‘Why Nigeria needs banking reforms’
By OMODELE ADIGUN
Thursday, March 08, 2012
• Chike-Obi
Recently, the nation’s media were in frenzy with the news of the impending sale of the three nationalized banks – Mainstreet Bank Limited, Keystone Bank Limited and Enterprise Bank Limited, whose history is as familiar as the palm of the hand.
According to the Managing Director/Chief Executive Officer of Asset Management Corporation of Nigeria (AMCON) – the bad bank saddled with the burden of resolving the problems of Non-Performing Loans (NPLs), capital adequacy and liquidity of the banks – Mr. Mustafa Chike-Obi, the process of selling the three banks was to start last month, February.
He explained that the act of disposing of the bridge banks would stretch to a maximum of 18 months. “The process of selling the nationalised banks will start this month. We are going to put out advertisement on how to sell the nationalised banks. We would ensure the process is transparent and runs its course, but the process would take about 12 to 18 months. It is a level playing field, everybody, both local and foreign investors, will have a chance to invest, but the Central Bank of Nigeria (CBN) will have to approve the investors,” he was quoted as saying.
This is cheering news indeed! It is even more heart-warming to note that the apex bank has been able to live up to its promise that none of the rescued banks would be allowed to collapse. This is a feat not easily achievable even by the almighty United States of America (USA) in spite of its long history of banking and finance. To prove this, an example here will suffice. In this new year, 31 banks underwent Mergers and Acquisitions (M&As) within the first two months. And despite that, one -Home Savings of America, Little Falls- was not rescued. It was forced to go under. That scenario never happened in Nigeria since 2009 in spite of the glaring hopeless situation.
This shows that the banking sector reforms, initiated by the present management of the apex bank, are working. The reforms were a response to, not only the devastating impact of the global financial crisis but also, the plethora of problems plaguing the banking sector. These include proven rot occasioned by near total absence of corporate governance in most of the banks, poor corporate governance, overt and undue exposure to both the capital market as well as oil and gas sector, poor risk management practices, inadequate disclosure and transparency about the banks’ financial position.
The kernel of the reforms, as enunciated in the banking Czar’s policy framework, are fourfold: enhancing the quality of banks; establishing financial stability; enabling healthy financial sector and ensuring financial sector contributes to the real sector. Broadly speaking, the establishment of the bad bank is part of the measures and initiatives taken by the CBN to promote the safety, soundness and stability of the banking system. And it is quite gladdening that the bad bank is on track to deliver on its mandates.
Chike-Obi also disclosed that N600 billion bad debts had been recovered from debtors. According to the AMCON boss, the corporation had recovered N100 billion this year. AMCON had previously put the total value of bad debts at N3.14 trillion. ?“We are recovering the debts at a faster rate as expected and our target is to recover N1 trillion this year. About another N2 trillion in debts will be pending to be recovered. Debtors must pay what they owe,” he said.
Road to reforms
It has been a bumpy journey so far for the apex bank on the wonky road to the transformation and sophistication of the financial system. Critics and cynics are many, and challenges are legion. But kudos must be given to whom it is due. The Board of CBN led by Mallam Sanusi Lamido Sanusi must be given a pat on the back for remaining focus and resolute in the face of this terrifying situation.
As the bank itself acknowledged, “the required costs of the expected infrastructural needs of the economy are daunting and remain a major challenge to the financial sector. The need for a low-cost long-term infrastructure financing requires more than what the CBN alone can tackle. Major structural bottlenecks and supply-side constraints, including enabling legal framework have slowed the responsiveness of some of the CBN reform measures.”
To understand this scenario, one needs to take a trip down the memory lane, as they say.
In 2004, CBN embarked on a banking sector consolidation exercise aimed at recapitalising and strengthening the banking system for improved operational efficiency and business capacity. Prior to the banking consolidation, Nigerian banks were generally weak, inefficient and unable to support meaningful economic growth. A surveillance report in 2004 indicated that the number of unsound banks in the system has increased significantly.
The report highlighted the risk of many banks depending on public sector deposits and recourse to CBN discount window for daily liquidity and survival. Generally, beside been grossly undercapitalized, the banking system was characterised by severe weaknesses, including poor corporate governance, poor asset quality, shenanigans, non-compliance to regulatory standards, skewed – oligapolistic market share structure where 10 of the 89 banks control more than 50 per cent of the industry market share, inefficient completion, and lack of capacity to support the real sector of the economy.
Banks’ indebtedness to the CBN continued to rise unsustainably, weaker banks were able to raise fund in the inter-bank market and resort to paying higher interest rates in a bid to attract counter-party funds. The consolidation exercise was, therefore, meant to address these weaknesses through recapitalisation of banks. The required minimum paid-capital of the banks was dramatically increased from N2 billion to N25 billion to improve the capacity of the banks to drive the economic processes effectively. The reforms were also geared towards ensuring minimal reliance on public sector fund, adoption of risk focused and rule-based regulatory framework, accurate and transparent data/information rendition and full disclosure, enforcement of corporate governance principles.
Following the consolidation exercise, the number of banks shrank from 89 banks to 25, through regulatory induced merger and acquisition and to 24 through market-induced merger and acquisition. The bank branches grew from 2,900 in 2005 to almost 5,500 mid-2009. Besides deepening of the capital market, the banks were positioned to actively participate in a wider range of activities, including financing of infrastructure in the oil sector.
However, while the consolidation exercise lasted, the developments that followed posed new challenges to the Nigerian financial system and indeed the banking sector. The increased revenue inflows due to higher oil prices in the years up to 2007 and the increased foreign capital inflows posed a significant demand pressure on the economy as excess liquidity built up unsustainably.
The excess liquidity also encouraged demand pressure on the stock market.And coupled with other ‘insider’ dealings, asset prices rose very sharply. This, coupled with poor risk management practices, ultimately led to a concentration of risky assets in banks portfolio, in particular margin lending and oil sector credit. As at end-December 2008, banks’ total exposure to oil industry stood at over N754billion, representing over 10 per cent of the industry total and over 27 per cent of total shareholders’ funds in the banks.
It was clear, therefore, that when the global financial crisis eventually hit Nigeria, the banking sector was relatively weak to withstand the crisis in spite of the earlier reforms in 2004. Given the exposure of many banks to the stock market and the oil sector, which were most hit by the crisis, the Nigerian banking sector was thrown into severe shock following the impact of the global financial crisis.
As a result of all these, the CBN, in 2009, launched a reform agenda to institute financial system stability and, secondly, to ensure that the financial system contributes to the growth of the real sector of the economy. All these are tailored towards one goal: To see that economic growth translates to job creation, poverty reduction and improved standard of living for the people.
