It was perhaps meant as a routine remark, but by calling for bank mergers in his first major pronouncement, Charles Soludo - who recently became Central Bank of Nigeria (CBN)ís 7th governor - touched upon what will be a prime determinant of his 5-year tenure's success: consolidation of the banking industry.
The 112-year-old industry is fragmented among 89 banks. This is particularly crucial in core capital - shareholders funds plus most reserves - which underpin banking operations. The 26 Nigerian banks among sub-Saharan Africa's top 100 account for only 10 percent of the $13 billion total core capital. Conversely, South Africa's six account for 70 percent.
This discourages deposits because it severely limits how much depositors can recover from a failed bank, beyond the statutory minimum insurance of N100 000 ($714). Also, small/medium credits by SA standards, for instance, are deemed large and must be spread around. This is expensive for borrowers, who have to pay
all the fees, and often cause project delays as banks struggle to co-ordinate their internal logistics. Foreign banks seeking local credit counterparts also find the situation cumbersome. The fragmentation is also believed to be responsible for widespread malpractice.
To achieve his goal, Soludo will need to look beyond the fragmentation to its causes. These include blanket access to public sector deposits and foreign exchange sales. New penalty-and-incentive rules targeting the genuineness of capital reporting is what is needed.
He will, however, face stout resistance from two directions: banks managements' vested interests and the political lords who really own and control banks.
Can he deliver? Soludo, 44, has impressive academic credentials: economics PhD, merit professorship at Nigeria's oldest university at Nsukka, fellowships with, among others, Washington-based conservative Brookings Institution and Oxford University. But he has no banking
education or experience. His only known management experience outside his young NGO/consultancy, Africa Institute for Applied Economic Research, is chairmanship of the National Planning Commission from where he moved to the CBN. In his two-year tenure, the commission co-authored the government's latest economic programme, NEEDs.
The programme is widely faulted for a lack of detailed infrastructure and investment underpinnings for its targets, which include seven million new jobs in the private sector by 2007. Many, both in and outside banking, thus see his appointment as short on technical merit and a political move to curb the CBN's autonomy.
Unhelpfully, his predecessor, Joseph Sanusi, is well admired for his achievements. A banker of nearly four decades in the CBN and commercial banks, Sanusi quietly surprised many by upholding the bank's autonomy and as a constructor set on global practices. Two years ago, he automated the traditionally chaotic clearing system
and last April instituted a 7-bank settlement system. The latter not only freed the CBN to concentrate on regulation/supervision, but also enthroned a more competitive and merit-based framework with the appointment of newer banks on the same level as the old `big 4.
Sanusi also, insisted that his former bank must fully provide for its lost N11 billion financing of an abortive bid for telecoms parastatal Nitel. Similarly, he upheld the CBN's fiscal responsibility by keeping its financing of the government's deficit under the legal 12.5 percent of budget. He used his industry knowledge to persuade banks, traditionally averse to funding small industrial enterprise, to set aside N22 billion of their pretax profits for the sub-sector. A defender of small depositors' rights, Sanusi not only persuaded banks to lower their minimum deposits, but also, recognising that many families depend on inward remittances, insisted on beneficiaries being paid in US dollars and no longer in naira
at bank- dictated exchange rates. Consequently, the interest rate stayed relatively stable, and the exchange rate's deterioration slowed to fewer than 20 percent in the two years of the Dutch auction, while parallel-official market premium dropped to under the critical 10 percent.
Soludo stands to succeed by building on his predecessor's achievements. He will, however, be better remembered if, he can midwife consolidation. A necessary step is enforcement of accurate capital reporting, which will expose the hollowness of many banks. The CBN has publicly diagnosed widespread false reporting, but exacted no fundamental penalties. Exposure and impressive penalties will cause weak banks to offer themselves for mergers/acquisitions, exit or be exited. Players with strong capital could then be rewarded with public sector deposits and FX dealership.
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