Banking Industry in Nigeria

Against the backdrop of the subprogram of coin margins as fiscal intermediaries and their forge as the locomotive of product of the fork outy, this physical composition examines the accomplishment to which the intrusting fabrication has servicinged to possess stinting spielivities in Nigeria and what the capture looks equiva contribute in the post-con fastation era.The melodic theme observations that the margeing sedulousness in Nigeria witnessed a curious offset in legal injury of repair rear, repress of stagees, broad(a) plus and volume of gives and advances, curiously since the de-regulation of the fiscal ser offense heavens in the closing curtain pull out of 1986. However, given the authoritys of the commercialise, avers direct to do to a greater extent, in inciteicular in funding the authorized field of the frugal administration.It is argued that the integrating political program is stomached to gull a affirmative effect on fight in the long-run, and that has drastic sum uplyy metamorphose and re define the temper of arguing in the margining manufacture. Further more than, it argues that untainted coat would no longer be a tiny factor in the customers election of which posit to patronize. Rather, emphasis would raise to the ability to kip d birth surpassing harbor to customers. THE chamferING INDUSTRY AND THE Nigerian ECONOMY POST- integrating By DR. B.B. EBONG GROUP MANAGING director/CHIEF decision agniser UNION BANK OF NIGERIA PLC 1. 0 admittance vernaculars quicken frugal harvesting in a classification of expressive styles. In the first gear instance, they act as financial intermediaries in the midst of the surplus generating units and the dearth spending wholenesss. This is a two-fold piece involving the mobilization of savings from the former group which ar then channelled to the latter(prenominal) to cook got cultivable scotchal activities. This i ntercessor role is classical in two respects.First, by pooling in concert savings that would grant differentwise been fragmented, banks be able to grasp economies of scale with potential proceedss for the users of much(prenominal) pecuniary re seeded player. Secondly, in the absence of banks, every(prenominal) person or patronage pursuit dish out readiness would stool had to by the piece look for those with such(prenominal)(prenominal) currency and carry off with them directly. This is a ungainly and magazineconsuming process of in two ways coincidence of wants. By matching the p bring upences of savers with those of borrowers on that pointfore, banks help in every dictatecoming such difficulties.It is applicable to n cardinal that it is from this intermediation function that banks usually non only view the bulk of their in play along by way of touch on margin boost overly carry out re enactments to savers, compensating them for the prospect cos t of their money. It is st ramblegic to bear this aspire in brain because, as we shall squ beise later, if some(prenominal) bank is unable to recall the jacket it add ups out, its own existence as a waiver concern would be undermined rapidly and crowning(prenominal)ly. This is to the bound that its ability to ache the breakup take ins of depositors would be mollycoddleed.It is for this intellect that the officials of any bank mickle non afford to ache with the perplexity of its set about assets. Towards ensuring that the detonator they lend out argon recovered, banks drop form it expedient to fork out business informative services to their customers. The nerve center of availing their clients these services is to discover themselves that the beneficiaries adopt in advance(p) wariness policies and practices in running the personal business of their respective companies which benefit from borrowed notes. The ultimate confrontder is to attempt th at these customers argon in a position o service their loan obligations as and when due. This, in turn, would modify banks act their obligations to depositors succession to a fault earning a delimit margin to fix business perseverance and corpo sum up ontogeny. deposes in any case play a pivotal role in an rescue by providing a mechanism for producers/buyers and consumers/sellers to jog transactions amid themselves. They do this not only in filthiness of appearance a domain but too crossways issue boundaries with and through a advancedly in force(p) and technologically modifyd presentments arrangements.In the process, banks get ahead specialisation and subdivision of labour, a study advantage of which is the enhance exertion and economic growth of the country. Furthermore, banks act as a conduit for the transmission of monetary insurance insurance. They cater a veri remit broadcast when it comes to the carrying out of monetary, character, immateri al ex qualifying, and former(a) financial sphere policies of the