Regulatory Alert – NIGERIA: CBN upends 2005 Soludo-era banking reforms

I seek your indulgence to deviate from our regular I.T. beats to share a write-up i saw on PROSHARENG.COM website about Nigeria’s Central Bank Governor, Lamido Sanusi’s Banking reforms.

Reactions welcomed.

Nigerian Central Bank Governor Lamido Sanusi has true to form and our longstanding expectations finally upended the fundamental structure of the Nigerian Banking sector. In a 8 September directive titled ‘Scope, Conditions & Minimum Standards for Commercial Banks Regulation #1’ Sanusi has given the country’s 24 universal banks 90 days to present re-organization plans and apply for new licenses. In 2004, after taking office, the former central bank governor Charles Soludo issued a directive forcing the consolidation of the country then almost 100 banks into 25 large universal banks by requiring a new minimum capital requirement of N25 billion. The M&A activity that ensued concurrent with the broader macroeconomic reforms launched under former Finance Minister Ngozi Okonjo-Iweala spurred the Nigerian Stock Markets to multi decade highs.

While Soludo’s reforms dramatically improved the capital base of the local banks and boosted the local bourse to dizzying heights, the reforms however failed to have any major structural macroeconomic impact on two of Nigeria’s largest economic sectors – Agriculture and Manufacturing. By late 2007 the agricultural sector, which accounts for almost 40% of Nigeria’s GDP, and which still employs the largest number of workers on received on average only about 5% of total bank private sector credit. The manufacturing sector which accounts for about 18%-20% of GDP also got very little credit from the consolidated banks.

The services sector which saw the emergence of large telecom players such as MTN and Globacom however received a very disproportionate amount of bank credit, as was the real estate, oil and gas and the export-import sectors. During the same period, Nigeria’s debt of over $35bn was cancelled by the Paris and London Clubs, and high oil prices following the Second Iraq War swelled government revenues and kept banks plush with cash.

The period between 2005 and 2009 however saw very little change in the risk management protocols used by many of the country’s banks even as their balance sheets doubled and quadrupled. Corporate Governance was abysmal and many abuses occurred. Recent revelations point to large scale insider dealing, stock market manipulation and reckless lending at several banks.

It was therefore against this backdrop that Sanusi – previously the CEO of First Bank, one of Nigeria’s most well run and largest banks – replaced Soludo. Sanusi has in the year and a half that he has been at the helm of CBN affected the forced retirements of most of the CEOs of all the banks in Nigeria. He has pushed to impose stringent IFRS reporting standards on the banks and recently gotten the president and legislature to set up a multibillion toxic asset management company which will purchase from the country’s banks certain categories of bad loans in order to facilitate credit intermediation and remove the ‘black holes’ on bank balance sheets. The toxic assets have prevented CBN’s easy monetary policy stance from achieving its full macroeconomic effects.

Therefore the 8 September CBN directive to – abolish the current universal bank licenses, create new regional, national and international bank licenses, impose IFRS standards on entire industry, establish new minimum capital requirements and bar commercial banks from proprietary trading, asset management, equity underwriting and general investment banking activities is simply the final act (dénouement) of Sanusi in a bid to firmly stamp his ideas on the country’s banking system.

The net effects of the new regulations will take a while to become totally apparent. However the regulations totally upend all the current bank market share projections, bank profitability assessments and structural competitive analyses of the Nigerian banking sector.

New regional banks will be licensed. Banks that confine their activities to only two geopolitical zones of the country will pose significant challenges to the current national banks that operate in those zones. Local governors will become invested in protecting those regional banks and removing large government deposit accounts from Lagos based national banks to those regional banks. Local companies will probably also move their accounts from the large Lagos national banks to the regional banks. While the regional banks will not be able to undertake forex transactions, the regional banks, which will themselves probably keep accounts at the large international banks will be able to effect those transactions on behalf of their clients without their clients having to open separate forex accounts at the large international banks.

Zenith bank, which is the leader in forex transactions, is likely to become a major beneficiary of the new structure. It is very likely that because of the now doubled minimum capital requirement for international banks, most of the 10 ‘CBN rescued banks’ – Afribank, Finbank, Intercontinental, Oceanic, Union, Bank PHB, Spring, Equatorial Trust Bank, Wema and Unity Bank – will very likely opt to be re-licensed as regional banks in order not to raise new tier 1 capital. Those that opt to become regional banks will be forced to sell their ‘out of zone’ branch networks to larger national banks which may now need more branches. GT bank, Ecobank, IBTC-Stanbic and FCMB may opt for merchant/investment bank status since they already excel at those investment banking services. Ecobank, despite having been in Nigeria for almost 20 years, has not been able to become domestically competitive as a commercial bank. However its regional network throughout West Africa makes it a major acquisition target from a large global bank.

GT bank, IBTC-Stanbic and FCMB have excelled as underwriters of some of Nigeria’s major IPOs and secondary offerings. They will probably consider leaving the hustle and bustle of commercial retail banking to others and become pure merchant banks. IBTC-Stanbic’s historic strength in the fixed income area will likely make it a very good candidate to become the leading corporate bond issuance bank in Nigeria.

Sterling, Access and Diamond bank will all probably choose to focus on commercial hub Lagos and get licenses to that effect. Those licenses will also allow them to service the South Western industrial corridor and the adjacent cash rich oil and gas industries of the Niger Delta region.

Mega banks like First Bank, UBA and Zenith will likely use the new rules to deepen their domestic and sub-regional expansion plans, but will lose their lucrative investment banking fees. The new regulations bar commercial banks from – Insurance underwriting, Loss adjusting services, Re-insurance services, Asset Management services, Issuing House and Capital Market underwriting services and Investment in equity or hybrid-equity instruments. Standard Chartered Bank, which despite its long historic presence in Nigeria, has been unable to expand its national presence  may seek to double its capital base and become an international bank if it is to keep its lucrative forex and other international banking services.


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