World Report

he Nigerian banking sector, which comprises dozens of indigenous players as well as some well-known foreign institutions, is in a state of flux as sweeping reforms start to take effect.

The Central Bank of Nigeria (CBN) is leading the overhaul with fundamental changes that are re-shaping the very structure of the industry. In July 2004, the CBN’s respected governor, Charles Soludo, unveiled a sweeping 13-point reform programme intended to pave the way for a more competitive and efficient financial services sector.

Recapitalisation leads to consolidation through mergers and acquisitions

At the heart of the reform process was a recapitalisation exercise, notably the introduction of minimum capital requirements, a move designed to facilitate consolidation through bank mergers and acquisitions.

The central bank directed the country’s 89 banks to raise their capital individually or through mergers or they would lose their banking licences. The minimum capital requirement was raised sharply by 12 times to N25 billion (£106 million) in a shake up of the crowded and fragile sector.

The intention, according to Professor Soludo, is to stop the rot that has afflicted the industry in past years. “The agenda is a pre-emptive and pro-active measure to prevent a systematic crisis and collapse of the banking industry, and permanently stop the boom and bust cycles that have characterised the industry,” he says.

More fundamentally, the reforms are aimed at ensuring a sound, responsive, competitive and transparent banking system, better suited to the demands of the emerging Nigerian economy and the challenges posed by global and regional integration.

There are already clear signs that the strategy is working. A recent high-profile merger deal between Standard Trust Bank (STB) and United Bank for Africa (UBA) is aimed at creating the largest bank in Nigeria.

Numerous other outline merger deals have also been agreed and are making headway. Indeed, in an attempt to speed up the process the government is even offering incentives for all deals completed before the year end.
Professor Soludo says that more and more institutions are now clearing the minimum capital hurdle, a sign that the industry is already on a firmer footing. “In our consolidation effort, 16 banks are already sure to make the new capital requirement compared to only two banks as at 6 July 2004.”

The changes have received a positive response, both inside the industry and elsewhere, notably from foreign donors and investors.

One of the benefits of an improved financial infrastructure is the greater access to capital to fuel further economic growth, a primary objective of the government. “It is also good news that fresh funds are flowing into Nigeria in response to the emerging investment opportunities in the Nigerian banking sector as a result of the consolidation exercise,” says Soludo.

The CBN is already starting to look at the Nigerian post-merger banking environment, with plans for mandatory risk management measures to ensure continued stability as well as to foster a general climate of transparency and accountability.

The measures would also reduce the potential for bank failures, a problem that has blighted Nigeria in the past. According to Professor Soludo, sound corporate governance structures would provide “a form of insurance” against such an eventuality. He says that the price of the new emerging banks failing is one that the country cannot afford to pay.

The attention to detail underlines the determination of the financial authorities to make sure the reforms succeed, another building block in Nigeria’s re-awakening.