Banking Subsector Consolidation and Bank Recapitalisation in Nigeria: This the Story, This is the Song

1.1    Introduction

The banking sub sector of any economy is very fundamental to the well-being and survival of such economy. Therefore, issues and developments in this subsector are of great interest to the economy as a whole. The need to reform the Nigerian banking subsector became glaring. This stemmed from the need to transform this subsector from the situation of deterioration and set back which in the past, resulted in distress of banks, causing the erosion of public confidence in the Nigerian banking system.

A 13-point reform agenda was announced by the Governor of the Central Bank of Nigeria, Professor Charles Soludo on 6 July, 2004 with the objective of addressing the problems of the Nigerian banking system and refocusing it for effective and meaningful impact on the economy. This was to usher in an era of rigourous transformation in the Nigerian banking subsector. Item one (1) on the reform agenda pertained to raising the minimum capitalisation of Nigerian banks to ^25 billion with full compliance before the end of December 2005 while item three (3) was about the consolidation of the Nigerian banking institutions through mergers and acquisitions.

This paper will trace the position of banking before the decision to reform the banking subsector. Attempts will also be made to look at consolidation of the Nigerian banking subsector and the capitalisation of banks in Nigeria and the implications of these for the economy. This paper tells the story of the banking subsector consolidation and recapitalisation of banks in Nigeria. It sings the song of the banking subsector consolidation and recapitalisation of banks in Nigeria.

1.2    The Pre-recapitalisation /Banking Consolidation Era in Nigeria

This was pre-2005 era during which the Nigerian banking subsector was generally characterised by weak capital base (when compared with the world’s standard), high competition between the ‘old generation banks’ and the ‘new generation’ banks, government intervention/interruptions in the banks’ activities and ownership structure, high level of default, poor risk management, high dependent on the volatile public sector fund, sharp practices etc.

As at 30 June, 2004, most banks in Nigeria operated with a capital base that was less than $10 million. This situation left Nigerian banks within relegation zone in the world’s financial market capital base league. For instance, as that time, the smallest bank in Malaysia had $526 million capital base whereas the Nigeria’s largest bank had a capital base of $240 million. The inadequate capital base of most Nigerian banks gave way to stratification of banks into large, medium and small banks and most of the new generation banks were known to be family banks. In spite of the small size and low capital base of most of these banks, they engaged in huge overhead costs in terms of expensive head offices, expensive cars, huge salary packages etc.

	Total Assets of all Banks	Total Deposits Liabilities of all Banks	Total Savings Deposits of all Banks	Total Foreign Exchange of Earnings of all Banks	Gross Earnings of all Banks	Total Risk Assets of all Banks
Top 30 Banks Controlled:	97%	90.3%	93%	85%	84%	78%
Top 20 Banks Controlled:	88%	81%	92%	74%	75%	68%
Top 10 Banks Controller:	71%	62.3%	86%	54.2%	58%	49%

Table 1: Top Banks in Pre-consolidation Era and their Control of the Nigerian Banking Sub-sector

Table 1 shows that out of the eighty nine (89) banks in existence as at the time the announcement of the reform agenda was made, the top thirty (30) banks were controlling 97% of the assets of banks, 90.3% of the total deposit liabilities of banks, 93% of savings deposits, 85% of the total foreign exchange, 84% of gross earnings of banks and 78% of the risk assets of banks. The top twenty (20) banks controlled 88% of total assets of all banks, 81% of deposit liabilities, 92% of savings deposits, 74% of total foreign exchange, 75% of gross earnings and 68% of risk assets of all banks. The top 10 banks controlled 71% of total assets, 62.3% of deposit liabilities, 86% of savings deposits, 54.2% of total foreign exchange, 58% of gross earnings and 40% of risky assets of all banks.  Though, every bank was aiming at gaining market shares despite lack of infrastructure facilities to withstand public demands, clearly, we can deduce that only few out of eighty nine (89) banks dominated the banking industry in Nigeria during the pre-consolidation era.

