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N25 Billion Naira Capitalization: The Journey So Far and its Likely Implications on the Nigerian Economy. (Posted 11th Jul  2005) Tell your friends about this page! Email it to them.

On Tuesday July 6, 2004 at a special session of the Bankers Committee in Abuja, the Governor of the An Abuja streetCentral Bank of Nigeria, Professor Charles Soludo, unveiled a 13-point reform agenda to bank chiefs which included an upward review of banks capital base from N2 billion to N25 billion.

Explaining the need for re-capitalization, the CBN Governor said that banks have not played their expected role in the development of the economy because of their weak capital base and as such, the decision to raise the capital base of banks was with the aim of strengthening and consolidating the banking system.

He further explained that the strengthening and consolidation of the banking system was the first phase of reforms designed to ensure a diversified, strong and reliable banking sector which will ensure the safety of depositors’ money, play active development roles in the Nigerian economy and also become competent and competitive in the regional and global financial system.

Besides strengthening the Nigerian banks, the new capital, Professor Soludo explained, is intended to stem the systemic distress that has continued to rock the system. According to him. “If we do not do anything today, several banks would go under and we will end up with more job losses, but with this measure, we will end up with more job savings than if we allowed banks to go under. Speaking further he said, “we have a duty to be proactive and to strategically position Nigerian banks to be active players and not spectators in the emerging world, adding that “the inability of the Nigerian banking system to voluntarily embark on consolidation in line with the global trend has necessitated the need to consider the adoption of appropriate legal and supervisory frameworks as well as comprehensive incentive package to facilitate mergers and acquisition in the country as well as crisis resolution option and to promote the soundness, stability and enhanced efficiency of the system”. The CBN Governor subsequently directed banks operating in the country to raise their capital from N2 billion to N25 billion before December 2005, adding that the apex bank would publish the names of banks that qualify by December 31, 2005, while those that merge and meet the minimum capital base by March 2005 would be rewarded. To make banks comply with the directive, the CBN helmsman said that “only the banks that meet the requirement can hold public sector deposits and participate in the Dutch Auction System (DAS) by the end of 2005.”  In addition, the CBN would embark on phased withdrawal of public sector funds from banks and adopt zero tolerance in banks’ rendition of their returns.

The CBN’s new policy was undoubtedly a bitter pill for many banks to swallow and in no time, heated debates both within and outside the financial circle began to surface over the appropriateness of the policy in relation to Nigerian banks and the current state of the economy. One of such instances was from the bankers themselves who, in a swift reaction to the CBN’s recapitalization directive constituted a 10-man panel on July 9, 2005, to examine the new directive and provide an industry position for onward presentation to the Presidency, National Assembly and the CBN

The panel, which was headed by the President of the Chartered Institute of Bankers of Nigeria (CIBN), Mr. Samuel Kolawole, subsequently came up with its own submissions in a 19-page document titled “Recapitalization of Banks to N25 billion: Banking Industry’s Position Paper” in which it had sought among others, an extension of the re-capitalization deadline from December 2005 to 2006 and canvassed for the stratification of banks into three categories namely Investment, Universal and megabanks with each having different amounts as capital base.

The bankers were however not alone in their crusade for a soft pedaling of the CBN’s hardliner posture on recapitalization, as the Senate equally made spirited efforts to force the CBN to reverse its N25billion minimum capital base prescription for banks. The negative response of the banking public did not help matters much as many depositors made panic withdrawals.

Despite the hue and cry from certain dissenting quarters, the CBN’s recapitalization directive was not without its own fair share of supporters, which included President Olusegun Obasanjo who publicly supported the N25 billion capital base for banks, the Manufacturers Association of Nigeria (MAN) who endorsed the policy, saying it would broaden the nation’s economic base and help to position the real sector. Another view expressed by the President of the Institute of Chartered Accountants of Nigeria (ICAN), Mrs. Ibironke Osiyemi who said that the N25 billion capitalization of banks and other CAbuja, NigeriaBN reform initiatives would encourage co-operation among banks, institute corporate governance and discourage one-man bank ownership. In the midst of the raging storm, the CBN Governor, Professor Charles Soludo stuck to his guns saying that there was no “going back” on the issue of recapitalization.  Realising that the CBN would not budge and having found all doors to negotiation shut, the banks inevitably settled down to work out strategies and options towards meeting the Central Bank’s prescribed capitalization.

Some of the options the banks began to explore included among others; new capital raising programmes, through the stock market,  private placement, foreign equity participation, group consolidation and outright mergers and acquisitions.

