Bank Consolidation 2004-2009
There
has been a wave of restructuring and consolidation of the banking sector around
the globe, particularly in the developed and the emerging market economies.
This has been driven mainly by globalization, structural and technological
changes, as well as the integration of financial markets. Banking sector
consolidation has become prominent in most of the emerging markets, as financial
institutions strive to become more competitive and resilient to shocks. It is also
promoted by the desire to reposition corporate operations to cope with the challenges
of an increasingly globalized banking
system. It was based on the above premise
that banking sector consolidation, through mergers and acquisitions, was
embarked upon in Nigeria from 2004.
The Bank consolidation was focused on
further liberalization of banking business; ensuring competition and safety of
the system; and proactively positioning the industry to perform the role of
intermediation and playing a catalytic role in economic development. The reform
was designed to ensure a diversified, strong and reliable banking sector which
will ensure the safety of depositors‘ money, play active developmental roles in
the Nigerian economy, and be competent and competitive players in the African,
regional and global financial system. Following the banking sector
consolidation, notable achievements were recorded in the financial sector among
which was the emergence of 25 well capitalized banks from the former 89 banks. The
banks raised N406.4 billion from the capital market. In addition, the process
attracted foreign capital inflow of US$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 had 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
capitalization increased markedly. Ownership structure has been positively
affected such that the problems of insider abuse and corporate governance have
been reduced. Depositor confidence has improved due to ―safety in bigness‖
perception by depositors. With virtually all banks now publicly quoted, there
is wider regulatory oversight. With the inclusion of the Securities and Exchange
Commission and the Nigerian Stock Exchange in the regulatory team, resources
have been committed to the regulation of few and more stable banks in an
efficient and effective manner. The banks have begun to enjoy economies of
scale and, consequently, are passing on the benefit in the form of reduced cost
of banking transactions. In general, the reform efforts had engendered stable
macroeconomic environment evidenced by low inflation and relative stable
exchange rates.
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.
These
include:
Sudden capital inflows and macro-economic instability
Poor corporate governance and character failure
Lack of investor and consumer sophistication
Inadequate disclosure and lack of transparency
Critical gaps in regulatory framework and regulation
Uneven supervision and enforcement
Weaknesses within the CBN
Weaknesses in the business environment