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BANKING
Nigeria’s big banking purge
John Etkind
Published: 29-MAY-06

In its determination to take its place as Africa’s premier financial centre, Nigeria first had to sweep up the ashes of the Cinderella banks that were cluttering the financial kitchen. In a sudden move that pulled the plug on 13 banks that failed to make new liquidity requirements and forced the merger and acquisition of dozens of others, the Central Bank of Nigeria (CBN) found itself shepherding 25 financial institutions where, just a few months earlier, 95 had been.

In a wide-ranging, often brutal, rationalisation of its financial sector, 13 banks were dumped when they were not able to raise the minimum capital required to continue trading.

The restructuring, referred to in the west African country’s capital markets as “rough, hard and uncompromising”, saw the number of banks slashed from 89 in mid-2004 to just 25 through shutdown, acquisitions and mergers. The new rationalisation called for minimum capital reserves 12 times the previous level – from 2bn naira to 25bn (about $16,5mn to $200mn) make the grade.

The consolidation of the sector was aimed at creating “economies of scale to reduce the cost of doing business and enhance competitiveness locally and internationally”, said a statement from CBN. “The Bank wishes to state that it is very conscious of the challenges that lie ahead as a result of the consolidation.” Apart from resolving the distressed institutions, the recapitalisation of the 25 banks that have emerged is only the first step towards Nigeria realising its potential as Africa’s premier financial centre.”

The resizing of the banking industry resulted in a massive injection of new investment into the Nigerian Stock Exchange and doubled the size of the banking sector on the Lagos bourse.

The turnaround, now in its 20th month, was launched by NCB governor, Charles Soludo, on a 13-plan platform designed to overhaul a financial sector he acknowledged was suffering from cronyism, corruption and inadequate capacity to cater for the country’s development demands.

“There was a poor corporate governance culture in the banking sector and a very weak capital base. If we wanted to leapfrog the process we needed to do something fundamentally different.”

The Nigerian government sees the financial sector as a way out of the stranglehold oil has on its economy. Accounting for more than 90 percent of foreign earnings and some 41 percent of GDP, oil pervades the economy. The wells currently pump out 2,5 million barrels and day, and this will increase to over 4 million in just two years from now.

The upshot is a grossly under-exploited mineral wealth and three-quarters of its arable land lying fallow.

“A stronger financial sector is the key to diversification,” says one merchant banker. “As our oil business grows, mineral extraction and agriculture must grow twice as fast. And let’s not forget the technology sector. Aggressive diversification will take money, lots of it, and that can only be raised on capital markets that function, are transparent and trusted and respected around the world.”

That’s exactly what Soludo has in mind. Topping the list of what needs to be fixed are improving the transparency of reporting in the sector, zero tolerance on corruption and stricter measures against money laundering.

Soludo has trained his sights on recapitalisation.

The measure has already started to pay dividends with signs that interest non-oil projects might not be as fanciful as first feared.

“We’ve had $2,5bn worth of new investment in the sector,” he reports. ”External investment is about $500mn and internal about $2bn. That is the largest single investment in the non-oil sector of the economy within the period of one year in our country’s history.”

It all comes down to the unearthing of huge amounts of idle income looking for an investment home. “The banking sector reforms provided people with the confidence to bring their money out from under the mattresses,” Soludo believes.

Disclosing that the rush of interest had resulted in a doubling to 50 percent of banking’s share of market capitalisation on the NSE, Soludo says, “It goes to show that Nigeria’s capital market can be much deeper than it is today, if only you had a lot more companies going public to raise money.”

In a frank appraisal of its problems, the CBN identified a number of weaknesses in the Nigerian financial sector:

The inability to guide against unethical actions of Commercial banks in the areas of money laundering, such as inter-bank forex exchange fraud;

The inability to curb the current rising inflationary rate in the country;

The lack of effective regulatory measures that led to high lending rates imposed by commercial banks on their customers;

The lack of capacity to effectively execute government economic policies;

Failure to promote and encourage Nigerians to invest in Small and Medium-Scale Enterprises by not giving enough incentives; The inability to monitor the skyrocketing foreign exchange rate in the country; The inability to promote a saving culture among Nigerians which could have helped the nations capital base; Inability to tap into the Information Technology super highway of e-banking and e-commerce, a major prerequisite for the country to partake in the globalisation.

The return to democracy after decades of military dictatorship also led to the central bank autonomy and “this is reflected in its aggressive drive to build a savings regime, encourage foreign investment through attractive enabling environments and policies and, above all, in the facilitation of good conduct of monetary and fiscal policies for ensuring macroeconomic stability and stable governance”.

The central bank also promises significant investment in information technology, and points to steps already with the implementation of Universal Banking. “The CBN took the bull by the horns, by restructuring and re-engineering financial business processes to enhance effectiveness, efficiency and productivity.” What Soludo intends is to stop the rot that has afflicted the country in past years.

“The agenda is a proactive and pre-emptive measure to prevent a systematic crisis and collapse of the banking industry, and permanently stop the boom or bust cycles that have characterised the industry.”

Encouraging things are happening, evidenced by a high-profile deal between Standard Trust Bank and the United Bank for Africa aimed at creating the largest financial institution in Nigeria. Numerous other merger deals have been agreed. Soludo says the number of institutions that cleared the minimum capital hurdle is encouraging, leading to positive responses both from inside the industry and from elsewhere, notably foreign investors and donors.

The CBN is now looking at Nigerian post-merger banking scenarios with plans for mandatory risk management measures to ensure continued stability and fostering a general climate of transparency and accountability.

Soludo believes the measures will reduce the potential for bank failures, a problem that has dogged the country in the past.

This article was first published in Business in Africa Magazine, April 2006. To subscribe click here