SEC Raises Task Force on Mergers
N25bn Capital
NDIC to aid weak but solvent banks
From Ayodele Aminu, Kunle Aderinokun in Enugu and Ahamefula Ogbu in Abuja
The Security and Exchange Commission (SEC) has set up a task force in readiness for the expected acquisitions and mergers to be in the banking industry following the new guidelines on capitalisation of banks.
The Central Bank of Nigeria (CBN) last month directed banks in the country to shore up their capital base to N25 billion within the next 18 months. Already, some of the banks have commenced talks on mergers and acquisitions in line with the new policy.
But the Nigeria Deposit Insurance Corporation (NDIC) has said it may bail out any weak bank that may be experiencing liquidity problem as a result of the new capital base requirement. It also warned that if the current liquidity problem in the system is not properly managed, it may lead to failure of some banks.
Director General of SEC, Dr. Suleyman Ndanusa, yesterday disclosed the setting up of the task force when he briefed the House Committee on Capital Market on some queries raised on the activities of the Commission, particularly as regards revenue derived from transactions.
Ndanusa said the SEC has been preparing the grounds for the development in the banking sector as proof of their support to the Federal Government reforms.
He reiterated the willingness of the commission to to bring down charges on transactions in the capital market. He said though the measure will lead to loss of revenue to the commission, it would further deepen the reform policies and positively impact on the economy.
He said instead of the normal one per cent charged on total transactions, the commission is now considering a charge as low as 0.2 percent to serve as encouragement to those wishing to merge or those to be acquired.
On alleged partial disclosure of revenue predicated on the alleged N1.3 trillion volume of transaction, as against the declared revenue of less than one percent, the SEC DG explained that the commission operates a system where the charges are reduced with the volume of transactions while waivers are given in some circumstances.
Moreover, he said it was not possible for the commission to give the exact expected revenue from transactions since certain policies of government could arise and the system may witness reduction in business which would in the end affect the total projected revenue.
The SEC boss cited the instance of the capitalisation policy of the CBN, and asked if the commission should be held responsible for not disclosing how much it was going to make from charges on it even when it not know of its introduction midway into the year.
Ndanusa told lawmakers that the commission based its revenue projection on variables from the preceding year.
He informed the House Committee that the commission had made remarkable improvement in revenue collection due to stringent measures introduced, especially in ensuring remittances of charges on transactions. He said SEC no longer allows brokers to hold on to the funds of the commission, as such practice now attracts penalties.
He pointed out that since the commission started implementing the policy, its revenue collection jumped from 40 percent to over 99 percent despite a downward review of charges.
He said the commission has witnessed many activities due to the N150 billion bond floated by the federal government, in addition to floatation of initial public offers by some banks. He added that the commission hoped to introduce more tradable instruments to continue the good run in business.
NDIC Managing Director, Mr. Ganiyu Ogunleye, told a workshop organised for finance correspondents and business editors by the corporation in Enugu that banks could neither be merged nor acquired at the end of the on-going consolidation exercise will certainly face liquidation. He said those that would receive a sort of life boat from the Corporation would have to meet certain eligibility criteria.
Ogunleye said such bank that would receive a life boat from the Corporation must be solvent and have positive networth. "You can be insolvent and be asking for liquidity because liquidity assistance will not solve your problem," he said.
He added that the corporation must also be satisfied with the corporate governance structure of such bank.
Ogunleye said the liquidity assistance would be in form of a loan which will provide the bank temporary reprieve.
"Currently, some banks have been thrown out of clearing system as a result of their weak liquidity position. This situation becomes a concern for the NDIC as these banks may be unable to meet their obligations to depositors.
"If the development is not properly managed, what begins as a mere liquidity problem may cause runs on these banks and other banks and may well lead to the failure of some banks. The situation may warrant the provision of financial assistance by the Corporation to some eligible banks", he added.
While noting that "the new minimum capital requirement of N25 billion, which prompted the on-going consolidation exercise, has led to panic in the inter-bank market," he pointed out that "following the new policy direction of the CBN, particularly as it relates to consolidation and increase in banks' capital base, the big players in the inter-bank market withdrew their funds in the market with the attendant liquidity problem for the marginal banks. The situation has been compounded by the phased withdrawal of public sector funds from banks."
The CBN on Monday confirmed that two banks recently joined three others that had been suspended from clearing system as a result of acute liquidity crunch which some bankers had attributed to the withdrawal of public sector funds from commercial banks. But the apex bank has since suspended the action.
Earlier in his presentation, Assistant Director, Research, Dr. J. A Afolabi, said "some banks that could neither be merged nor acquired (either because of their financial condition or the observed ownership culture in our environment), will certainly face liquidation and that will trigger a call on the corporation's deposit insurance fund (DIF).
He said the decision of the CBN to consolidate the banking system is to address the various shortcomings of banks.
Afolabi explained that the international movement towards the consolidation of the banking system has held a promise for more efficient, better diversified banks, with more intense competition in local markets.
"In some cases especially when acquirers paid a reasonable price and managed the resulting post-merger organizational problem effectively, this promise has certainly come true," he added.
He said that "there is however, accumulating evidence in surveys and empirical research that in some cases, neither greater efficiency nor substantial improvements in diversification appear to have been realised, while bank profitability has fallen in 12 countries, despite the recent wave of consolidation. There is also some evidence of less, instead of more, competition resulting from the process of consolidation."
Afolabi, however noted that in order to adequately protect depositors, contribute to the stability of the banking system and reduce problem of moral hazard often associated to deposit insurance, some specific deposit insurance features have been put in place by the NDIC. These include:
placing limits on the amounts insured as currently being done but the limit's adequacy should be ensured;
excluding certain categories of depositors from coverage which is also the practice in Nigeria;
implementing the differential or risk-adjusted premium assessment systems: NDIC is currently adopting the flat-rate approach.
minimizing the risk of loss by adopting prompt corrective action and through closure of troubled banks where the case arises. This would entail the development of a robust statistical early warning model that would sensitise the corporation of impending problems as well as the nature of the problems in individual banks and the banking system.
demonstrating a willingness to take legal action, where warranted against directors and others for improper acts.
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