The Banking Industry in 2008

The Banking Industry in 2008

For about two decades since the liberalisation of financial services brought about under General Ibrahim Babangida’s Structural Adjustment Programme (SAP), the banking sector has been one of the few sources of growth in Nigeria’s economy. The policy environment under SAP brought about a tripling of the number of banks (from around 40 to almost 120), entailed the deregulation of interest and exchange rates, the licensing of non-bank financial institutions such as mortgage, finance houses and bureaux de change (many of which failed in the atmosphere of acute macro-economic instability and mismanagement in the mid-1990s) and a general change in the atmosphere around Nigerian banking from a laid-back, conservative, and process-focused manual systems to a more entrepreneurial, dynamic, and market-centred automated banking system.

The banking sector benefited from the return to civil rule in 1999, with increase in economic activity in private sector and government business, increased access to international credit and a more stable macro-economic and political environment. But it was the consolidation exercise announced in July 2004 that radically altered the face of the Nigerian banking industry reducing the number of players from 89 to 25 through mergers, acquisitions and liquidations, and stimulating an unprecedented inflow of foreign and domestic capital into the sector. At the end of the consolidation in December 2005, the industry reflected a two-tier industry structure with a top-tier of legacy, global (and regional) and entrepreneurial players who did not have to endure complex post-merger integration and a lower-tier of more marginal institutions.

I thought the imperatives for the industry at the end of consolidation included stronger corporate governance, professional ethics and transparency in financial reporting, stronger regulation, tighter credit standards, regional and continental expansion, putting in place institutional mechanisms for consumer finance (such as credit bureaus, abolishing the Land Use Act, instituting a national identity management system and faster commercial adjudication) and strengthening capacity-human, risk management, information technology and systems and processes-in the industry. I also thought that further consolidation was required in the industry to eliminate the two-tier structure such that the more marginal entities could be acquired by stronger local players or international banks and to guarantee sustainable levels of investment returns.

In the last two years, some of these imperatives have been addressed. But the emphasis in the industry has been a second round of capital raising, rather than further consolidation through mergers and acquisitions. The only notable merger transaction was the IBTC Chartered tie-up with Standard Bank of South Africa, while a prospective deal between Ecobank and Sterling Bank may still be on the cards. Instead the other significant industry development was the CBN rules on acquisition of shares of Nigerian banks by foreign interests. Those guidelines effectively rule out the possibility of a take-over of any of the remaining twenty-four Nigerian banks by foreign banks. The CBN position appears to have evolved from at first suggesting that foreign interests will not be allowed to control our top three…then top ten…, and now none of the existing Nigerian banks.

The Bank justifies this position with the spread (actually lack of it) by the foreign-controlled banks in Nigeria, and their perceived minimal contribution to Nigerian economic development, as well as examples from Singapore and other countries. On the other hand, perhaps the new policy does not do much to advance the CBN’s objective of building an International Financial Centre in Lagos under its FSS 2020 strategy. One could in fact have argued that it may have been in the interest of our financial system if the second tier of banks (say the weakest 10 out of 24) were encouraged to seek strong international mergers or acquisitions, so that they could be strengthened and more international players could be attracted into our market. In any event, the market share of players in this tier could never threaten the CBN’s apparent objective of ensuring local control of our banking sector.

Indeed the argument that foreign banks have shied away from domestic branch expansion and aggressive growth is correct only if the analysis starts from the post-indigenisation era. First Bank (Standard Bank), Union Bank (Barclays Bank), UBA and Afribank (IBWA) and several others were all foreign-owned banks in the days when they expanded their operations all over Nigeria. Perhaps the conservative expansion posture of the successor institutions was a carry-over of the fears generated by nationalization and other institutional weaknesses in the Nigerian economy. The substantive question however is whether the Nigerian economy will benefit in any way from the presence of more international banks, and whether as a nation we should encourage or place impediments in the way of any interested institutions?

What is the outlook for the industry in 2008? Of course all the local banks which have not raised additional capital may have no alternative but to do so, since the capital threshold has now been implicitly raised to around N150 billion. But questions will remain (and may generate heightened attention in the years to come) about the efficiency of the increased capital and assets that the banks now carry and their returns on investment. Some have argued that rather than move towards greater efficiency driven by tighter processes and systems, the industry has actually moved to greater slack as entities, subsidiaries and branches are built and headcount is rapidly increased. It remains to be seen however whether this point will be supported by sector’s performance in future. I still believe the imperatives for the industry are not so different now than in January 2006 when the consolidation exercise was concluded.

Nevertheless the larger financial services industry will continue to deepen with increased specialisation and capacity building in various parts of capital markets activities-pensions and asset management, corporate finance, bonds trading and fixed income securities, real estate and infrastructure financing and hopefully continued expansion in retail financial services. Of course the institutional constraints militating against a boom in retail finance largely remain unaddressed so the astronomical volumes may not yet happen, but the gradual re-emergence of a semblance of a middle class means opportunities continue to exist in that space. I believe the industry should also accelerate the pace of regional and continental expansion before barriers begin to go up against Nigerian banks in African markets. But the serious work remains at home-dealing with governance issues, capacity building, strengthening institutional processes and systems, and improving regulatory oversight.

Agbaje is Senior Consultant/CEO of Resources and Trust Company (RTC), a Strategy, Consultancy and Business Advisory Firm.