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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


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

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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
  • 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

“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

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

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

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

“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