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    Consolidating The Banking Sector Reforms in Nigeria. - 3

    Uploaded by

    undeckedsadiq
    consolidation

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    © All Rights Reserved
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    of 7
    Wi Paspacneson ster dlorgeneOnepmanin Ngee Chapter 9: Costing Road Crashes in Nigeria and the Need for Further Research ~ Tunde Arosanyin 140 Chapter 10: Estimating the Rate of Absolute Poverty for National Development Gafar Yaiya 164 Chapter 11: Trends and s racture of Employment and Wages ~ Abdullateet Usras: Chapter 12: Globalization and the Challenges of Desolopment = Noah Chapter 13: Prospacts¢ ~doseph 2 Chapter 14: Globalization sat she Performance of Banks =Lukman Adam 215 Chapter 15: Banking Sector Reform and Bank ‘Consolidation: Challenges and Prospect, ~ Ibrahim Abdullahi 228 (Chapter 16:Consolidating the Banking Sector Reforms “Abdulrasheed Abdulraheem 239 Chapter 17: Small and Medium Scale Enterprises: ‘A Synopsis of Informal Financing Sources ~Abideen Adewale 250 Chapter 18 Public Private Partnerships in the Provi of infrastructural Facilities Chapter 19: Census Delineation Bxercise and Suecessful Head-Count =Yusuf Ahmed 279 Chapter 20: Industrializtion and Undedevelopernt = Attah Ech 295 Certs wth Chapter 21: An Overview of Developments in Health. Care Administration, 1960 ~ 2005 Solomon Adebola 308 so Mosith nao 1 Sint Adopemi : pee were on ad a Fin, Religie: fie a the Chapter 25: Narcotic Devg Abus : Index uth sor £238, Proetisen atin sg &Dompnantin get Entornet Ezra in, stronger and globally competitive enough to play developmental roles in the Nigeria economy and beyond and resinforce the confidence of all stakeholders in the industry. finde al Organizations, ‘ello, ¥.A (2005). “Banking System Consolidation in Nigeria end Some ‘Regional Expiene: Challenge and Prospect’ In Banking Sector Reforms and Bank Consolidation in Nigeria. Abia: CBN 29(2): Berges Allen, becca S, Domsitz and ES, Philip 1999). “The Consolidation ofthe Financial Servies Industry: Causes, Consequences and Implicatns forthe Failures." Journal of Banking and Finance 23:90-137 Borger, AN. (1998) "The Eficioncy Baer of Bank Morgrs and Acquisition: ‘A Preliminary Lookat the 1900s Data" In Bank Mergoeand Acquisition, ‘Amitud Y. and G, Miler, (os) Amsterdam: Kluwere Academie Publishers. ‘Berger, A.N. (2000). "The Integration af the Financial Services Industry ‘Where are the Efficiensies” FEDS Paper No, 26 Central Bank of Nigeria (2008). Banking Soctor Consolidation: Social Tneentivs to encourage weaker Banks (Press Release, CBN, April 1). ‘Deccan, H. (2004). “New Banking Rferms to Focus on Consolidation” New Delhi DHNs (wen deeeanherald.com) Do Nicolo, Giami (2008), “Bank Consolidation Intermationalizatin and Conglomeration: Trends and Implications for Financial Risk. MP Working Paper 0158, ‘Gyargy, 5.2001). "Banking Sectar Reform in Hungary: Lessons Learned ‘Current Trond and Prospects" In Current lasues in Emerging Market eonomies, Organized by the Croatian National Bank Journal International Monctary Fund, (2001). “Financial Sectar Consolidation in Emorging Markets" Chapter Vin International Capital Market Report Donal JM. and J.S. Garry Washington: IMP. ‘Odufu, L1. (2006), “Challenges of Banking Soctor Reforms as Bank ‘Consolidation in Nigeria." In Banking Seotor Reforms and Bank (Consolidation in Nigeria, A Publication of Contral Bank of Nigoria, 2922 ‘Udhend,O.A (2005) "Banking Seca Reforma and Bank Canseliation: The ‘Malaysia Experience "in Banking Sector Reformsand Bank Consolidation in Nigeria. Abuja: CBN 282) Chapter 16 is theo tag ed + inculeating be: cb 4 mobilizing savis ge “or © channelling reso cso from eurplus “1 the collapse of many indigenous banks, With the full ape: oa of the ordinence {in 1955, all the mushroom banks established «co 1945 collapsed except three. However, the period also witnessed the enactment of the Banking Ordinance of 1958, which led to the establishment of the Central Bank of Nigeria (CBN). The bani: began operation on July 1, 1959. independence in 1960 till date. This era can be described as the ra of intensive banking regulation, especially 1960-1985. The ra witnessed the indigeniaation of Nigerian banking and the ‘enactment of the Nigerian Enterprises Promotion Decrees (1972 and 1977). However, the banking sector became over-regulated in an attempt to ensure that the industry, which had hitherto operated with little or no regulation, was controlled to avoid the mistakes of the banking boom and doom of the late 1940s and early 1950s respectively. It was also intended to minimize the distortions associated with the over-regulation, especially with regard to interest rates and exchange rate management. Consequently, some reform measures were introduced in 1986 under the Structural Adjustment Programme (SAP) which characterized the deregulation era of the banking industry. 