Regulatory Alert – NIGERIA: CBN upends 2005 Soludo-era banking reforms

I seek your indulgence to deviate from our regular I.T. beats to share a write-up i saw on PROSHARENG.COM website about Nigeria’s Central Bank Governor, Lamido Sanusi’s Banking reforms.

Reactions welcomed.

Nigerian Central Bank Governor Lamido Sanusi has true to form and our longstanding expectations finally upended the fundamental structure of the Nigerian Banking sector. In a 8 September directive titled ‘Scope, Conditions & Minimum Standards for Commercial Banks Regulation #1’ Sanusi has given the country’s 24 universal banks 90 days to present re-organization plans and apply for new licenses. In 2004, after taking office, the former central bank governor Charles Soludo issued a directive forcing the consolidation of the country then almost 100 banks into 25 large universal banks by requiring a new minimum capital requirement of N25 billion. The M&A activity that ensued concurrent with the broader macroeconomic reforms launched under former Finance Minister Ngozi Okonjo-Iweala spurred the Nigerian Stock Markets to multi decade highs.

While Soludo’s reforms dramatically improved the capital base of the local banks and boosted the local bourse to dizzying heights, the reforms however failed to have any major structural macroeconomic impact on two of Nigeria’s largest economic sectors – Agriculture and Manufacturing. By late 2007 the agricultural sector, which accounts for almost 40% of Nigeria’s GDP, and which still employs the largest number of workers on received on average only about 5% of total bank private sector credit. The manufacturing sector which accounts for about 18%-20% of GDP also got very little credit from the consolidated banks.

The services sector which saw the emergence of large telecom players such as MTN and Globacom however received a very disproportionate amount of bank credit, as was the real estate, oil and gas and the export-import sectors. During the same period, Nigeria’s debt of over $35bn was cancelled by the Paris and London Clubs, and high oil prices following the Second Iraq War swelled government revenues and kept banks plush with cash.

The period between 2005 and 2009 however saw very little change in the risk management protocols used by many of the country’s banks even as their balance sheets doubled and quadrupled. Corporate Governance was abysmal and many abuses occurred. Recent revelations point to large scale insider dealing, stock market manipulation and reckless lending at several banks.

It was therefore against this backdrop that Sanusi – previously the CEO of First Bank, one of Nigeria’s most well run and largest banks – replaced Soludo. Sanusi has in the year and a half that he has been at the helm of CBN affected the forced retirements of most of the CEOs of all the banks in Nigeria. He has pushed to impose stringent IFRS reporting standards on the banks and recently gotten the president and legislature to set up a multibillion toxic asset management company which will purchase from the country’s banks certain categories of bad loans in order to facilitate credit intermediation and remove the ‘black holes’ on bank balance sheets. The toxic assets have prevented CBN’s easy monetary policy stance from achieving its full macroeconomic effects.

Therefore the 8 September CBN directive to – abolish the current universal bank licenses, create new regional, national and international bank licenses, impose IFRS standards on entire industry, establish new minimum capital requirements and bar commercial banks from proprietary trading, asset management, equity underwriting and general investment banking activities is simply the final act (dénouement) of Sanusi in a bid to firmly stamp his ideas on the country’s banking system.

The net effects of the new regulations will take a while to become totally apparent. However the regulations totally upend all the current bank market share projections, bank profitability assessments and structural competitive analyses of the Nigerian banking sector.

New regional banks will be licensed. Banks that confine their activities to only two geopolitical zones of the country will pose significant challenges to the current national banks that operate in those zones. Local governors will become invested in protecting those regional banks and removing large government deposit accounts from Lagos based national banks to those regional banks. Local companies will probably also move their accounts from the large Lagos national banks to the regional banks. While the regional banks will not be able to undertake forex transactions, the regional banks, which will themselves probably keep accounts at the large international banks will be able to effect those transactions on behalf of their clients without their clients having to open separate forex accounts at the large international banks.

Zenith bank, which is the leader in forex transactions, is likely to become a major beneficiary of the new structure. It is very likely that because of the now doubled minimum capital requirement for international banks, most of the 10 ‘CBN rescued banks’ – Afribank, Finbank, Intercontinental, Oceanic, Union, Bank PHB, Spring, Equatorial Trust Bank, Wema and Unity Bank – will very likely opt to be re-licensed as regional banks in order not to raise new tier 1 capital. Those that opt to become regional banks will be forced to sell their ‘out of zone’ branch networks to larger national banks which may now need more branches. GT bank, Ecobank, IBTC-Stanbic and FCMB may opt for merchant/investment bank status since they already excel at those investment banking services. Ecobank, despite having been in Nigeria for almost 20 years, has not been able to become domestically competitive as a commercial bank. However its regional network throughout West Africa makes it a major acquisition target from a large global bank.

GT bank, IBTC-Stanbic and FCMB have excelled as underwriters of some of Nigeria’s major IPOs and secondary offerings. They will probably consider leaving the hustle and bustle of commercial retail banking to others and become pure merchant banks. IBTC-Stanbic’s historic strength in the fixed income area will likely make it a very good candidate to become the leading corporate bond issuance bank in Nigeria.

