Uproar, reforms shape banking sector
Going by its financial intermediation function, the banking sector is the vital spark of any economy. It provides the needed muscles for other sectors to grow. In the last 20 years, the sector experienced several troubles and at the same time went through
The significance of the banking sector, not only to the nation’s economy but many Nigerians made it newsworthy. Readers and listeners await any story that affects the health or otherwise of the sector because when the banks sneeze, the whole economy catches cold. During the 2004 reforms, banks’ consolidation exercise and N25 billion recapitalization were among the key news stories that dominated the media as many Nigerians were eager to know what was going on. Readership of many newspapers in the country significantly increased and Daily Trust, being one of the most authoritative newspapers, carved a niche by becoming a reliable source of news for depositors, regulators, and shareholders.
In 2004, the then Governor of the Central Bank of Nigeria, Professor Charles C. Soludo introduced a 13-point reforms agenda that helped the sector picked up very fast. The reforms discarded many troubled banks and empowered others which helped stimulated many new and old industries such as information and telecommunication sector, agriculture, oil and gas, manufacturing and service sector. The contribution of the sector to the Gross Domestic Product [GDP] also rose as a result of the reforms from N134.5 billion in 1998 to N3,260.5 billion in 2015, faster growth than in the other sectors of the economy.
Key elements of the 13-point reform programme included minimum capital base of N25 billion with a deadline of 31st December, 2005; consolidation of banking institutions through mergers and acquisitions; phased withdrawal of public sector funds from banks beginning from July 2004; adoption of a risk-focused and rule-based regulatory framework; zero tolerance for weak corporate governance, misconduct and lack of transparency. Others were to accelerate completion of the Electronic Financial Analysis Surveillance System (e-FASS); establishment of an Assets Management Company; enforcement of dormant laws; revision and updating of relevant laws; closer collaboration with EFCC and the establishment of a Unit.
After successfully concluding the first two reform elements, the number of the bank reduced from 89 to about 23 more effective, efficient and liquid institutions. Before the consolidation and recapitalisation, many troubled banks folded due to their weak structure. For instance, Tunde Lemo, former deputy CBN Governor said the banking sector was characterized as highly oligopolistic whereby the top ten banks were found to control more than 50% of the aggregate assets, more than 51% of aggregate deposit liabilities and more than 45% of the aggregate credits.
The economy was false footage; bulk of Financial Intelligence on the transactions by many customers were carried out by small-sized fringe banks with very high overhead costs, low capital base averaging less than $10million or N1.4 billion, heavy reliance on government patronage with approximately 20% of industry deposits from government sources. According to Lemo, 24 out of the 89 deposit-money banks that existed in the preconsolidation era exhibited one form of weakness or another. Prominent among such weaknesses are undercapitalization and/or insolvency, illiquidity and poor assets.
Also the Nigeria Deposit Insurance Corporation [NDIC] said it its report that between 1998 and 2016 44 banks failed. In 1998 alone 26 banks failed which become the year with highest banks failure. The reforms were to ensure the safety of depositors’ money, position banks to play active developmental roles in the Nigerian economy, and become major players in the sub-regional, regional and global financial markets. The reforms led to the emergence of 25 strong and healthy banks and increased competition and rivalry among the banks.
Diversification of the economy and emergence of many economic subsectors such as ICT and service sectors also presented new opportunities and challenges to the banks. Since the reforms many of the banks embarked on new moves to drive new projects and attract new customers with various incentives and attractive financial products and loans. However, as a result of the tight competition in the sectors, the risk became so much as many of the loans issued by the lenders went bad. In addition, some of the loans were issued without due diligence with high level insider-related loans.
Recently, NDIC said most of the non-performing loans by the deposit money banks were insider loan availed directors of the institutions. According to Mr A.A Adeleke, NDIC’s Director, Bank Examination while speaking on the topic, ‘Curtailing the Growth of Non-performing Loans in Banks’ at a workshop in Kano, “Regrettably, between 1994 and 2011 we closed down over 50 banks, and what we discovered over time is that most of the loans that dragged these banks down where insider loans given to their directors.”
Also Managing Director of NDIC Umar Ibrahim, said bank directors were responsible for 40 per cent of the N1.85 trillion non-performing loans or bad loans in banks. He also revealed that directors were responsible for about 40 percent of N139.45 billion bad loans in microfinance banks and mortgage banks. As a result of the bad loans, CBN set up the Assets Management Company of Nigeria (AMCON) in 2010 to buy the toxic assets of banks and take it off their books in order to improve liquidity in the system. That has helped the sector to reduced potentials of another cycle of distress.