Banks Better Off With Mergers, Says Soludo
High interest rates worry bank directors
From Kola Ologbondiyan and Kunle Aderinokun in Abuja
Governor of the Central Bank of Nigeria (CBN), Professor Charles Soludo, yesterday urged boards and management of banks in the country to seriously consider mergers and acquisitions as options to the resolution of banking crisis in Nigeria.
Soludo who declared open the 20th Annual Directors Seminar organized by the Financial Institutions Training Centre (FITC) in Abuja said empirical evidence of mergers from the United States Federal Reserve data revealed that mergers and acquisitions had increased competition in banking industry in the last decade.
This, according to him, nullified arguments that "mergers and acquisitions are likely to lead to a substantial lessening or prevention of competition, which would in turn cause higher prices and lower quality of service, and a choice for several key-banking services."
He added, "it is also known that monetary policy is better achieved through significant players, rather than a motley of institutions, many of which are financially weak and fragile."
For instance, he cited a study by the G-10 which showed that the consolidation of banks has not significantly affected the ability of central banks to achieve the objectives of monetary policy because the aspect of the market that is important for monetary policy has remained uncompetitive.
Soludo pointed out that "another consequence of financial consolidation is the creation of very large and complex financial institutions." "Such complexity", he said, "tends to increase demand for information (greater disclosure) and in turn, improved transparency and market discipline, " which will therefore lead to "lower individual firms risk and perhaps increased financial stability."
While expressing the belief that consolidation should lead to greater concentration of payment and settlement flow among fewer parties, he, however, noted that "it does not appear to reduce competition in the market for payment and settlement services."
"Consolidation can also improve the effectiveness of credit and liquidity risk controls, for example, by increasing the institution's ability to net internal payment flows or get a more comprehensive picture of settlement exposures," he added.
However, Soludo disclosed that the regulatory authorities are aware that the process of consolidation in banks through mergers and acquisitions, particularly in the Nigerian environment, may not be as easy as in developed market. Given this scenario, he therefore called for "more efforts to be put in place to develop our market for faster growth and the needed consolidation of businesses."
He urged the directors of banks to "consider the options of mergers and acquisitions in order to strengthen their respective institutions and be better poised for the increased competitions arising from the globalization in the banking and financial services."
He expressed the view that if the challenges of the banking crisis in Nigeria were to be met, "there is the need for greater cooperation and collaboration among the regulators, supervisors, board and managements of banks and other related parties to pay increasing attention to mergers and acquisitions and to participate actively in its development for the good of the Nigerian economy."
The Central Bank governor said mergers and acquisitions are not completely alien to the Nigerian economy.
"For example, there was the merger between the West African Soap Company and Van der Berg Limited which resulted in the formation of Lever Brothers Nigeria Limited (now Unilever Ltd.) in 1926. The company later acquired Lipton Nigeria Ltd and A.J. Seward (a division of UAC).
"There have also been few cases in the banking industry in recent times. These included the acquisition of Magnum Trust Bank by Guaranty Trust Bank; Citi Trust Merchant Bank (now UBN Merchant Bank) by Union Bank Plc; Equity Nigeria Bank Limited by Intercontinental Bank; and African International Bank Limited by Citizens International Bank, Diamond Bank and Hallmark Bank. The acquisition of Continental Trust Bank by Standard Trust Bank is unique in that the acquisition was executed as a distress resolution option."
Therefore, he added that, "given the above few cases in Nigeria, one can argue that opportunities from mergers and acquisitions as strategy for business and expansion have not been fully exploited."
He observed that "an obvious feature of the Nigerian banking system is the continued existence of a large number of small players, which are usually prone to crisis and are largely uncompetitive because of their small sizes and inability to take advantage of economies of scales."
In another development, Bank Directors Association of Nigeria yesterday told the Senate Committee on Banking, Insurance and other Financial Institutions that the body has initiated "enquiry" to various banking bodies in the country "asking them to suggest a way out of the interest rates impasse."
The association's President, Prof. Green O. Nwankwo (OON), who disclosed this when he led members of the group like Mr. Goddie Ibru, Alhaji Aliyu Salman, Chief Adegoke Awomolo, Alhaji Hassan Momodu, Alhaji Omar Hameed and Amb. Moses Ihumbe, to an interactive session with members of the Senate committee, noted that the high interest rates required a study by all bodies involved in banking.
According to him, "we have delivered a letter to the Institute of Bankers, the Financial Institution Training Centre based on the issue of interest rates. Last month, when we paid a visit to President Oluesegun Obasanjo, we didn't raise the issue of interest rates but he (Obasanjo) raised it and the passion, the seriousness he attached to the issue has made the Bank Directors Association of Nigeria to decide that it is sufficiently serious and important to merit a study.
"The letter is asking them (banking bodies) to suggest a way out of the interest rates impasse. Interest rates are high but the level is a function of the banking funds but Mr. President could not understand because it (banking funds) derives from government funds. That is one of the issues we raised.
"Also, to address the real issue in funding of macro-economy, the problem is not the availability but accessibility of funds. How do the end users access the funds available because even if the interest rate is one per cent, it does not immediately translate to attraction of fund due to the ignorance of the public on the conditions prescribed by banks for accessibility to funds.
"There must be special conditions under which to lend funds and this is why banks have special criteria for lending this money. Study also showed that interest cost is a small percentage of total cost and even if rate is 5 per cent, it doesn't mean that investors would flock economy today because there are other factors to attract investors.
"Let us direct enquiry into bank cost of funds, interest rates, availability and accessibility. The issue of interest rate is important and proposals have been sent to enable a careful study or enquiry into this stormy problem," he added.
Before the interactive session commenced, Nwankwo had in an address he presented canvassed the need for appropriate amendments of the Money Laundering Act of 1995 as amended to make it more effective. He also wanted an increase in the N50,000 insured deposit currently paid to customers in the event of liquidation of a bank.
"The N50,000 currently paid to depositors in the event of liquidation of a bank is small and grossly inadequate. It was fixed and has remained so ever since the establishment of the Nigerian Deposit Insurance Corporation (NDIC) more than 15 years ago and the effect of inflation that has grossly devalued the naira has not been taken into account.
"Our visit to the Nigeria Deposit Insurance Corporation (NDIC) reveals that its proposal for a substantial increase of the insured amount is already with the National Assembly. We appeal for an expeditious consideration as well as incorporating some flexibility to facilitate periodic reviews without burdening the legislature always."
The banking association president also told the Senate committee of the need to provide for a commercial court to facilitate the trial of bank debtors and fraudsters in order to smoothen the operation of financial processes in the country.
"We believe that banks will be better off if their cases are handled in commercial divisions of our high courts or a special court for that purpose because of the incessant delays in determining the cases," Nwankwo said.
The chairman of the Senate Committee on Banking, Insurance and other Financial Institutions, Senator Ambuno Zik-Sunday, however told the members of the association that NDIC Act as well as the Central Bank of Nigeria (CBN) Act are under review and charged the bank directors to submit their inputs to the committee. Other senators present at the session were Senators Victor Ndoma-Egba (PDP, Cross River State) and Abu Ibrahim.
|
