But there is a broader significance to the move. The credibility of President Olusegun Obasanjo’s reform proposals is measured by the extent to which the government tackles the most difficult economic challenges; Mr Soludo has wasted little time in confronting a particularly vexing problem, battling vested interests and an influential corporate constituency. Observers are watching with interest to see whether the central bank – and the government by implication – has the resolve and stamina to push through the reform. And in this instance the stakes are even higher: to fail would not just upset the momentum of the government’s reform programme, but would also severely undermine the central bank’s reputation.
Sector and players
There are 89 deposit-taking banks in Nigeria, comprising institutions of various sizes and degrees of soundness. Structurally, the sector is highly concentrated: the 10 largest banks account for roughly 50% of the industry’s total assets and liabilities. Of the remaining banks, most have capital of less than $10m. Even the largest bank in Nigeria has a capital base of just $240m compared with, for instance, $526m for the smallest bank in Malaysia.
The relatively small size of many banks, each with expensive headquarters, separate investment in software and hardware, heavy fixed costs and operating expenses, and with bunching of branches in a few commercial centres, leads to high average costs for the industry. This, in turn, has implications for the cost of intermediation, the spread between deposit and lending rates, and has tempted banks into dubious practices as means of survival.
Fragility concern
“The truth is that the Nigerian banking system is fragile and very marginal relative to its potential and in comparison to other countries – even in Africa,” says Mr Soludo.
But it is not just size that bothers him; he cites a litany of corporate governance abuses that he believes undermine the system, including a high turnover of board and management staff, inaccurate reporting and non-compliance with regulatory requirements, deteriorating ethics and gross insider abuses, resulting in significant non-performing credits,
“Some of our banks are not engaged in strict banking business in terms of savings intermediation; they are traders, trading in foreign exchange, in government treasury bills and sometimes in direct importation of goods through phoney companies. This is not healthy for the economy,” says Mr Soludo.
This is driven by a growing dependence of many Nigerian banks on short-term government deposits. The three tiers of government and parastatals account for more than 20% of total deposits; in some banks this ratio is as high as 50%.
For such institutions, ordinary retail depositors with balances of less than N50,000 ($375) or N100,000 are not welcome. As a result there is more than N500bn in currency outside of the banking system.
“In recent times, many banks appear to have abandoned their essential intermediation role of mobilising savings and inculcating banking habits at the household and micro enterprise levels. The apathy of banks towards small savers, particularly at the grass-root level, has not only compounded the problems of low domestic savings and high bank lending rates in the country, it has also reduced access to relatively cheap and stable funds that could provide a reliable source of credit to the productive sectors at affordable rates of interest,” says Mr Soludo. Presently, just 3%-5% of lending is directed towards the productive sector.
Varied state of health
According to the central bank, while the overall health of the Nigerian banking system could be described as generally satisfactory, the state of some banks is less healthy. At the end of the first quarter, 14 Nigerian banks were classified as marginal and 11 as unsound. The marginal and unsound banks account for 19.2% of total assets of the banking system and 17.2% of total deposits. While not yet at the trigger point to declare the system in distress, Mr Soludo describes the situation a “major supervisory concern”. He foresees up to 25 banks at risk of collapse, if left unattended, which would trigger a major financial crisis. Not only would depositors lose their cash, but also the whole system would suffer a massive loss of confidence.
“The inability of the Nigerian banking system to voluntarily embark on consolidation in line with the global trend has brought the need to consider the adoption of appropriate legal and supervisory frameworks, as well as a comprehensive incentive package to facilitate mergers and acquisitions in the industry as a crisis resolution option, and to promote the soundness, stability and enhanced efficiency of the system,” says Mr Soludo.
Mr Soludo’s prescriptions have been as brutal as his assessment of the system. Banks must increase their minimum capital of N1bn (N2bn for new banks) to N25bn. And they have just 18 months to comply. This move is clearly designed to produce an outcome of consolidation rather than allowing enough to time for banks to raise the capital. Despite howls of protest, the governor is firm in his resolve to avoid what he describes as an “imminent systemic crisis”.
He has also indicated a phased withdrawal of public sector funds from banks, starting in July 2004. And he has committed to adopting a risk-focused and rule-based regulatory framework. “We will always pre-announce the rules of the game and stick to them. Arbitrariness will be reduced to the barest minimum,” he says.
This is a mixed message, given the sudden announcement of the dramatic hike in capital requirements, but focused more on banks that seek a “political solution”, that is, banks that use political contacts and levers to engineer beneficial regulatory terms and obligations.
“Those who petition for ‘political solutions’ to otherwise strictly economic and financial problems should understand the damages that such arbitrariness can do to the system, and the wrong signals and moral hazard that it creates. Once we start with one ‘political solution’, there is no end to it and the system would suffer. In the interest of preserving the integrity of the system, transparency and probity, we will insist on the rules and regulatory framework, in the interest of Nigeria and Nigerians,” says Mr Soludo.
There will, he says, be zero tolerance of regulatory abuses, especially in the area of financial reporting.
Phased reforms
Consolidating and strengthening the banking system will constitute the first phase of reforms designed to ensure a diversified, strong and reliable banking sector, which will ensure the safety of depositors money, play active developmental roles in the Nigerian economy, and be competent and competitive players in the African regional and global financial system.
The second phase will address the issues of diversification, including programmes to encourage the emergence of regional and specialised banks.
The central bank is taking its cue from the trend towards consolidation in the global banking industry. Mr Soludo cites examples in other emerging markets, including Argentina, Brazil and Korea, where consolidation has been rapid.
“I see a world economy with no more than 10 to 20 mega-banks all over the world. I see national and cross-national mergers and acquisitions taking place on a massive scale. It will not be a world for marginal or fringe players,” he says, citing South African bank ABSA, which has an asset base larger than all of Nigerian commercial banks combined.
