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cbn should come out with more guidelines�Prudent Bank ED
THE central bank of Nigeria has ordered banks to raise their capital base to N25 billion. What is the implication for the economy?
What it means for banks is one of several options: either you go to the market to raise funds or you go to the shareholders to raise the money. You also need to find out for yourself whether it is possible. Secondly, if that is not possible, what is the other way round? Do you want to drop your banking license and then go and do something else or if you don�t want to do that you want to form a coalition with some other people-what is known as mergers to be able to raise or meet the N25 billion mark, or, even still, you want to surrender yourself to others who may with you meet the said sum.
The effects on the economy have to be viewed from two perspectives. If in any circumstance you cannot get into an alliance, a merger or being acquired what that means is that you close shop. If you close shop, there will be issue of shareholders, there�ll be issue of staff, then there�ll be issue of depositors with you. I just hope that doesn�t happen. For the economy at large, if banks now have 25 billion capital base a whole lot of ideas are being sold around as to what the likely benefits will be. People have said interest rates will go down, some say it will create job opportunities, while others say it will create confidence in the minds of depositors. Yet, some others have said it is not exactly so. In mergers for example, there�ll be duplication of assets, there�ll be duplication of branches in some locations. The question then arises whether you want to keep two or three branches in a radius of one kilometre.
So you might take a decision to rationalise some branches. There could also be temporary loss of employment in some cases. In some other cases, there could be loss of assets too. Even there could be jettisoning of some IT systems because if four or five banks come together with different IT systems, some would have to go.
So, there are some investments that were made in year 2000 that have not even been completely written off; so this type of decisions would have to be taken, so loss of investments in this type of scenario. So a lot of rationalisation would have to be done. Talking rationalisation. For example, at the senior level, you can�t have five managing directors or 40 board members; and it goes down the line like that.
What then is the implication of the withdrawal of public sector funds?
We all know that in this part of the world, government is the biggest spender. So when government is not spending, every sector of the economy will feel the consequences, so when you withdraw government money from the financial system, immediately there will be a hole and dislocation. By the simple law of supply and demand, there�ll be many people chasing or gunning for less or insignificant volume of cash in the financial system. Price will go up, even interest rate too in the immediate term.
You mentioned mergers and acquisitions. Will the emerging mega banks still reckon with SMEs against the backdrop of Federal government�s avowed commitment to them in Budget 2004?
In this, the Central Bank and the Federal Government have the responsibility to let us know the full guidelines over this issue because not knowing the details has led to a lot of speculations. The CBN governor at the Bankers� Committee meeting did not say that if you cannot meet the N25 billion mark, you must close shop. What we realised from the meeting specifically was that government will not patronise your bank and it has the prerogative to put their money anywhere. What it then means is that you won�t be able to participate in the Dutch Auction, you won�t be able to deal in foreign exchange, they won�t place their deposits in your banks or you won�t be allowed to collect money on behalf of any government agencies.
If I should interpret that very well, one could decide I don�t want to deal with government, that I�d like to direct my attention elsewhere. So, this is where small banks come in. They still may have roles to play wherein they�ll be doing business with SMEs, doing LPO financing, trading in goods and services etc. So, with or without public sector funds, they can go on with life. In this scenario, there could still be banks that�ll remain small. Going back to the issue of financing SMEs, the regulatory body has assured of incentives for those who support them. There was a time when USAID was giving guarantees, so mega bank or no mega bank, there�s a subsisting rule on SME financing.
Mergers have been known to be inefficient, tricky and risky. Don�t you think this will lead to crisis in the banking sector in the short run?
It will be totally right to say mergers are largely risky and could be inefficient. People go into mergers for different reasons. Most times you go into merger because of synergy. If you are taking a decision because of synergy, and, it is a business decision you have taken. Yes, I know it is not a piece of cake. It is not adding one plus one to get two. It doesn�t work out that way. It is more about some other qualitative issues, culture. I have a culture, you have a culture, you have a culture, we merge together which culture should we subsume for the other or how can we fuse the two together or can we even fuse the two together, and how do we evolve a new culture together and dump our own individual ways of doing business. Certainly, there are a lot of issues with mergers, but all over the world, banks are coming together in alliances and mergers, in Germany, in Japan because banking is no longer a local business, it is global. If we want to compete globally, we have to match up in size so that when some transactions come, we should be able to deal with them. This is one advantage of mega banks. However, we need time, we need guidelines, it is not something you want to force down within a short time frame, because there are so many issues to deal with. In fact, in the case of mergers, people need their interests to be protected, especially in a forced situation like this. As an investor, someone has put up a bank, there were other banks, but I have put my money here. Some policy decisions should not just overnight wipe it away like that. investors� money, therefore, needs to be protected. Also, people who have decided to put their career in a place need to be protected. There should be some framework to put together that would not cause disruption, that would not cause panic or precipitate banking crisis. In places where we have things like this, safeproof measures were put in place to prevent a serious financial crisis. Again, the time frame of 18 months will not be enough.
The bank management was reportedly discussing merger options with some interest groups. What�s the situation now?
When you have your friend, you will be able to discuss freely on your options. Many of those we have been discussing with were those we have worked together before. They know who we are and we know who they are. People, we say, are like minds who we�ve had business dealings which had worked out well.
Specifically, who are these groups or people?
We�ve had talks with people in Magnum Trust, Chartered Bank, you know the core management of Prudent Bank came from Chartered Bank, where many of us had put in a minimum of eight years, so we know ourselves very well. The discussions are going quite well and useful. As events unfold, we�ll be able to reveal our strategy and conclusions.
Sunday Punch, July 25, 2004
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