History, they say, always repeats itself. This assertion proved true last Monday when the Governor of the Central Bank of Nigeria (CBN), Mr Godwin Emefiele, fired a warning shot to the banking sector to brace up for another round of recapitalization, akin to the one done by his predecessor, Prof Chukwuma Soludo, 15 years ago, which was tagged ‘Consolidation’.
Like Soludo, Emefiele, had said, while unveiling his second term five-year agenda (2019-2023) in Abuja, that the CBN management would work with relevant stakeholders to recapitalise commercial banks in the country to make them stronger to undertake greater risks.
It would be recalled that Soludo had in his address on July 6, 2004 announced a ‘13-point Reform Agenda for Repositioning the CBN and the Financial Sector.’
The recapitalisation policy was just one of the steps taken to sanitise the banking industry.
He had noted that the vision or prospect of the CBN and the Federal Government was a banking system “that is part of the global change, and which is strong and reliable especially with the prevailing global financial meltdown. It is a banking system which must be efficient, depositors can trust and investors can rely upon.”
Recapitalisation was then the policy thrust that required that the minimum capitalization for banks should be N25 billion, as against the prevailing N2 billion, with full compliance before the end of December 2005 (that is, 18 months rather than 12 months normally given in many countries).
Only banks that met the requirement were licensed to undertake banking business while those that failed to meet up either merged or liquidated. For the first time, the Nigerian banking industry witnessed merger between the small and big banks. However, banks that are able to exceed the capital requirement stand a better chance of luring customers and instilling confidence in the system. The ensuing mergers and acquisitions (M&As) involved 76 banks, out of the initial 89 banks. This brought down the number of banks to 25.
Moreso, all the banks mobilized funds through Initial Public Offering (IPO) and 14 bank
licences were revoked. The 76 banks represented 93.5 per cent of the deposit
share of the market, while the 13 banks that failed to meet the
recapitalization requirement accounted for 6.5 per cent of the deposit share
of the industry.
At the end of the 18-month consolidation/recapitalization exercise, the capital market witnessed a boost of N406 billion in market capitalization and N360 billion was accepted by the CBN in addition to foreign capital inflow of $654 million and £161,993.
Later, IBTC and Stanbic merged. This brought the total numbers of banks operating in Nigeria to 24. Bankers and financial experts all over the world expressed satisfaction at the success of the policy which eliminated the old fashioned banking style for one that would move the economy forward.
13 banks failed the consolidation exercise
These are: African Express Bank, All States Trust Bank,
City Express Bank, Eagle Bank, Fortune International Bank,
Gulf Bank, Lead Bank,
Societe Generale Bank of Nigeria,
Trade Bank Plc;
and Triumph Bank Plc.
Following the consolidation, the banking industry and the country’s economy
were better off. The benefits included:
Roll-out of more branches to reach the unbanked
high-paying jobs for graduates,
funding of big ticket transactions, increased value to shareholders, the emergence of mega banks, promotion of choice products for consumers, delivery of world-class services, among others.
And many Nigerian banks opened offshore branches in Africa, Europe , China and the USA for the first time in history.
But while giving reasons for the impending recapitalisation exercise, Emefiele rationalized the move on capital depreciation of the lenders.
His words: “In the next five years, we intend to pursue a programme of recapitalising the banking industry so as to position Nigerian banks among the top 500 in the world. Banks will, therefore, be required to maintain higher level of capital, as well as liquid assets in order to reduce the impact of economic crisis on the financial system.
“Soludo did the last recapitalisation exercise in 2004 and increased the capital base of banks from N2 billion to N25 billion. It helped the banks and the economy become stronger. We could now take up large ticket transactions.
“But relate the value of N25 billion in 2004 when the exchange rate was about N100/dollar to now when the rate is N360/dollar. That is about $75 million. So, we need to recapitalise. It’s a policy trust and will be discussing at committee of governors meeting and modalities will be unveiled for everyone to see”.
When Mallam Sanusi Lamido Sanusi was appointed on June 4, 2009, by President Umar Yar’Adua as the CBN governor, he pledged to give a sense of direction to the banking sector which was in dire need of close monitoring and supervision.
On assumption of office, he carried out in-depth review of the banking system and its operators.
He reversed most of Soludo’s policies, due to a number of factors.
He identified eight interdependent factors that led to the fragile financial system that was pushed into crisis by the global economic meltdown and recession.