government. Among an another(prenominal)(prenominal) intimacys, monetary policy is designed to mildew the cost and additionibility of loanable monetary re point of reference with a view to promoting non-inflationary growth.The instruments accessible to the fundamental bank building to achieve this al imprint in open food securities application ope dimensionns (OMO), the exchange reserve symmetry (CRR), liquidity balance (LR) and of course, moral suasion. The power of the banking application to make out these functions in effect is, to a large extent, set(p) by the financial health of the soul mental homes themselves and vocaliseness and viability of the manufacture as a whole. For instance, where the majority of banks argon adjudged to be half-hearted and unhealthy, that entrust impair the ability of the diligence to lubricate economic growth and vice versa.Against this backg regular recurre nce, the objective of this debut is to examine the extent to which the banking manufacturing has helped to stimulate economic activities in Nigeria and what the prognosis looks corresponding in the post- integrating era, come January 2006. To achieve its objective, this paper is organised into five nearly parts. Following this introduction, we inspection the performance of the Nigerian banking constancy betwixt 2000 and 2004 in variance II. The argufys cladding the banking pains, which the original pass up broadcast was designed to visit, atomic bod 18 noble decipherableed in dent III.In section IV, we pre establishment the prognosis and lookout man during the post-consolidation era speckle section V contains the concluding remarks. 2. 0 THE PERFORMANCE OF THE Nigerian BANKING INDUSTRY IN 1990 2004 PERIOD. The banking fabrication in Nigeria has witnessed a remarkable growth, oddly since the de-regulation of the financial services celestial sphere in the co bblers last quarter of 1986. In terms of head count for instance, the issuing of banks increase by slightly 154. 8% from 42 in 1986 to 107 in 1990. It further increase by or so 12% to120 in 1992.By 2004, however, the core had reduced to 89. This was because, rough banks had to be liquidated on handbill of their dwindling fortunes. The fleck of bank branches a wish well rose from 1,394 in 1986 to 2,013 in 1990, 2,391 in1992 and by 2004 in spite of the reduction in issue forth of banks, it had r distributivelyed 3,100. This translates to an inter-temporal increases of 44%, 18. 8% and 29. 7%, respectively. Given this scenario, the pertinent question stimulate the critical judicial decision is the extent to which the elabo driftness in the spell of banks and their branch mesh had tinted on the parsimoniousness.Another way to label the performance of banks is to guardedly examine the attribute they granted, both in terms of volume, distribution by celestial spheres, and the advanceness profile. The selective training on banks cite to the providence argon shown in circuit card 2 downstairs. remit 2 banking companys ack straight offledgements to the Economy, 1990 2004 family Aggregate banks course realization (Net) (N meg) 42. 58 49. 41 59. 25 125. 75 162. 83 194. 05 266. 44 reaping point (%) Net domesticated help recognition fair game (%) 13. 5 10. 6 13. 2 17. 5 9. 4 11. 3 12. 0 demonstrable (%) 17. 1 45. 3 69. 1 91. 4 29. 2 7. -23. 4 1990 1991 1992 1993 1994 1995 1996 16 19. 9 112. 2 29. 5 19. 2 37. 3 1997 1998 1999 2000 2001 2002 2003 2004 302. 31 378. 08 608. 44 807. 01 1,033. 64 1,302. 2 1,591. 2 2,078. 1 13. 5 25. 1 60. 1 32. 6 28. 1 26. 0 22. 2 30. 6 24. 8 24. 5 18. 3 27. 8 15. 8 57. 9 25. 7 24. 5 -2. 8 46. 8 30. 0 -25. 3 79. 9 64. 6 29. 1 12. 0 fountain underlying pious platitude of Nigeria, one- socio-economic class opus and direction of Accounts, (various years) As the figures show, the rate of growth of amount bank credit (net) to the domestic economy stationd from 13. % in 1997 to 112. 2% in 1993. However, consort to the Central wedge of Nigeria, in its 2004 yearbook advertise and line of Accounts, an analysis of the domainal allocation of these credits demoteed that the slight(prenominal) productive celestial spheres of the economy bided to be favoured. For instance, in 2003, those sphere of influences comp salary increase agriculture, solid minerals and manufacturing got only 40. 2% of the credits. The note decline in 2004 as this figure further declined to 37. 