242. PespcsenNaton lrg Dnata Ngo Eniormora Earn Deregulation here refers to the policy aimed at rationalix regulation through removal or mitigation of unnecessary ef fashioned regulations that foster ineflicioncy, thereby enhansng cficoncy and stability in the banking soctor (Ojo, 1994), ‘This is whore liberalization entails the provision of en appropsite legal and regulatory framework for effective privete-cosse participation in the economy {CBN, 2001] which is o ensure exfty of and stimulate publie confidence in the banking industry. This ra also witnesed the establishment of the Nigeria Deposit Insurance Corporation [NDIC} in 1988 which has the responsiility of insuring all licensed banks. The reform made provision for payment to depositors in failed banks up to a maximum of NS, (000.00 as insured depasit. This has recently heen gazzatted at N20, 000 awaiting the approval of relevant authorities. However, on January 1, 2001, the Nigerian banking industry also took a giant stride with the adoption of the Universal Banking System. The Universal Banking System refers to the ability of one firm or organization to provide a full range of financial services, including the products of commercial banks, investment banks and insurance companies (Chizea, 2000) Within the concept of globalization, deregulation and liberalization, the preference would be for a system that permits unfettered choice which removes the rigid distinction between banks (CBN, 2005). ‘This process, according to Bzirim & Muoghalu (2004), has accumulatively led to the villagization of the globe. ‘Thus, with the adoption of Universal Banking, the dichotomy between coramercial and merchant banking was removed in 2001 (CBN, 2001), On July 6, 2004, the CBN Governor in his address titled “Consolidating the Nigerian Banking Industry to meet the Development Challenges of the 21st Century,” which was delivered at the special meeting of the Bankers’ Committee in Abuja, announce @ reform agenda which, according to the address, is to ‘consolidate and build upon the achievements of the sector, ‘especially in the last 10 years to take the system to a greater contig ta Bing Secorlams 243 Fame andes tn fllwing to pase fom fama, 2005) ‘The first phase is to strengthen and consolidate the banking stem. 1 The second phase » ineluding # progr + Megional and unit 44 The “major policy a = requirement that the "2 ‘Tpuvld be N26 billion wish 41: December 2006. ‘he various regulation processes that Pkg scorn Nigeria inc tT 6 i ord 39 ) The Indigenization Decrees of 1972 <4 127 G BRe Sreetare Adjustment Progra, 2086 fi) Establishment of the NDIC, 1988 {f) Commencement of Universal Banking, 2002 {9 Bank Consolidation, 2005, Way Reforms in Nigerian Banks ; deter, simply pot, implies improvement on the prevailing ‘alone nee orally brought about by series of policy driven tee ot eared tawards eliminating waste and attaining tisency (Kslawole, 2000. Tenkingrefoms ac, therfore, viewed by «school of ought Rankng eer ervntion in conor aces Te inking Seams orem cr eel cnatons ea one See (eel and im hon under pes en, fo rrr rol elcome tats decison ax helms This reason, however, varies from country to country. For aie eee emtng ser in the Yugoslav esonemy Was a oe aes elon a ve banking seer that ome i tay terol of ttoredati and provide Te nil srvie witht of te Torah eas Te dae ne tcwnod bai (Alok and Okage, 200 it eddrere the is sme to aca teased in t “Sighted below 244 Pooper entation Burg & Ontong Ener Eton m, However, the Nigorian banking sector reform was necessitated by a number of factors, chief among which are: 1 Poor asset quality Undereapitalization Poor corporate governance Low level of financial growth, Operation at a level lower than that which eould deliver competitive return on equity. _ Poor risk management practice Poor quality service and diversified delivery channels, Diseconomies of scale of operation ‘Thin spread of qualified and experienced manpower ‘Those ware some of the myriad of problems facing the Nigerian banking sector pre-consolidation. It, therefore, became imperative to address these identified weaknesses and repositioning the sector for the competitive market and to be able to play its role in the comprehensive economic reform programme of the Obasanjo administration, as contained in the National Economie Empowerment and Development Strategy (NEEDS) document-This position is illustrated in the statistical table I hAtrca | Malayala igri apo [ioe | 456. 