Introduction:
Before the arrival Democracy in Nigeria, the above definition of a bank
in the Nigeria contest will not fit into this definition of bank. A
situation where majority of the Nigerian citizens have phobia for depositing
their money in banks. Today the story has turnaround. The Nigerian Bank
can now fit into the global definition of bank. Consolidation of the
Nigerian Banking sector is one of many reforms of the Gen. Obasanjo's
administration that Nigerians have to embrace happily. Before the advent
of this reform, the Nigerian Banking Sector was grossly underdeveloped,
leading to so many setbacks to the Nigerian Economy. Many thanks to
the Governor of Central Bank of Nigeria for his invaluable effort toward
building a banking sector that can be trusted.
A Global Phenomenon
In the United States of America, there had been over 7,000 cases of
bank mergers since 1980, while the same trend occurred in the United
Kingdom and other European countries. Specifically, in the period 1997-1998,
203 bank mergers and acquisitions took place in the Euro area. Cross-country
mergers are also taking hold. In 1998 a merger in France resulted in
a new bank with a capital base of US$688 billion, while the merger of
two banks in Germany in the same year created the second largest bank
in Germany with a capital base of US$541 billion. In many emerging markets,
including Argentina, Brazil and Korea, consolidation has also become
prominent, as banks strive to become more competitive and resilient
to shocks as well as reposition their operations to cope with the challenges
of the increasingly globalized banking systems. In Korea, for example,
the system was left with only 8 commercial banks with about 4,500 branches
after consolidation.1
In the next 3 to 5 years banking organizations around
the world will be under pressure from a variety of forces. The forces:
Economics, Consumers, Government/Regulation and Technology will impact
different geographies in different ways. These forces are evolutionary,
they will not be strong enough to create a major discontinuity in any
of the geographies we have looked at.
Depending on the profitability and volatility in each market however
they will force banks to think about their businesses in different ways
and they will present both opportunities and imperatives to change.
In countries where the industry is more competitive, more volatile and
less profitable incumbents will be forced to make bigger and bolder
bets around their business models. Accordingly, we expect that countries
like Germany and the US will drive innovation in business models whilst
banks in more profitable and less volatile climes will be less bold
in relation to business model changes.2
Main causes of consolidation in Nigerian banking
sector
Proponents of financial sector consolidation argue that institutions
need size to spread growing information technology and processing costs
over larger revenue bases. Another key factor is the need for greater
market capitalization, with governments and financial sector regulators
accepting financial operators’ arguments that greater size is
crucial to cost-cutting and strong national institutions. Smaller countries
are also encouraging consolidation to counter growing competition from
larger institutions in neighboring countries.4 Nigeria is the most populous
Black nation in the world with an estimated population of 137 million
and she is the 13th largest oil producing country in the world. However,
the state of the Nigerian economy and infrastructure is yet to reflect
the benefits of this position.3
The Banking sector is partly responsible for this state
of the Nigerian economy. It has reneged on its role of financing sustainable
economic development by rather supporting the import- dependence nature
of the economy. Most of the revenue generated by banks is import business-related.
This is largely due to the highly fragmented nature and the weak capital
base of Nigerian banks.3
Benefits of Consolidation in Nigerian Banking
Sector
Efficiency, Size and Developmental Role
With internationalization of finance, size has become an important ingredient
for success in the globalizing world. In the world of finance, no country
can afford to operate in isolation. The last few years have witnessed
the creation of the world’s banking group through mergers and
acquisitions. The trend has been influenced by factors such as prospects
of cost-savings due to economies of scale as well as more efficient
allocation of resources; enhanced efficiency in resource allocation;
and risk reduction arising from improved management.1
EMPLOYMENT
The reform will have a positive impact on the labour force in the long
term.3 The banking industry is a significant employer of labour, employing
over 47,0003 of the skilled workforce in Nigeria. A potential fall-out
of the proposed industry transformation will possibly be staff redundancy
in a bid by banks to maximize efficiency. However, the number
of the economically active population of the country, which is estimated
to be about 71 million individuals, makes the overall impact of potential
lay-offs minimal. 3
Whilst this may be disruptive in the short-term, the
benefits to the economy over the long-term are more far-reaching. A
stronger banking industry would be able to adequately support the real
sector in the economy, in turn rejuvenating the real sector and ultimately
creating more jobs within the economy in the long-term.3
The Central Bank of Nigeria (CBN) and the Nigeria Deposit
Insurance Corporation (NDIC) report that, of the 115 banks in operation
in 1997, 47 were in varying states of distress, with an average ratio
of non-performing assets of around 82 per cent. The restructuring
of distressed banks starts with their being put under joint control
through “acquisitions-in-trust” by the NDIC and the CBN
for eventual sale to private operators. Six mergers between 1996 and
1998 resulted in 88 net job losses out of a total workforce of 1,860.
