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Bank Consolidation: Reform Or Die? By Olatunde Anthony
In barely five months from now, the Nigerian banking industry would have witnessed a dramatic transformation going by the December 31, 2005, deadline set under the banking consolidation exercise. What then can we expect in less than 200days, before the curtains are drawn on the exercise. Can it be safely assumed that at the end of the exercise, there will be safe landing for investors, depositors and other stakeholders who have their fortunes tied one way or other to the industry? What possible scenarios are we looking at if at the end of the day some banks are unable to meet the deadline? Is the Central Bank, CBN’s insistence on this deadline not going to be injurious to players and the banking public in the light of the snail pace of operators?
Fears have been expressed from several quarters over the ability of some of the banks to comply with the deadline. Last week, the Institute of Chartered Accountants of Nigeria added its voice to the growing clamour, saying it will support an extension of the deadline by six months to June30, 2006. The body based its justification on the lead time required to effectively fulfill the transformation. In essence, there are apprehensions over the fate that might befall some of the banks in the likely event that the CBN sticks to its stand and the implications on the economy as a whole.
So far, progress report shows that 17groups involving 51banks have been granted pre-merger consent as at July 2005, while 21 groups involving 64 banks have signed various Memoranda of Understanding (MOUs). Only one group has approval-in-principle, while the STB/UBA group is the first to emerge as a consolidated bank. In all, a total 240.9 billion naira was raised from the capital market by the banks out of which N 6.68billion represents foreign inflow.
From the consolidation timeline, all those banks who signed MOUs should have obtained approval-in-principle by the end of this August, and by the end of October, the merging banks should have their final approval. Perhaps, it is too early in the day to express fears, but definitely there is cause for apprehension. M any of the banks that floated Initial Public Offers, IPOs, in the last three months are yet to declare the outcome of the exercise. One possible explanation is that some of these IPOs were undersubscribed. And since they are not fully underwritten, these banks are left in the lurch. The decision of the CBN to scrutinize foreign inflow has also made it a bit difficult. The CBN in an effort to prevent money-laundering makes capital verification mandatory, a move which some of the banks claim to be scaring away potential foreign investors, some of whom don’t want questions raised about the source of their funds.
Now that consolidation exercise has entered the strategic phase, what options do those banks that are yet to firm up their base have? It should definitely be clear that going to the capital market to raise funds is out of it. The time required to put the share offer in motion and conclude it cannot accommodate such move. It would take no less than three months to conclude the process. So IPOs are out, in view of the December31, deadline.
Therefore mergers present the best option. Besides the synergy, the merger route is beneficial to the larger economy in the sense that, it will, for once, offer a chance to subject some of the banks’ books to proper scrutiny. The opportunity to conduct due diligence will give investors an eye-view of the true position of such banks. When the CBN declared that one of the reasons for embarking on the reform was due to the rot in the banking industry, many analysts had lampooned the apex bank for crying wolf when there was none. Now the chicken has literally come home to roost.
Even then merger is still a better option for these banks with dwindling earnings, low deposit base, poor quality assets and weak corporate governance. The benefits that will accrue far outweigh the loss of ego and control that had come to be associated with ownership. Of what use is the ownership of a dead bank if one may ask? Pre-consolidation, it was public knowledge that no less than 24 banks were rated as marginal and unsound, while eleven others failed to meet the minimum capital adequacy ratio requirement. At least, merger offers some sort of salvage for both depositors and investors of those banks that fall into the aforementioned category.
Mergers also offer a win-win situation for some of the banks which accounts are already overdrawn with CBN. There is a forbearance package in the guidelines of incentives put in place by the apex bank. Critics had railed against the forbearance initiative, querying why the CBN would come to the rescue of banks that mismanaged depositors’ fund. But it is apparent, that the cost to the economy far outweighs whatever possible write-down of CBN’s exposure to these distressed banks.
A good case in point was the recent forbearance granted 13 weak banks owing the Bank a whooping N75billion. If the CBN had not granted these banks forbearance last April, they would have had their nunc dimities. The impact would have been devastating. Over 7000 jobs would have been lost by the closure of these 13 banks, while a total of N108 billion in uninsured deposit and other sundry deposits would have been lost. The forbearance package is not even a free lunch. It is a temporal relief meant to improve the balance sheets of those banks pending their consolidation.
Still, the banks are in a quandary in view of the fast approaching deadline. If the CBN refuses to extend the deadline it means some banks might be forced to close shop. Unsavoury as this position might look, it is high time owners, depositors and other stakeholders of such banks took drastic steps to stave off such an ugly development. On the long run, it is in their best interest to take advantage of the reform to retool and revamp their ailing banks. A policy that re-engineers an institution cannot be said to be counter productive.
Indeed, no policy in Nigeria’s economic history has had a profound positive effect in the capital market in such a short period. The awareness it has created on investment in shares is unrivalled. Even the typical average person is now aware of the benefits of owning shares and keeping something away for the rainy day. It has also more than any other policy induced a high level of direct foreign investment in less than a year. A total of $3billion is the estimated foreign inflow. So far, almost one billion dollars have been realized. The foreign inflow will additionally bring forth international best practices, engineer new competition, new vision and new ways of doing business. It is definite that the banking system will never be the same again.
Anthony writes in from Lagos.
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