Some key elements of the reforms include the following:

1. Requirement that the minimum capitalization for banks should be raised to a minimum of N25billion (approx $250million) from N2billion (approx $15million) with full compliance before the end of December 2005.

á      Only banks that meet this requirement can hold public sector deposits and participate in the Dutch Auction System of buying and selling foreign exchange

á      The CBN shall publish names of banks that qualify by 31 December 2005.

2. Consolidation of banking institutions through mergers and acquisition
3. Phased withdrawal of public sector funds from banks.
4. Adoption of a risk focused, and a rule based regulatory framework.
5. Adoption of zero tolerance in the regulatory framework.
6. The automation process for reporting of returns.       
7. Establishment of a hotline, confidential internet address for all Nigerians wishing to share any confidential information with the Governor of the CBN on the operations of any bank or the financial system.
8. Strict enforcement for the contingency planning framework for systemic banking distress.
9. Work towards the establishment of an Assets Management Company as an important element of distress solution.
10. Promotion and enforcement of dormant laws, especially those relating to the issuance of dud cheques, and the laws relating to the vicarious liabilities of the Board members of banks in cases of failings by the bank.
11. Revision and updating of relevant laws and drafting of new ones to the effective operation of the banking system.
12. Closer collaboration with the Economic and Financial Crimes Commission (EFCC) in the establishment of the Financial Intelligence Unit, and enforcement of the anti-money laundering and other economic crime measures. Greater transparency and accountability will be the hallmark of the system.

This paper shall focus on the consolidation option with the view to achieving the minimum capital base of N25 billion. For this purpose, Capital Base means paid up capital and reserves unimpaired by losses.

Consolidation Option:

The CBN has recognized that all over the world and given the internationalization of finance, size has become an important ingredient for success in the globalised world. The last few years have witnessed the creation of the worldÕs banking group through mergers and acquisitions. Flowing from this, the CBN has stipulated that the only legal modes of consolidation allowed are mergers and outright acquisition/takeovers. A mere group arrangement is not acceptable for the purpose of meeting the minimum capital base. This means that all banks that have other banks as subsidiaries or have common ownership are encouraged to merge.

The CBN has provided the following incentives for the Banks that consolidate or are able to achieve the required minimum capital base by 31 December 2005.

• Authorization to deal in foreign exchange
• Permission to take public sector deposits and recommendation to the fiscal authorities for the collection of public sector revenue.
• Prospects of managing part of NigeriaÕs external reserves, subject to prevailing guidelines.
• Tax incentives in the areas of capital allowances, company income tax and stamp duties.
• Reduction in transaction costs.
• Provision of team of experts to provide technical assistance to the Banks.

Another very important incentive the CBN has provided is; Amnesty For Past Misreporting. Banks are encouraged to be open in their negotiations by placing the actual value of their assets on table. Sanctions will not be imposed for any previous misreporting detected in the course of consolidation. However, if any of the parties to the consolidation is found after the consolidation exercise to have presented false or misleading information to the other parties and or the regulatory authorities, such party will bear the full legal and regulatory consequences of such misbehavior.

Background.

In Nigeria, we have eighty-nine banks many of which have a capital base of less than US$ 10 million. This section will set out some of the factors that necessitated the need for major banking sector reforms.

Need for a Stronger Banking Sector.

Through financial intermediation, banks are supposed to facilitate capital formation and promote economic growth by operating in a safe and sound manner. In the past, some financial institutions showed glaring inability to maintain an efficient flow of funds within the economic system. The sharp practices of some Banks together with the unsoundness of others led to a wide spread of financial sector distress and losses to depositors.

It has been seen as a paradox that despite the size of the economy, the countryÕs reserves are still deposited in foreign Banks due to the low capacity of the local Banks. The sector has been highly concentrated structurally as the ten largest Banks account for about fifty percent of the industryÕs total asset and liability. Most Banks in Nigeria have a capital base of less than 10 million Dollars; this has rendered the system very marginal relative to its potentials and in comparison to other countries.  There has therefore been the need to be proactive and to strategically place Nigerian Banks to be active players and not spectators in the emerging world economy.

