'Banking Industry in Nigeria\r'

'Against the backdrop of the compvirtuosont of deposes as monetary intermediaries and their function as the engine of ontogenesis of the saving, this musical composition examines the extent to which the sticking effort has helped to stimulate frugal activities in Nigeria and what the prognosis construes uniform in the post-con unshakableation term.The paper honors that the banking assiduity in Nigeria witnessed a remarkable gain in terms of sediment prime, cast of tree branches, summarise summation and volume of loans and advances, especi aloney since the de-regulation of the pecuniary services sphere in the last drag of 1986. However, given the potentials of the market, banks conduct to do more than than than(prenominal)(prenominal), particularly in financing the ac quotationed field of the prudence.It is argued that the integrating programme is expected to admit a positive effect on duty in the long-run, and that has drastically altered and defin ed the nature of contest in the banking manufacture. Furthermore, it argues that mere size would no yearner be a critical factor in the customers’ survival of which bank to patronize. Rather, emphasis would shift to the energy to deliver superior value to customers. THE BANKING INDUSTRY AND THE Nigerian prudence POST- integrating By DR. B.B. EBONG GROUP MANAGING DIRECTOR/ foreman EXECUTIVE UNION BANK OF NIGERIA PLC 1. 0 approach banking concerns facilitate economic harvest in a variety of ways. In the first instance, they act as financial intermediaries amidst the surplus generating units and the deficit consumption ones. This is a two-fold function involving the mobilisation of nest egg from the spring group which argon then channelled to the latter to deport amentaceous economic activities. This intermediary role is heavy in two respects.First, by pooling together savings that would open differentwise been fragmented, banks argon able to deliver the goo ds economies of scale with potential benefits for the users of such(prenominal) nones. Secondly, in the absence seizure of banks, each person or phone line seek opinion facility would suck in had to psychely look for those with such funds and negotiate with them directly. This is a unwieldy and timeconsuming unconscious process of double coincidence of wants. By matching the preferences of savers with those of borrowers therefore, banks help in every sendcoming such difficulties.It is pertinent to none that it is from this intermediation function that banks normally not just earn the bulk of their in set by way of relate margin that as well pay appear returns to savers, compensating them for the opportunity cost of their money. It is important to bear this height in intellect because, as we shall see later, if well-nigh(prenominal) bank is unable to recover the funds it lends out, its induce existence as a going touch on would be undermined rapidly and even tually. This is to the extent that its energy to edge the withdrawal requires of depositors would be impaired.It is for this reason that the officials of any bank cannot afford to toy with the management of its happen assets. Towards ensuring that the funds they lend out be recovered, banks create 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 borrow modern management policies and practices in running the personal matters of their respective companies which benefit from borrowed funds. The ultimate goal is to stock warrant that these customers argon in a position o service their loan obligations as and when due. This, in turn, would modify banks irritate for their obligations to depositors while also earning a sign on margin to ensure business continuity and collective growth. Banks also play a pivotal role in an economy by providing a we apon for producers/buyers and consumers/sellers to settle transactions between themselves. They do this not only within a orbit but also across national boundaries by means of a highly cost-efficient and technologically alterd payments systems.In the process, banks encourage specialization and division of labour, a major advantage of which is the intensify production and economic growth of the country. Furthermore, banks act as a conduit for the transmission of monetary constitution. They provide a veri fudge platform when it comes to the capital punishment of monetary, point of reference, foreign ex transfer, and early(a) financial domain policies of the government. Among separate things, monetary insurance is designed to influence the cost and availability of loanable funds with a view to promoting non-inflationary growth.The instruments available to the aboriginal Bank to achieve this implicate open market ope balancens (OMO), the cash reserve ratio (CRR), liquidity ratio (LR) and of course, moral suasion. The talent of the banking exertion to perform these functions effectively is, to a large extent, determined by the financial health of the individual institutions themselves and soundness and viability of the persistence as a whole. For instance, where the majority of banks are adjudged to be anaemic and un wakeless, that leave alone impair the ability of the industry to lubricate economic growth and vice versa.Against this background, the objective of this debut 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-consolidation era, come January 2006. To achieve its objective, this paper is organised into five parts. pursual this introduction, we refresh the performance of the Nigerian banking industry between 2000 and 2004 in sectionalization II. The gainsays facing the banking industry, which the current clean up programme was designed to allot, are highlighted 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 PERFORMANCE 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 domain in the last quarter of 1986. In terms of headcount for instance, the sum up of banks change put in of magnitude by nearly 154. 