The future of Nigerian banking after the current crisis

How would the current crisis in the Nigerian banking system affect the way banking is done in the country? What are the lessons to be learnt and what are the strategies Nigerian banks should adopt to overcome the many negative impact that this crisis will leave behind? Do the regulators stand to learn from this crisis? What should the business community expect or learn from this crisis when it blows over? These are the many questions that should be going through the mind of everyone watching the unfolding crisis in the Nigerian banking industry.

Taking these questions one by one, we will attempt to answer them and possibly paint a picture of what banking will look like after the current crisis which has been termed the Sanusi banking Tsunami.

How would the current crisis affect banking in Nigeria?

The first casualty will be the ranking of the top banks in the country. Three of the five banks taken over by the CBN are ranked among the top five banks in the country. These are Oceanic Bank, Intercontinental Bank and Union Bank. These banks are likely not to retain this position when the current crisis blows over. Though feelers show that these banks may not have experienced the massive run that most had expected them to experience after the CBN takeover, nonetheless confidence in them as strong financial institutions may have been irreparably eroded that it will affect their ability to compete as they have done before. Going forward, these banks will fight to survive than compete.

Also the fact that the CBN has plans to put these banks on sale will mean possibly new priorities for whoever takes over these banks. The new owners of the banks may decide to forego growth for stability or be a core player in a specific field than a general market player. There is also the real possibility than the former owners may lack the drive of the former owners.

Entrance of foreign banks?

Foreign owned banks are said to be waiting on the wings to enter the Nigerian banking market. Before now the strong presence of Nigerian banks and disposition of the CBN towards foreign owned banks has been a hindrance. Now the current CBN under Sanusi is ready to handover a 100 percent ownership in Nigerian banks to foreign owned banks and some of them are said to be willing to take the opportunity of the current crisis to enter into the Nigerian market. Any of the five banks would definitely be a good pick for them depending on how they want to play in the Nigerian banking industry. Also the stricter reporting standards and transparency that is expected after the current CBN action will create a more favourable environment for these banks to operate in the system.

Would foreign banks benefit the Nigerian system?

This is critical question perhaps better answered by asking how has the currently existing foreign owned banks impacted on the Nigerian banking system? Who are their major customers? Who do they lend to? What would be the impact on the Nigerian economy if top Nigerian banks are foreign owned and run? Experiences from other economies have shown that foreign banks are usually the first to take flight with their capital from a domestic economy when there is a hint of crisis. This was easily seen in the Nigerian capital market crisis when hedge funds took flight setting off the steep decline in the Nigerian capital market. If the CBN wants foreign banks to come in, do they have strategy to ensure that they do not leave the Nigerian economy high and dry when they are needed the most? The critical question though is will they be disposed to lend to Nigerian owned businesses whose business practices in most cases may fall below their international benchmark standards?

Any lessons to be learnt from the current crisis by Nigerian banks?

There is no doubt that Nigerian banks have many lessons to learn from the current crisis. The first obvious lesson is that poor risk analysis can have a debilitating effect on banking operations. Nigerian banks ignored the dangers of credit, operational, financial, currency and reputation risks and today are paying a heavy price for it. Banking goes beyond deposit mobilization and lending. Banking is about risk analysis, strategic placement of funds to enhance maximum returns at minimal risk. It is not about "my balance sheet is bigger than yours" or "I am that fastest growing bank". For too long, Nigerian banks have taking banking for granted and now they have to realize that it is a serious and solemn business that demands the highest sense of diligence.

First area most banks will have to focus in the post crisis period will be to increase their in-house risk analysis talent. The two critical areas that sank the five banks taken over by the CBN was lending to the oil and gas sector and the capital market. These two areas are sectors which most of the banks were opening their books to for the first time. Obviously, from hindsight it is obvious that there was poor risk analysis of lending to this sector. It is difficult to blame the banks for this oversight as risk analyst talents in these two sectors are scarce in the banking industry. Going forward most banks have to grow their skills in these two potential lucrative sectors that also comes with high risk.

Also I am not sure of how many Nigerian banks have Chief Risk Officers (CROs) reporting directly to the board through the MD/CEO. Going forward most banks will have to set a fully empowered risk division to help the banks evaluate and manage the various risks it faces in the deployment of the huge assets at its disposal. As Nigerian banks grow bigger and go international, they are increasingly taking on several risks that before now they have been unfamiliar with. Banks ability to manage, cross border regulatory risks, currency risks, financial market risks are all strange to the average Nigerian bank. Skills in these areas will be critical going forward.

Any lessons for the regulatory bodies?

Did the regulatory bodies go to sleep while Nigerian banks went on lending spree? I really do not think so because even in the United States of America, credited to have had the most stringent regulations, over 75 banks, including some of the oldest and respected like Lehman brothers, have failed since the global economic crisis started in the last one year. The implication is that this crisis may have been more due to regulatory knowledge gap than regulatory laxity. Recently, Alan Greenspan, whose word is considered sacred in banking worldwide, noted that "you cannot legislate against greed" neither can you regulate greed. When greedy people see an opportunity to make money that looks "easy" it is difficult to stand in their way.

But there is no doubt that regulators have to sit up and become more proactive in their regulatory functions. It is not enough to react to crisis, the CBN must be anticipate potential crisis in the banking sector and nip it in the bud. The CBN and the NDIC must improve its stock of in-house skills to do this. They must be well remunerated and be people of high integrity.

Other regulatory bodies like the Securities and Exchange Commission (SEC), the Nigerian Stock Exchange (NSE) must all sit up. The development in the international capital market is so fast and complex that the current pedestrian regulation of the capital market will not do.

How does it affect credit?

Businesses should be prepared for a most likely credit freeze. Banks will have to get their acts together before they start lending again especially to the most vulnerable sectors of the Nigerian economy which bears the highest credit risk. Small businesses are likely to bear the biggest blunt as banks put in place new credit risk appraisal techniques that are likely to be more stringent than current practices. Besides, the publication of bank debtors list and the criminalization of lending and borrowing by the Economic and Financial Crimes Commission (EFCC) will likely have a negative impact on lending in and borrowing in the long term. Its great danger lies in its ability to inhibit free enterprise as no expanding good business can do without credit. Good business ideas are usually nurtured by bank credit. If entrepreneurs start getting afraid to borrow to pursue their ideas and expand their businesses, then we will soon start having economic stagnation. This is the danger in the current tactics pursued by the CBN and the EFCC.

Would targets gone wild be tamed?

After this crisis, would banks reduce their "crazy" deposit and profit targets? This is doubtful. Deposit targets will remain but profit targets may no longer be that ambitious and perhaps the crazy timelines will be relaxed. The truth however is that for banks to be effective in the new environment, they have to restructure their targets to reduce unnecessary risk taking, take into consideration staff internal and external motivation in meeting targets and reduce the motivation for fraud. Banks may need to realize that high targets lead to higher risk taking which results in higher profits because of the higher risks taken and not necessarily to higher performance. Banks have to evolve a strategy to attain high performance within acceptable risk levels.