Easing Nigeria’s banking gridlock

By Jude Fejokwu
Posted on Tuesday, 8 October 2013 10:47

The past decade of banking in Nigeria has not been for the faint hearted. The combination of a large population and a large economy has driven international and domestic interest in the sector – with investors often attracted more by the market’s potential than its reality.

After the 2004 bank consolidation and the rapids of the stock market bubble and crash of 2009, Nigeria’s banks now find themselves in calmer and better regulated waters.

Nigeria now has 22 licensed commercial banks; 21 are fully operational, while Savannah Bank has not recommenced full banking operations since the central bank reinstated its licence to operate in February 2009 after its earlier revocation in February 2002.

The newest addition to Nigeria’s commercial banking sector is Heritage Bank, which formally commenced operations on 4 March 2013. The bank is not new in the true sense of the word as it was formerly called Société Générale Bank of Nigeria.

It regained its operating licence in 2010, having had it revoked in 2005 after it failed to recapitalise.

Things have plainly improved. Nigerian banks are now better capitalised, with 18 of the 21 fully operational banks having tier-1 capital in excess of N25bn ($156m).

8-Point Plan: Making it happen
1. Use better technology. That means more working automated teller machines (ATMs). No bank is above reproach, but Skye Bank has consistently headed in the right direction over the years.

2. Show a deep commitment to seeing the customer as the end and not the means to an end.

3. Establish a unique means of identification for every Nigerian citizen or resident to enable banks to better identify potential and existing customers. Following from this, the sector should develop and utilise an active and well-structured credit-reporting system.

4. Close down AMCON within the next two years and sell the three banks owned by it to competent investors. The latter is in progress, while the former has a big and bold question mark next to it.

5. Practise financial inclusion through the creation of products that serve the interest of the masses and not necessarily the powerful minority. For example, establish savings accounts that are devoid of complicated paperwork and a debt-repayment culture that accommodates irregular or seasonal cash flows. FCMB started a new savings ac- count called Nairawise in May that does not require the holder to have identification documents and can be opened with a deposit of N500.

6. Establish a more proactive and consistent policy direction for banking regulation. The regulator must mean what it says and say what it means. Too many policy reversals have blighted the progress of Nigeria’s banking industry. The CBN gave banks the go-ahead to build off-site ATMs, then disallowed it and asked banks to remove all off-site ATMs in June 2009. The banks bore the cost of this CBN flip-flop.

7. Remove banking sector supervision from the CBN and create a new body created to focus directly on the banks. Managing Nigeria’s economy and currency should be of paramount importance to the CBN. The government should establish a body similar to the Financial Services Authority in the United Kingdom.

8. Limit the control of individual banks over the country’s deposit base. No bank should be allowed to possess more than 10% of the country’s deposits. When one bank becomes too important to the system, that bank becomes the system. First Bank, UBA and Zenith Bank have all hovered above or close to this limit.

They now also have much better corporate governance practices. The competency of the professionals in the industry has greatly improved.

“Many of my friends from other sectors tell me the same thing,” says Tony Elumelu, former chief executive of United Bank of Africa (UBA). “The workforce in the banks is among the most sophisticated and talented in the entire economy,” he argues.

The non-performing loan ratio for the sector was less than 9% as of 31 December 2012, compared to 23% in 2004.

The level of financial intermediation has also improved as the banks have enhanced their risk-management capabilities and intellectual knowhow. Many bank managers have realised that the retail market is where the potential lies.

They are aggressively strategising and carrying out their action plans to benefit from the windfall that is expected to emanate from the largely untapped retail market in Nigeria and beyond.


Thanks to regulatory enforcement, the banks are less reliant on public-sector deposits.

In July the industry regulator increased the cash reserve ratio from 12% to 50% on public-sector deposits for all tiers of government, including ministries, departments, agencies and companies. This new rule came into force on 7 August.

This progress came via two major reforms. The Central Bank of Nigeria (CBN) embarked on Nigeria’s most ambitious reform to date in August 2004 with a 13-point plan.

The most audacious and widely discussed reform was the mandatory recapitalisation of banks to N25bn. The deadline for compliance was 31 December 2005.