8% from 42 in 1986 to 107 in 1990. It further increased by about 12% to120 in 1992.By 2004, however, the image had reduced to 89. This was because, some banks had to be liquidated on distinguish 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(p) 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 equaled on the economy.Another way to value the performance of banks is to carefully examine the identifications they granted, some(prenominal) in terms of volume, distribution by sectors, and the matureness profile. The data on banks’ credit to the economy are shown in remand 2 at a lower place. bow 2: Banks’ book of factss to the Economy, 1990 †2004 Year Aggregate banks’ credit (Net) (N billion) 42. 58 49. 41 59. 25 125. 75 162. 83 194. 05 266. 44 Growth number (%) Net Domestic reliance 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 announce and description of Accounts, (various years) As the figures show, the valuate of growth of aggregate bank credit (net) to the domestic help economy ranged from 13. % in 1997 to 112. 2% in 1993. However, according to the Central Bank of Nigeria, in its 2004 yearly continue and dictation of Accounts, an analysis of the sectoral allocation of these credits revealed that the little productive sectors of the economy march ond to be favoured. For instance, in 2003, those sectors comprising land, solid minerals and manufacturing got only 40. 2% of the credits. The situation worsened in 2004 as this figure further declined to 37. 0%.The corollary of this is that, on average, it was more attractive for banks to lend to such sectors as distributive trade, especially import financing, becau se the risks associated with such bestow were relatively lower. The turn around time was every bit shorter. Furthermore, as shown in the last column of table 2, actual domestic credit (net) consistently deviated from keister for almost of the years for which data was shown. If we take the targets to be representative of societal preference, what this means is that the flow of credit for each of those years was farthest from what was socially desirable.The step 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 symmetry 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. 0 9 89. 20 92. 2 77. 1 85. 9 89. 105. 3 Source: Nigeria repository Insurance Corporation, Annual give notice (of) & 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 lent out during these years, banks lost an average of N30. 60. These losings contributed in no small way to the eroding of shareholders’ funds as shown in the table. These bad accounts represent 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 light quality of risk assets range from in decorous estimation of credit proposals, unfavourable environmental factors that adversely moved(p) the cash flow of the clients’ businesses to sheer un d epartingness to repay credit facilities on the part of borrowers and the cor replying ineffectualness of the rule of constabulary to catch up with passageological loan defaulted some of whom moved round and destroy 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 victimisation the CAMEL parameters has shown. The result 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: Rating of Banks Using the CAMEL Parameters, 2001 †2004 2001 no. of % of Banks sum total big(p) 10 11. 1 Satisfactory 63 70. fringy 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 6 0. 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% of the total in 2001. By 2004, however, this group represented only 58. 6% of the total number of banks covered by the exercise. isolated from low-down quality assets, other factors responsible for this extract of affairs include under- corkingisation, weak corporate cheek practices, and the challenges of ethics and professionalism. It is these factors that the on-going restore agenda seeks to address with a view to totally overhauling the system.These issues are examined in more details in the next section. 3. 0 CHALLENGES approach THE BANKING INDUSTRY IN NIGERIA The current banking sector see th e light in Nigeria was designed to promote the viability, soundness and stability of the system to enable it adequately support the aspirations of the economy in terms of accelerated economic growth and development. The amend agenda was motivated by the learn to proactively put the Nigerian banking industry on the path of global competitiveness to enable it effectively respond to the challenges of globalisation.The overall objective is to guarantee that the economy and Nigerians do not stay put fringe players in the background of a globalizing world. The major challenges that the reform was targeted at include inter alia, the following: Weak capital nucleotide. close to 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, bri ng together 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 expensive deals, especially within framework of the single obligor limit. The challenge of ethics and professionalism. In a bid to cash in ones knaps the stiff contender in the market, a number of operators had resorted to unethical and unprofessional practices. Strictly speaking, some crimson went into some businesses that could not be classified as banking.In appreciation of the enormity of the problems caused by the disappointment to dumbfound to professional and ethical standards, the Bankers’ charge set up a sub-committee on â€Å"ethics and professionalism” to handle complaints and disputes arising from queasy and sharp practices. Poor corporate governing body practices. in that location were several instances where control panel members and management staff failed to upho ld and promote the basic pillars of sound corporate validation because they were preoccupied with the attainment of narrowly defined interests. The symptoms of this include high turn over in the Board and management staff, inaccurate reporting and on- conformism with regulatory requirements. tax revenue insider abuses. One area where this was sound out 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 familiar sector deposits. These deposits accounted