Central Bank's Dream for Nigerian Banks
By Wale Hamed
Merger:- By accounting definihon, a Merger is a business organisation term under long ter~m corporate financial shrategy that involves the coming together of two or more businesses of equal size via asset, liability and capital consolidation under one new corporate name. Symbolically, a Merger can be illushrated thus:
A Ltd + B Ltd = AB Ltd (e.g. Exxon + Mobil = Exxon-Mobil)
As a consequence of the above consolidation, what is known as a synergic effect is expected to take place following a successful merger. i. e. 2 + 2 = 5 and not 4 as would have been expected since economies of scale arising through size and shared goodwill would come to bear.
Acquisition:- An Acquisihon is a business organisation term also under long term corporate financial shrategy that involves a business endty taking over enbrely (full acquisihon) or parhally (parhal acquisihon) the assets, liabilibes of another business such that the business taken over would condnue to exist only as a subsidiary of the business which acquired it otherwise known as the Holding company. Symbolically, a simple Acquisihon can be illushrated thus:
A Ltd + B Ltd = A Ltd (e.g. Agip + Unipetrol = *Unipehol) Unipehol later underwent change of name to become Oando
It should be noted that partial acquisihons may result in associate company relationship. In other words, for a company to be known as Holding company, it must have acquired at least 51% of the shareholding of the subsidiary company. Any acquisition of between 21% to 50% is referred to as an Associate Company status. Acquisihons below this range fall under Inveshment category.
Capital:- Capital can be defined as the pool of funds used in financing the assets and operahons of a business for the purpose of wealth creahon. It is the owner's stake in starting a business. Capital may be in liquid form or otherwise.
Capital under company accounts, though based on the same principle as the foregoing, could come in various types:
1. Equity Capital
2. Preference Capital
3. Debenture Capital
4. Loan Capital, etc
Equity Capital, the purpose of this article, refers to the Capital provided by the ordinary shareholders of the business. It can be sub-divided into the following:
1. Authorised Share Capital
2. Issued Share Capital
3. Paid-up Share Capital
4. Called up Share Capital
5. Uncalled Share Capital
Authorised Share Capital (ASC) is the total share capital that a business is allowed to raise from the general public by the local enabling law (Corporate Affairs Comn~ission for Nigeria) in coalition with other specialized regulatory agencies such as the CBN for the banking industry.
Issued Share Capital (ISC) is that portion of a company's ASC that has been issued to the general public in the case of a public liability company, or to existing private shareholders in the case of a private company.
Paid-up Share Capital is that portion of a company's ISC that has actually been paid for. That is, the company is actually in receipt of the money paid by the shareholders either reflected by cash or bank balances.
Called up Share Capital (CSC) is that portion of a company's ISC that has actually been called for. This type of share capital is necessary since the dynamics of share allotment allows for part calls to be made at intervals towards making up the total nominal value of unit shares.
Uncalled Share Capital is that portion of the ISC that is yet to be called for by the company. Anytime after allotment, the company may call up this capital as the need arises.
Shareholders' Funds is the aggregate total of Paid-up Capital, Revenue Reserves, Profit After Tax, General Reserves and Share Premium of a company. It is the Shareholders' Funds that effectively finance the assets and current liabilities of a company.
The Governor in his speech briefly evaluated the history of banking in Nigeria, highlighted the problems facing the banking industry in Nigeria today and later proceeded with a list of proposals that would hopefully correct the anomalies in the banking sector. Topmost and perhaps most shocking amongst his revelations is the plan to increase minimum paid-up capital of Nigerian banks to N25billion! His main reason for this was a need for the government to force down lending rates towards a consequential financial boost for the real sector. Towards the end of his speech, he hinted on the option of Mergers and Acquisitions for banks that cannot comply with the proposed directive before what I call an unrealistic deadline of 31St December, 2005.
BeIow are what I call my 10 golden reasons why the CBN Governor and the Federal Government should seriously review this particular plan at this point in time and especially the mode d'emplo!/ that they plan to adopt.
In Foreign Economies Surplus Funds Lies With The Private Sector.
