The current
banking sector reform in Nigeria was designed to promote the viability,
soundness and stability of the system to enable it adequately meet the aspirations
of the economy in terms of accelerated economic growth and development. The
reform agenda was motivated by the need to proactively put the Nigerian banking
industry on the path of global competitiveness to enable it effectively respond
to the challenges of globalisation. The overall objective is to guarantee that
the economy and Nigerians do not remain fringe players in the context of a
globalizing world.
The major
challenges that the reform was targeted at include inter alia, the following:
· Weak
capital base. Most banks in Nigeria had a capital base that was less than US$10
million while the largest bank in the country had a capital base of about
US$240 million. This compared unfavourably with the situation in Malaysia where
the smallest bank had a capital base of US$526 million. The small size of most
local banks, coupled with their high overheads and operating expenses, has
negative implications for the cost of intermediation. It also meant that they
could not effectively participate in big-ticket deals, especially within
framework of the single obligor limit.
· The
challenge of ethics and professionalism. In a bid to survive the stiff competition
in the market, a number of operators had resorted to unethical and
unprofessional practices. Strictly speaking, some even went into some businesses
that could not be classified as banking. In appreciation of the enormity of the
problems caused by the failure to adhere to professional and ethical standards,
the Bankers’ Committee set up a sub-committee on “ethics and professionalism”
to handle complaints and disputes arising from unwholesome and sharp practices.
· Poor
corporate governance practices. There were several instances where Board
members and management staff failed to uphold and promote the basic pillars of sound
corporate governance because they were preoccupied with the attainment of
narrowly defined interests. The symptoms of this included high turnover in the
Board and management staff, inaccurate reporting and non-compliance with
regulatory requirements.
·
Gross
insider abuses. One area where this was pronounced was the credit function. As
a result, there were several cases of huge non-performing insider-related
credits.
· Insolvency.
The magnitude of non-performing risk assets was such that it had eroded the
shareholders’ funds of a number of banks. For instance, according to the 2004
NDIC Annual Report, the ratio of non-performing credit to shareholders’ funds
deteriorated from 90% in 2003 to 105% in 2004. This meant that the
shareholders’ funds had been completely wiped out industry-wide by the
non-performing credit portfolio.
·
Over-reliance
on public sector deposits. These deposits accounted for over 20% of total
deposits in the system. In some institutions, such public sector funds
represented more than 50% of total deposits. This was not a healthy situation
from the viewpoint of effective planning and plan implementation, given the
volatile nature of these deposits.
·
On
account of the huge reliance on public sector funds, a number of players did
not pay adequate attention to small savers who normally constitute a major
source of stable funds which should be channeled to finance the real sectors.
Instead, they concentrated on a few high networth individuals, government
parastatals and blue chip companies. It was in response to this situation
coupled with the need to accord the small and medium enterprises sub-sector the
priority it deserves that the Bankers’ Committee came up with the Small and
Medium Enterprises Equity Investment Scheme (SMEEIS) with a view to redirecting
credit flows to the sub-sector
Distinguished
Ladies and Gentlemen, the foregoing captures the situation in the banking
industry at the time the reform agenda for the sector was conceptualized and introduced.
One has taken time to highlight the challenges that the industry was grappling
with to enable us better appreciate the rationale for the reform in terms of what
it is intended to achieve. Even though the consolidation programme has thirteen
basic elements, it is those relating to the minimum capital base for banks and
mergers and acquisitions that have received the most attention in the ensuing
public discourse on the subject. In the light of this, it might be useful to
enumerate these elements, more so that they are at the centre of this discussion.
These planks of the reform programme are:
_ Increase in
the minimum capital base of banks from N2 billion to N25 billion with December
31, 2005 as deadline for compliance;
* Consolidation
of banks through mergers and acquisitions;
* Phased withdrawal
of public sector funds from banks, beginning from July, 2004;
* Adoption of a
risk-focused and rule-based regulatory framework for the industry;
* Adoption of
zero tolerance in the regulatory framework particularly in the area of information
rendition/reporting. All returns by any bank must now be signed by the Managing
Director;
* The automation
of the process for rendition of returns by banks and other financial
institutions through the electronic Financial Analysis and Surveillance System
(e-FASS);
* Establishment
of a hotline and confidential internet address to enable Nigerians wishing to
share confidential information with the Governor of the Central Bank of Nigeria
to do so;
* Strict
enforcement of the contingency planning framework for systemic banking distress;
* The
establishment of an Assets Management Company as an important element of distress
resolution;
* Promotion of
the enforcement of dormant laws, especially those relating to the
issuance of dud
cheques and the law relating to the vicarious liabilities of the
Board members of
banks in cases of bank failure;
* Revision and
updating of relevant laws, and drafting of new ones relating to the
effective
operations of the banking system;
* Closer
collaboration with the Economic and Financial Crimes Commission in the establishment
of the Financial Intelligence Unit and the enforcement of the antimony laundering
and other economic crimes measures; and
* Rehabilitation
and effective management of the Mint to meet the security printing needs of Nigeria,
including the banking system which constitutes over 90% of the Mint’s business.
The likely impact of these measures on the banking industry and the economy are
examined in the next section.