The Cost Of Banking Reforms In Nigeria

There has been a wave of banking sector restructuring and consolidation around the globe, predominantly in the developed and the emerging market economies.  This has been driven by globalisation, structural and technological challenges, as well as the integration of financial markets.  Banking sector reforms have become important as financial institutions struggle to become more competitive and elastic to shocks. It is also encouraged by the yearning to reposition corporate operations to manage the hitches of an increasingly international banking system.

The quest to play in the global markets and the concern to guarantee a healthy banking industry by the Central Bank of Nigeria is accentuated by the crucial role of banks in economic development. Thus, banking reform in Nigeria is an integral part of fiscal policies aimed at repositioning the economy to achieve the objectives of becoming one of the 20 largest economies in the world by the year 2020. As part of the vision, the banking sector is expected to effectively play its role in financial intermediation. Through this function, banks promote economic growth and facilitate capital formation. These objectives can only be achieved if there is a sound, stable and healthy banking system. That is why over the years, the sector has witnessed several reforms.

Regulatory Reforms In the Banking Industry
The Nigerian banking system has steadily evolved, following wide and far-reaching restructuring embarked upon by the regulatory authorities. The industry has recorded five distinct phases of reforms which started in 1986 when the industry was deregulated to tolerate significant participation of the private sector. At the time, the sector was subjugated by banks which materialised from the indigenisation programme of the 1970s, with the Federal and state governments having majority stakes. The regulation era of 1993 to 1998, was the aftermath of the profound financial distress. In 1999, the banking sector witnessed the return of liberalisation and the adoption of the universal banking model.

The year 2004 was Chukwuma Soludo’s Banking Reform. He introduced banking sector consolidation which reduced 89 banks to 25 banks. This was expected to correct the structural and operational weaknesses in the system. During this era, a total of ₦406.4 billion was raised from the Nigerian capital market while foreign capital inflow accounted for $652 million invested in the banking sector. Bank consolidation was focused on further liberalisation of banking business; ensuring competition, safety of the industry, and proactively positioning the banks to perform the role of intermediation and playing a catalytic role in economic development.  

The current Lamido Sanusi’s banking reform was triggered by the need to address the combined effects of the global financial and economic crises and a number of domestic issues which include;

  • Banks’ huge exposures to the oil and gas sector.
  • Margin loans (The loan secured against tradable securities purchased by the borrower), which were largely non-performing.
  • Corporate malfeasance.
  • Outright corruption among operators in the system.

The “Sanusi Tsunami” as it was tagged, gave rise to the emergence of Asset Management Corporation of Nigeria (AMCON) in 2010 following the promulgation of its enabling Act by the National Assembly. It is a special purpose vehicle designed to addressing the problem of non-performing loans in the Nigerian banking industry.  In line with its mandate, AMCON acquired the non-performing risk assets of some banks worth over ₦1.7 trillion, which saw the banking industry ratio of non-performing loans to total credit significantly reduced from 35% in November 2010 to 5% as at December 2011.

Prior to the commencement of AMCON’s operations, there was the stress test conducted by a joint team of the Central Bank of Nigeria (CBN) and the Nigerian Deposit Insurance Corporation (NDIC). The test revealed that some banks were in grave financial situations. They were rescued by way of direct CBN intervention. Money was injected into these banks for liquidity support. Management of the affected banks were changed and more efficient hands were hired to run the banks.

Critical Elements of Banking Reforms in Nigeria
Beyond the need to recapitalise the banks, the regulatory reforms also focused on the following:

  • Revision and updating of relevant laws for effective corporate governance and ensuring greater transparency and accountability in the implementation of banking laws and regulations.
  • The introduction of a flexible interest rate based framework that made the monetary policy rate the operating target.
  • Expeditious process for rendition of returns by banks and other financial institutions through electronic Financial Analysis and Surveillance System (e-FASS).
  • Zero tolerance framework for regulatory infractions.
  • Risk-focused and rule-based regulatory framework
  • Strict enforcement of corporate governance principles in banking

With the various measures notwithstanding, there was a need for some intervened banks to merge in order to strengthen their capital base and to remain competitive in the market. Accordingly, Transactions Implementation Agreements (TIAs) were signed among the banks, and the CBN issued a letter of no objection to the banks being acquired to proceed with the merger of the entities. The signing of legally binding TIAs for the banks and the full capitalisation of the three nationalised banks by AMCON had resolved the issue of the combined negative asset value of the eight CBN intervened banks.

However, all these reforms sought to substantially improve the banking sector, strengthen the regulatory and supervisory framework, and address the issue of impaired capital and provision of structured finance through various initiatives, in order to provide cheap credit to the real sector. Surprisingly, this has not deeply reflected in the flow of credit to the real economy, as the growth rate of credit often fluctuate while actual credit did not reflect the proportionate contribution of the sector to the Gross Domestic Product (GDP). For these reforms to attain the desired economic impact, the pervasive corruption in the Nigerian economy and the weak rule of law must also be addressed.

Did The Reforms Have Any Impact In The Sector?
Arguably, it could be said that the reforms have brought about greater confidence in the banking system following some noticeable improvements.

  • With the initial liquidity of about ₦1.7 trillion injected into the banking system through the issuance of AMCON bonds, banks have gradually resumed lending to the private sector.
  • Banks are putting in place best practices in the areas of corporate governance and risk management. Improvement has been recorded in the area of transparency and public disclosure of transactions.
  • A considerable number of banks have improved their balance sheets as they have returned to profit-making path.
  • The Chief Executive Officers of banks can only serve a maximum tenure of 10 years, as a new code of corporate governance has been issued by the Central Bank.
  • Nigerian Banks are now key players in the global financial market with many of them falling within the Top 20 banks in Africa and among Top 1,000 banks in the world.
  • The reform has culminated in moderating the spread between the lending and deposit rates to 9.70% as at end-December 2011, from 12.20% in 2010.
  • Increased widespread use of e-payment services among Nigerians.
  • Innovations in banking products/services delivery.
  • Improvement in technology and globalisation of operations in the industry thereby aiding modernisation of the Nigerian economy.
  • Increased branch network thereby aiding employment of both capital and labour.
  • Better management of the banking/financial sector of the economy.

