This week I am thinking a lot about the financial services sector. I consider myself somewhat of a stakeholder in that sector and appreciate the need to rein in fear and scaremongering that appears to be growing concerning the state of things in the sector. Unfortunately in the absence of information and transparency, concerns about the financial sector spread and if not assuaged develop into a freezing of the inter-bank system and on the part of investors and depositors a flight to (real or perceived) safety. The proper response is transparency and full disclosure about the condition of individual banks instead of hoarding information which raises fear and may precipitate an unnecessary systemic crisis. But first I am forced to reflect again on some of the things that I have written in this column in the past.
On July 25, 2007 in an article on the so-called FSS 2020 I wrote, “…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?” The very next week I examined the same questions further in another article titled “Nigerian Banking: Differentiating or Commoditizing” (August 1, 2007)
In that piece I wrote “…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. 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…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…”
I find it amusing that the Central Bank which has de facto assumed responsibility for the strategies implemented by banks is now turning around in the face of difficult times to divert the blame to the banks. It is curious for instance that the bank is blaming deposit money banks for over-publicity, a trend of which the regulator is arguably guiltier. But the more important point the entire industry will have to internalize is the fact that there is a difference between regulation and strategy. Regulation is based on industry-wide standards and common principles, but the objective of strategy is, or should be uniqueness which means each institution must craft its own strategy based on institutional intent, values and peculiarities.
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