In this section,
we will attempt to paint a scenario regarding the probable impact of the
consolidation programme on the banking industry and, hence, the economy. In
doing so, it is important to reiterate that even though the reform agenda is targeted
at the banking industry, its ultimate focus is the Nigerian economy. In view of
this, and in order to put the discussion in proper perspective, we would like
to begin this section with a brief review of the performance of the economy between
2000 and 2004 which data are presented in table 5 hereunder:
Table 5:
Nigeria, Selected Macroeconomic Indicators, 2000 – 2004
Source: Central
Bank of Nigeria, Annual Report and Statement of Accounts, 2004
The data in
table 5 reveal that, in real terms, the rate of growth of domestic output ranged
from 3.5% to 10.2% between year 2000 and 2004. The average annual growth rate
for the period was 5.96%, which falls far short of the 10% minimum that is
required for the country to meet the targets set in the Millennium Development
Goals (MDG). Furthermore, the service sector and wholesale & retail trade
still account for a disproportionate share of total output, considering our
stage of economic development. On the other hand, the real productive sectors like
agriculture and manufacturing are yet to assume their pride of place in the economy.
As can be seen from the statistics, capacity utilisation in the manufacturing sector
was consistently below 50% throughout the five years. Among other things, this
is a reflection of the undue competition that local manufacturers have had to
face from their relatively more mature and efficient overseas counterparts.
These are not healthy developments from the viewpoint of a developing country
that is desirous of achieving sustained economic growth. Given the low level of
domestic output, coupled with the rising demand, it is not surprising that the
authorities were not able to keep the inflation rate below double digit as
intended. It is this parlous state of the economy that the banking sector
reform was designed to address at the end of the day. The expectation is that
the reform programme will impact positively on the banking industry and thus
put the economy on the path of sustainable growth.
While most
analysts have expressed serious concerns regarding the adverse impact of the
consolidation programme on the level of employment, the authorities at the
Central Bank of Nigeria have allayed such fears. While acknowledging that
employment opportunities in the industry would shrink, at least in the short
run, the management of the Bank is optimistic that the long-term positive
effects of the reform programme on the labour market will be more farreaching. The
thrust of the argument is that at the end of the day, the consolidation
programme will lead to a stronger and more robust banking industry that will
adequately support the expansion of economic activities, especially in the real
sectors of the economy. In this process of rejuvenating the economy, more job
opportunities will be created.
The
consolidation programme will drastically alter and redefine the nature of competition
in the banking industry. By significantly increasing the minimum capital base
for banks, the policy has not only raised the barriers for new entrants, it has
also reduced the number of banks in the system through the mergers and acquisitions.
It will be recalled that hitherto, competition in the industry was essentially
between those players that one may safely refer to as the “industry giants” on
the one hand, and those popularly referred to as the new generation banks, on
the other. Going forward, however, what we will witness is a battle for survival
among the ensuing mega banks, all with extensive branch network. In the new
dispensation, stability of individual institutions and, hence, safety of depositors’
funds is not likely to remain a major consideration in customers’ choice of
which bank to patronise. Rather, emphasis will shift to the ability to deliver
superior value to clients and stakeholders generally as well as the prices for
bank products and services.
As pointed out
earlier, many banks in Nigeria had relied heavily on the public sector as a
source of funds. Consequently, they did not aggressively explore available
potentials in other market segments. This situation will, however, change with
the withdrawal of public sector funds from the vaults of banks as part of the
policy shift. We therefore expect that banks will focus more on those sectors
that were hitherto underserved like the real, informal sectors, including the consumer
market. They need to devise creative ways of effectively tapping into the
opportunities in these market segments, both in terms of deposit mobilization and
the provision of credit facilities. Going forward therefore, banks are more likely
to provide better support for sustained economic growth in Nigeria. The
pressure to aggressively explore those market segments that were hitherto underserved
will be reinforced by the desire on the part of the management of each bank to
continue to generate attractive returns to shareholders. Currently, the average
return on invested capital (ROIC) in the Nigerian banking industry is estimated
at 38%. With the substantial increase in shareholders’ funds, however, each
bank will need to generate a minimum of N9.5 billion in profit before tax in order
to maintain the same rate of return. This is a daunting challenge that calls for
creativity. To meet the challenge, banks will need to radically redefine their business
models and strategies.
The status of
corporate governance in the banking industry is expected to improve remarkably
following the change in ownership structure. This is because, even though poor
governance practices cut across the industry, they were more pronounced in the
privately owned institutions. Given the dilution of ownership in the new
dispensation, the situation where individuals and their cronies had overbearing
influence in the running and management of banks will become a
thing of the
past. Moreover, as public companies, each bank will now be subjected to a
higher standard of governance in terms of information disclosure.
BIBLIOGRAPHY
Central Bank of
Nigeria, Annual Report and Statement of Accounts, (various issues.)
Nigeria Deposit
Insurance Corporation, Annual Report and Statement of Accounts, (various
issued)
Mckinnon, R. I.
(1973), Money and Capital in Economic Development Washington, D.C.: The
Brookings Institution.
Oboh, G. A. T.
(2005), Selected Essays On Contemporary Issues In The Nigerian Banking System.
Ibadan: University Press Plc.