Banking sector makes transition to global competitiveness

A combination of better regulation, deployment of high-tech applications and a more qualitative approach to corporate risk governance has lifted Nigerian financial institutions to the realm of global competitiveness. UDO ONYEKA writes.

Banking in Nigerian has gone through the usual upheavals that define lasting institutions but the fact is that today, Nigerian banks can now compete favourably with financial institutions in other climes due to a series of adjustments that had been made especially in the regulatory environment over time.

Significantly, the number of banks operating in the country has been prune down over the years with 22 commercial banks in operation including the newest addition, Heritage Bank, which formally commenced operations March 4, 2013. The bank is not new, as it was formerly called Societe Generale Bank of Nigeria, but regained its operating licence in 2010, having had it revoked in 2005, after it failed to recapitalise.

Nigerian banks are now better capitalised, with 18 of the 22 banks having tier 1 capital in excess of N25 billion.

The financial institutions now also have much better corporate governance practices. The massive deployment of top grade information technology manned by highly competent professionals in the sector has tremendously elevated banking practice in the country. Even though there is still room for improvement but there is departure from the past.

The non performing loan ratio for the sector was less than nine per cent as at December 31, 2012, compared to 23 per cent in 2004. The level of financial intermediation has also improved as the banks have enhanced their risks man agement capabilities and intellectual knowhow.

According to the Nigeria Deposit Insurance Corporation, NDIC, 2012 annual report there was no unsound bank in the banking industry as at December 31, 2012. NDIC said out of the 20 banks which level of soundness was examined, the NDIC reported that ten (10) banks were rated sound; nine (9) satisfactory and only one (1) bank was rated marginal. “The banking industry recorded significant improvement in its financial condition and performance in 2012 as revealed by all major financial indicators compared to the previous year.

The banking industry’s total assets grew from N21.89 trillion in 2011 to N24.58 trillion in 2012 (or 10.91 per cent). “Out of the total industry’s assets of N24.58 trillion, total loans and advances stood at N8.15 trillion, representing over 33 per cent (or one-third) of total assets.

Of the banking industry total loans, the sum of N4.48 trillion (or 54.97 per cent ) was extended to the real sector of the economy in 2012 as against N3.88 trillion (or 53.37 per cent) and N3.51 trillion (or 48.95per cent) in 2011 and 2010, respectively”, NDIC report said.

Banks have become more creative in the face of challenging business environment and competition. For instance, the many analysts have said the CBN’s increase of Cash Reserve Requirement, CRR, on public sector deposits to 50 per cent from 12 per cent would challenge the banks to look elsewhere for fund, instead waiting for government funds.

According to a financial analyst Jude Fejokwu, many bank managers have realised that the retail market is where the potential lies. “They aggressively strategising and carrying out their action plans to benefit from the windfall that is expected to emanate from the largely untapped retail market in Nigeria”, Fejokwu said. To bring the sector to the level it is now, where two major reforms, even though the banking industry has gone through series of reforms and changes in the past.

The CBN under the leadership of Professor Charles Chukwuma Soludo as governor in 2004 embarked on an ambitious reform. The thrust of the reform was to increase capital base of banks.

Banks were mandated to shore up their capital base from N2billion to N25 billion and the deadline for compliance was December 25, 2005. This led to the reduction of Nigerian banks from 89 to 25 through mergers and acquisitions, while some were forced to close shops for not been able to recapitalise or merge with another bank.

This reform enabled the 25 banks at the time to reap the benefits of economies of scale. Following the consolidation, notable achievements were recorded in the financial sector. The banks raised N406.4 billion from the capital market. In addition, the process attracted foreign capital inflow of $652 million and £162,000 pound sterling. The liquidity engendered by the inflow of funds into the banks induced interest rate to fall significantly, while an unprecedented 30.8 per cent increase was recorded in lending to the real sector in 2005.

With a higher single obligor limit, Nigerian banks now have a greater potential to finance large value transactions. More banks now have access to credit from foreign banks, while the capital market deepened and consciousness about it increased significantly among the populace. The market became active and total market capitalisation increased markedly.

However, not long after, the global financial and economic crises came in 2007, leading to the collapse of many financial institutions across the globe. The financial crisis reduced the gains made in the Nigerian financial services sector from the banking sector consolidation exercise.

The experience in the industry however, followed global trends. Following from the impact of the global financial crises, a section of the banking industry was badly affected as some banks were in grave condition and faced liquidity problems, owing to their significant exposure to the capital market in the form of margin trading loans, which stood at about N900.0 billion as at end-December 2008.

The amount represented about 12.0 per cent of the aggregate credit of the industry or 31.9 per cent of shareholders’ funds. Furthermore, in the wake of the high oil prices, a section of the industry that was excessively exposed to the oil and gas sector was also badly affected. As at end-December 2008, banks’ total exposure to the oil industry stood at over N754.0 billion, representing over 10.0 per cent of the industry total and over 27.0 per cent of the shareholders’ funds.