0 109.4 3DP Growth Tate 3.4 19 4a of Capita Income($){—820 | 27803780” | i230 inflation Rate) Manufacturing Sector] 142 a Tz oo} [a2 Na | 757 re elodensity(@) 3 it 20 EC} [Purchasing Power [Parity on) 900 ‘| 10270 _| soso | 241806 Source: bankconsolationdesk @canbank.org (2005) ‘The present position of the Nigerian economy, as reflected in table I, has been a result ofthe inactiveness ofthe bankking sector, ‘which has renoged on its role of ensuring financially sustainable cereicg Baking ScerRenms 245 mic development. This is because most of the revenue Soerated ‘by banks are from import-related business, ae ee he Highly fragmented nature andthe woak capital ‘fNigerian Banks (New Age, 2005). ‘fhe CBN Governor observed that the Ni as experiencing serious threats “ek » foncern, He was of the 02 thould be encouraged w ‘ensolidating the industry. 14 was found out that many Kiseric: find to emall in size to be velavant § problems identified in the banking = tf cssete, los of plie confidence in deralustion of the national currency sa result, the reform focused on ! that would enhance the capabili projects, Tt is important to note the: fanking sector and this, among other iakey ctormines the ability trek Ranks to provide funds to borrovers, thus becoming an {ndieation of stability to depositors (Soludo, 2004). a ecg na np Fa ee i ena eran ise ecg Set edanpe toners were decrectreinietes me ii riandatsani rh Sn Should sao act asa catalyst to propel banks to view tee dic as capable af having over and above the N25 bllon nd probably over 70 blion capitalization benchmark o ele tree lereze effectively and participate in the global fnanc 246. Pesptioson tse Bing Doeapnan Nise Enornerl& Eerie ‘marketplace, thus becoming provider of highly capitalintensivg project financing, Consolidation and Its Aftermath, Viewers of the competitively driven consolidation of the Nigerian banking sector are of tho beliof that the presontation of the expected transformation is the kernel of a major policy shif, as its expected that the reform will make Nigerian Banks, proactive, thus stratogically positioned as active players and rot spectators in the emerging world economic order. Therefore, the consequence could be looked at from a dual perspective; in other words negative and positive, depending on which side of the divide one stands. ‘The capital base of banks would have been beefed up, thus helping banks to meet the conditions of increased capital commitment, increased transparency and accountability to both, regulators and other stakeholders. It will bring about a situation of heavy investment in information technology infcastructure which is likely to secure a competitive edge for both banks and their customers and thus an unparallled advantage in the marketplace. However, the structure of the banking industry is oligopolistic. ‘There will be very big banks as well as others not as big, that will aspire to be big. Therefore, this structure will still enhance competition as the not-very-big banks will strive to become big. Consolidation, as part of the overall strategy to boost image and increase shareholder confidence, will result in eost saving, reduced overheads, increased geographical spread and ultimately high profit returns for banks that are successfully merged and consolidated. ‘Again, the merger and acquisition arrangement suggested as a policy option by the Central Bank of Nigeria for banks that cannot ‘meet the new eapital base might not be without its own attendant implications. One of these could be the movement of low-ranlked officers as a fallout of the merger, to a higher rank without & commensurate remuneration or downgrading an officer, twin CrneseegeBavergSactrfaoms 247 prams which ae kel repel whee a lately rane ee or UBAISTS and Intercontinental Bank san (anather is the inability to quickly move over from one Groep) ie to the other, aa vitoaly all banks operate oa Tien ET peckages for their dayio aby trensecions, thos aifecing an unenoy ov eusy reece c2=asgemect far, 21 groups invalving 6 bas. Sra akindlng (WOW) Out of e~ <2 30 groups have athed premerger eonont fron =~ wile to groups cat cpnraral in prinipe, A: «258 ilion ha been sae through privete placerat anc =e fer at the capital Sitka ll 25 bans finally made tof those who met {ho rocpitalzation reeirement. Ssely consequence is that of firms or corporate ly discover that they work together and situation is a likely Another major post-consolidation merger divorce. This is a situa bodies that have agreed to mere ew are strange bedfellows and so

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