Despite being aware of the CBN’s favourable disposition towards the mergers and acquisition option, many banks opted initially for the capital market to raise funds through initial public offers (IPOs), while some other banks like Equity Bank, Diamond Bank, Platinum Bank and Pacific Bank adopted private placement of their shares among the wealthy as a strategy to raise their share holders fund to an appreciable level before looking for a bank to acquire or merge with.

By the close of business in 2004, First Bank of Nigeria Plc, Union Bank of Nigeria Plc, Zenith Bank Plc, Guaranty Trust Bank Plc and Oceanic Bank International Plc had formally crossed the N25 billion hurdle, with several other banks following suit in the first quarter of 2005.

On the 30th of March, 2005, the CBN released a “Revised Procedures Manual for Processing Application for Bank Mergers/Takeovers” in which banks wishing to merge or acquire would be required to undergo three stages of approval namely, pre-merger consent from the CBN, approval-in-principle and final approval. The stage was now set for the consolidation exercise and in April 2005, the CBN offered N73 billion reprieve to eight weak and heavily indebted banks. The move, which generated widespread criticism, was however defended by the CBN Governor who said investors were no longer interested in the banks because of the huge indebtedness of the banks to the CBN, adding that, that would have amounted to the liquidation of the banks with the CBN losing everything.

By the first week of May 2005, 55 of the nation’s banks had coalesced into 15 distinct groups, with 13 banks, (some of which had already met the N25 billion capital base) opting to stand alone, while 20 banks were yet to make public consolidation plans. Five banks in the meantime had also applied to the CBN for a N10 billion-debt relief package with which they hoped to conclude consolidation plans.

The race for consolidation gathered further momentum in June, 2005 when the country’s financial regulatory authorities - the CBN, the Securities Exchange Commission (SEC), and the Nigerian Stock Exchange (NSE) endorsed the merger between United Bank for Africa (UBA) and Standard Trust Bank (STB).

836,670,000 shares of the UBA were officially transferred to STB in a cross deal on the Lagos floor of the Exchange, thereby making the group the first to advance to the second stage of the merger approval process. Very recently, the CBN gave an appraisal of its on-going bank reform programme. According to the apex bank, “the sum of N210.5 billion has been raised by banks form the capital market through public offers and private placement” adding that, “Fifteen groups involving 47 banks have also been granted pre-merger consent, while approval in-principle has been given to only one group so far.”

As encouraging as the consolidation rate may seem, the exercise has not been without its drawbacks One of such instances is the cancellation of the sale of some banks’ shares by the CBN due to their inability to provide details of the source of the funds and their owners in the current verification exercise being carried out by the apex bank in collaboration with the Economic and Financial Crimes Commission (EFCC) on banks that raised funds form the capital market. Despite such drawbacks, the consolidation drive has continued to gain further grounds, with several banks fast embracing the mergers and acquisitions option being advocated by the CBN. 

Mergers and acquisitions are a useful tool to management in business restructuring and repositioning. It is a process that involves using existing resources and opportunities more effectively and building a sustainable competitive position for the purpose of ensuring survival or fostering economies of scale. For successful mergers and acquisitions to occur, there are important merger steps that must be systematically followed to ensure a successful deal.

The first step is planning, which defines the overall corporate strategy and shows how merger or acquisition fits into the overall framework. It identifies the essential characteristic to look out for, that qualifies the candidate to fit into the picture. Those characteristics should then be developed into screening criteria specifying quantitative and qualitative factors with which a preliminary screening of target banks is conducted. This exercise will produce a list of high potential banks on which due diligence is then conducted to determine how their strengths and weaknesses fit into the overall strategic purpose. The prospective candidate(s) should emerge from the second round screening.

The second step starts with detailed investigation of the prospective candidate(s) that proceeded from the first stage. The investigation provides the basic information for evaluation, deal structuring and negotiation.

It could be the full purchase investigation and audit where all the unwanted candidates have been eliminated or less detailed if more than the number of candidates required are still present at this point. The final stage of investigation is detailed valuation studies at the end of which all the necessary details for structuring specific deals would have been assembled.

If there is serious interest and a real meeting of minds, the parties proceed to the level of deal structuring. This typically involves negotiating and agreeing on a purchase price; deal structuring to specify payment terms, incorporating accounting and legal basis of the transaction; financing the transaction; negotiating the operating terms of the emerging company such as the main integration plan, employee benefits, among others; drafting the acquisition agreement and closing the deal.

