Merger and acquisitions have been a topic of immense interest. In the last couples of years, mergers and acquisitions have also become a global phenomenon having realised that firms in financial and real sectors across the world can derive synergy by combining their businesses together. Despite the frequency of mergers and acquisition activities, there continues to be significant scholarly debate over whether mergers and acquisitions are successful in achieving their objectives. Some studies even found that fewer than 25 percent of all mergers achieve their stated objectives.
Merger and acquisition in banking is a global phenomenon and Nigeria has also seen merger activities. In the Nigeria case, an administrative circular in 2004 by Central Bank of Nigeria (CBN) increased the capital requirements for the operating banks to N25billion (approximately $200m). The banks were compelled to achieve the new capital base within a period of 18 months. The policy forced 89 banks to merge and resulted in 25 new banks. Of the 25 banks less than 15 survived the first five years of post-merger.
Many lessons came to mind in the consolidation of banks in Nigeria. First, it was observed not to be properly thought through by the leadership of the then Central Bank of Nigeria. The consolidation policy was put together by naïve personnel in a box office who appeared distant from actual peculiar bank market in Nigeria nay Africa, but did a copycat of what was thought successful in other jurisdictions and fairly applied to the Nigeria environment. Most of the constituent banks in the CBN induced merger had unique incorporation and antecedent which make a merger or capital increase a solution for their problems. The constituent banks differ in size, age, ownership, listed and unlisted. These differences are parameters that should have been treated in isolation and specific to individual bank and their business model.
Second, the merger conception was based on the assumption that larger capital is a prerequisite to better performance and support for credit creation for Nigeria businesses. The wrong mindset on increased capital became a bane which resulted in some of the merged banks failing within five years of their existence. Furthermore, this consequently resulted in bad loan problems for the entire banking industry which continued till today. The creation of AMCON was just one of the solutions to the bad loan problem but not entirely the game changer for resolving the implicit poor credit creation of the banks.
Third, human resource management and specialisation of each bank were grossly downplayed resulting in the poor service delivery and dearth of manpower. Most of the good human capital became unemployed senior bankers in the labour market post-merger, the merger documents were also with strange caveat, ‘buyer beware’.
The current banking environment portends further danger due to perceived thinking of regulators that capital is more important for bank survival. Banks are constantly being evaluated based on capital adequacy, without reference to the risk each bank assumes. Interestingly, there is no established correlation between bank failure and capital in literature of banking. Some economists argued that well managed banks should operate with lower capital ratio, while others argued on liquidity problems. In other forum, the argument is between accounting and economic values. If market value of capital is negative, no lender would extend credit and failure is then tied to market values and not accounting values.
Our postulation is that Central Bank of Nigeria should look beyond rules of supervision in other jurisdictions in regulating financial institutions in Nigeria. The rule of supervision should be local in idea and focus to our banking culture. Banks with higher operational risk should have more capital while low risk banks should be allowed to increase their financial leverage. Our CBN should not be the judge and the master of all to those investing in banking business.
- By Dr. Oladeji-Johnbrowne, Lagos
Leave a Reply