The Future Of Nigerian Banks

The Future Of Nigerian Banks

Recent Policy on Banking

The introduction by the Central Bank of Nigeria (CBN) of universal banking in 2000 was a watershed in banking in Nigeria. This altered the banking landscape such that banks were no longer separately classified as commercial and merchant banks. More significant was the fact that the policy on universal banking enabled banks to offer a broader spectrum of financial services including financial advisory, stock broking, insurance, mortgages, retail banking, merchant banking and bureau de change services.   Further, the minimum share capital of Nigerian banks was raised to twenty five billion naira (N25 billion) in 2005. This resulted in several mergers as banks struggled to meet this capital requirement, thereby reducing the number of banks operating in Nigeria from over seventy to twenty five.1 Also, no foreign investor was allowed to acquire more than 10% of banks which had majority Nigerian shareholding.

The Emerging Landscape and Key Reforms
Broadly speaking, banks in Nigeria may be classified as universal banks and microfinance banks.2 Universal banks may be further classified into the Nigerian subsidiaries of international banks3 and Nigerian-owned banks. Micro finance banks are classified into unit banks4 and state banks5.
Following recent changes at the helm of the CBN, a number of policy proposals which are likely to alter the banking landscape have been announced by Lamido Sanusi, the new CBN Governor. These include:

i. The abrogation of universal banking
The view of the current CBN management is that universal banking has caused banks to deviate from their core banking function resulting in inefficiencies that have led to loss of shareholder funds, insider abuses and illiquidity. The plan of the CBN is therefore to create specialized banks such as non-interest banks, small and medium enterprises (SME) banks, infrastructure banks and agriculture banks. In addition, banks are expected to be categorized into regional, national and international banks. The CBN plans to prescribe separate minimum share capital requirements for each category of banks. These proposed policies are effectively a reversal of the 2000 and 2005 reforms.

ii. Encouragement of Foreign ownership
Unlike his predecessor, the current CBN Governor is not averse to foreign investors, especially banks, acquiring control of the current Nigerian – owned banks. He has in fact actively courted foreign investors to take over the eight banks recently bailed out by the CBN. The result of this policy is likely to be an increase in the number of Nigerian banks that are controlled by foreign investors. The Central Bank of Nigeria has set the tenure of Chief Executive Officers (CEOs) of banks at a maximum of 10 years comprised of two terms of five years each. This policy was made to take retroactive effect. Therefore, the tenure of any CEO who has served for 10 years by July 31, 2010 is to terminate on that day. Where a bank resulted from a merger, an acquisition or a similar process, the ten-year period is reckoned to include the pre and post – combination service years of the CEO, provided that thze bank in which he previously served as CEO forms part of the new bank that resulted from the combination. Two of the three banks whose CEOs must retire by July 31, 2010 in accordance with the policy, have already designated successor CEOs. Hitherto, the CBN’s Code of Corporate Governance for Banks limited the tenure of only non-executive directors. Under, the Code non-executive directors may only serve for a maximum of three terms of four years each.

The Future
The likely effect of the reforms summarized above is that the era where one can be the CEO of a bank for as long he has the confidence of the board is gone. It is expected that this will improve corporate governance in the banks as the CEOs likely to be affected by the policy are those that control a majority of the shares in the bank and could influence the appointment and removal of directors.   It remains to be seen whether Nigeria will see more acquisitions of existing banks by foreign investors as a result of the removal of the cap on foreign shareholding in Nigerian-owned banks. This is because it will depend largely on the willingness of the shareholders of the banks to sell and less on regulatory fiat.   Foreign investors are also likely to consider the larger investment environment before deciding to invest. However, with the abolition of universal banking and the possible reduction of the minimum share capital with respect to some categories of banks, more banks are likely to emerge.   It is also likely that Islamic banking will be introduced. The envisaged increase in the number of banks will in our opinion challenge the regulatory capacity of the CBN.   Notwithstanding the above, given the policy reversals in the banking sector less than ten years after the initial policy on universal banking, the jury is out as to how long the current spate of reforms will outlast the current CBN management.