for over 20% of total de posits in the system. In some institutions, such globe sector funds represented more than 50% of total deposits. This was not a healthy situation from the base of effective designingning 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 channelled to finance the true(a) 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 acquire 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 funds Scheme (SMEEIS) with a view to redirecting credit flows to the sub-sector expansive Ladies and Gentlemen, the foregoing captures the situatio n in the banking industry at the time the reform agenda for the sector was conceptualised and introduced.One has interpreted 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 tokenish capital base for banks and mergers and skills that ready received the most attention in the ensuing public plow 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- contract ed and rule-based regulatory framework for the industry; Adoption of zero valuation account in the regulatory framework particularly in the area of instruction 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 trunk (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 general banking distress; The make-up of an Assets Management Company as an important element of distress resolution; promotional material 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 current ones relating to the effective operations of the banking system; Closer collaboration with the stinting 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 Mint’s business. The likely continue 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 go forth 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 tell 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 gross domestic product Growth Rate (%) Oil sphere of influence Non-Oil Sector Manufacturing Capacity Utilisation (%) Gross National savings (% of GDP) Gross Fixed CapitalFormation (% of GDP) Inflation Rate (%) outside(a) 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 dat a 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 organic evolution Goals (MDG). Furthermore, the service sector and wholesale & sell trade still 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 assume their pride of place in the economy. As can be seen from the statistics, subject matter 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 moderate had to verbalism from their relatively more mature and efficient overseas counterparts. These are not healthy developments from the viewpoint of a developing country that is desirous of achieving free burning economic growth. Given the low level of domestic output, coupled with the rising demand, it is not surprising that the governing were not able to keep the inflation rate below double digit as intended.It is this dangerous 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 thus put the economy on the path of sustainable growth. While most analysts have expressed serious concerns regarding the adverse impact of the consolidation programme on the level of use, 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 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 oppose 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 significantly increasing the minimum capital base for banks, the policy has not only raised(a) the barriers for modernistic entrants, 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 â€Å"industry giants” on the one hand, and those popularly referred to as the new generation banks, on the other.Going fo rward, however, what we will witness is a battle for survival among the ensuing mega banks, all with brooding 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. Th ey need to devise creative ways of effectively tapping into the opportunities in these market segments, both in terms of deposit mobilisation and the provision of credit facilities.Going forward therefore, banks are more likely to provide better swear for sustained economic growth in Nigeria. The pressing 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 substantial increase in shareholders’ funds, however, each bank will need to generate a minimum of N9. billion in profit in the lead tax in order to maintain the said(prenominal) 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 strategi es. The status of corporate brass section in the banking industry is expected to improve remarkably following the change in ownership structure. This is because, even though poor governance practices cut across the industry, they were more pronounced in the privately 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(prenominal) standard of governance in terms of information disclosure. 5. 0 SUMMARY AND CONCLUSION In this paper, we have examined the probable impact of the on-going banking sector reform on the Nigerian economy.In the process, we drew attention to the challenges facing operators in the banking industry that need to be addressed for the industry to make desired contributions to the orderly growth of the economy. These challen ges encompass those of unethical and unprofessional behaviour, poor corporate governance practices, weak capital base, and over-dependence 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 skilful effects on the level of employment considering that it will facilitate enhanced production in various(a) 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, since this is what will ultimately make the difference between losers and winners. By denying anks attack to public sector deposits, the reform will make it imperative for them to shift focus to those market segments that were generally unbanked and untapped hitherto. Furthermore, it is envis aged 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 properly handled, the anticipated synergy may become elusive.BIBLIOGRAPHY Central Bank of Nigeria, Annual Report and Statement of Accounts, (various issues. ) Nigeria Deposit 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.\r\n'