Friday, October 16, 2009

Before another consolidation of banks

Prior to the present reforms initiated by the Governor of Central Bank of Nigeria (CBN), Mr Lamido Sanusi, Nigeria’s banking sector was under a huge blanket of suspicion. Confidence, a key ingredient for stability, was greatly eroded. Even among the operators themselves, unethical and other underhand tactics were employed to discredit one another’s performance.

Despite the 2005 recapitalisation exercise, the financial balance sheets of some of the banks were not as good as the investing public was made to believe. It was, therefore, no surprise when the new CBN governor ordered an audit of the 24 banks. The outcome led to the removal of eight bank chiefs by the apex bank. A total of N620 billion was injected to keep them afloat.

With the audit exercise over, there are signals that CBN may commence another round of bank consolidation. Undoubtedly, lifting our banks from the morass they are currently mired in, requires comprehensive measures that should go beyond recapitalisation. We agree that as long as the banks’ balance sheets remain weighed down by problematic assets, credit growth will remain sluggish.
In this wise, a second round of recapitalisation is not a bad idea. But a fresh consolidation should be just one of the strategies to put our banks in good stead to withstand both domestic and external turbulence. Our worry, however, for any planned recapitalisation is that it could be a ploy by the CBN governor to reduce the number of commercial banks operating in Nigeria to his ideal number of 15, which he indicated on assumption of office.

If that is the reason, the CBN may be working to the answer in the name of consolidation. We hope that is not the real intention. While we support every effort to sanitize the banking sector, the CBN must create a framework that will enable banks emerge either through acquisitions or mergers. In this regard, the apex bank must be thorough and impartial. Any bidding to acquire the ailing banks, either by local or foreign banks, must be seen to be transparent. It must follow all due process.

It is our view that the main problem facing Nigeria’s banking sector is lack of corporate governance, not necessarily capital. For any meaningful reform, the operators must embrace best practices as demanded by the tenets of corporate governance. This entails keeping scrupulously to the ethics of banking. Until now, many banks have been found to cook their financial records, apparently to deceive shareholders and the investing public. Ethics mattered little to many of the bank chiefs. Violations of the rules and regulations were the norm. All of these were part of the portal of fraud that assailed the Nigerian banking sector before the CBN hammer fell on erring bank MD/CEOs.

Therefore, one solution is to ensure that henceforth, the banks and their Chief Executives are ready to play by the rules of proper banking operations. The key to enduring reform rests with enforcement of corporate governance and punishment of offenders. In the past, the CBN and the Nigeria Deposit Insurance Corporation (NDIC) which should have kept watchful eyes on the commercial banks appeared rather soft in the area of enforcement of the rules. In some instances, top officials of the two regulatory authorities were accused of compromising themselves by cavorting with MD/CEOs of some banks. Too much familiarity breeds reluctance in enforcing the rules.

We advise that every plan by the apex bank to reform the banking sector must clearly define and determine the scope and next level the industry will aspire to reach. But in all, corporate governance must take pre-eminent position in every strategic plan.

Also, effective control measures that can identify and discipline erring banks staff should be considered. Overall, any fresh round of bank consolidation must go notches higher than the previous one