Against the backdrop of the role of banks as financial intermediaries and their function as the engine of growth of the economy, this paper examines the extent to which the banking industry has helped to stimulate economic activities in Nigeria and what the prognosis looks like in the post-consolidation era.
The paper notes that the banking industry in Nigeria witnessed a remarkable growth in terms of deposit base, number of branches, total asset and volume of loans and advances, especially since the de-regulation of the financial services sector in the last quarter of 1986. However, given the potentials of the market, banks need to do more, particularly in financing the real sector of the economy.
It is argued that the consolidation programme is expected to have a positive effect on employment in the long-run, and that has drastically altered and redefined the nature of competition in the banking industry. Furthermore, it argues that mere size would no longer be a critical factor in the customers’ choice of which bank to patronize. Rather, emphasis would shift to the ability to deliver superior value to customers. THE BANKING INDUSTRY AND THE NIGERIAN ECONOMY POST-CONSOLIDATION By DR. B.
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B. EBONG GROUP MANAGING DIRECTOR/CHIEF EXECUTIVE UNION BANK OF NIGERIA PLC 1. 0 INTRODUCTION Banks facilitate economic growth in a variety of ways. In the first instance, they act as financial intermediaries between the surplus generating units and the deficit spending ones. This is a two-fold function involving the mobilisation of savings from the former group which are then channelled to the latter to support productive economic activities. This intermediary role is important in two respects.
First, by pooling together savings that would have otherwise been fragmented, banks are able to achieve economies of scale with potential benefits for the users of such funds. Secondly, in the absence of banks, each person or business seeking credit facility would have had to individually look for those with such funds and negotiate with them directly. This is a cumbersome and timeconsuming process of double coincidence of wants. By matching the preferences of savers with those of borrowers therefore, banks help in overcoming such difficulties.
It is pertinent to note that it is from this intermediation function that banks normally not only earn the bulk of their income by way of interest margin but also pay out returns to savers, compensating them for the opportunity cost of their money. It is important to bear this point in mind because, as we shall see later, if any bank is unable to recover the funds it lends out, its own existence as a going concern would be undermined rapidly and ultimately. This is to the extent that its ability to meet the withdrawal needs of depositors would be impaired.
It is for this reason that the officials of any bank cannot afford to toy with the management of its risk assets. Towards ensuring that the funds they lend out are recovered, banks have found it expedient to provide business advisory services to their customers. The essence of availing their clients these services is to assure themselves that the beneficiaries adopt modern management policies and practices in running the affairs of their respective companies which benefit from borrowed funds. The ultimate goal is to guarantee that these customers are in a position o service their loan obligations as and when due. This, in turn, would enable banks meet their obligations to depositors while also earning a narrow margin to ensure business continuity and corporate growth. Banks also play a pivotal role in an economy by providing a mechanism for producers/buyers and consumers/sellers to settle transactions between themselves. They do this not only within a country but also across national boundaries through a highly efficient and technologically enabled payments systems.
In the process, banks encourage specialisation and division of labour, a major advantage of which is the enhanced production and economic growth of the country. Furthermore, banks act as a conduit for the transmission of monetary policy. They provide a veritable platform when it comes to the implementation of monetary, credit, foreign exchange, and other financial sector policies of the government. Among other things, monetary policy is designed to influence the cost and availability of loanable funds with a view to promoting non-inflationary growth.
The instruments available to the Central Bank to achieve this include open market operations (OMO), the cash reserve ratio (CRR), liquidity ratio (LR) and of course, moral suasion. The capacity of the banking industry to perform these functions effectively is, to a large extent, determined by the financial health of the individual institutions themselves and soundness and viability of the industry as a whole. For instance, where the majority of banks are adjudged to be weak and unhealthy, that will impair the ability of the industry to lubricate economic growth and vice versa.
Against this background, the objective of this presentation is to examine the extent to which the banking industry has helped to stimulate economic activities in Nigeria and what the prognosis looks like in the post-consolidation era, come January 2006. To achieve its objective, this paper is organised into five parts. Following this introduction, we review the performance of the Nigerian banking industry between 2000 and 2004 in section II. The challenges facing the banking industry, which the current reform programme was designed to address, are highlighted in section III.
In section IV, we present the prognosis and outlook during the post-consolidation era while section V contains the concluding remarks. 2. 0 THE PERFORMANCE OF THE NIGERIAN BANKING INDUSTRY IN 1990 – 2004 PERIOD. The banking industry in Nigeria has witnessed a remarkable growth, especially since the de-regulation of the financial services sector in the last quarter of 1986. In terms of headcount for instance, the number of banks increased by about 154. 8% from 42 in 1986 to 107 in 1990. It further increased by about 12% to120 in 1992.
