Bigger banks need skilled staff as well as good governance and regulation in the tougher competitive environment. James Eedes reports on the challenges.
Nigeria’s 25 post-consolidation banks are squaring up in a battle for talent. The need for stronger management has grown in equal proportion to the increasing size of the banks. Stiffer competition demands better skills in areas such as strategy, risk management and operations. And far stricter regulatory enforcement will increase the compliance burden substantially.
With the injection of new capital, the pressure on banks to increase earnings and deliver returns is intense; and regulators are under equal pressure to ensure sustainability. However, skills and know-how are in short supply.
“You can have all the systems and regulations in the world – in the end a bank is only as good as the people who are running it,” says Pascal Dozie, chairman of Diamond Bank. In the past, the relative underdevelopment of the Nigerian banking system held back management development. The quality of skills is poor and skilled staff are too few.
“Managing a N120bn ($930m) bank [in asset terms] is very different to managing a N20bn bank,” says Francis Atuche, MD and CEO of Platinum Bank, reflecting the steep learning curve facing the majority of managers who survived the consolidation shake-out. He says many of the banks are stretched in terms of management capacity.
“There are so many different aspects to running a big bank,” says Reginald Ihejiahi, MD and CEO of Fidelity Bank. “We have seen banks prove themselves very capable of raising capital but I think we will see signs that banks are not so good at deploying that capital effectively.”
Mr Dozie says that as soon as the Central Bank of Nigeria (CBN) announced the new minimum capital requirements, his board realised that skills attraction and retention would be critical to success. Achieving that is hard in practice, he says, particularly staff retention. “Diamond Bank has a good reputation for its training but we are already facing the dilemma that our investment in training is being lost when staff are poached by competitors.”
Mr Ihejiahi echoes concerns about skills availability: “I am not sure where we will find these skills in sufficient numbers. Aspects of banking are cultural. We cannot simply go to London to recruit Nigerians trained there. And foreign bankers are not the answer.”
Halfway step
The consolidation of the Nigerian banking sector has been widely hailed as an important step towards improved financial intermediation and a greater role for the sector in economic development. But reducing the number of banks and increasing their size is barely the halfway point to ensuring the institutions’ operational efficiency and effectiveness. Ensuring that banks are competently managed, competitive yet prudent, and ultimately sustainable demands better corporate governance and more rigorous supervision.
For the most part, no such tradition exists in the sector, which in the past has been characterised instead by widespread inefficiency, mismanagement and corruption, and a near total absence of regulatory oversight. Even banks that were notionally well managed and clean exhibited a strategic lethargy – without competitive impetus, innovation and product development was not necessary.
Tighter governance
The CBN wants to instil the necessary governance standards and back them up with appropriate compliance checks. CBN governor Charles Soludo is quick to point out that the banking system he inherited in May 2004 was in a parlous state. Rather than requiring tweaks and fine-tuning, Nigeria’s banking system needed an overhaul. Consolidation was phase one but that did not completely address the sector’s legacy.
A recurring feature of banks in the pre-consolidation era was the total ineffectiveness of their boards of directors. Commonplace was the overlap of the chairman and managing director roles, occupied by a powerful individual who wielded overbearing influence and control over the bank, often rendering the board impotent if not redundant. Also, individual board members were often pursuing personal interests at odds with the corporate interests of the bank and this gave raise to fraud and other self-serving practices, which typically went unchecked given the climate of weak oversight. Soft loans to directors and other insider-directed loans were rarely repaid. Even when directors had clearly outlasted their usefulness, there was a culture of torpor that meant directors were seldom forced out.
Such problems stemmed from a number of factors. First, historically it was easy to obtain a licence to set up a bank, at one time requiring just N1bn (about $10m). This led to banks being set up by individuals, families or a small group of investors with little to counter-balance the rogue actions of individuals. Second, the deterioration of public institutions – gradually since independence in 1960 and most rapidly after General Sani Abacha assumed power in 1993 – meant there was little or no bank supervision or regulation. The CBN was palpably incapable of regulating the banking system properly while a broader wave of corruption and lawlessness was sweeping the country.
