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 globalization. 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.
BIBLIOGRAPHY
Central Bank of Nigeria, Annual Report and Statement of Accounts, (various issues.)
Nigeria Deposit Insurance Corporation, Annual Report and Statement of Accounts, (various issued)
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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