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August 30, 2011updated 04 Apr 2017 1:07pm

New dawn for Nigeria

Nigeria could have been a gold mine long ago, were it not for the unregulated and crime-infected banking sector But, in 2009, the Central Bank cleaned up the system, bailed out 9 banks and a deadline to meet new liquidity requirements rapidly approaches

By Duygu Tavan

Picture of an acacia tree at sunrise


Nigeria could have been a gold mine long ago, were it not for the unregulated and crime-infected banking sector. But, in 2009, the Central Bank cleaned up the system, bailed out 9 banks and a deadline to meet new liquidity requirements rapidly approaches. Duygu Tavan examines the current state of the market.


Exactly two years ago, the Central Bank of Nigeria (CBN) shook up the country’s banking sector. It dismissed or arrested senior banking managers at five banks (Oceanic International, Intercontinental, FinBank, Union Bank and Afribank) on counts of fraud, concealment and loan grants without adequate collateral.

The CBN also injected NGN420bn ($2.75bn) into the banks to prevent them from failing. That same year, the CBN injected emergency funds into Bank PHB, Equatorial Trust Bank, Spring Bank and Wema Bank, taking the total amount of injections to NGN620bn.These bailed-out banks received a deadline to meet higher liquidity requirements by the end of September 2011.

Since then, three credit bureaux have been put in place to ease consumer identification and reduce credit risk; the Nigerian Asset Management Corporation (AMCOM) was established as a financial vehicle to purchase bad debts; and The Banking Sector Resolution Cost Sinking Fund was set up in January to supplement the resources of AMCOM by collecting 0.3% of each of the 25 banks’ asset base as well as an annual pay-out by the CBN worth NGN50bn.

Bar chart showing Nigerian banks ranked by market share, deposits Q310


Parallel to their efforts to meet higher capital requirements, the institutions have also begun to invest in core banking technology with the aim, eventually of meeting international banking standards.

With the deadline less than a month away now, the majority of the bailed-out banks have crumbled under the pressure to meet these capital demands, giving rise to aggressive merger and acquisition opportunities (see, All change – Nigerian banks on the merger and acquisitions trail, p20). The transformation in the Nigerian banking sector is significant outside of Africa for various reasons:

  • The transformation deals as an example for peer emerging markets, especially in regard to viable revenues from low-cost-high revenue retail banking propositions, such as mobile and micro-payment services.
  • Its banking sector is a tabula rasa now, starting from scratch to meet international standards; thus, Nigeria can be a gold mine for banking technology firms to secure lucrative contracts.

RBI spoke to Opeyemi Agbaje, CEO of Nigeria-based consultancy company Resource and Trust, which provides advisory services to several Nigerian banks, Adesoji Solanke, Nigeria banking analyst at Renaissance Capital (RenCap) and a number of Nigerian bankers about the evolution in Nigeria’s banking sector.

According to Agbaje, the country’s number of banks will decline from 24 to “between 18 and 20” by the end of the year.Agbaje believes that despite South African banks’ great appetite to enter the Nigerian market (First Rand’s negotiations with Sterling fell through in July), weak Nigerian lenders will be acquired by better-capitalised national peers. His predictions are backed up by the M&A activity to date.

Bar chart showing Nigerian retail banks, ranked by branches


Both Agbaje and Solanke believe that banks will, in the short to medium term (one-two years), focus more on consolidation of their businesses, optimising IT infrastructure and operating systems and generally “pull down costs where necessary”.

“The old system allowed the banks to get away with inefficiency,” says Agbaje. “Now their priorities are investments in human capital, risk management – including credit quotation and the ability to cope with large investments – and distribution, including investments in branches and alternative channels.

“There is incredible scope for mobile banking, there are about 100m mobile phone users in Nigeria and this channel is an area of great focus.”

Nigerian banks’ lending portfolios have until now been corporate dominated. Now banks are turning their focus on retail banking propositions.

“Banks’ key focus is now to strengthen their existing relationships with their clients. They already have strong brands,” Solanke explains.

Retail customers present a low-cost and low-demand funding base, through which banks can fund their asset-related activities.

Low-cost current and savings accounts dominated banks’ deposit base at year-end 2010.

According to RenCap, banks offer near-zero interest rates on current accounts and savings accounts rarely offer more than 3%.

This makes retail banking customers even more attractive for banks.

RenCap forecasts that Nigerian banks will continue to swim in a pool of cheap retail deposit funding as banks continue to open more branches and target the semi- and unbanked population.

Bar chart showing banking penetration, retail loans to GDP, of selected countries


However, attracting depositors is expensive and presents a challenge to many banks. Banking activities mainly take place in-branch and are therefore costly due to the cost of security, communications, staff and training.

The high cost of risk has also deterred many banks from sufficiently leveraging multi-product propositions.

According to a senior banker at Intercontinental Bank, who declined to be named due to ongoing changes at the bank, Nigeria’s banks had to hold back direct banking propositions because their priorities lay in meeting capital requirements and mopping up their operational challenges.

“But after the September deadline, we will start marketing our retail products more aggressively,” he explains.

Among the retail banking products in focus are debit cards in particular – way ahead of contactless or prepaid cards.

The Intercontinental executive says that contactless has not been taken up yet due to fear of loss and fraud.

“The sector has not even started distributing contactless cards yet. If anybody is doing so, it will be a trial phase.”

The executive predicts that contactless cards will be in place in “about two years” as part of the government’s efforts to promote a cashless society. Of course, upgrading banks’ infrastructure is the first priority for now.

Solanke believes that cost and risk optimisation will take a “couple of years” and once “things settle down, the sector will be more competitive”.

And indeed, it will take a while until the sector reaches the standards of international peers in mature markets.

On par with other African countries, the Nigerian population has no formal identification system in place.

Credit bureaux are evolving, but are far from being commonplace. So far, the CBN has licensed three credit bureaux, two in 2009 and one in 2010.

All financial institutions are now required to obtain credit reports and agree to data-exchange with at least two credit bureaux before granting a person any banking services or products.

“We have never had a credit bureaux before,” says Solanke. “Now these three have all the data needed. The next questions is: Are the banks actively using the credit bureaux? They do not. But they are increasingly doing so.

“The availability of the data may not be at its best yet, but the practise is starting to become common place. We are getting there.

“We have had M&As before; this is no situation where a big bank is buying a small bank. There are small banks buying bigger banks.

“The banking sector is going through a learning curve, but nothing will happen over night.”

Nigeria’s banking sector is on the path to achieve a sound and efficient banking system.

Provided the CBN’s and AMCON’s ambitions and plans bear fruit, the sector will boast well-capitalised, liquid and thus underleveraged balance sheets, resulting in resilient net interest margins and a strong enough capital base to withstand another credit crisis.


Box story outlining how Nigerian banks are on the merger and acquisitions trail

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