The eight main factors include: “macro economic instability caused by large and sudden capital inflows; major failures in corporate governance in banks; lack of investor and consumer protection; inadequate disclosure and transparency about the financial position of banks; critical gaps in regulatory framework and regulations; uneven supervision and enforcement; unstructured governance and management process at the CBN and weaknesses in the business environment in the country.”
He announced a blueprint that is meant to change the mindset, meet
expectations of banking public, restore confidence and stabilize the
banking industry and grow the economy for the well-being of Nigerians.
“The blueprint is anchored on four pillars, namely: enhancing the
quality of banks; establishing financial stability; enabling healthy
financial sector evolution and ensuring that financial sector
contributes to real economy.”
For record purpose, the CBN governor, having critically identified the weaknesses and strengths of the banking industry, revealed his well articulated blueprint for banking reforms during the policy interviews he granted Financial Times of London on June 21, 2009, barely two weeks after he assumed office and the second interview that was granted on December 19, 2009.
However, mixed reactions trailed the reforms and policies of the apex
bank. The stakeholders in the financial sector expressed divergent
views on Sanusi’s reforms and policies.
Some stakeholders said his
reforms, rather than solving the problems in the financial sector, had
brought more problems to the sector and economy at large.
however, argued that his policies had impacted positively on the
According to the CBN governor, although the 24 banks had bad
loans, the negative capital of 10 of them was put at N1.5trillion. The
total estimate of non-performing loans (NPLs) in the industry was summed up to N2.2 trillion, with the eight banks that failed his audit test, namely Union Bank, Afribank, Intercontinental Bank, Bank PHB, Spring Bank, Oceanic Bank, FinBank, Wema Bank, Unity bank (capital adjudged inadequate for operations) and ETB, accounting for N1.5 trillion of the NPLs”.
Major highlights of the CBN reforms are: Sacking of indicted bank Chief Executive Officers and Executive Directors; injection of N620 billion into the eight bailed out banks; categorisation of banks; appointment of advisers for affected banks; licensing of three credit bureau; screening and interviews of managing directors, executive and
non-executive directors; establishment of the Asset Management Corporation of Nigeria (AMCON); N500 billion for financing power sector projects; restructuring and refinancing loans for SMEs and manufacturing sector; and the introduction of the N200billion Small and Medium Enterprises (SMEs) guarantee scheme.
Since the banking sector is the hub around which all other economic activities revolve, the health and prosperity of the bank is a major source of concern to Nigerians , especially the regulators.
According to Soludo, out of the 10 banks audited as at August 2009, the balance sheets of five of them: Union bank, Finbank, Oceanic bank, Afribank and Intercontinental bank shrunk, shareholders’ funds impaired and they had liquidity problems.
Their huge exposure to non-performing loans (margin loans) has affected the banks. These banks had spent length of time at the expanded discount window (EDW) introduced in September, 2008 by the apex bank. These five banks accounted for 90 per cent of transactions at the EDW. The remaining banks accounted for 10 per cent.
“These banks took money from the inter-bank to repay their exposure to the discount window. It is an indication that their balance sheets had shrunk. The management teams had acted in a manner that was detrimental to the interest of their depositors and creditors,” he added.”
In September last year, the apex bank revoked the operating
licence of Skye Bank Plc with immediate effect, and licensed Polaris Bank to take its assets and liabilities.
Emefiele explained that the decision was reached following the inability of the owners of the bank to shore up the capital of the distressed bank which had earlier received a N350 billion intervention in July 2016.
“Skye Bank requires urgent recapitalization as it can no longer continue to live on borrowed times with indefinite liquidity support from the CBN. We have decided to establish a bridge bank, Polaris Bank, to assume the assets and liabilities of Skye Bank. The strategy is for AMCON to capitalize the bridge bank and begin the process of sourcing investors to buy out AMCON.
Diamond Bank merged with Access Bank
Following the completion of its merger processes with Diamond Bank, Access Bank Plc last April 1 became the largest retail bank in Africa by customer base spanning three continents, 12 countries and with 29 million customers. Its executive director, Personal Banking, said that the merger created a Nigerian banking powerhouse and a pan-African financial services champion with 27,000 staff across 592 branches.
He said that with the successful merger, the bank has a new visual identity, which fuses the best of Access Bank and Diamond Bank.
