With two months until the year-end deadline for Nigerian banks to meet new minimum capital requirements, central bank governor Charles Soludo has declared the process on track and on time.
In a July 2004 announcement that rocked the industry, Mr Soludo ordered banks to increase their minimum shareholder capital from N2bn ($15m) to N25bn, a move that is designed to cull the country’s numerous weak, under-capitalised banks and trigger the formation of a competitive banking sector that could contribute more effectively to Nigeria’s economic development. At the time, just two banks out of 89 licensed institutions had capital bases of more than N25bn: Union Bank and First Bank.
Despite fierce resistance from the industry, Mr Soludo – formerly economic adviser to the president and the main architect of the government’s widely praised economic reform plan – stood his ground, facing down threatening overtures from the country’s elite who had long utilised the banking system for personal enrichment. (A common ploy was to solicit deposits, often by dubious means, from state-owned enterprises, which in turn would be invested in low-risk government treasury bills.)
Risk of meltdown
At the time of Mr Soludo’s appointment in May 2004, 25 banks were at risk of collapse, threatening a wholesale loss of confidence and systemic meltdown. The industry was characterised by weak governance, patchy regulatory compliance, numerous cases of corruption, and less than 5% of total loans directed to productive sectors. Uneconomic branch infrastructure, under-investment in information systems and generally low skill levels constrained financial intermediation.
Restructuring the banking sector is a key aspect of the government’s reform plan, the National Economic Empowerment and Development Strategy. Mr Soludo argued at the time that it was a necessity that had to be pursued with urgency and determination. Reasonable question marks over the 18-month time frame have been answered and the governor is confident that the industry’s restructuring will be on schedule.
Mr Soludo predicts at least 20 banking institutions will meet the minimum capital requirements, almost double the numbers forecast by analysts when the policy was announced. Already, more than $2bn in Tier I capital has been raised, and with several banks still in the market for funds, the final figure could top $3bn.
A clearly satisfied Mr Soludo is happy to have proved doubters wrong, although he was never in doubt. “We have set a world record for the lowest cost of consolidation,” he says. More importantly, he notes, banks are showing an appetite for large-scale and longer-term lending, a key motivation for undertaking the reform.
But concerns have been voiced that banks, awash with liquidity, might be tempered into relaxing credit procedures in the rush to grow assets and deliver shareholder returns. Not so, says the governor. “I think there is a healthy understanding from shareholders that returns will take time to deliver,” he says, pointing out that a new crop of professional managers now head the country’s leading banks. “Whereas the industry’s corporate governance score was something like 40% in the past, it is now more like 60% or 70%, and improving.” Mr Soludo also cites increased investment in technology and the attraction of skilled managers, some from abroad, who are a drawn to the sector now that it is better run, viable and clean.
Foreign interest
He says strong interest has been shown by foreign banks such as Citibank. Standard Chartered has led the pack, injecting $140m into its Nigerian operation.
“No other policy in Nigeria’s history has induced this volume of resources flow into a non-oil sector within the space of a year,” says Mr Soludo. He also points out that the number of branches of Nigerian banks in the rest of west Africa has more than doubled, a step towards deeper economic integration in the region.
Recapitalisation of the banking sector was just one of 13 reforms announced by the governor, including enhanced regulatory and supervisory capacity, and new monetary and exchange rate policy approaches. Buoyed by the success of his banking sector reforms, Mr Soludo has set his sights on a more ambitious goal: for Nigeria to be the financial centre of Africa.
He has some work to do yet. The smallest of South Africa’s so-called Big Four banking groups has Tier I capital of $2.6bn and the biggest, Standard Bank, has Tier I capital of $5.7bn – dwarfing any institution in Nigeria.