Without the mergers, many of the banks would have been closed by regulators
with the loss of all the jobs involved. Although the worst of the crisis
may be over, only 30 of the 82 remaining banks are serious operators.
Recovery does not mean an end to restructuring as the industry is expected
to shrink in both the number of institutions and active branches, although
the latter already declined from nearly 2,500 to 2,200 between 1997
and 1999. Employment in the sector dropped from 78,514 workers in 1990-91
to 54,292 in 1999-2000, though this can be attributed to bankruptcies
and closures and not wholly to Mergers and Acquisitions. 4
Share Holders Value
Currently, the average Return on Invested Capital (ROIC) in the Nigerian
banking industry is 38%. To maintain this average Return on Invested
Capital, banks will need to generate at least N9.5bn in profits before
taxation. To sustain such performance, banks are forced to be creative
in utilizing their universal banking licenses. Underserved market segments
especially the consumer market should be cultivated. Banks will also
need to expand their operations beyond the Nigerian market to participate
in the regional and global financial market place.4 At its most basic,
creating shareholder value means that the market favours firms that
increase the productive use of their assets by increasing turnover ratios,
margins and profitability. Increasing sales growth adds shareholder
value as long as reinvestment earns returns that exceed the firm’s
cost of capital. Conversely, firms without such opportunities destroy
shareholder value by reinvesting and should return the money to shareholders
through dividend increases or share buy-backs. These are largely motherhood
statements in finance, but are often not reflected either in managerial
policies or corporate culture. Shareholder value maximization is specified
by only 20 per cent of executives polled in the survey as an objective
of Merger and aquistion.4
Operating Synergy
Consolidation of Nigerian banks will result to merging of banks which
will give rise to a large bank, which will use its operation synergies
to generate higher net income. The stronger banks at the beginning of
consolidation had assured most of the marginal banks that whatever shareholders'
funds they had were not important but the synergy they would bring to
bear in the operation of the bigger entity to emerge from consolidation
effort was crucial. Such factors include the presence in areas where
the smaller banks were and the stronger banks had no presence were being
touted.5
Ownership
The consolidation of the banking sector will considerably modify the
system of ownership structure of Nigerian banks, making it more widespread
and better diversified. The emerging stakeholder of banking institutions
are likely to demand higher level of job ethics, transparency and professionalism
in the modus operandi of banking business, which will further
promote better corporate governance and will consequently guarantee
accountability in the Nigerian banking system
Conclusion
In summary, the Nigerian banking
will yield veritable goldmine of superior returns such as: an unmatched
array of financial solutions provided through a sophisticated and wide
branch network through out Nigeria; a banking sector with clearly defined
growth strategy and expertise that offers full spectrum of financial
products and services. It will also engender economies of scale, saves
cost, synergies and shareholders’ returns on a level yet unparalleled
by any other financial institution in Africa
References
1.Consolidating the Nigerian banking industry to meet the development
challenges of the 21st century Govadd-6Jul.pdf.
2.The Evolution of Banking Business Models in Australia evolutionbanking.pdf.
www.acenture.com / evolutionbanking.pdf.
3. Consumer Information On Consolidation Of Banks
URL: http://www.cenbank.org /FAQs/faqconsolidation.htm
4. The employment impact of mergers and acquisitions
in the banking and financial services sector.
URL:http://www.ilo.org/public/english/dialogue/sector/techmeet /tmbf01/t
mbfr. htm#_Toc501871876
5. Banks consolidation: The ripple effect of a deadline
URL: http://www.guardiannewsngr.com /moneywatch/article01.htm