On Tuesday, 6th of July
2004, the new Governor of the Central Bank of Nigeria (CBN),
Professor Charles C. Soludo made pronouncements on Banking sector
reforms. The first phase of the reforms is designed to ensure
a diversified, strong and reliable banking sector, which will
ensure the safety of depositors money, play active developmental
roles in the Nigerian Economy and become competent and competitive
players both in the African and global financial systems, while
the second phase will involve encouraging the emergence of regional
and specialized banks.
Some key elements of the reforms
include the following:
- 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.
Only banks that meet this requirement can hold
public sector deposits and participate in the Dutch Auction
System of buying and selling foreign exchange
The CBN shall publish names of banks that qualify
by 31 December 2005.
- Consolidation of banking
institutions through mergers and acquisition
- Phased withdrawal of public
sector funds from banks.
- Adoption of a risk focused,
and a rule based regulatory framework.
- Adoption of zero tolerance
in the regulatory framework.
- The automation process
for reporting of returns.
- 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.
- Strict enforcement for
the contingency planning framework for systemic banking distress.
- Work towards the establishment
of an Assets Management Company as an important element of
- 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
- Revision and updating of
relevant laws and drafting of new ones to the effective operation
of the banking system.
- 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.
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
world’s 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
- Permission to take public
sector deposits and recommendation to the fiscal authorities
for the collection of public sector revenue.
- Prospects of managing part
of Nigeria’s external reserves, subject to prevailing guidelines.
- Tax incentives in the areas
of capital allowances, company income tax and stamp duties.
- Reduction in transaction
- 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.
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 country’s 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 industry’s 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
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
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
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
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 Bank’s 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.
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
Sam N. Okagbue
Taiwo B. Aluko (Ms.)