Financial standing of the banks
As of last May, the total assets and liabilities of the banks amounted to N38,641.8 billion at end of April 2019, showing a 0.5 per cent increase, compared with the level at the end of the preceding month.
Total specified liquid assets of banks stood at N13,634.3 billion at end of April 2019, representing 60.3 per cent of their total current liabilities. At that level, the liquidity ratio was 0.1 percentage point below the level at the end of the preceding month, but was 30.3 percentage points above the stipulated minimum liquidity ratio of 30.0 per cent. The loans-to-deposit ratio at 58.49 per cent, was 1.0 percentage point lower, compared with the level at the end of the preceding month and was lower than the maximum ratio of 80.0 per cent by 21.51 percentage points. Banks’ credit to the domestic economy rose by 0.6 per cent to N20,973.8 billion at end-April 2019, compared with the level at the end of the preceding month.
Reacting to the planned recapitalisation of banks, President of the Chartered Institute of Bankers of Nigeria (CIBN), Dr Uche Olowu, said there was no need for panic among bankers as the Nigeria financial system remains stable.
He said that the whole idea of recapitalisation was to continue to sustain that stability in order to expand the scope of banks to do bigger businesses.
Olowu said that the only thing the boards of these banks would do is to go back to the drawing board and restrategise ahead of the CBN’s impending guidelines of the reapitalisation, assuring the system will take care of itself with adequate planning.
Asked if the policy would lead to mergers and acquisition, the CIBN boss said there was no need to preempt the CBN or banks, but that the system will in itself unfold when the guidelines are released.
In his response to CBN’s planned recapitalisation, the Chief Executive Officer of Financial Derivatives Limited, Mr Bismarck Rewane, said that the move was all about building
buffers to enable them withstand shocks should there be any.
The economic expert said that the N25 billion recapitalisation in 2004 does not have the same value as what obtains in 2019 coupled with the differentials in exchange rate over a 15-year period.
He explained that when N25 billion is divided by N155 to one dollar which was the exchange rate in 2014, the dollar equivalent should now be multiplied by N360 to a dollar which is the current prevailing rate, about N75 billion would be the result.
He said that what that means is that banks should be prepared to triple their shareholders fund or at best double their capital over a 15- year period, saying it is a regulatory induced consolidation.
Rewane said that compared to African banks, Nigerian banks are still strong considering what happened during the AMCON induced consolidation of 2009 to 2012 when some banks bought into one another.
According to him, some banks will have to increase their capital, and not necessarily merge because the CBN has just licensed some banks which will also have to meet the new capital requirement.
“Is it true that the banks need higher capital to do their businesses, the answer is yes. Let us take stock of the consolidation of 15 years ago. Has it led to increased financial inclusion and services, has it reduced cost, has it made Nigerian banks competitive? If the answer is yes, then there may be no need for further recapitalisation. But if the answer is no, then there will be need to increase capital to make them regional giants.
Also commenting of the planned bank recapitalisation policy, the Managing Director, Cowry Asset Limited, Mr Johnson Chukwu, said that it should be not be a one size fits all approach just like it was done in 2006.
He said that given the level of advancement in banking regulation globally, what the CBN should do in its latest effort is to design a guideline that will allow banks have capital that can sustain their operational risk capacity.
He argued that already the banking sector has the capital adequacy ratio that is clearly based on the risk portfolio a financial institution is exposed to.
For instance, he said international banks have a higher level capital adequacy ratio compared to local banks that have lower ones.
“I don’t expect the CBN to come up with a blanket capital base requirement for all banks. The need should be risk based for it to make meaningful impact,” he warned.
Meanwhile the Chairman, Chartered Institute of Bankers of Nigeria (CIBN), Prof Uche Uwaleke has urged the CBN to raise new bank’s capitalisation threshhold to N100 billion, up from N25 billion.
“The N25 billion is already eroded when you look at our exchange rate.
It is better to have 10 healthy banks than 20 that will be giving CBN headache. The tier two banks are also the most exposed banks to NPLs. The big five, are not giving CBN much problem like the others.
Bigger banks can easily bankroll larger businesses. So, if we are one of the 500 banks in the world, we can play comfortably in the international league.
Bigger banks have better corporate governance and monitoring by CBN is much easier. Fewer stronger banks will invest in the right technology to deliver better services”, he said.