The CBN Governor in his speech made the same mistake millions of Nigerians make 'everyday - comparing Nigeria to the United States of America that has wih~essed "over 7000 cases of bank mergers" since 1980. What the governor failed to mention in his speech is that well over'80 percent of global inter-bank funds pass through ~New York which is regarded as the financial nerve center of world trade! Do you know that a simple electronic rnoney transfer from a bank in Nigeria or South Africa to another bank in Germany or France ~rzust pass through New York before it gets to the beneficiary? Do you realize that the 100 biggest companies in the United States between themselves control assets worth more than the total economies of the entire 182 countries in the world only excluding the top 10 countries? This tells us that a greater proportion of money supply in the U.S rests within the private sector hence the low interest rates. In Nigeria the reverse is the case as most of our money supply comes from the public sector such that where government fails to release an annual budget, the economy remains virtually dormant.
Unrealistic comparisms
The CBN Governor also went on to compare Nigerian banks with their Malay counterparts in terms of capital base. Malaysia, a middle-income country, transformed itself from 1971 through the late 1990s from a producer of raw materials into an emerging multi-sector economy. Malaysia, against World Bank advice, went on to build an International airport over the sea. This project has turned out to be one of the most viable projects the country has ever embarked upon. Malaysia boasts of per capita GDP of USD9,000 compared to USD800.00 in Nigeria. The country's GDP as at last year stood at USD207.2billion against Nigeria's USD110.8billion, while its budget revenue was USD25.2billion compared to Nigeria's USD3.4billion. This small country with a total land mass of about 329,750 square miles has a population of just about 23.5 million people behind these gross figures!* Talk about unrealistic comparisons.
_Source: CIA world fact book.
Unrealistic time frame for attaining strategic objective
I detected a touch of radicalism in the CBN Governor's intentions when he added that the minimum paid- up capital is to be met within 18 months. Mergers and Acquisitions are strategic planning tools. In business planning, strategic planning tools are expected to be actualised within a 5 to 10-year action period. I guess now the young banks can only but prepare to be swallowed up in the CBN's bid to promote oligopolies and/or monopoly and their attendant consequences in the banking industry.
Misplaced Priorities And Corruption in the Public Sector
The government cannot run away from the real issues devastating our economy in this country. Ranging from poor state of infrastructural facilities to widespread corruption in both the private and public sector, Nigerians are all aware of the main problems facing our real sector. In developed nations, the financial sectors thrive as a result of the stable economy thus created where inhabitants have excess funds to save and the real sector can borrow the funds at low interest rates for further expansion and growth after taking full advantage of the inherent economies of scale. Until the real sector can begin to have access to good roads, until auxiliary transportation services such as rail and inland waterways become fully operational, until raw materials become easily available to the factories that need them, until the government take full advantage of innovation and technology, until a power system that really works become available to provide power for our factories to operate at low average costs, until the government begin to practice sincere and patriotic identification, implementation and completion of public projects, our real sector will never be revived.
Commercial banks are financial intermediaries and not macro-economic tools
Judging from his speech, it would seem that the CBN Governor, being an economist is of the opinion that commercial banks should be seen as economic tools to be used in stimulating the growth of failing sectors of the economy. While indeed banks play a vital role in economic development through lending to the deficit sector, this should not be mistaken to be their primary function. The traditional role of banks has been financial intermediation and not financial arbitration as the CBN Governor implied in his speech when he blamed commercial banks for high interest rates. We have all seen the apex bank wield its powers in the past through excess liquidity mop ups via Special Treasury Bills (STBs), fixing of Marginal Rediscount Rate (MRR), fixing of Prime Lending Rate (PLR), etc. We keep talking script economics of allowing forces of demand and supply to determine price of this and that. We have totally thrown reality to the winds and fail to realise that even these so called economic theories have exceptions. Have we not heard theories of abnormal demand and supply? Do we not consider the elasticity of demand of a product before allowing forces of demand and supply to determine the price levels? A product with inelastic demand such as a necessity or an item without a close substitute should not be allowed to find its price level in the open market if truly the interest of the people is sincerely the concern of the government. And what about corruption on the part of government officials where top officials of parastatals demand for brokerage commission in consideration for government deposits with banks? These additional costs lead to high interest rates.