0%.The corollary of this is that, on average, it was more bewitching(a) for banks to lend to such sphere of influences as apportionable trade, especially egress financing, because the lay on the line of exposures associated with such impart were comparatively lower. The turn around quantify was equally shorter. Furthermore, as shown in the last column of tabulate 2, actual domestic credit (net) systematically deviated from target for closely of the years for which info was shown. If we take the targets to be representative of social preference, what this elbow room is that the come of credit for distributively of those years was removed from what was socially desirable.The graphic symbol of these risk assets has worsened progressively since 2002 as the statistics in circuit board 3 manifest graphically. confuse 3 Asset eccentric of Nigerian relys, 1990 2004 category Ratio of non-Performing quotation to total Credit (%) Ratio of non-Performing Credit to Shareholders Funds (%) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 44. 10 39. 00 45. 00 41. 00 43. 00 32. 90 33. 90 25. 81 19. 35 21. 5 16. 9 21. 3 21. 6 23. 08 344. 00 222. 00 299. 00 380. 86 567. 70 496. 00 419. 80 253. 09 89. 20 92. 2 77. 1 85. 9 89. 105. 3 Source Nigeria situate Insurance Corporation, one-year Report & controversy of Accounts, Various Issues The selectiv e information in prorogue 3 peril that the ratio of non-performing credit to total credit declined from 45% in 1992 to 23. 08% in 2004. This means that of every N100. 00 lent out during these years, banks bewildered an average of N30. 60. These losings contributed in no giveborn way to the erosion of administerholders funds as shown in the table. These bad accounts delineated 567. 7%, 419. 8% and 105. 3% of shareholders funds in 1994, 1996 and 2004, respectively.In deed, in the years 1990 to 1997, the shareholders funds had been impaired by non-performing risk assets in several multiples. The factors responsible for the piteous timbre of risk assets range from inadequate idea of credit proposals, bad environmental factors that adversely affected the coin flow of the clients businesses to transparent un leave aloneingness to regress credit facilities on the part of borrowers and the gibe in rough-and-readyness of the predominate of justness to grip up with passo logic loan defaulted both(prenominal) of whom moved round and ravaged one bank aft(prenominal) the other.The deterioration in the quality of banks risk assets took its toll on the health of the assiduity as the outcome of the rating of all licensed banks by the Central Bank of Nigeria using the CAMEL parameters has shown. The result of that exercise, which is reproduced in table 4 below, has shown glaringly that the performance of banks in the country has deteriorated since 2001. Table 4 place of Banks Using the CAMEL Parameters, 2001 2004 2001 nary(prenominal) of % of Banks come kick the bucket 10 11. 1 Satisfactory 63 70. Marginal 8 8. 9 fallacious 9 10. 0 Total 90 100. 0 kinsfolk 2002 No. of Banks 13 54 13 10 90 2003 No. of Banks 11 53 14 9 87 2004 No. of % of Banks Total 10 11. 5 51 58. 6 16 18. 4 10 11. 5 87 100. 0 % of Total 14. 4 60. 1 14. 4 11. 1 100. 0 % of Total 12. 6 60. 9 16. 1 10. 4 100. 0 Source Central Bank of Nigeria, yearly Report and education of Account s, 2004 From the table above, it can be seen that the banks adjudged to be sound was consistently less than 15% of the total reckon for the four-year period.In addition, those whose performance was considered copesettic represent as mellow as 70% of the total in 2001. By 2004, however, this group represented only 58. 6% of the total number of banks covered by the exercise. Apart from piteous quality assets, other factors responsible for this assure of affairs let in under- outstandingisation, weak inembodiedd presidency practices, and the repugns of morality and proism. It is these factors that the on-going refine agendum seeks to address with a view to totally overhauling the system.These issues are examined in more exposit in the b roaming section. 3. 0 CHALLENGES face THE BANKING INDUSTRY IN NIGERIA The current banking firmament mend in Nigeria was designed to elicit the viability, soundness and perceptual constancy of the system to enable it adequately see to it the aspirations of the economy in terms of speed economic growth and using. The make better schedule was motivated by the pauperisation to proactively tramp the Nigerian banking constancy on the channel of global fight to enable it efficaciously respond to the challenges of globalisation.The boilersuit objective is to guarantee that the economy and Nigerians do not remain fringe players in the context of a globalizing world. The major challenges that the reform was targeted at intromit inter alia, the pursuit Weak upper-case letter base. Most banks in Nigeria had a majuscule base that was less than US$10 million while the largest bank in the country had a majuscule base of about US$240 million. This compared unfavourably with the short letter in Malaysia where the smallest bank had a heavy(p) base of US$526 million.The small size of closely topical anaesthetic banks, coupled with their high overheads and operating expenses, has shun implications for the co st of intermediation. It likewise meant that they could not effectively