1.3    Bank Re-capitalisation and the Implications for Nigerian Banks

Capital is the money or property required to start a business or to produce more wealth. Capitalisation is the act of supplying a business with money so that it can operate properly and achieve the aims and objectives of the owner. Consequently, bank capitalisation is an act of supplying long term funds to a bank so as to place such bank on good standing financially in order to be able to carry out the business of banking. Therefore, bank recapitalisation means the act of beefing up the long term ownership capital of a bank to a level required by the monetary authorities.

According to Nwude (2006), bank recapitalisation has positive and negative implications for a banking system and the economy within which the banking system operates. Some of the positive implications are:

·         strong, sound, competitive and reliable big banks will emerge;

·         quality management and best practice in corporate governance;

·         improved quality;

·         improvement in credit availability and enlargement of area; and scope of operations;

·         improved professionalism and ethical practices;

·         diluted ownership structure, giving rise to professionalism;

·         improved capacity to finance major projects;

·         improved depositors and investors’ confidence;

·         healthy competition;

·         reduced regulatory abuses;

·         reduced lending rates;

·         higher economic growth rate;

·         deepened level of the capital market operations;

·         attractive returns on investment;

·         creation of new entrepreneurs

In spite of these positive implications, the following negative implications are worthy of note:

·         many banks will lose identity due to mergers, acquisitions, take-over etc;

·         erring banks may be sanctioned – for instance, through the inability to hold public sectors’ funds etc;

·         downsizing of the workforce;

·         savings flight by depositors;

·         higher shareholders’ expectations;

·         dilution of ownership control;

·         marriage of incompatible/strange bed fellows through mergers, acquisitions and take-overs etc.

1.4    Recapitalisation as a Precondition for Consolidation in the Nigerian Banking System

Before the 31 December 2005, the minimum capital requirement of banks was ^2 billion. The Central Bank of Nigeria’s directive of 6 July, 2004 to banks to recapitalise specified the minimum capital requirement for Nigerian banks as ^25 billion and that this should take effect from 1 January 2006. The remarkable changes in the Nigerian banking system over the years called for a solid capital base. The changes were largely influenced by challenges posed by globalisation of banking operations, technological innovations that conform to international standards and the deregulations of the financial sector.

The inability of many banks to meet the minimum capital requirement of ^25 billion within the period of eighteen (18) months notice and as at the 31 December 2005 deadline prompted bank consolidation through mergers, acquisitions and take-over. By simple explanation, bank consolidation refers to the joining together of banks in order to make their positions stronger and more likely to maintain or improve on the level of performances, profits, achievements, progress,  accomplishments etc.

The first known merger during the 18-month notice period was concluded by the United Bank for Africa (UBA) and the Standard Trust Bank (STB). This successfully produced the new ‘UBA’. Gulf Bank, All States Trust Bank, Hallmark Bank and Lion Bank signed a memorandum of understanding (MoU) on 3 September 2004 to form the ‘First Consolidated Bank’. This arrangement failed and could not hold. The plan of Wema Bank, Lead Bank and Fountain Trust Bank to consolidate failed. The agreement of the First Atlantic Bank, Manny Bank, Assurance Bank and Guardian Express Bank to form ‘Astra Bank’ also failed. The MoU to form ‘Sterling Bank’ was signed on 18 October, 2004, but some of the banks that were parties to this agreement withdrew to join other groups while new member banks were admitted into the group. The consolidation arrangement to form the ‘North-Omega Bank’ collapsed totally due to the misunderstanding between Bank of the North and Omega Bank. Bank of the North eventually pulled out of the arrangement to join the ‘Unity Bank’ group while other members of the ‘North-Omega’ group (except NUB International Bank) made the last minutes effort to join Citizen Bank, ACB International Bank and Guardian Express Bank to form ‘Spring Bank’ on 28 December, 2005.

At the end of the notice period (31 December 2005), thirteen (13) banks could not make recapitalisation and consolidation while seventy six banks evolved the new twenty five (25 banks) that emerged after the recapitalisation and consolidation exercise. Out of the seventy six (76) banks, five (5) banks namely Ecobank, Guaranty Trust Bank, Stanbic Bank, Standard Chartered Bank and Zenith Bank sailed through and stood alone without merging with or acquiring any bank.