By 2004, however, the number had reduced to 89. This was because, some banks had to be liquidated on account of their dwindling fortunes. The number of bank branches also rose from 1,394 in 1986 to 2,013 in 1990, 2,391 in1992 and by 2004 in spite of the reduction in number of banks, it had reached 3,100. This translates to an inter-temporal increases of 44%, 18. 8% and 29. 7%, respectively. Given this scenario, the pertinent question agitating the critical mind is the extent to which the expansion in the number of banks and their branch network had impacted on the economy.
Another way to evaluate the performance of banks is to carefully examine the credits they granted, both in terms of volume, distribution by sectors, and the maturity profile. The data on banks’ credit to the economy are shown in table 2 below. Table 2: Banks’ Credits to the Economy, 1990 – 2004 Year Aggregate banks’ credit (Net) (N billion) 42. 58 49. 41 59. 25 125. 75 162. 83 194. 05 266. 44 Growth rate (%) Net Domestic Credit Target (%) 13. 5 10. 6 13. 2 17. 5 9. 4 11. 3 12. 0 Actual (%) 17. 1 45. 3 69. 1 91. 4 29. 2 7. -23. 4 1990 1991 1992 1993 1994 1995 1996 16 19. 9 112. 2 29. 5 19. 2 37. 3 1997 1998 1999 2000 2001 2002 2003 2004 302. 31 378. 08 608. 44 807. 01 1,033. 64 1,302. 2 1,591. 2 2,078. 1 13. 5 25. 1 60. 1 32. 6 28. 1 26. 0 22. 2 30. 6 24. 8 24. 5 18. 3 27. 8 15. 8 57. 9 25. 7 24. 5 -2. 8 46. 8 30. 0 -25. 3 79. 9 64. 6 29. 1 12. 0 Source: Central Bank of Nigeria, Annual Report and Statement of Accounts, (various years) As the figures show, the rate of growth of aggregate bank credit (net) to the domestic economy ranged from 13. % in 1997 to 112. 2% in 1993. However, according to the Central Bank of Nigeria, in its 2004 Annual Report and Statement of Accounts, an analysis of the sectoral allocation of these credits revealed that the less productive sectors of the economy continued to be favoured. For instance, in 2003, those sectors comprising agriculture, solid minerals and manufacturing got only 40. 2% of the credits. The situation worsened in 2004 as this figure further declined to 37. 0%.
The corollary of this is that, on average, it was more attractive for banks to lend to such sectors as distributive trade, especially import financing, because the risks associated with such lending were relatively lower. The turn around time was equally shorter. Furthermore, as shown in the last column of table 2, actual domestic credit (net) consistently deviated from target for most of the years for which data was shown. If we take the targets to be representative of societal preference, what this means is that the flow of credit for each of those years was far from what was socially desirable.
The quality of these risk assets has worsened progressively since 2002 as the statistics in table 3 demonstrate graphically. Table 3: Asset Quality of Nigerian Banks, 1990 – 2004 Year Ratio of non-Performing Credit to total Credit (%) Ratio of non-Performing Credit to Shareholders’ Funds (%) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 44. 10 39. 00 45. 00 41. 00 43. 00 32. 90 33. 90 25. 81 19. 35 21. 5 16. 9 21. 3 21. 6 23. 08 344. 00 222. 00 299. 00 380. 86 567. 70 496. 00 419. 80 253. 09 89. 20 92. 2 77. 1 85. 9 89. 105. 3 Source: Nigeria Deposit Insurance Corporation, Annual Report & Statement of Accounts, Various Issues The data in table 3 reveal that the ratio of non-performing credit to total credit declined from 45% in 1992 to 23. 08% in 2004. This means that of every N100. 00 lent out during these years, banks lost an average of N30. 60. These losses contributed in no small way to the erosion of shareholders’ funds as shown in the table. These bad accounts represented 567. 7%, 419. 8% and 105. 3% of shareholders’ funds in 1994, 1996 and 2004, respectively.
In deed, in the years 1990 to 1997, the shareholders’ funds had been impaired by non-performing risk assets in several multiples. The factors responsible for the poor quality of risk assets range from inadequate appraisal of credit proposals, unfavourable environmental factors that adversely affected the cash flow of the clients’ businesses to sheer unwillingness to repay credit facilities on the part of borrowers and the corresponding ineffectiveness of the rule of law to catch up with pathological loan defaulted some of whom moved round and ravaged one bank after the other.
