry. The truth is that stronger and weaker institutions remain, but the basis of strength or weakness appears increasingly not to depend on unique or differentiated strategic positions but size-of capital, branch network and balance sheets.

If the above analysis is correct, then it suggests a trend towards homogenization (and perhaps attendant commoditization) in Nigerian banking. IBTC became more of a mainstream commercial bank after merging with Chartered Bank, and is about to be acquired by South Africa’s Standard Bank. The size advantages of the legacy banks have been eroded as others became better capitalized and embarked on rapid branch expansion. GTBank seeks to appeal to a retail audience discarding its previous wholesale commercial banking approach. Across the landscape, differentiation strategies are being abandoned in favour of size. Since everyone is doing the same things, execution and (in the context of a distributive economy like Nigeria), closeness to the political authorities become critical sources of competitive advantage.

If differentiated positions are disappearing and banks are adopting homogenous strategies, commoditization (or at least standardization) may develop. This trend may also be re-enforced if over capacity emerges as banks build overlapping branches, duplicate ATM locations, chase the same markets and acquire capital in excess of current requirements. The classic sequence then is for price competition to ensue, margins to drop, and in the specific context of banking, imprudent loans and transactions to be booked. These sequences will be amplified if the market is not growing or growing slower than the rate of capacity accumulation. There is nothing that suggests that Nigerian banking must follow this sequence, but nothing precludes the possibility. Is this the end of differentiation in Nigerian banking? Certainly not! Paradoxically, as institutions become more and more similar, the opportunity for differentiation increases.