The last of the merger steps is the implementation of the merger or acquisition deal, which is the practical integration of the merging corporate cultures. It calls for skills to combine products and services, assets and liabilities, streamlining of organization structures, marketing and customer service orientation, rebuilding the board, as well as reconstructing the management and the whole body of staff.  Considerable changes will also most likely occur in policies and procedures, accounting systems and data processing technology.

This stage is critical in the sense that the practical implementation of the paper work deal is bound to meet with daunting challenges. A co-coordinating team is required to ensure compliance with the implementation plan, resolve operating hitches and manage staff resistance to the changes. A proper orientation of staff is therefore is a key aspect of a successful implementation programme.

In summary, the consolidation process is one where banks are looking out for compatibility in terms of vision, corporate culture and value system of prospective partners. Successful mergers will consequently depend on expert structuring and execution.

The on-going consolidation exercise has several implications for both the banks and the Nigeria economy at large.

With respect to the banks, the implications can be categorized into two namely: (1) Brand implication (2) structural implication. With regards to brand implications, the new entities that will come from the dust of consolidation will need to deal with brand-related issues such as change of name, change of logo, the evolution of a new brand culture and brand message as well as communication.

In addition to the aforementioned brand expectations, the current consolidation of the banking sector will leave in its wake a number of structural issues, which will have direct impact on staff, customers and the entire banking sector. These include: reduced number of banks; the closure of many small banks (especially those in the rural areas with poor capital deposit); increased competition due to better incentives and efficient rendering of services; acquisition digestion issues, which will include loss of jobs, consolidation of branch locations and tackling of inefficiencies and bureaucracies.

Other structural issues will include fewer bank to choose from by customers, low multiple expansion of credit due to reduced number of operating banks, reconstitution of management and boards of the bank, loss of positions by Chairmen, Managing Directors, the emergence of true financial super markets and increased focus on technology.

With regards to the economy, the consolidation policy is expected to have the following implications namely: unemployment due to job losses; improved capacity of local banks to finance major projects such as in the oil and gas sector; raise the level of confidence in the banking sector by finally curing the system of the prolonged financial distress; improve retaining capacity of financial capital through the promised retention of external reserve in banks, which could encourage the return of flight capital; ensure a healthy competition on a level-playing field and reduction in regulatory abuses and operating malpractices; increase in the value of the naira; encourage the growth of the agricultural sector; reduction of interest rates.

With less than six months to recapitalize and the CBN still maintaining its hardliner stance on bank consolidation, the reality of the mergers and acquisitions (M&A) option is finally beginning to dawn on many banks.

According to one banking source, the on-going consolidation exercise is not easy. “Many banks are unwilling to merge or acquire because they do not want to acquire “liability” banks” the source said. “Some of these banks are owing their staff salaries and even some of their customers, so no one is willing to acquire a problematic bank ” the source added. Querying the viability of the M&A option, a banker from one of the new generation banks said, “ When you are talking about capitalization , you look at the way it is done as a different entity in itself. Do we really believe that 18 months is enough? Do we really believe that the way we are going about it is in order? Have you really tested mergers in Nigeria before? Can it stand the test of time? Can we really merge?” Mr. Francis Okereke, a chartered accountant was however of a differing view. “It is actually rather rushed” he admitted. “But then, no matter how long you give the banks, definitely they would still not be ready. Even if you give them the next two years, they would rather be slow in coming to court, in terms of agreement, in terms of getting pre-merger consent” he said.

Rev.Ndeobi sees things a little differently. According to him, “We have a problem on ground whereby a lot of people are not looking for long-term investments because we are for short-term investments that will yield you the cash immediately. Because money is the language, everybody wants to have access to cash.” He offers  a suggestion, “ The first thing I think we need to do is orientate Nigerians' way of reasoning, we need to have an orientation that cash which is the means of an exchange should not be the main deciding factor on everything we do. Trading does not help the growth of the economy because it is the lowest form of business enterprise - buying and selling; it does not add anything to our economy. What adds to our economy is manufacturing, when people are manufacturing, it helps employment and helps the growth, so that is what we need."

Mr. Okereke offers his position on the issue of recapitalization as follows: " I think the whole essence is actually to pull in our money from outside instead of leaving it lying idle outside."  The issue of banks consolidation has no doubt generated a lot of debate both within and outside financial circles, it however remains a question of time for the real beneficiaries and the effects of the exercise to show.


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