Other problems include; weak corporate governance evidenced by high turn over in the Board and management staff, inaccurate reporting and non-compliance with regulatory requirements, late or non-publication of annual accounts that obviates the impact of market discipline in ensuring bank soundness; gross insider abuses, resulting in huge non-performing insider related credits; insolvency, as evidenced by negative capital adequacy ratios and shareholders funds that had been completely eroded by operating losses.

Over Reliance On Public Sector Deposits.

In as much as the minimum capital base requirement for banks was N2 billion, a lot of Banks still depended on deposits from the public sector. Many banks appeared to have abandoned their essential intermediation role of mobilizing savings and inculcating banking habit at the household and micro enterprise levels. Although the distribution among banks of public funds was not uniform, there were some banks whose dependency ratios were in excess of fifty percent. The implications were that the resource base of such banks became weak and volatile, rendering their operations highly vulnerable to the swings in government revenue, arising from the uncertainties of the international oil market. In tackling this issue, the CBN will not withdraw the licences of the Banks that may not meet up with the new requirements but they will be excluded from holding public funds and participating in the Dutch Auction System.

Issue of Disclosure

The CBN as a tradition does not publish the condition of individual banks. In times of distress, such banks were shielded from massive withdrawals capable of collapsing them. It was the belief of the CBN that such banks in distress can be revived through managerial repositioning. In dealing with this issue, the CBN decided that by the end of December 2005, the names of Banks that meet up with a minimum capital base would be published. The idea is to enable potential depositors have enough information about the status of the Banks.

Story so far.

The banks have since started to comply with the pronouncement by the CBN, by taking active and positive steps towards increasing their capital base to and over the required minimum.

The economy has witnessed the signing of Memorandum of Understanding (MOU) among four groups expressing their intention to merge as a single Bank and also the signing of an MOU between two Banks, one expressing the intention to acquire the other.

First Amalgamated Bank comprising of All States Trust Bank, Hallmark Bank, Gulf Bank, Lion Bank and Universal Trust Bank set the merger trail as the first group to sign an MOU to formalize their merger. Next came the Intercontinental Group consisting of Intercontinental Bank Plc, Gateway Bank, Equity Bank of Nigeria, and Global Bank Plc. The fusion of another four Banks: First Atlantic Bank Plc, Assurance Bank Plc, Manny Bank and Guardian Express Bank are the formation of a mega Bank called Astrabank. Another mega bank to be formed is the merger of Prudent Bank Plc, Magnum Trust Bank Plc, Eko International Bank, NBM  Bank and Trust Bank of Africa into Sterling Bank.

Guaranty Trust Bank signed an MOU expressing intention to takeover a smaller Bank; Inland Bank Plc to become the first Bank to make an acquisition. One of the benefits of this take over is that the shareholders of the smaller bank: Inland Bank will enjoy the benefits of the larger bank who have already achieved the new re-capitalization requirements.

Apart from these consolidations, four banks namely; Guaranty Trust Bank Plc, Zenith Bank Plc, Oceanic Bank Plc and Access Bank Plc increased their capital base in line with the Central BankÕs Directive by offering their shares to members of the public by way of Public offers, while several others have engaged in a private placements in a bid to attract high network individuals and institutional investors to invest in their Banks. One of reasons why such banks have adopted this model is in order to increase their financial strength before signing an MOU with any bank in order to avoid ending up as junior partners. Another reason is that some banks have no intention of merging or consolidating.

Conclusion.

The main objective of these changes is to move the Nigerian economy forward and to strengthen the banking system in order to facilitate development.

Our firm: George Ikoli & Okagbue is presently involved in the Astrabank merger, which is expected to crystallize by March 2005.

Sam N. Okagbue