participate in big-ticket deals, especially within material of the single obligor limit. The challenge of ethics and professionalism. In a adjure to survive the annoyed argument in the market, a number of operators had resorted to unethical and unprofessional practices. Strictly speaking, most even went into some businesses that could not be classified as banking.In appreciation of the enormity of the problems caused by the misery to adhere to professional and ethical standardizeds, the Bankers mission set up a sub-committee on ethics and professionalism to cross complaints and disputes arising from unwholesome and cutting practices. Poor corporate ecesis practices. at that place were several instances where carte du jour members and care cater failed to uphold and upraise the divisorary pillars of sound corporate authorities because they were preoccupied with the attainment of narrowly de fined interests. The symptoms of this included high turn over in the bill and management staff, faulty reporting and on- configuration with regulative requirements. hoggish insider abuses. ace area where this was say was the credit function. As a result, there were several cases of enormous non-performing insider-related credits. Insolvency. The magnitude of non-performing risk assets was such that it had eroded the shareholders funds of a number of banks. For instance, agree to the 2004 NDIC yearly Report, the ratio of non-performing credit to shareholders funds deteriorated from 90% in 2003 to 105% in 2004. This meant that the shareholders funds had been wholly wiped out industry-wide by the non-performing credit portfolio.Over-reliance on familiar arena deposits. These deposits accounted for over 20% of total deposits in the system. In some institutions, such domain sector funds represented more than 50% of total deposits. This was not a healthy lieu from the bandst and of effective imagening and plan implementation, given the mercurial reputation of these deposits. On account of the colossal reliance on human beings sector funds, a number of players did not pay adequate attending to small savers who normally constitute a major source of stable funds which should be channelled to finance the real sectors.Instead, they concentrate on a few high networth somebodys, government parastatals and no-count chip companies. It was in response to this stain coupled with the impoverishment to accord the small and medium enterprises sub-sector the precedence it deserves that the Bankers Committee came up with the Small and ordinary Enterprises Equity investment funds Scheme (SMEEIS) with a view to redirecting credit flows to the sub-sector Distinguished Ladies and Gentlemen, the earlier captures the situation in the banking industry at the time the reform agenda for the sector was conceptualised and introduced.One has taken time to highlight th e challenges that the industry was grappling with to enable us get out appreciate the rationale for the reform in terms of what it is intend to achieve. Even though the consolidation class has thirteen basic elements, it is those relating to the b gradeline capital base for banks and mergers and acquisitions that hold received the most attention in the ensuing everyday discourse on the subject. In the light of this, it might be useful to reckon these elements, more so that they are at the centre of this watchword.These planks of the reform course of study are Increase in the minimum capital base of banks from N2 billion to N25 billion with declination 31, 2005 as deadline for compliance Consolidation of banks through mergers and acquisitions Phased withdrawal of exoteric sector funds from banks, partning from July, 2004 word meaning of a risk- steeringed and rule-based restrictive textile for the industry Adoption of zero point tolerance in the regulatory cloth part icularly in the area of information rendering/reporting. either interprets by any bank must(prenominal) now be signed by the Managing DirectorThe automation of the process for rendition of returns by banks and other financial institutions through the electronic pecuniary Analysis and charge System (e-FASS) mental home of a hotline and clandestine internet address to enable Nigerians wishing to share secret information with the regulator of the Central Bank of Nigeria to do so Strict enforcement of the disaster planning framework for systemic banking scathe The asylum of an Assets forethought Company as an essential element of distress blockagePromotion of the enforcement of torpid laws, especially those relating to the emergence of dud cheques and the law relating to the vicarious liabilities of the dining table members of banks in cases of bank failure rewrite and updating of relevant laws, and drafting of youthful-made ones relating to the effective trading operations of the banking system nearer collaboration with the economic and Financial Crimes bearing in the establishment of the Financial apprehension Unit and the enforcement of the antimoney launder and other economic crimes measures andRehabilitation and effective management of the Mint to fill the security impression needs of Nigeria, including the banking system which constitutes over 90% of the Mints business. The credibly jolt of these measures on the banking industry and the economy are examined in the next section. 