VA: Can you briefly describe how the banking sector in Nigeria evolved since the 1980s and what have been the major developments?
A: Over the last 35 years the banking industry in Nigeria has been through several transitions that have led to a complete transformation. To put this in perspective, below is a timeline that briefly describes the major changes over this time that should be noted;
In the 1980s regulations begun to be phased in that would see the opening up of the banking sector, as prior to these regulatory changes the banking sector was very strict and it wasn’t easy to gain access or obtain a banking licence.
During 1984 Nigeria underwent an economic reform and the
Financial Services sector was identified as having a key role to play in the new economy and subsequently, the Financial Sector – and banking industry in particular – went through its own reform phase that liberalised the market. To put this into context, prior to 1981 there were only 21 banks operating in Nigeria. However, following the liberalisation of the industry there was a sharp increase in the number of banks or banking licenses being granted. This trend continued between 1982 and 1990 and, by 1992 there were 65 commercial banks in the country with approximately 2000 branches – whereby the structure of these banks differed between Merchant and Commercial.
The year 2000 saw the banking ceiling break – and similar to the experience in the US and/ or UK – that would see banks being able to offer a host of services or all services. In 2001 Nigeria began issuing new banking licenses for Universal principle banking, which completely took away the previous differentiation between Merchant and Commercial banks. As a result, during 2000 and 2001, there was a further increase in the number of banks or banking licenses issued and, in fact, there were a total of 90 registered banks in the country at this time, however only 5 – 7 main banks controlled the market.
Over this time, often banks only took a license so as to be able to participate in foreign exchange. This created other challenges, however, as these smaller banks didn’t contribute to the economic growth of the country and it was realised that the banking industry wasn’t being properly capitalised on. To try and amend this, the industry became a positive contributor to the economy the Nigerian Central Bank instituted a re-capitalisation policy that would see the re-distribution of resources.
The advent of the re-capitalisation policy led to a significant number or of mergers and acquisition as the industry experienced a period of consolidation between 2002 and 2005. For instance, the 90 banks became 24, all of whom had asset capital to the value of N25 billion and collectively had about 3000 branches across the country. Collectively, the banks had total assets to the value of N32 trillion and, total capital to the value of N200 billion.
Following the period of consolidation, 2006-2007 saw rapid expansion by a lot of the banks. For instance, many banks expanded their footprint beyond Africa’s borders into other regions on the continent. Additionally, over this period, in Nigeria there was also a trend of increased reckless approval of credit, or reckless lending, by the banks – that subsequently had a negative impact on those equity markets, for instance in the oil and gas downstream industry.
The global credit crisis of 2008 led to the bubble in capital markets bursting, as although margin costs prices went down there was no liquidity in the capital markets – as there was no one to sell to.
To address and rectify weaknesses in the industry, the Central Bank of Nigeria instituted a ‘stress test’ that was aimed at weaning those weaker banks that may continue to place strain on the industry. Key pressure points included; banks that wouldn’t survive the economic climate or global credit crisis and banks that had excessive bad credit – for instance, with 70% (plus) non-performing loans, etc. Following this process, 9 banks were declared unfit and between 2009 and 2010 the Central Bank of Nigeria took over administration of these businesses. – where the Central Bank would sell off 5 of the banks immediately and later, address issues in the remaining banks before the assets were redistributed or sold off.
During 2009-2010 the Central Bank of Nigeria also instituted another set of reform, which was aimed – not exclusively, but importantly – at;
- Assessing the distress of the Nigerian banking industry and the economy
- Improving Corporate Governance in the banking industry
- Introducing stricter corporate reporting (including IFRS and Basil el2)
With significant restructuring in line with Corporate Governance principles, in 2011 the industry experienced a second wave of consolidation – and only the strongest banks that could appropriate support the economy and growth in the country survived.
VA: What percentage(s) of the growth that the banking sector has experienced in the last decade are due to homogenous growth vs. foreign investment and/or merger and acquisition activity?
A: While it may seem as though the banking industry shrunk between 2004 and 2014 due to massive consolation in the market, these mergers and acquisitions in fact represented approximately 60% of the organic growth for the remaining (stronger) banks.