The deterioration in the quality of banks’ risk assets took its toll on the health of the industry as the outcome of the rating of all licensed banks by the Central Bank of Nigeria using the CAMEL parameters has shown. The result of that exercise, which is reproduced in table 4 below, has shown glaringly that the performance of banks in the country has deteriorated since 2001. Table 4: Rating of Banks Using the CAMEL Parameters, 2001 – 2004 2001 No. of % of Banks Total Sound 10 11. 1 Satisfactory 63 70. Marginal 8 8. 9 Unsound 9 10. 0 Total 90 100. 0 Category 2002 No. of Banks 13 54 13 10 90 2003 No. of Banks 11 53 14 9 87 2004 No. of % of Banks Total 10 11. 5 51 58. 6 16 18. 4 10 11. 5 87 100. 0 % of Total 14. 4 60. 1 14. 4 11. 1 100. 0 % of Total 12. 6 60. 9 16. 1 10. 4 100. 0 Source: Central Bank of Nigeria, Annual Report and Statement of Accounts, 2004 From the table above, it can be seen that the banks adjudged to be sound was consistently less than 15% of the total number for the four-year period.
In addition, those whose performance was considered satisfactory represented as high as 70% of the total in 2001. By 2004, however, this group represented only 58. 6% of the total number of banks covered by the exercise. Apart from poor quality assets, other factors responsible for this state of affairs include under-capitalisation, weak corporate governance practices, and the challenges of ethics and professionalism. It is these factors that the on-going reform agenda seeks to address with a view to totally overhauling the system.
These issues are examined in more details in the next section. 3. 0 CHALLENGES FACING THE BANKING INDUSTRY IN NIGERIA 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 turn over in the Board and management staff, inaccurate reporting and on-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 channelled 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 conceptualised 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 antimoney 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. 4. 0 ANTICIPATED IMPACT OF THE CONSOLIDATION PROGRAMME ON THE BANKING INDUSTRY AND THE NIGERIAN ECONOMY 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 Indicator Real GDP Growth Rate (%) Oil Sector Non-Oil Sector Manufacturing Capacity Utilisation (%) Gross National Savings (% of GDP) Gross Fixed Capital
Formation (% of GDP) Inflation Rate (%) External Reserves (US $ million) 2000 5. 4 2001 4. 6 2002 3. 5 2003 10. 2 2004 6. 1 11. 3 2. 9 5. 2 4. 3 -5. 7 7. 9 23. 9 4. 5 3. 3 7. 5 36. 1 39. 6 44. 3 45. 6 45. 0 NA 11. 3 15. 6 13. 6 15. 3 7. 3 7. 2 9. 1 12. 0 16. 2 6. 9 9,910. 4 18. 9 10,415. 6 12. 9 7,681. 1 14. 0 7,467. 8 15. 0 16,955. 0 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. 6%, 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 far- reaching. 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 mobilisation 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. 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. 5. 0 SUMMARY AND CONCLUSION In this paper, we have examined the probable impact of the on-going banking sector reform on the Nigerian economy.
In the process, we drew attention to the challenges facing operators in the banking industry that need to be addressed for the industry to make desired contributions to the orderly growth of the economy. These challenges encompass those of unethical and unprofessional behaviour, poor corporate governance practices, weak capital base, and over-dependence on public sector deposits. From the analysis, it is clear that the consolidation programme will impact positively on the economy for a number of reasons.
First, the development is expected to have long-term beneficial effects on the level of employment considering that it will facilitate enhanced production in diverse sectors of the economy. The reform programme will also redefine the nature of competition in the banking industry such that each institution will have no choice but to assign priority to its capacity to deliver superior value to its clients, since this is what will ultimately make the difference between losers and winners. By denying anks access to public sector deposits, the reform will make it imperative for them to shift focus to those market segments that were largely unbanked and untapped hitherto. Furthermore, it is envisaged that the consolidation programme will have salutary effects on corporate governance practices in the industry. In concluding this discussion, it is important to reiterate that the realisation of these outcomes would depend on the effective implementation of the programme. In particular, it would depend on how the banks that have embraced mergers and acquisition handle the post integration challenges that will face them.
Where these issues are nor properly handled, the anticipated synergy may become elusive.
BIBLIOGRAPHY Central Bank of Nigeria, Annual Report and Statement of Accounts, (various issues. ) Nigeria Deposit Insurance Corporation, Annual Report and Accounts, (various issued) Statement of 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.
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