Challenges To The Banking Reforms
The Nigerian banking reforms, despite its laudable achievements were confronted with certain challenges. These include:

  • Wrong perception of the intent of the reform: The introduction of the new banking model, and in particular, the specialised banking (non-interest banking), is intended to broaden the scope of financial services offered by banks in Nigeria. However, this has been given a religious connotation. The wrong perception and stiff resistance to the policy could potentially deter prospective investors in the industry.
  • The reluctance of Nigerians to accept positive changes in global dynamics: There is incontrovertible evidence that the excessive liquidity in the system measured by broad money (M2), narrow money (M1) and currency in circulation is partly attributable to the high cash transactions for economic activities. This has continued to undermine the efforts to achieve price stability. Yet the cashless policy has faced significant resistance, despite its prospect for economic growth and development and the global trend in the intensity of usage of e-payments.
  • Poor state of infrastructure: The cost of doing business in Nigeria is still high when compared with developed countries and some emerging economies owing to the decay of infrastructure. The 10th edition of Doing Business report series, recently released by the International Finance Corporation (IFC) and the World Bank, ranked Nigeria 131st out of 185 countries surveyed. Some African countries rated ahead of Nigeria include Mauritius, 19; South Africa, 39; Rwanda, 52; Botswana, 59; Ghana, 64; Namibia, 87; and Zambia, 94. The region’s average ranking on the ease of doing business is 140 out of 185. Mauritius and South Africa are the only African economies among the top 40 in the global ranking.
  • The quality of manpower: The competitive financial sector environment requires a highly skilled workforce that would effectively contribute to value creation within financial institutions. Real strategic change can only take place with competent and committed workforce that is constantly exposed to training and development.
  • Poor banking habit in the country: The perceived high growth rates of the financial sector recorded in the last five years have not been inclusive, implying that it has not transcended into sustainable development. This situation is responsible for the high unemployment and poverty levels, which inevitably affect our banking habit.

According to a survey on “Access to Financial Services in Nigeria” carried out recently by Enhancing Financial Innovation & Access (EFInA), less than 21% of the population have bank accounts in contrast with the developed economies where 90-95% citizens have bank accounts. The survey revealed that about 39.2 million Nigerians, representing 46.3% of the adult population are unbanked (financially excluded) while only 25.4 million Nigerians, representing 30% of the adult population are banked.

Cost-Benefit Analysis Of Banking Reforms
The quality of Nigerian banks have been enhanced by enforcing good corporate governance, installing macro-prudential guidelines, and limiting of the tenure of banks’ managing directors and external auditors. The current reform has reversed the policy of universal banking to ensure that banks played within the areas of their strength and curtail their risk appetite.

To ensure the stability of the industry, the CBN has curtailed bank lending to the capital market and the prohibition of banks from using depositors funds for proprietary trading and venture capital investment. The CBN established credit bureau and credit registrars to strengthen credit management system of the banks. Today, the reform is hailed as the only “banking sector intervention or bailout where depositors did not lose their deposits with banks.” There has been improved lending to various sectors of the economy due to enhanced capital base of the consolidated banks.

The AMCON operation that made the balance sheet of banks free of non-performing loans also helped to inject liquidity into the banking sector. Currently, nine Nigerian banks are among the top 1,000 banks in the world.  Lending to the private sector has also increased with non-oil sector acting as the growth driver in a way that the Nigerian economy has remained one of the fastest growing in the world, with the overall GDP growth projected at 7.1% for 2012.

While some of the positive impact of these reforms on our economy is being celebrated, it is expedient that the alternatives forgone are kept in view. We must attempt to evaluate the cost of these reform adventures to the taxpayers to forestall future wasteful escapades.

Financial liberalisation has been a laudable initiative given the extent of financial repression that was prevalent prior to these reforms and its stifling effects on both the financial sector and the economy as a whole. The reforms were intended to ensure a diversified, strong and reliable banking sector which will guarantee the safety of depositors’ money, play active developmental roles in the Nigerian economy, be competent and competitive players in  the African and global financial system.

Nevertheless, as laudable as these reforms were perceived, the question is: were the general public interests served? –Perhaps not the common Nigerians whose deposits were trapped in the defunct banks. The costs imposed on the economy resulting from the inability to secure the release of these funds, gives room for speculation on the basic action plans that went into these programs before they were executed.

It is reckless to assume that reforms will come without costs; however, these costs, if they must come, should not be overwhelming. Unfortunately and as always, it is the ordinary Nigerians who the reforms were supposed to help that are bearing the brunt for failures of planning by the regulatory authorities. It is against this background that the recent moves by the apex bank to restructure the naira generated enormous apprehension of an obvious trip into the vestiges of our uncertain past, where government policies were manoeuvred to suit the interests of a selected few.

It is assumed that the reforms have transformed the financial system into a supply leading sector. Therefore it is expected to unlock and transform the traditional sectors by making technical expertise and large funds available to the real sector. Since the banking sector occupies a critical spot in the economy, we encourage regular but prudent reforms in the system for optimal economic role. However, for the Central Bank to build and maintain a sound and vibrant banking system, there is the need to ensure that its policies are sustained. It should take into cognisance the costs of these reforms and adopt stringent measures to forestall further financial mishap.