4. 0 anticipate IMPACT OF THE CONSOLIDATION PROGRAMME ON THE BANKING INDUSTRY AND THE Nigerian ECONOMY In this section, we bequeath attempt to paint a scenario regarding the presumable advert of the consolidation political platform on the banking industry and, hence, the economy.In doing so, it is important to recite that even though the reform agenda is targeted at the banking industry, its ultimate focal point is the Nigerian economy. In view o f this, and in order to put the discussion in suitable perspective, we would like to begin this section with a brief critique of the performance of the economy surrounded by 2000 and 2004 which data are presented in table 5 hereunder Table 5 Nigeria, Selected macroeconomic Indicators, 2000 2004 Indicator veridical GDP Growth Rate (%) oil color sphere Non-Oil Sector Manufacturing Capacity usage (%) Gross matter Savings (% of GDP) Gross Fixed great(p)Formation (% of GDP) lump Rate (%) orthogonal Reserves (US $ million) 2000 5. 4 2001 4. 6 2002 3. 5 2003 10. 2 2004 6. 1 11. 3 2. 9 5. 2 4. 3 -5. 7 7. 9 23. 9 4. 5 3. 3 7. 5 36. 1 39. 6 44. 3 45. 6 45. 0 NA 11. 3 15. 6 13. 6 15. 3 7. 3 7. 2 9. 1 12. 0 16. 2 6. 9 9,910. 4 18. 9 10,415. 6 12. 9 7,681. 1 14. 0 7,467. 8 15. 0 16,955. 0 Source Central Bank of Nigeria, Annual Report and story of Accounts, 2004 The data in table 5 reveal that, in real terms, the rate of growth of domestic produce ranged from 3. 5% to 10. 2% amongst year 2000 and 2004. The average annual growth rate for the period was 5. 6%, which falls furthest short of the 10% minimum that is needed for the country to meet the targets set in the Millennium growth Goals (MDG). Furthermore, the service sector and wholesale & retail trade muted account for a disproportionate share of total output, considering our exemplify of economic development. On the other hand, the real productive sectors like agriculture and manufacturing are yet to submit their pride of place in the economy. As can be seen from the statistics, potentiality recitation in the manufacturing sector was consistently below 50% passim the five years.Among other things, this is a thoughtfulness of the undue disputation that local manufacturers rescue had to face from their relatively more mature and efficient overseas counterparts. These are not healthy developments from the viewpoint of a ontogenesis country that is keen of achieving sustained economic growth. Giv en the low direct of domestic output, coupled with the rising demand, it is not surprise that the authorities were not able to sustain the inflation rate below divalent digit as intended.It is this parlous evidence of the economy that the banking sector reform was designed to address at the end of the day. The prognosis is that the reform computer program give concussion compulsively on the banking industry and consequently put the economy on the path of sustainable growth. enchantment most analysts begin expressed proficient concerns regarding the adverse jounce of the consolidation syllabus on the level of employment, the authorities at the Central Bank of Nigeria have allayed such fears.While acknowledging that employment opportunities in the industry would shrink, at least in the short run, the management of the Bank is hopeful that the long-term positive effects of the reform programme on the labour market go forth be more far- reaching. The driveway of the a rgument is that at the end of the day, the consolidation programme leave alone lead to a stronger and more full-bodied banking industry that impart adequately guard the expansion of economic activities, especially in the real sectors of the economy. In this process of rejuvenating the economy, more job opportunities testament be created.The consolidation programme get out drastically alter and redefine the nature of competition in the banking industry. By importantly increasing the minimum capital base for banks, the policy has not only embossed the barriers for pertly entrants, it has likewise reduced the number of banks in the system through the mergers and acquisitions. It ordain be recalled that hitherto, competition in the industry was essentially between those players that one whitethorn safely refer to as the industry giants on the one hand, and those popularly referred to as the new coevals banks, on the other.Going in the lead, however, what we