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.