VA: Trends in foreign investment in banking in Nigeria – particularly which foreign franchises have shown the most interest in expanding into Nigeria?
A: Following the last banking crisis in 2008 – that led to the 9 banks being declared “unfit” and where the 5 banks were put up for sale – there was significant interest by foreign banks to buy these assets.
While foreign investment in Nigeria’s insurance industry has seen more active investment, the banking industry remains an attractive investment opportunity for foreign banks due to the 20-30% return on equity that the market offers, making Nigeria attractive for investments in equity or, for portfolio investments.
The challenge with investing in any new markets is understanding the market’s operational and regulatory frameworks and, while foreign investors may not have the necessary knowledge or skills to immediately establish a foreign bank in a new market, they certainly look to take an equity stake first, which enables them to establish the necessary relationships – service or collaborative partnerships – and understanding the profile and structure of the market.
VA: How the Nigerian Sustainable Banking Principles have been adopted, to date?
A: To a large degree environment practices have already been adopted by most banks as “a way to do business” as it is in their interest to, not only from a sustainability point of view, but also how their business is viewed in the market – by Government, their clients, peers or competitors. There is a definite increase in awareness and stronger consciousness in the banking industry on their impact on the environment and, the need to protect the environment.
That said, there is a lot more banks could be doing and I believe that in 2015 we will see the Sustainable Banking Principles being embraced with far more positive adoption and – from a good governance point of view – with the possibility of the 9 core principles being incorporating into the corporate reporting of the banking sector.
VA: When the principles were launched by the Central Bank of Nigeria in 2012, these were applauded as the first of its kind in the world, but what impact have these had on the sector in the country?
A: Banks in Nigeria are required to submit quarterly reports to the Central Bank of Nigeria and quite a few banks have already complied, however, there is room for improvement in the actual practices and in reporting. As such, I expect that over the next 5 years we’ll see a greater impact of these principles on the industry and particularly with regards to social responsibility and corporate reporting.
VA: At the time these principles were launched it was also said to that they made Nigerian banks less competitive when compared to multi-nationals – with two years in review, what impact (if any) have these principles had on the ability of Nigerian banks to compete in a liberalised market?
A: Those banks who have embraced the sustainability principles are happier for it, as they have already addressed the socio-economic impact of their business and operations by adapting so as to improve on the impact they have on communities, the environment and how they positively contribute to the economy.
VA: In October the Federal Government disclosed its intentions to explore the network of the Nigerian Postal Service to reduce the unbanked population in the country to 10% by 2016. In your view, is this a feasible strategy? And; if yes, what would be required to make this work?
A: This is certainly a very aggressive target by the Federal Government, especially if we consider that in 2012 approximately 46.7% of the adult population of the country (+/- 90 000 000 then) was unbanked. Even if we work of this number – as the latest available statistic – the Federal Government is talking about reducing 40 000 000 unbanked to 9 000 000. To do this, even within three years is challenging.
That said; the target is achievable. Currently the National Postal Service (NPS) has approximately 5000 outlets, which presents a great opportunity of access that can be leveraged – particularly in areas where the banks may not have a physical presence.
However, there will be a lot of challenges to getting this strategy right and a few critical cornerstones that will need to be considered include:
- Capacity building – up-skilling employees to be efficient in Financial Services will need to be undertaken, taking into consideration the recent customer-centric approach the banks are striving will mean intense training and skills development
- Technology – technology and networking will be critical and as such, a full scale collaborative system will need to be built, managed and rolled out nationally
- Infrastructure – access to adequate and reliable infrastructure will be paramount including power, transport and bandwidth (internet access) – particularly in rural areas
Additionally, while leveraging on the National Postal Service certainly isn’t a bad strategy to tap into the unbanked population, it shouldn’t be the only strategy. For instance, Nigeria has a mobile money strategy, though currently this isn’t being implemented, which is limiting – but if we consider the trends and numbers around mobile penetration and rapid adoption, it may be something worth relooking.
Overall, Nigeria may see a dramatic decrease in the unbanked population however; the 10% of the banking population by 2016 target is not realistically obtainable
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