Nigeria Banking Update

The Central Bank of Nigeria (CBN) has set fresh hurdles for foreign banks desirous of merging with or acquiring any of the existing local banks in the country.Under the new regulation being considered, any foreign bank coming into the country to take a banking licence and wants to merge with or acquire any of the local banks must have operated in Nigeria for a minimum of five years and if a group of foreign institutions decides to invest in any of the local banks, the aggregate investment must not be more than 10 per cent of the latter’s total capital.
In a situation where a single foreign investor invests in a local bank, such investment may not exceed the holding of the largest Nigerian shareholder.Also, to qualify for merger or acquisition of any of Nigeria’s local banks, the foreign bank must have achieved a spread of two-thirds of the states of the federation. This, in a nutshell, means that the foreign bank must have branches in at least 24 out of the 36 states of the federation.

With this development, the two foreign banks in the country, Standard Chartered Bank and Nigeria International Bank – excluding Stanbic Bank which has since coalesced with IBTC Chartered Bank – are not qualified to acquire directly or through their parent company any bank in Nigeria.While Standard Chartered Bank and Nigeria International Bank, which opened shop in Nigeria in 1999 and 1983, have scaled the first hurdle (having operated in Nigeria for a minimum of five years), they, however, do not have the requisite number of branches. Standard Chartered Bank has just 12 branches, while Nigeria International Bank has 13.

The banking watchdog would soon launch a new framework on foreign ownership of Nigerian banks.Soludo who spoke at the “Nigeria Meets the World Summit” organised by THISDAY, had hinted that owing to growing foreign interest in the Nigerian banking sector, the apex bank would soon roll out a framework that would restrict foreign ownership of banks in the country.“We are coming up with something pretty soon. We will work out a framework on the issue of the structure for our banks whereby we shall be a bit reluctant towards foreigners taking over our top ten local banks which constitute about 71 per cent of the banking sector,”

He said foreign investors preferring to invest in existing banks with the structures and branches in place could only do so in smaller banks that do not make up the top ten.Justifying the need to roll out a new framework at the 11th edition of a seminar organised for finance correspondents and business editors in Enugu last November, Soludo noted that foreign ownership of local banks had drawn back Nigeria’s economic development.He explained that the decision of the CBN was premised on what it had observed in terms of the relationship between ownership and control of the nation’s financial system and economic development.

He clarified the issue by saying that we had repeatedly said we are limiting foreign ownership in banks. We are currently working on the policy and before the end of the year, we will come up with a clear policy. It does not have much to do with corporate governance but has to do with the empirical evidence about the relationship between ownership and control of the financial system and economic development of a nation especially at the level of our own economic development,” he had said.

He explained then that the Central Bank was not preventing foreign banks from investing in the economy, stressing that what the regulatory authorities would not allow was the acquisition of any local bank.“Foreign banks are allowed to come into Nigeria and set up shops. If they meet the N25 billion requirement, we will give them a fresh licence but if they want to take over some of the existing ones, we will be reluctant to do so,” he had said.

Inter-bank offer rates (NIBOR) were on the increase last week inspite of the statutory allocation for the month of December by the Federal Allocation Account Committee (FAAC).
But the FSDH Weekly attributed the tightness in the market to huge withdrawals amounting to N187.40 billion from the system.Analysts say they anticipate that the tightness in the market during the week may ease as maturing bills worth about N34 billion and the effect of the December allocation from the Federal Allocation Account Committee (FAAC) are expected to be felt more in the system.Consequently, we expect inter-bank rates to drop marginally during the week," said FSDH.

The 7-day NIBOR increased throughout the week, in spite of the December allocation, to close at 10.33 percent, from the previous week's figure of 8.92 percent.The 90-day NIBOR on the other hand, dipped marginally towards the end of the week, closing the week at 13.10 percent, from the previous week's figure of 13.13 percent.At the 91-day Treasury bill auction, a total of N5 billion worth of bill was offered, N4.18 billion was subscribed, and total allotment was N4.18 billion at a discount rate of 8.5 percent, a 9basis point increase from the previous week's rate of 7.6 percent. A total of N5billion worth of matured bills was repaid into the system; this resulted in a total inflow of N815million into the system.At the 182-day Treasury bill auction, the CBN offered a total of N100 billion worth of bills, while they sold N100 billion. A total of N4.87 billion worth of bills was initially allotted, while N95.34billion was underwritten by Money Market Dealers (MMDs). The discount rate applied was 8.75 percent up by five basis point from the previous week's figure of 8.25 percent. A total of N10 billion worth of matured bills was repaid into the system. This led to a total outflow of N90 billion from the system.

