The relevance of banks in the economy of any nation cannot be overemphasized. They are the cornerstones, the linchpin of the economy of a country. The Encyclopedia Americana international edition succinctly puts the position thus“economic activity as it is known could not be smooth sailing without the continuing flow of money and credit. The economies of all market-oriented nation depend on the efficient operation of complex and delicately balance systems of money and credit. Banks are an indispensable element in these systems. They provide the bulk of the money supply as well as the primary means of facilitating the flow of credit." Consequently, it is submitted that the economic well being of a nation is a function of advancement and development of her banking industry.
The financial deregulation in Nigeria that started in 1987 and the associated financial innovations have generated an unprecedented degree of competition in the banking industry. The deregulation initially pivoted powerful incentives for the expansion of both size and number of banking and non-banking institutions. The consequent phenomenal increase in the number of banking and non-banking institutions providing financial services led to increased competition amongst various banking institutions, and between banks and non-banking financial intermediaries.
Apart from the keen competition with the range of financial activities, banks have also faced problems associated with a persistent slowdown in economic activities, severe political instability, virulent inflation, worsening economic financial conditions of their corporate borrowers and increasing incidence of fraud and embezzlement of funds.
Another major problem banks have had to content with is the inconsistency in monetary and regulatory policies. The surveillance and regulatory measures of the Central Bank of Nigeria(CBN) have unfortunately been unable to keep the pace with the rapidity of the charges in the financial system.
All these factors – deregulation, competition, innovation, economic recession, political instability, escalating inflation, and frequent reversal in monetary policy have combined to create a challenging and precarious financial environment for banks. Consequence of the new financial environment has been rapidly declining profitability of the traditional banking activities. thus, in a bid to survive and maintain adequate profit level in this highly competitive environment, banks have tended to take excessive risks. But, then the increasing tendency for greater risk taking has resulted in insolvency and failure of a large number of the banks.
The continuing deterioration in the financial health of the banks and increasing incidence of bank failure since deregulation have raised question about the nature and state of the Nigerian banking sector.
CONSOLIDATION
Consolidation is simply another way of saying survival of the fittest that is to say a bigger, more efficient, better-capitalized, more skilled industry. Consolidation is part of the natural evolution of industries. it is primary driven by
- Business motives and/or market forces
- Regulatory interventions
Consolidation is a term used by the central bank of Nigeria(CBN)to describe the coming together of some banks within the country to become one bank and be able to meet CBN’s requirement for capitalization to a minimum of N25billion .when this happen, it is expected to improve services rendered by the bank.
CAPITAL BASE AND BANK SOUNDNESS
Generally, capital is required to support business. but the importance of adequate capital in banking cannot be overemphasized. it is an essential element which enhances confidence and permits a bank to engage in banking. A very important function of capital in a bank is to serve as a means of absorbing losses it serves as a buffer between operating losses and insolvency. As Phillips (1997,12) has correctly observed, "the more capital a bank has, the more losses it can sustain without going bankrupt capital thus provides the measure for the time a bank has to correct for lapses, internal weakness or negative developments. The larger sized and capital, the longer the time a bank has before losses completely erode its capital."
Apart from offering protection against losses, adequate capital confers other benefits, among which are
Protection of depositors and creditors in time of failure.
Strengthening of banks ability to attract funds at lower cost and
Enhances a bank’s liquidity position. The higher the liquidity of a bank the less risky is the bank. The snag however ,is that little risk is rewarded with the return in line with the observation in finanace theory of positive linear relationship between risks and return.thus, while inadequate liquidity will damage a banks reputation,excess liquidity will retard earnings.
In a view of its signifigance ,the regulatory authorities consider capital adequacy a primary index to monitor bank. The traditional measures of capital adequncy ratio are:
1. ratio of equity funds to risk assets,i.e shareholders equity total assets.
2. ratio of capital funds to risk assets, i.e, capital funds risk assets.
The minimum capital adequancy ratio as prescribed by Basle committee of Central Banks’ supervisions is 8%.this ratio relates capital to what considered the banks biggest risk namely credit.the 8% ratio implies that for every N100 credit a bank needs N8 capital.a lesser ratio shows different degrees of undercapitalization.the basle committee is agroupof international bankers that met to fashion out more strigent ways of determining a bank’s capital adequancy ratio in 2003.in their explation of the relevance of a bnks capital base,they stated that “A capital serves as a foundation for a bank future growth and as a cushion against unexpected losses. Adequate capitalized vbanks that are well managed are better able to withstade losses and provide credit to consumers and businesses alike throughout the business cycle including during downturns. Adequate capital therby helps to promote confidence in the banking system."
Consolidation model
They various consolidation models they named after the country the country in which they are operated.these include
1. the Lebanon model
2. the Goldman sachs model
3. the Malaysian/Singaporean model
in this paper I shall discuss nly the malasian/Singaporean model
the Malaysian and Singaporean model provide great lessons for the Nigerian situation,as these economies have, at some time faced similar challenges such as
import-dependence
foreign-financing of project
composing agriculture as the largest contributor to GDP
in the banking sectors of these econmomies,we also see similaritiesin challenges
high interest rates
liquidity issues and
declining asset quality
following reforms stimulate by regulators I these economies, viable banking industries have emerged, capable of supporting the overall growth of these nations.
