In the last two weeks, I have published reflections on the Nigerian banking industry. The first part focussed on issue of strategy vis-a-vis regulation and counselled against the trend for players in the industry to act in a homogenous manner. Last week we examined issues of future structure of regulation in the industry and approaches to resolve current challenges faced by the industry. In both articles, I was merely re-stating arguments that had been expressed on these pages up to two years ago. In these final reflections, I go back even further to an article written immediately after the conclusion of consolidation early in 2006 titled “Banking Consolidation...and then What?”
The arguments I made in that article (which unfortunately were by and large ignored) have been borne out in three short years, to everyone’s regret. I will do no more than quote from that article which started by reminding all concerned that “…simply consolidating the industry will not automatically put an end to all the problems therein. Like they say, it is not yet Uhuru!” I went on to diagnose the pre-consolidation problems of the industry, “…poor corporate governance and weak institutional capacity, low skill levels, weak processes and standardization, weak management information systems, sub-optimal utilization of technology, amongst others-in addition to low capital which recapitalization and consolidation has addressed.” The point being made was that consolidation addressed only one problem-low capital-which of itself did not remove the others!
Indeed in that article I warned about a particular problem which it turns out consolidation did not address but appears to have made worse, the issue of ethics-“…Crucially the concept of who a good banker is has changed from a trained, thinking, careful person of very high integrity to what in effect has become some thing resembling a clever, aggressive, “sharp” and unscrupulous person. Consolidation will not change that! The industry will itself have to redefine what acceptable ethical standards will apply to its staff and the institutions themselves.” I also noted that the transition from capital base of less than N2billion in most cases to over N25billion did not automatically raise the institutions’ capacity to manage at the new level urging “The banks have to develop the required institutional capacity to manage at their new “mega bank” status-at the level of strategy, processes, people development, corporate governance etc. Higher capital levels do not automatically guarantee those.”
The article also focused on more technical concerns which as an erstwhile insider I was aware of, “At the technical level, the banks will have to deal with credit process, credit culture, credit management and credit restructuring and work-out, the standards regarding all of which have deteriorated rather dramatically within the last fifteen years… The industry’s treasury and liquidity management is characterized by rules of thumb and other unscientific decision-making processes, under-the-table practices, and very poor judgment. While the banks have succeeded in using technology to improve operations and service delivery, it is clear that many processes remain outside the purview of technology and management information systems remain inadequate and subject to substantial manual intervention.”
It is these inadequacies that have led to the anguish and pain many of the banks are currently facing with imprudent lending, for instance to capital market loans, based on rules of thumb and subject to little rigour and analysis. I recall that speaking at a NECA seminar in February 2008 (as it turns out days to the beginning of the capital market collapse in March of that year), I mentioned that I thought the capital market was grossly over-valued and may be due for some correction. The bankers in the room vociferously disputed my position, based on no evidence other than “this market cannot fall!”
Finally I also called attention to improvements required in regulation and regulatory capacity, “At the level of the regulators- CBN, NDIC, and SEC, there is also a vast amount of work to be done! The history of the financial sector in fact does not reveal large capitalization as of itself a very enduring indicator of which financial institutions will do well or vice versa. Neither does capital of itself guarantee the long term health and safety of any financial sector. N25 billion can easily be lost in four or five loan transactions. The more sustainable indicators are the quality of corporate governance, ethical and professional standards, skill levels, risk management and compliance, and the robustness of institutional processes and systems. And of course regulatory capacity!”
Today re-reading that article, even I was shocked at how accurate my analysis has turned out to be. If only I was wrong!
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