At the secondary segment of the government securities market, bills worth N115billion with tenor days ranging from 48-318days were offered. Out of which a total of N16.5 billion worth of bills was initially allotted while a total of N98.5 billion was underwritten by MMDs. A total of N17 billion matured bills was repaid, leading to a total outflow of N98 billion from this segment of the market.The bills were issued at discount rates ranging from 8.50 percent to 9.93 percent from the previous week's range of 7.50 percent to 8.50 percent.

There was no action at the foreign exchange auctions last week, probably due to the public holiday declared during the week by the Federal government. The marginal rate in the sale of the foreign exchange was N116.80/$1 same as the previous week. The value of the naira remained stable in the parallel and official markets while it depreciated marginally in the inter-bank market. In the parallel and official markets, the value of the naira stood at N120/$1 and N116.80/$1 same as the previous week's figures respectively. In the inter-bank market, the value of naira depreciated very marginally by 1kobo to close the week at N118.09/$1 from the previous week's figure of N118.08/$1.

At the foreign exchange market, it is expected that the value of naira will continue its steady appreciation as a result of the county's favourable balance of payment position, and the lower demand pressure on foreign exchange as a result of the yuletide season.

The community banks according to the CBN, were discovered to have closed shop and consequently, are to be liquidated. It would be recalled that the federal government launched the micro finance and regulatory policy for Nigeria on December 15, 2005.

The new policy created two categories of micro finance banks - MFBs licenced to operate as unit banks and MFBs licenced to operate within the four walls in a state. Community banks were therefore given 24 months to recapitalise and convert to MFBs in line with the conversion requirements of the CBN. As the deadline for conversion lapsed, and the affected CBs failed to forward the necessary statutory returns to the apex bank as earlier directed, the CBN had issued what it called "last warning "To the chairmen and directors of the failed CBs to within 21 working days from the date the first request was made, make the returns to the appropriate quarter in CBN.The returns information, which should be provided by the CBs as at the last date of their operation, should cover:
• statement of the assets and liabilities;
• comprehensive and verifiable list of depositors showing their name, addresses and the amounts in their favour;
• list of all debtors including their addresses and the amount owed to the CBs; and
• list of its assets (movable and fixed).
Out of the 750 CBs, which operated in the country hitherto now, only 407 have successfully transformed and registered by the CBN as MFBs.

Analysis on the proportion of failure by state wise in the country reveals that Ebonyi and Zamfara states recorded the least number of one each, followed by Niger, Kaduna and sokoto states having two failures each. The highest number of 14 failures each occurred in Edo and Delta states. This failure figures do not however represent equal levels in each state of the federation as there are clearly some states with less than 10 and others with more than 120 community banks prior to CBN conversion policy deadline.

Meanwhile, this last request by CBN serves as the last warning to all chairmen and directors of the affected CBs as failure to respond appropriately within the specified period shall make them liable for persecution in the court of law.

Often the critical roles which banks play in fostering economic development does not seem to be appreciated and this would explain why you do not see too many reviews of the developments in the banking sector as part of the usual end of year reviews. But yet banking should be the lubricant which oils the wheel of economic progress. If there are any complaints, if there are any surprises; it would be the fact that banks appear to thrive while the rest of the economy is in a tail spin. Witness the huge profits which banks have been declaring defying happenings else where in the economy. It would also appear that developments with the regular banks have captured the centre stage while momentous development in the other segments of the financial sector in being treated with scant regard. No one seems to be talking about the important developments with Community Banks ( CBs ) which are expected to convert to Micro Finance Banks by the end of December, 2007.

The Central Bank has served notice of its intention to publish the names of all CBs that have obtained either provisional approvals or final licenses as microfinance banks by December 31, 2007. It is reported that 145 community banks have ceased operating across the country and the CBN has asked such banks to remit to it the statement of their assets and liabilities, comprehensive and verifiable list of depositors and a list of all debtors which is a tall order of a request as most of the affected CBs have stopped operations many years back. The affected banks are in the throes of having their operating licenses effectively withdraw. It would be recalled that when the CBN introduced the Microfinance Policy on December 15, 2007 that it specifically targeted the micro and small scale businesses which are marginalized from the perspective of their ability to access institutional credit from the regular banks and if we appreciate the importance and impact of this category of businesses for the development of an economy particularly for an economy with a large informal sector like Nigeria, the developments in this connection would easily qualify as a major and momentous one for the economy in the year under review.