Unchecked capital flight - nigerian funds used in boosting foreign economies
Africa loses over NGN250 trillion yearly due to capital flight overseas (recent African Economic Union reports). Do we not realise that our top government officials and elite are busy looting this nation dry and channeling these funds out to European and American banks where they are safe and beyond the reach of any phony economic crime comrnission set up by any government of today? These same NIGERIAN funds form part of the capital base of these foreign banks that we are now comparing with our own local banks. Even the CBN maintains a series of Federation Accounts with one of the largest banks in the U.S. today. I believe we should focus more on ways to force these shameless but admirably cunning Nigerian looters to please return our money home! If we succeed in getting back half of what Nigerians have stolen at home and stashed away abroad, I guarantee the CBN Governor that a N25billion capital base or Shareholders' funds requirement for commercial banks would only be too easy to accomplish if need be but more importantly, the real sector would flourish.
Mergers Are Not to Be Forced - Only Encouraged
Going back to the issue of mergers and acquisitions, I wish to use this opportunity to advise Mr. Governor and his lieutenants that these business amalgamation tools known as Mergers and Acquisitions are not supposed to be forced down on companies. They are simply employed by more ambitious and dexterous companies as strategic tools for gaining comparative advantage over their competitors. Mergers and acquisitions are similar to marriage, and should never be forced. Small as most Nigerian banks are, some of them have not been able to get over their board room crises. Imagine a South- Eastern owned bank for instance trying to merge with a purely Northern owned bank. Which of the chief executives step down; which stays, who would compromise and who would negotiate? I see Mafiosi banking unleashed. For the sake of efficiency, Mr. Governor, kindly allow banks to specialize in their own chosen niche and capitalize accordingly.
Majorlty of Nlgerians Are Too Poor To Sa
Mr. Governor, I believe there is a formula in macro economics which goes thus: Y = C + I + G. Where Y is National Income, C is consumption, I is investment and G is Government Expenditure. The "I" in the formula is our source of concern here. The rule is that people can only save or invest "I" where there is excess after consumption has been tentatively considered. This scenario brings us to the Nigerian economy where there are no jobs for the majority let alone income and consequently savings. Now Nigerian banks are being blamed for overdependence on public sector for deposits. Where else would the banks turn to for deposits when majority of the Nigerian populace are too poor to save and the majority of the elite are too busy siphoning their ill-gotten loot to foreign countries?
Commercial banks are not price makers
In furtherance to the foregoing point, it should also be noted that based on the relationship described above concerning banks, depositors and borrowers, the banks tend to be the price takers in the long run if the CBN does not stand up to fulfill its control and regulatory function of price fixing. This is because an average depositor in an enlightened environment such as in the information age we are in today has access to market information and can to a reasonable extent negotiate favourably the price he would accept in consideration for parting with his money for a period of time. The high risk present in the nation's political and economic environment does not favour the banks any better as the depositor would in addition to whatever price also demand for risk premium. The borrower on the other hand may not be as shrong as a negohiator but more as a compromiser. Judging from the foregoing, I believe the problem of pricing of currency in the Nigerian Money Market lies more with the surplus sector and the regulatory agencies - not on the banks.
Inflation is an economic smoke-screen for growth
My final point before I conclude this write-up, borders on inflahion. A larger proporhion of the perceived "growth" in the economic sectors is nothing but bogus if systemahcally analyzed. Inflahon is either eahng up the computed growth or deceiving us into thinking there is growth parhicularly in the banking sector where the produce on offer is currency or liquidity. The few thriving real sector companies like the breweries and other manufacturing indushries easily combat this economic saboteur called inflation by quickly adjushng prices of their products accordingly which has a direct impact on turnover and consequently on the bottom line of the company. This leads to "real" or "tangible" growth. However, this simple shrategy unfortunately is not available to the banking sector because of the high level of regulatory presence.
The banking sector no doubt is a very critical part of the total economy because it serves as a cenbral link to the others. Thus the sector needs to exhibit a high sense of responsibility, character, humility, ethics, professionalism, maturity, forthrightness and integrity. It also entails courage, dedicahion and hard work. The banks need to throw selfish pride to the winds; they need play no part in politics because there is no place for polihcs in the vaults and on the balance sheet where all that matters are facts and figures. They need to embrace positive change and resist negative ones by seeking dialogue and making due representations where necessary. No bank can lose its license for saying the truth except if the counhy has gone berserk. It is right for ailing businesses to seek financial salvation through acquisitions if need be. However, forced and hurried mergers to healthy companies in order to meet ill hmed hastily handed down government targets should not be encouraged because it could lead to unnecessary shake-ups with dire social and economic consequences.
Hamed wrote in from Lagos
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