Below is the summary of the 25 banks emerging at the end of the consolidation; and the names of the banks that composed each of the new banks in consolidation.

NEW BANK		MEMBERS OF THE GROUP
1	Access Bank	Access Bank, Marina International Bank, Capital International Bank Plc
2	Afribank	Afribank Nig Plc, Afribank International (Merchant Banker)
3	Diamond Bank	Diamond Bank, Lion Bank, African International Bank
4	Ecobank	Ecobank (alone)
5	ETB	Equitorial Trust Bank, Devcom Bank
6	FCMB	First City Monument Bank, Cooperative Development Bank, Nigerian American Merchant Bank, Midas Bank.
7	Fidelity Bank	FSB International Bank, Manny Bank, Fidelity Bank
8	First Bank	First  Bank, MBC International Bank, FBN {Merchant Bankers} Ltd, Ecobank Transactional Incorporate (ETI), MBC
9	First Inland Bank	First Atlantic Bank, Inland Bank, Int. Merchant Bank, NUB
10	GT Bank	Guaranty Trust Bank (alone)
11	IBTC Chartered Bank	IBTC, Chartered Bank, Regent Bank
12	Intercontinental Bank	Intercontinental Bank, Equity Bank, Global Bank, Gateway Bank
13	NIB/Citibank	Nigerian International Bank, Citibank
14	Oceanic Bank	Oceanic Bank, International Trust Bank
15	Bank PHB	Platinum Bank, Habib Bank
16	Skye Bank	Prudent Bank, EIB Bank, Bond Bank, Reliance Bank, Cooperative Bank
17	Spring Bank	Citizen Bank, Guardian Express Bank, ACB International Bank, Omega Bank, Fountain Trust Bank, Trans-International Bank
18	Stanbic Bank	Stanbic Bank (alone)
19	Standard Chartered Bank	Standard Chartered Bank (alone)
20	Sterling Bank	Magnum Trust Bank, NBM Bank, NAL Bank, INMB, Trust Bank of Africa
21	UBA	United Bank for Africa and Standard Trust Bank, Continental Trust Bank
22	Union Bank	Union Bank, Broad Bank, Universal Trust Bank, Hallmark Bank, Union Merchant Bank.
23	Unity Bank	Bank of the North, NNB International Bank, New Africa Bank, Pacific Bank, Tropical Commercial Bank, Centre Point Bank, First Interstate Bank, Intercity Bank, Societe Bancaire.
24	Wema Bank	Wema Bank, National Bank.
25	Zenith Bank	Zenith Bank (alone)

As at 1 January 2006, the following thirteen banks were unable to make recapitalisation in the consolidation exercise: Hallmark Bank, Trade Bank, Africa International Bank, Societe Generale Bank, All Trust Bank, Fortune Bank, Liberty Bank, Triumph Bank, Afex Bank, Eagle Bank, Metropolitan Bank, City Express Bank and Gulf Bank.

1.5    Conclusions

The recapitalisation and consolidation exercise in the Nigerian banking sub-sector has come and gone. Some banks were unable to make it while some actually made it. Banks that were unable to make it could be liquidated. The reform programme will no doubt bring forth a solid Nigerian banking system. Strongly, I am of the view that the ensuing big banks will ensure a higher degree of soundness of the Nigeria’s banking sub-sector since the enough capital at their disposals will cause them to withstand shock in addition to offering good services. The dependency on public sector deposit liquidity would be reduced. Apart from insolvency would be removed from the Nigerian banking sub sector, professionalism and ethical conduct would be brought back into the Nigerian banking world, distress would be erased from the minds of the banking public while excessive risk taking by banks with adequate capital would be curtailed. Upon the whole of these, banks would be able to finance the commanding heights of the economy through reduction in interest rates.

There is a blessed assurance that the Nigerian banking sub-sector is moving to a great height. This is the story. This is the song.

Published in Fidelity Magazine, a Publication of the National Association of Banking and Finance Students of the Federal Polytechnic, Ado Ekiti, Nigeria, Volume 1, Number1, March 2006