Banking Industry in Nigeria

Against the backdrop of the mathematical function of confides as pecuniary intermediaries and their function as the engine of development of the scrimping, this typography examines the extent to which the banking application has helped to stimulate stinting activities in Nigeria and what the prognosis looks like in the post-con satisfyingation era.The paper postings that the banking industriousness in Nigeria witnessed a remarkable growth in terms of deposit base, look of branches, total asset and volume of loans and advances, peculiarly since the de-regulation of the pecuniary services heavens in the last quarter of 1986. However, given the potentials of the market, banks contend to do more, particularly in financing the solid sector of the economy.It is argued that the integrating platform is expressed to surrender a positive effect on employment in the long-run, and that has drastically altered and redefined the nature of competition in the banking constancy. Furthermore, it argues that mere size would no longer be a critical factor in the customers choice of which bank to patronize. Rather, focus would shift to the ability to deliver superordinate word value to customers. THE BANKING INDUSTRY AND THE Nigerian ECONOMY POST-CONSOLIDATION By DR. B.B. EBONG GROUP MANAGING DIRECTOR/CHIEF EXECUTIVE UNION BANK OF NIGERIA PLC 1. 0 launch intrusts facilitate frugal growth in a variety of ways. In the first instance, they act as financial intermediaries among the surplus generating units and the deficit spending whizs. 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 frugal activities. This intermediary role is alpha in two respects.First, by pooling together savings that would have otherwise been fragmented, banks are able to win economies of scale with potential benefits for the users of such coin. Secondly, in the absence of banks, e ach person or business desire credit facility would have had to individually look for those with such property and negotiate with them directly. This is a ungainly and snipconsuming process of twin coincidence of wants. By matching the preferences of savers with those of borrowers therefore, banks help in overcoming such difficulties.It is pertinent to n unrivalled that it is from this intermediation function that banks normally not only earn the bulk of their in stick with by way of have-to doe with margin but excessively pay out returns to savers, compensating them for the opportunity cost of their money. It is important to bear this stop consonant in brain because, as we shall see later, if each bank is unable to recover the currency it lends out, its stimulate existence as a going concern would be undermined rapidly and ultimately. This is to the extent that its ability to congruous the withdrawal needs of depositors would be impaired.It is for this reason that th e officials of any bank cannot afford to toy with the instruction of its guess 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 commission policies and practices in running the personal matters 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 determine their obligations to depositors while also earning a peg down margin to ensure business continuity and corpo value growth. deposes 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 nation al boundaries through a richlyly efficient and technologically enabled payments systems.In the process, banks encourage specialisation and division of labour, a major advantage of which is the compound production and economic growth of the country. Furthermore, banks act as a conduit for the transmission of monetary policy. They provide a veri slacken 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 ope proportionalityns (OMO), the notes reserve ratio (CRR), liquidity ratio (LR) and of course, moral suasion. The capacity of the banking constancy to perform these functions effectively is, to a large extent, determined by the financial health of the individual innovations themselves and soundness and viability of the industry as a whole. For instance, where the majority of banks are adjudged to be rickety and unhealthy, that pass on impair the ability of the industry to lubricate economic growth and vice versa.Against this background, the objective of this initiation 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- desegregation 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 atom II. The challenges facing the banking industry, which the current reform programme was designed to address, are high schoollighted 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 PERFORM ANCE 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 takings of banks increase by near 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, approximately 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 valu ate the performance of banks is to carefully examine the credits they granted, both in terms of volume, distribution by sectors, and the adulthood profile. The data on banks credit to the economy are shown in table 2 below. Table 2 Banks reference books to the Economy, 1990 2004 Year Aggregate banks credit (Net) (N million) 42. 58 49. 41 59. 25 125. 75 162. 83 194. 05 266. 44 branch 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, yearbook state and disceptation of Accounts, (various years) As the figures show, the rate of growth of aggregate ba nk 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 discontinueed that the less productive sectors of the economy continued to be favoured. For instance, in 2003, those sectors comp wage hike agriculture, solid minerals and manufacturing got only 40. 2% of the credits. The land site worsened in 2004 as this figure further declined to 37. 0%.The corollary of this is that, on average, it was more lovely for banks to lend to such sectors as distributive trade, especially import financing, because the dangers associated with such alter were comparatively 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 b e 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 fictitious character 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 induct forward 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 ad d 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 ridiculous property 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 chemical formula 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 essence 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 paygrade 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% o f 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- not bad(p)isation, weak incarnate governance practices, and the challenges of morality and headmasterism. 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 enlarge in the succeeding(a) section. 3. 0 CHALLENGES FACING THE BANKING INDUSTRY IN NIGERIA The current banking sector reform in Nigeria was designed to set up 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 challen ges of globalisation.The boilersuit 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 cap 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 note 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 austere competition in the market, a number of operators had resorted to unethical and unprofessional pr actices. 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 needlelike 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. taxation insider abuses. mavin area where this was pronounced was the credit function. As a result, there were several cases of coarse non-performing insider-related credits. Insolvency. The magni tude 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 existence 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 wariness to small savers who normally constitute a major source of stable funds which should be channelled to pay the real sectors.Instead, they concentrate d 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 precedent 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 trillion 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, bring forthning 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 interpretation/reporting. All returns by any bank must outright be signed by the Managing DirectorThe automation of the process for rendition of returns by banks and other financial institutions through the electronic Financial Analysis and Surveillance System (e-FASS) substantiation of a hotline and confidential internet address to enable Nigerians wishing to share confidential i nformation with the regulator 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 resolutionPromotion of the enforcement of hibernating(a) 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 change and updating of relevant laws, and drafting of new ones relating to the effective operations of the banking system Closer collaboration with the scotch and Financial Crimes Commission in the establishment of the Financial Intelligence Unit and the enforcement of the antimoney laundering and other economic crimes measures andRehabilitation and effective management of the Mint to meet the security printing needs of Nigeria, including the banking system which constitutes over 90% of the Mints business. The likely imp act 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 CapitalFormation (% of GDP) Inflati on 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 put away 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 assum e 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 evolution 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 hence put the economy on the path of sustainable growth. While most analysts have expressed atrocious co ncerns 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 importantly increasing the minimum capital base for banks, the policy has not only raised the barriers for new entr ants, 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 excerpt 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 productive ways of effectively tapping into the opportunities in these market segments, both in terms of deposit mobilisation and the furnish 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 positive increase i n 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 monomania structure. This is because, even though poor governance practices cut across the industry, they were more pronounced in the in camera 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 unofficial AND CONCLUSION In this paper, we have examined th e probable impact of the on-going banking sector reform on the Nigerian economy.In the process, we pull attention to the challenges facing operators in the banking industry that need to be addressed for the industry to make craved 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- guessence 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, s ince 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 justly handled, the anticipated synergy may become elusive.BIBLIOGRAPHY Central Bank of Nigeria, Annual Report and Statement of Accounts, (various issues. ) Nigeria cook 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.