Good drives out bad
Nigerian regulators responded to impact of the global economic crisis with reforms that have strengthened the country’s banking system.
In 2009, Nigeria’s banking sector was on the verge of collapse as the aftershocks of the global financial crisis washed onto the country’s shores.
When the capital market bubble burst, the balance sheet of Nigeria’s banks became eroded to the extent that some of them remained for some time on “life support” from the Central Bank of Nigeria (CBN). Inter-bank rates spiked as banks tried to borrow at any rate to remain afloat, the size of non-performing loans significantly increased, customer panic reemerged and several instances of unethical conduct among the managements of banks were revealed.
A special audit of the country’s 24 banks (which accounted for more than 80% of the financial sector) showed that about half of them were exposed to margins and non-performing loans.
It was this scenario that set the stage for the broad set of bank reforms implemented by Lamido Sanusi, who took office as Governor of the CBN in 2009. Sanusi says that maintaining a safe and sound banking sector is essential due to the key role banks play in facilitating economic growth and financing developmental projects, particularly key infrastructure, agriculture and industry.
“Most emerging market economies have been known to use the domestic financial institutions to execute real sector big ticket projects and financial institutions in Nigeria should not be an exception if we hope to achieve our developmental objectives,” says Sanusi, who in 2011 was named Central Bank Governor of the Year by The Banker magazine and one of the 100 most influential people in the world by Time magazine.
In August 2009, the CBN started imposing the reforms, which were of two types. In the first, the Central Bank intervened in ten banks, firing the chief executives of eight of them. It provided the financial sector with a $4 billion bailout and also created the Asset Management Corporation of Nigeria (AMCON) to buy up the non-performing loans in the banks and help bring the affected banks to capital adequacy.
Three of the bailed-out lenders failed to meet a September 2011 deadline to re-capitalize. They were nationalized by the state-owned Nigeria Deposit Insurance Corporation (NDIC), which insures banking deposits. The three lenders – Main Street Bank, Keystone Bank and Enterprise Bank – will be sold to new investors within two years.
The reforms have led to mergers and acquisitions that have reordered the banking sector rankings on the basis of assets and deposit. Nigerian lenders are now classified into three groups according to asset and deposit size. The total number of Nigerian banks has been reduced to 20, with seven lenders in the top tier controlling an average of 66% of total assets and deposits in the industry. This is down from a pre-reform average of 70%.
The tier two and three banks have been the biggest winners over the past two years, grabbing a greater share of the sector’s assets and deposits from the intervened banks, according to an August 2011 Renaissance Capital report on Nigeria’s banks.
As a result of the reshuffle, three banks – including Guaranty Trust Bank, Zenith Bank and First Bank – now account for more than two-thirds of the top ten Nigerian banks by index weight.
The second set of reforms focused on more medium and long-term goals. The four parts of these reforms are enhancing the quality of banks, establishing financial stability, enabling healthy financial sector evolution, and ensuring that the financial sector contributes to the real sector.
The reforms have led to mergers and acquisitions that have reordered the banking sector rankings.
Bank quality is enhanced by industry remedial programs to fix the key causes of the crisis; risk-based supervision; reforming the regulatory framework; enhanced customer protection; and internal transformation of the CBN. Consumer confidence is being tackled in the reform program as complaint desks have been opened to ensure that financial services are delivered to customers as transparently and fairly as possible.
Financial stability is being addressed by actions to stem wide fluctuations in the key macroeconomic indicators, such as limiting capital market lending to a set proportion of bank’s balance sheet, and prohibiting banks from using depositors’ funds for proprietary trading, private equity or venture capital investment, and adjusting capital adequacy and capital requirements driven by stress tests by the CBN.
Healthy financial sector evolution entails a review of the basic one-size-fits-all model of banking. This has made possible the emergence of international, national, regional, mono-line and specialized banks, such as non-interest banks.
The fourth part of the reform is focused directly on developing the real sector as it positions the banking system to contribute to the growth and development of the various sectors of the economy. The reform has identified priority sectors and developed tailored interventions to support and promote their growth.
These include a $1.3 billion Commercial Agricultural Credit Scheme (CACS) funded through the issuance of bonds. The scheme was initially to promote commercial agricultural enterprises but was later expanded to accommodate small scale farmers. As of December 2010, $617 million had been disbursed to 104 projects through 11 banks and 18 state governments.
The Power and Aviation Intervention Fund made available $1.9 billion to stimulate credit to the domestic power sector to help finance badly needed power projects and to refinance loans to the heavily indebted airline industry. To ensure that credit flows to the real sector of the economy, $1.3 billion has been made available for re-financing banks’ existing loan portfolios to the manufacturing sector and SMEs.
Finally, the $1.3 billion Small and Medium Scale Enterprises Guarantee Scheme aims to promote access to credit by SMEs by guaranteeing loans by banks to the sector. The activities covered under the scheme include manufacturing and agricultural value chains; SMEs, processing, packaging and distribution of primary products.
Lamido Sanusi’s banking reforms were taken at the height of the financial crisis in 2009 and helped that country’s financial system survive the global shakeup. But with the global economic picture still uncertain, can Nigeria’s banks withstand another crisis?
I think the banks are much better prepared today than they were in 2009. They had huge exposures to a capital market that was already in a bubble, and those exposures have gone because we have taken those loses and put in tight controls on margin lending.
In 2009 they (banks) had huge and hedged exposures to oil marketers and the lessons that have been learned from that means that at the moment most of the oil marketing exposures are covered by product or by receivables.
So in terms of banks, the principal risk that we see is a massive collapse in oil price. This is really a nightmare scenario that affects government revenues and that is likely to affect those banks that are dependent on public sector liabilities, so it is a balance sheet affect. We know the banks that have public sector exposures, we have run stress tests, and we have action plans to deal with that in the event of that happening.
The foreign exchange positions that they are holding are not significantly risky, so even in the event of a depreciation of the currency, we are not going to see the kind of impact we had in 2009 when the Naira crashed by 25%. By and large I think the banks are better prepared and I think the economy itself is more vulnerable only because of the very low buffers that we have in terms of reserves. But I think that with the news coming out of Europe, and what we know of the oil market, I do not see a major problem.
Used by permission from ABN Digital: www.abndigital.com
FirstBank is Nigeria’s oldest bank and biggest based on third quarter 2011 revenues. It is regarded as the country’s most stable bank, having survived the 2009 banking sector reforms unscathed.
How would you assess the health of the banking sector in Nigeria at the moment?
The challenging conditions faced by the global financial market manifested locally and led to fund withdrawal from the capital market perhaps in an attempt to take profit and meet obligations in their home country. As expected the market responded to the fund withdrawal and equity prices took about 66% plunge with the industry heavily exposed to the market. The result is what we experience today.
What strategies are in place to strengthen and develop the FirstBank of Nigeria brand in the coming years?
The FirstBank brand has a high top-of-mind awareness within the Nigerian public. Indeed, it is near impossible to find an individual in Nigeria who does not know about FirstBank. However, the strategic direction for sustainable growth and leadership in the coming years is to continue the evolution and transformation of the brand in order to ensure its relevance and appeal to younger generations of customers while not alienating our long-standing customers. Our goal is to significantly grow market share among the young and upwardly-mobile consumer segment.