The excessive exposures resulted in serious liquidity problems exhibited by some of the banks towards the end of 2008. As part of its liquidity support, the CBN Discount Window was expanded in October 2008 to accommodate money market instrument, such as Bankers’ Acceptances and Commercial Papers.

As at June 2009, the banks’ total commitment under the Expanded Discount Window ,EDW, was over N2,688.84 billion, while the outstanding commitments was over N256.0 billion, most of which was owed by less than half of the banks in operation.

When the CBN closed down the EDW and, in its place, guaranteed inter-bank placements, it was observed that the same banks were the main net-takers under the guarantee arrangement, indicating that they had deep-rooted liquidity problems. Further investigation by the CBN identified eight interdependent factors as the main origin of the crisis in the banking sector. It was against this background that the CBN under the headship of Mallam Sanusi Lamido began a total reform in the financial sector.

Lamido had told journalists at the commencement of the reform in 2009 that it was y to strengthen the industry, protect depositors‘ and creditors‘ funds, safeguard the integrity of the industry and restore public confidence.

In that regard, the CBN replaced the chief executives/executives directors of the banks identified as the source of instability in the industry and injected the sum of N620billion into the banks in an effort to prevent a systemic crisis. Arrangements were also made to recover non-performing loans from banks ‘debtors, while guaranteeing all foreign credits and correspondent banking commitments of the affected banks.

In this regard the CBN established Asset Management Corporation of Nigerian, AMCON. The AMCON as a resolution vehicle has been able to soak the toxic assets of troubled banks, which has reduced the NPLs of banks to the barest minimum. The CBN is also collaborating with the Securities and Exchange Commission, SE and the Nigerian Stock Exchange, NSE, to reduce the cost of transactions particularly bond issuance so as to diversify funding sources away from banks, as well as attract more foreign portfolio investors into the sector.

Efforts are also being intensified towards strengthening regulatory and supervisory framework and enhancing the monitoring of the operations of the Deposit Money Banks, DMBs, to ensure that they remain safe, sound and healthy. To further engender public confidence in the banking system and enhance customer protection, the CBN established the Consumer and Financial Protection Division to provide a platform through which consumers can seek redress. The CBN has also issued a directive to banks to establish Customer Help Desks at their head offices and branches. In addition, the CBN has reviewed the guide to bank charges with a view to making the charges realistic and consumer-friendly.

The CBN has begun close collaboration with other stakeholders like the Nigerian Accounting Standard Board, NASB, Federal Ministry of Finance , Nigeria Deposit Insurance Corporation, Security and Exchange Commission, NAICOM, PENCOM, Federal Inland Revenue Service FIRS, and the Institute of Chartered Accountant of Nigerian ,ICAN, among others, towards ensuring a seamless adoption of IFRS in the Nigerian banking sector by 2012.

The CBN has also reviewed the universal banking Model with a view to refocusing banks to their core mandate. Under the new model, banks are not allowed to invest in non-bank subsidiaries, while banks with such investments are required to either divest or spin-off the businesses to holding companies that will be licensed by the CBN as other financial institutions. The three classes of deposit money banks now operational are: International banks, National banks and Regional banks.

The Ongoing banking reforms has direct bearing on the development of the real sector. It seeks to position the banking system to contribute to the growth and development of various sectors of the economy. Apart from the fact that banks can now finance big ticket project, for instance, in September, Dangote Group and a consortium of 14 banks signed N60 billion multiple loan facilities to support Dangote Industries Limited and the group’s Obajana Cement Plc, the CBN, provided series of intervention funds at concessionary interest rates to priority sectors. Lamido had said at a forum “We have the N200 billion Commercial Agricultural Credit Scheme ,CACS; N300 billion Power and Aviation Intervention Fund ,PAIF, N200 billion Restructuring/Refinancing Fund ,RRF, to the manufacturing Sector/ SME; and N200 billion Small and Medium Scale Enterprises Guarantee Scheme ,SMECGS.”

The evolution of banking in Nigeria pre-dates the nation’s independence. It began with the activities of Elder Dempester and Company Limited of Liverpool, United Kingdom in 1892. Other notable organizations in the early times include the Nigerian Mercantile Bank Limited, Nigerian Farmers and Commercial Bank Limited, British and French Bank (which transformed to UBA) to the era of the Agbonmagbe Bank in 1945 which later transformed to WEMA Bank and African Continental Bank.

However, most of the banks which had operated in Nigeria before independence were plagued by the challenges of poor capital base, incompetent management, stiff competition from foreign competitors and the recession of the 1930s. One important FACTOR which led to such massive bank failures was absence of regulatory framework, thus between 1929 – 1952 has been described as the era of “free” banking.

However, the period from 1952 to 1959 was that of legislation and regulation with the enactment of the Banking Ordinance of 1952 and the establishment of the CBN. The 1958 Central Bank of Nigeria Act charged the Bank with responsibilities which include the issuance legal tender currency, the maintenance of Nigeria’s external reserves to safeguard the external value of the domestic currency, the Promotion of monetary stability and a sound financial system as well as Acting as a banker and financial adviser to the Federal Government This laid the platform for the coordination and regulation of banking activities.

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