BRIEF HISTORY OF MINIMUM PAID UP CAPITAL IN NIGERIA
Prior to 1992, the minimum paid up capital requirement for banks in Nigeria was N12 million for merchant banks and N20 million for commercial banks. A review that year moved the requirements to N40 million and N50 million respectively. This level lasted till 1997 when a uniform N500 million minimum capital was introduced. The reason for discontinuing the dichotomy was to allow for a level playing field and the realization that there was no real difference between the capital requirements of the two categories. It was also to prepare the system for the introduction of universal banking. In 2000 the minimum capital was moved to N1 billion for new banks while existing banks were expected to meet this level by December 2002.
N2 million minimum paid up capital was introduced for new banks in 2001 while existing banks were given until December 2004 to comply. The reasons for these adjustments include:
1. Increasing cost of IT and other infrastructure
2. Comparison with other jurisdictions
3. Inflation and increasing interest rates
4. Depreciation of the national currency, the Naira
5. Strengthening the operational capacity of deposit money banks
6. Minimising the risk of distress
There was also the need to curb the spate of requests for licenses which in many cases were not backed with any serious intention. The absorptive capacity of the system was also an issue i.e. things like the executive capacity to run the banks, supervisory resources, the cut throat competition that was breeding malpractices, etc
REASONS FOR THE N25 MINIMUM CAPITAL BASE
In july 6,2004,a day now reffered to as “black Tuesday" in banking sector of the economy,the CBN governor,professor charles soludo maad an obviously unexpected policy pronouncement.the highlight was the increment of the earlier N2billion to N25billion ,with full compliance deadline fixed for the end of this year.
According to the CBN the following are benefits of the new minimum capital base
Enhance capabilities to finance large projects
- Size is a key factor in the banking sector that, amongst other factors determines the ability of the banks to provide funds to borrowers and provides an indication of stability to depositors. In Nigeria, the single borrower (obligor) limit is 35% of shareholders' funds for commercial banks. For a bank with total shareholders' funds of N25bn, the maximum exposure allowable to a single borrower will be N8.7bn or about $64m. This figure is barely large enough to provide adequate funding for most projects in the country today, not only in the mainstay of the Nigerian economy, the oil and gas industry, but also in other sectors such as telecommunication, construction and power that are critical for improving the standard of living in the country.
Ensure a capital base that can support service delivery channels
- To effectively provide banking services to customers and mobilize funds from the public, banks will need to deploy various capital-intensive service delivery channels. The over-dependence on cheap public sector funds has negatively affected the drive of Nigerian banks to provide these alternative service delivery channels and therefore, undermined the need for banks to increase their capitalization. With the new reforms, banks should, finally begin to look beyond the minimum N25bn and regard these policy changes as an opportunity to emerge as mega banks with capitalization of probably over N70bn to effectively migrate into and participate in the global financial marketplace.
STRATEGIES FOR GENERATING SUPERIOR RETURNS
-Diversify service delivery channels
banks in the country are experiencing growth while the real sector and informal sector are experiencing slow growth, stagnation and even negative growth. The reason behind this abnormality is that the more income generating line for the Nigerian banking industry has been import finance. the impetus for the Nigerian banking sector to support the relatively riskier real and informal sectors of the economy has been eroded since the import finance business with shorter turn-around time and reduced risk can deliver the required profitability for banks. But, unfortunately the impact has been a falling naira and dwindling foreign reserves.
With the present bank consolidation and banking sector reforms, specifically the removal public sector funds from banks, banks should diversify their services to the real and informal sector of the economy by devising creative means of offering services to the currently underserved sectors of the economy, thereby supporting economic growth I in a sustainable way
-provide banking at a very low cost
-innovation
in this era for banks to generate superior returns, it need to roll out innovative products and services to its customers that is to say, banks should distinguish themselves in the kind of service they offer.
-IT
banking in Nigeria today I will say is semi-IT driven in the sence that only few services of banks can be access through their IT facilities .
in other to be a major player in the banking sector of Nigeria ,banks should make their IT product to be more sophisticated,in the sence that customers can check account balance,deposit and do other banking transaction online.
-curtail fraud and financial misappropriates
over the years,they have been many cases of fraud and moral hazards like insider lending in the banking sector causing many banks to distress.
Thus in a bid to generate superior returns banks should stimulate their financial control to guide against fraud and financial misappropriates. Also, banks should make frantic effort to guide against insider lending.
- mobile banking
it is no news that about 40% of the Nigerian population lives in rural area but what is pathetic is that this community still save their money in the traditional way and thus this has lead to several lost of money either by theft or fire.thus, in order to generate superior returns banks should encourage saving in rural area by establishing mobile banks since onsite banks will be expensive.
- Atm
I will commend Nigeria banks in this aspect,because there is ATM machines in virtually all banks in the country today but this is not enough. Banks should place their ATM machine in market places,fast food cafeteria, school hostels, hotels, holiday inn etc
CONCLUSION
Hence, if the process of consolidation is properly implemented,tehen the ongoing consolidation of banks in the country will surely improve the banking sector in Nigeria and thus will translate to better banking services and cheap funds.
More importantly,the public will not have fear of distress in any bank,since the consolidated bank will have enough funds
Reference
Obadan M I,(1997) “distress in nigeria’s financial sectorneed for house cleaning by financial instiutions". A speech delivered at the closing lunch of the 3rd annual bankers conference
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