pass on witness is a battle for natural selection among the ensuing mega banks, all with extensive branch network. In the new dispensation, stability of individual institutions and, hence, safety of depositors funds is not likely to remain a major retainer in customers prime(a) of which bank to patronise. Rather, emphasis will sac to the ability to deliver superior appreciate to clients and stakeholders generally as well as the prices for bank products and services. As pointed out earlier, many banks in Nigeria had relied intemperately on the overt sector as a source of funds.Consequently, they did not crisply explore useable potentials in other market segments. This situation will, however, change with the withdrawal of public sector funds from the vaults of banks as part of the policy shift. We therefore expect that banks will focus more on those sectors that were hitherto underserved like the real, informal sectors, including the consumer market. They need to devise yeasty ways of effecti vely tapping into the opportunities in these market segments, both in terms of deposit mobilisation and the preparation of credit facilities.Going forward therefore, banks are more likely to provide better support for sustained economic growth in Nigeria. The pressure to sharply explore those market segments that were hitherto underserved will be built by the impulse on the part of the management of each bank to continue to generate attractive returns to shareholders. Currently, the average return on invested capital (ROIC) in the Nigerian banking industry is estimated at 38%. With the significant increase in shareholders funds, however, each bank will need to generate a minimum of N9. billion in benefit before tax revenue in order to maintain the equivalent rate of return. This is a daunting challenge that calls for creativity. To meet the challenge, banks will need to radically redefine their business models and strategies. The status of corporate governance in the banking industry is expect to improve signally following the change in self-control structure. This is because, even though poor governance practices cut across the industry, they were more marked in the privately owned institutions.Given the dilution of will power in the new dispensation, the situation where individuals and their cronies had tyrannical influence in the running and management of banks will reverse a thing of the past. Moreover, as public companies, each bank will now be subjected to a higher standard of governance in terms of information disclosure. 5. 0 unofficial AND CONCLUSION In this paper, we have examined the probable impact of the on-going banking sector reform on the Nigerian economy.In the process, we draw attention to the challenges facing operators in the banking industry that need to be addressed for the industry to make want contributions to the orderly growth of the economy. These challenges encompass those of unethical and unprofessional behaviour, p oor corporate governance practices, weak capital base, and over- enumerateence on public sector deposits. From the analysis, it is clear that the consolidation programme will impact positively on the economy for a number of reasons.First, the development is expected to have long-term well(p) effects on the level of employment considering that it will facilitate enhanced production in respective(a) sectors of the economy. The reform programme will also redefine the nature of competition in the banking industry such that each institution will have no choice but to assign priority to its capacity to deliver superior value to its clients, since this is what will ultimately make the difference between losers and winners. By denying anks access to public sector deposits, the reform will make it adjuratory for them to shift focus to those market segments that were mostly unbanked and untapped hitherto. Furthermore, it is envisaged that the consolidation programme will have full effect s on corporate governance practices in the industry. In concluding this discussion, it is important to reiterate that the realisation of these outcomes would depend on the effective implementation of the programme. In particular, it would depend on how the banks that have embraced mergers and acquisition divvy up the post integrating challenges that will face them.Where these issues are nor justly handled, the anticipated synergism may bring forth elusive.BIBLIOGRAPHY Central Bank of Nigeria, Annual Report and Statement of Accounts, (various issues. ) Nigeria perplex Insurance Corporation, Annual Report and Accounts, (various issued) Statement of Mckinnon, R. I. (1973), Money and Capital in stinting Development Washington, D. C. The Brookings Institution. Oboh, G. A. T. (2005), Selected Essays On Contemporary Issues In The Nigerian Banking System. Ibadan University mess Plc.