Tag: share

Four years after the gale of sanitisation swept through the nation’s financial services industry, the goal of fewer and generally more effective banking institutions appears to have been met. Whereas in 2009, the motley assembly of anaemic financial houses numbered 24, it is currently down to 20, all of which are said to be relatively stable and in good standing. Between then and now, the industry has, without question, witnessed vast improvements in risk management practices and corporate governance, just as the environment of regulation has gone through some transformation.

But then, the question bears restating, even now, as to whether the larger objectives which necessitated the wholescale restructuring of the industry can be said to have been achieved several years after the financial services industry set out on the restructuring journey.

When the journey started in 2005, the objective was consolidation. The singular requirement was for the banks to raise their share capital to N25 billion. By 2006 when the exercise ended, 25 out of the initial 84 managed to scale the hurdle; a sizeable number went into mergers, others that couldn’t find suitors went into liquidation.

Unfortunately, all manners of risk management and corporate governance practices would reduce the exercise to a farce barely three years after. By then, a good number of the newly consolidated banks were already in the financial hole. What followed was the remedy of sweeping sanitisation under which the entire executive management of eight banks were swept away. At the end of the exercise, the industry was further reduced from 24 to 20.

Today, whereas the industry has emerged from the ashes of that turbulent phase, there are however isssues from that past that still linger. First is that of access to credit – the lifeblood of the economy; this has remained restrictive, particularly to the real sector. Indeed, the cost of funds has not only remained astronomical, it has remained the sore point, more so in an environment where other enablers of production are sorely lacking.

Second is the issue of banking penetration. At current levels of 25million out of 84million adult Nigerians, it is well below those of other emerging markets and indeed below those of the nation’s frontier market peers.

But a more interesting dimesion of the problem appears to have been captured in a recent report by the Financial Derivative Company when it notes that “imperfect competition still prevails , where five Tier 1 banks control about 70 percent of the market and 80 percent of profit before tax (PBT)”.

Imperfect competition or not, the development comes as no surprise. While it may seem hard to reconcile the emergence of the big five with the objectives of deepening and liberalisation of the financial sector which the restructuring seeks, it seems to this newspaper an inevitable law of natural selection that dominant players would emerge at some point. What the development does is lay bare the pretence of some of the banks, particularly those that covet national or international classification without the requisite hard work, to grow their market share. We expect the report to cure them of their obsession with size which we consider absurd.

The challenge is for the regulators to keep an eye on the operators, particularly the emerging big banks, given the potential systemic risks they pose in the event of their failure. We expect to see the push for financial system stability matched by an equal if not greater push to deepen financial services. Just as we expect to see the banks lend more to the real sector, we also expect to see the cost of lending go down in the long run. The latter is, after all, what constitutes the rationale of the banks.