Widespread misfeasance
In this environment, all banks were guilty of corporate governance indiscretion, from the outright illegal (foreign currency round-tripping, for instance) to the imprudent (politically-motivated directed lending that regularly defaulted). Basic non-compliance with reporting requirements (late, incomplete, not properly audited and occasionally false) and prudential limits (lending more than 35% of equity to a single borrower, for instance) were commonplace.
In addition to the criminal undercurrent, the situation was compounded by the dearth of management know-how. Too few individuals knew how to implement internal risk management systems or manage banks efficiently and effectively. Nigeria’s turbulent post-colonial history drove many of the country’s finest skills abroad.
A number of these corporate governance concerns persist today, despite the consolidation process weeding out the worst offenders. And mergers during the consolidation process have created a new set of challenges: clashes of corporate culture, irreconcilable differences at board level, disparate systems for risk, IT and accounting, and fractured internal controls.
Fight against legacy
Framed by this pre-consolidation legacy, the CBN has three immediate priorities: to improve its own regulatory and supervisory function; to establish minimum standards of corporate governance, particularly relating to risk management systems within banks; and to develop much-needed skills. Internally, the CBN has committed substantial resources to its supervisory departments, including investment in technology infrastructure to facilitate automated regulatory filings. This will enable faster responsiveness to problems and enhanced predictive powers. Improving supervision is crucial: the CBN’s reputation for allowing abuses to go unchecked is poor.
To set the tone with the banks, the CBN distributed a draft code of corporate governance on January 5 this year, just days after the consolidation deadline passed. Although it is still to be debated in the Bankers’ Committee, the industry forum, its timing so soon after the deadline signals the central bank’s clear determination to raise the governance bar.
The draft code identifies a number of immediate challenges. These include the technical competence of the board and management to manage the new, bigger banks effectively; increased levels of risk stemming from higher lending limits and longer-dated, more complex loans; and the danger that pressures to increase earnings on higher levels of capital in a more competitive environment may lead to many of the pre-consolidation malpractices resurfacing. The code also highlights the many integration challenges facing merged banks. It gloomily notes: “Very few banks have robust risk management systems in place.”
Ground is laid
The code sets down a number of principles and guidelines, all sensible but worthless if not implemented. There is no firm date for adoption and no indication of whether adherence will be voluntary or compulsory. Although local banks profess commitment to good governance, there is no clear sense yet of how far they are prepared to go.
Key features of the CBN’s draft code include separation of the chairman and MD’s role, term limits for directors, a requirement that directors receive training in oversight functions, and disclosure of directors’ interests. No two members of the same family can sit on any one board and the number of non-executive directors (two of which must be “independent”) should exceed that of executive directors. There is also a proposal that single equity holdings in banks of more than 5% would need the approval of the CBN.
Despite enthusiastic public utterances by bank executives that sound corporate governance will be at the core of banks’ management policies, there is little evidence to distinguish rhetoric from reality. In the draft code, the CBN notes a 2003 Securities and Exchange Commission survey that found that only 40% of listed companies, including banks, had a formal code of corporate governance in place. Corporate governance is at a “rudimentary” stage, the CBN notes. It says that in virtually every known case of a financial institution becoming distressed, corporate governance gaps were a major contributing factor to precipitating and exacerbating problems.
Bold approach
It is clear that Mr Soludo has breathed new life into the CBN, demonstrated not least by his bold and unbending approach to bank consolidation. He is frank about the central bank’s supervisory weaknesses and his determination to correct them, and he can say with justification that historical CBN failings should be no indicator of the bank’s performance on his watch. It is likely that there will be quick improvements in supervision if not perfection.
The focus then is on the banks themselves to meet regulatory requirements and practise good governance, which ultimately depends on skills and know-how. “The CBN is right to propose [corporate governance] guidelines but I think we have to be careful about implementation. It works best when it is market driven. I think shareholders will start to discriminate more carefully between banks,” says Diamond Bank’s Mr Dozie. In the near term, pension reforms that hold the promise of the creation of a more vibrant institutional investor base will enhance shareholder influence.
Fidelity Bank’s Mr Ihejiahi says a great deal of learning needs to be done by both banks and regulators. “Institutional know-how and experience can only grow over time,” he says. But, like almost all bankers in Nigeria today, he is adamant that the rules have been tightened, the operating environment is far less permissive to abuse, and more intense scrutiny of fewer, bigger banks from shareholders will drive better management.