This major reform led to the reduction of Nigeria’s banks from 89 to 25 through mergers, acquisitions and forced closures. This enabled the 25 banks remaining at the time to reap the benefits of economies of scale.


The second reform was the new risk-based framework set up by the CBN that enabled the banking sector regulator to run stress tests for all of Nigeria’s banks.

The CBN ran these tests in the second half of 2009 and then sacked eight bank chief executives. The CBN deemed that the managers had mismanaged customer deposits and eroded shareholders’ funds at their respective banks.

This led to another round of mergers and acquisitions, which reduced the number of Nigeria’s banks from 24 to 20. The CBN then created a ‘bad asset’ bank in 2010.

The Asset Management Corporation of Nigeria (AMCON) now owns three of the eight banks that had their CEOs sacked.

All of Nigeria’s banks now contribute 0.5% – it was initially 0.3% – of their total assets at the end of every fiscal year to a sinking fund established to finance AMCON’s operations.

Prior to the reform period, Nigeria’s banking sector was weak, fragmented and unsound, with little regulatory activity.

Nigeria had 89 banks prior to the announcement of the mandatory recapitalisation. Most of the banks were relatively small, with few branches and many political interests and family ties driving their formation and continued existence.

Public-sector deposits were the focus of many of the banks trying to raise their deposit bases. Managers often granted loans with impunity to family, friends and business associates with little or no collateral.

Unsecured loans were the order of the day. Bank balance sheets were highly unsound in an environment of this nature. It was common for banks to use deposits belonging to the general public and the government for private interests.

Customer service and technology utilisation were weak; they existed more in pages of praise in the newspapers than in reality. Banking was largely non-responsive to the needs of its customers. But have all these bad habits now disappeared?

One problem that remains is a focus on prestige derived from size rather than quality. Nigerian banks are still raising funds domestically and internationally to fund their operations, and branch expansion is a major beneficiary of the capital generated.

To name a few, Sterling Bank, Diamond Bank and Skye Bank are currently looking for fresh capital.

First Bank is planning to launch a $300m eurobond after roadshows in the United States and United Kingdom later in 2013. The yield guidance on the bond is 8.5%, something Standard Bank’s emerging markets strategist Samir Gadio sees as “fairly valued”.

But this demand for capital is often a result of the quest for size. The majority of banks have national, regional or international expansion plans.

Banks in Nigeria are still fixated on growing their asset base driven by territorial expansion. Skye Bank chief executive Kehinde Durosinmi-Etti – who has suggested that the bank might add to its subsidiaries in Gambia, Senegal and Guinea – says, “We must understand that capital raising for banks is a continuous thing.”

Most Nigerian banks are still focused on lending to federal and state governments as well as companies in volatile sectors of the economy: oil and gas, mining, credit and financial institutions and general commerce. Other than government, these are speculative sectors of the economy.

Banks in Nigeria have been known to play to the gallery and this is still prevalent today.

The banking industry has been impervious to change except when forced to heed directives from the industry regulator, the CBN. This apathy to voluntary acceptance of best practices has reduced the pace of progress.


Short-term fixes for perennial problems have continued unabated. For example, a lot of banking systems have been incapable of handling traffic on their networks.

The banks’ immediate response has been either to upgrade to a newer version of their existing software or to change their software provider.

Meanwhile, the real problem is finding software that leaves ample room for operational traffic growth. Guaranty Trust Bank and Standard Chartered Bank are moving in the right direction; both banks have increased the number of their branches significantly within the past six months without any undue pressure on their networks.

Such growth will be tested because the unbanked population in Nigeria is approximately twice the size of the banked population. The task at hand is not that daunting but definitely requires a break from the past.

Nigeria’s banking sector still reflects a low level of financial intermediation when compared to other countries in Africa.

This is illustrated by the low level of Nigeria’s broad money to gross domestic product ratio – which measures the currency outside of the banking system and other elements – which stood at 20% in 2012.

The low level of penetration leaves plenty of untapped potential if banks pursue the following activities. This will require the cooperation of all Nigeria’s commercial banks, the industry regulator and the banking populace.

*Jude Fejokwu is founder and chief analyst of Thaddeus Investment Advisors & Research in Lagos

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