The other major developments at the level of the regulatory institution that is worthy of mention in this review would be attempts made to restructure the national currency. First was the introduction of coins to complement the currency structure and the experiment with alternative quality of paper for the production of the notes to explore the possibilities of underwriting their greater durability. The coins are yet to make the desired entry as there are not too many coins seen in circulation. I recall that in a paper I did after the introduction of the coins, I did observe that the coins would be used if we adopt an approach which would make their use based on specific needs, i.e. if we can configure vending machines, and sundry other payments such as payment of charges for packing at car parks that would be accessed based on the use of coins. There is no way the banks will have the clout to compel any customers to accept coins otherwise! The other development was the land breaking attempt at currency redenomination. Unfortunately the Country was denied the benefit of that experiment which for all you know could have had salutary effects on the economy particularly from the perspective of making the Naira the currency of reference in the west Africa sub region. One is not oblivious of the enormous challenges this could have entailed but we must accept that often limits and ceilings are imposed by our collective aspiration and imagination. After all the banking consolidation exercise which today has many fathers was vehemently opposed on introduction and but for the political support could have been aborted at birth! As I argued then in the paper a published following the announcement of the redenomination scheme; if Ghana could introduce currency redenomination successfully, why not Nigeria? I think that a kiss of death has been administered to this policy and I am not one so naÔve as to talk about its suspension.

The other development worthy of mention is the endless return to the Stock Exchange by banks to recapitalize. It would be recalled that following the arguments which raged post consolidation that most of us argued that regulatory mandated recapitalization might appear an aberration, it was what was actually needed at the particular point in our banking experience and that after that further recapitalization would be market induced. This prediction has been borne out today. It is true that the CBN dangled a carrot before banks by indicating that banks with minimum level of capitalization, the equivalent of one billion dollars would be allowed to partner with the CBN in managing the nationís foreign reserves. But even if that was not the case competitive pressure would have ensured that this trend was experienced. The consolidation exercise would seem to have leveled the playing field for the banks. But the fact remains that in the public mind such leveling has not really occurred. Witness the unprecedented development with regard to the recapitalization outing of the First Bank of Nigeria whereby for the rights issue the over subscription was of the order of 140 per cent and for the public offer it was of a whopping 750 per cent. Evidence of the face, if any was ever needed that public confidence is still very much reposed in the Elephant! The First Bank also did something unprecedented as it resolved and announced its decision to pay interests on an annualized rate of 5 per cent over an identified period of time. It must be observed here that there are some bogus claims by the banks regarding their performance. In my limited experience as a shareholder of some of the banks; they claim to pay dividends but I never get to receive them in the manner promised to support such claimed payments!

But it has not been smooth sailing with some of the post consolidation banks. Some of the problem cases have been duly advertised with all the muck. For instance, the Sterling Bank development which is now under interim management is a case in point. But some of the untoward happenings you get to hear through the grapevine. Some people who are still closet antagonists of the Central Bank for its capital offense of recapitalization which has pulled the rug from under their feet and taken them off their comfort zones came out blazing on all fours with all the base sentiments in full display. I just wondered how people thought such a massive exercise which was done within a tight schedule could have been prosecuted without glitches. One of the major surprises of this development has been the surprise depth which the capital market has shown even if one has heard of some sharp practices in this regard. There were also some banks which made passionate attempts to increase their size through the process of mergers. While some successes have been recorded in this connection; the most notable of this is the Stanbic Bank/IBTC merger. There were some glaring failures such as the much touted Eco Bank/ First Bank merger. The banks have now embarked on aggressive network expansion. There is hardly any nook and cranny of the country you will not find bank branches. Some of the banks have been quite aggressive in this regard and have recorded significant presence. One of the most aggressive in this regard as every one would attest is Zenith Bank. There has also been a considerable attempt made at leveraging on automation to augment the quality of service offering. Unfortunately there have been some negative developments with the operations of ATMs. We hear some of the banks have been casualties of fraud and that is some instances some customers who have tried to use their cards without success have had their accounts erroneously debited. The banks have also been quite aggressive in floating subsidiaries. Most banks now operate as financial supermarkets. Some of the advertisements have also been quite catchy and creative. So also the payoff lines; “in your best interest” “you are welcome” etc. I hope the CBN has not abandoned its statutory responsibility of vetting some of the ads that make claims which one feels should be substantiated in the interest of the banking public. We hope that as progress is made with driving the rate of increase in the rate of inflation downwards that it would reflect in cascading level of interest rates for the greater health, growth and development of the national economy.

By Boniface Chizea