RECENT BANKING SECTOR REFORMS IN NIGERIA

Bank Consolidation 2004-2009

There has been a wave of restructuring and consolidation of the banking sector around the globe, particularly in the developed and the emerging market economies. This has been driven mainly by globalization, structural and technological changes, as well as the integration of financial markets. Banking sector consolidation has become prominent in most of the emerging markets, as financial institutions strive to become more competitive and resilient to shocks. It is also promoted by the desire to reposition corporate operations to cope with the challenges of an increasingly globalized banking

system. It was based on the above premise that banking sector consolidation, through mergers and acquisitions, was embarked upon in Nigeria from 2004. 

The Bank consolidation was focused on further liberalization of banking business; ensuring competition and safety of the system; and proactively positioning the industry to perform the role of intermediation and playing a catalytic role in economic development. The reform was designed to ensure a diversified, strong and reliable banking sector which will ensure the safety of depositors‘ money, play active developmental roles in the Nigerian economy, and be competent and competitive players in the African, regional and global financial system. Following the banking sector consolidation, notable achievements were recorded in the financial sector among which was the emergence of 25 well capitalized banks from the former 89 banks. The banks raised N406.4 billion from the capital market. In addition, the process attracted foreign capital inflow of US$652 million and £162,000 pound sterling. The liquidity engendered by the inflow of funds into the banks induced interest rate to fall significantly, while an unprecedented 30.8 per cent increase was recorded in lending to the real sector in 2005.

With a higher single obligor limit, Nigerian banks now had a greater potential to finance large value transactions. More banks now have access to credit from foreign banks, while the capital market deepened and consciousness about it increased significantly among the populace. The market became active and total market capitalization increased markedly. Ownership structure has been positively affected such that the problems of insider abuse and corporate governance have been reduced. Depositor confidence has improved due to ―safety in bigness‖ perception by depositors. With virtually all banks now publicly quoted, there is wider regulatory oversight. With the inclusion of the Securities and Exchange Commission and the Nigerian Stock Exchange in the regulatory team, resources have been committed to the regulation of few and more stable banks in an efficient and effective manner. The banks have begun to enjoy economies of scale and, consequently, are passing on the benefit in the form of reduced cost of banking transactions. In general, the reform efforts had engendered stable macroeconomic environment evidenced by low inflation and relative stable exchange rates.

However, not long after, the global financial and economic crises came in 2007, leading to the collapse of many financial institutions across the globe. The financial crisis reduced the gains made in the Nigerian financial services sector from the banking sector consolidation exercise. The experience in the industry however, followed global trends. Following from the impact of the global financial crises, a section of the banking industry was badly affected as some banks were in grave condition and faced liquidity problems, owing to their significant exposure to the capital market in the form of margin trading loans, which stood at about N900.0 billion as at end-December 2008. The amount represented about 12.0 per cent of the aggregate credit of the industry or 31.9 per cent of shareholders‘ funds. Furthermore, in the wake of the high oil prices, a section of the industry that was excessively exposed to the oil and gas sector was also badly affected. As at end-December 2008, banks‘ total exposure to the oil industry stood at over N754.0 billion, representing over 10.0 per cent of the industry total and over 27.0 per cent of the shareholders‘ funds. 

The excessive exposures resulted in serious liquidity problems exhibited by some of the banks towards the end of 2008. As part of its liquidity support, the CBN Discount Window was expanded in October 2008 to accommodate money market instrument, such as Bankers‘ Acceptances and Commercial Papers. As at June 2009, the banks‘ total commitment under the Expanded Discount Window (EDW) was over N2,688.84 billion, while the outstanding commitments was over N256.0 billion, most of which was owed by less than half of the banks in operation. When the CBN closed down the EDW and, in its place, guaranteed inter-bank placements, it was observed that the same banks were the main net-takers under the guarantee arrangement, indicating that they had deep-rooted liquidity problems. Further investigation by the CBN identified eight interdependent factors as the main origin of the crisis in the banking sector.

These include:

 Sudden capital inflows and macro-economic instability

 Poor corporate governance and character failure

 Lack of investor and consumer sophistication

 Inadequate disclosure and lack of transparency

 Critical gaps in regulatory framework and regulation

 Uneven supervision and enforcement

 Weaknesses within the CBN

 Weaknesses in the business environment