Sterling, Access and Diamond bank will all probably choose to focus on commercial hub Lagos and get licenses to that effect. Those licenses will also allow them to service the South Western industrial corridor and the adjacent cash rich oil and gas industries of the Niger Delta region.

Mega banks like First Bank, UBA and Zenith will likely use the new rules to deepen their domestic and sub-regional expansion plans, but will lose their lucrative investment banking fees. The new regulations bar commercial banks from – Insurance underwriting, Loss adjusting services, Re-insurance services, Asset Management services, Issuing House and Capital Market underwriting services and Investment in equity or hybrid-equity instruments. Standard Chartered Bank, which despite its long historic presence in Nigeria, has been unable to expand its national presence  may seek to double its capital base and become an international bank if it is to keep its lucrative forex and other international banking services.


  • Unfortunately, it is very hard to take anything at its face value in Nigeria. Personally, i’ve believed in some sort of conspiracy theory about all that has been going on in the banking sector and i still believe that it was the emergence of J.Goodluck that sort of truncated whatever they had going on.

    I do agree with Sholay about one major thing, the competency of Sanusi and his team. Exactly what has he achieved so far? Where are the monies looted from the banks? Where are the key players fingered in the mismanagement of these banks? We could go on and on about this, but one thing is for sure, the emergence of new regional banks will not do much to the economy, it will only help in putting money in the hands of more greedy people, especially the politicians at the state level.

    I hate politics, especially as it is being practised in Nigeria, i don’t see anything good or selfless in any policies or acts by government. That’s just me.

    Yes, Muyiscoi, i got your postal details. Unfortunately, post offices are few and far between on the Lagos island so i kind of batch up requests, will try to dispatch them this week. Sorry for the delay.

    • It seems to me Sanusi sometimes get confused in a way. What is going with him? just last two weeks, he withdrew the licenses of all the micro banks, and before you know it he restore them back again. Can anyone tell me what is going on in his brain?

  • I just read this stuff and sincerely do not understand how it will work.

    I had read about the new CBN policy last week in another daily and what they said about the likes of Oceanic, Inter, Union and a few others is that they will still remain International banks as no international investor will want to put in its money in anything less.

    The Cache for the likes of these three banks is its wide branch network and national appeal, its very difficult to see any of them becoming a regional bank and come to think of it, what region will Union be choosing(Maybe Noth)? Oceanic and Inter nko?(West and East)

    The analysis done by the Pro share guys I think was just done based on the present positions and capital bases' of the banks not taking into consideration the fact that AMCON is coming up in another 2/3 months and of course will be mopping up the toxic assets of these banks or the workability of the Regional stuff for the bank's operations, will it even be profitable for banks that are that large to now start regional banking? Who will even buy their branches in other regions? How bout the present negotiations that are going on? Were they also considered in their analysis?

    GTB today is one of the strongest banks in retail banking, they have also put in a lot of funds into improving their Card and internet banking services in the last few years, income made by GTB on their new Master cards in the last two months is in the region of 10bn(1000 * 2,000,000customers), why on earth will they give up that simply because they want to become an Investment bank(They were never one).

    Retail banking surely is where money is in the banking industry right now, that's why even Stanbic (Stanbic + IBTC + Chartered Bank) has been investing a lot in new branches recently, IBTC was its only arm that was into Investment banking, Stanbic itself does plenty of retail banking in South Africa and other African countries, it surely will want nothing but the International license.

    ''Sterling, Access and Diamond bank will all probably choose to focus on Commercial hub Lagos and get licences to that effect'' Can you imagine Diamond bank leaving its Onitsha and Port Harcourt operations and rather focusing on Lagos.'' Dem wan die''. Diamond is about the major Ibo bank right now and it sure pays them plenty to still keep that ''look'' as they are gaining a lot from that, Access has been doing pretty well recently, none of them will definitely want to be seen as a ''regional'' bank, the banks even have over 50bn as Capital base at the moment.

    I really think the new policy is to help Banks that are just coming up as it is now easier and cheaper to start up a bank with 10bn instead of =N=25bn which was the previous amount, apart from that, banks like Spring, Wema and maybe Unity now have the opportunity to focus their activities on their regions as they have never been seen or accepted as ''National'' Banks.

    Neither of GTB, Stanbic, Oceanic, PHB, Union or even Intercontinental will be affected by the new policy.

    I am more worried bout their ''competency''. Sanusi and co.. Are we sure these guys know what they are doing?
    How long do we expect this policy to last? Can any of these policies outlive Sanusi's time at CBN?

  • muyiscoi

    When Soludo was there, we all saw him as the savior of Nigeria's banking industry. He had fresh ideas n all that. Now Sanusi is there, it looks like they are trying to make Soludo out to be not such a revolutionary afterall. I don't really understand much about how banks work as that is way off my area of specialization but what i have read here sounds interesting and looks like it might actually do some good. However, if people lose their jobs as a result of the banks which become "regional" selling off branches in areas where they no longer have a license to operate, then I don't think this will go down well with a lot of Nigerians.
    On an unrelated note, @wale, i sent u my postal details earlier on for the Mandriva DVD through ur contact me form. Hope you got it

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