Consolidation of the financial institutions

CONSOLIDATION OF FINANCIAL INSTITUTIONS, Consolidation of the financial institutions is one of the economic reforms programme initiated by the Central Bank of Nigeria. The programme was outlined at ensuring that the financial institutions like’s banks have a strong financial base in order to support the real sector of the economy.

The Central Bank of Nigeria, through its governor, Professor Charles Soludo who recently won the 2022 Anambra state election, on the 6th July, 2004 initiated Banks Consolidation of the financial institutions through mergers and acquisition and the 625billion recapitalization exercise in his 13 point reform agenda in the banking industry. He stated that by 31st December 2005, all banks must have a minimum capital base of 625 billion. Failure to meet up would lead to liquidation by January 2006. He stated that “The Nigerian banking system as at 2004 was fragile and marginal. The central bank vision was a banking system that is part of the global change which is strong, competitive reliable. It will be a banking system which depositors can trust, and investors can rely upon. Evolving such a system is a collective responsibility of all agents on the Nigerian economy. Consolidation of the financial institutions

Objectives of Bank Consolidation of the financial institutions

The objectives of Consolidation of the financial institutions by the central bank are:

  1. To inject fresh capital into the industry. To strengthen the banks recapitalization in order to support the real sector of the economy.
  2. To achieve the consolidation of the banking institutions through mergers and acquisition.
  3. To create better platform for more effective banking regulation and policy realization
  4. To make Nigerian banks to become more internationally competitive especially in West Africa
  5. To establish an Assets Management Company as an important element of distress resolution.

Problems with Nigerian banks before Consolidation of the financial institutions

The Central bank identified about twenty-five banks as “having liquidity problem” the latest assessment showed that while the overall health of the Nigerian banking system could be described as generally satisfactory, the state of some banks was less cheering. Specifically as at end of March 2004, the CBN’s ratings of all the banks, classified 62 as sound/satisfactory, 14 as marginal and 11 as unsound while 2 of the banks did not render any returns during the period.

Some of the critical problems with the banks as at 2004 were:

Persistent illiquidity

Weak corporate governance

Poor assets quality

Insider abuses

Weak capital base

Unprofitable operation

Over- dependency on public sector funds

Poor internal control

The outcome of the banking sector recapitalization.

By 1st January 2005, after the close of the unextended deadline, 25 banks emerged as having met the 625 billion recapitalization requirement for the Consolidation of the financial institutions. The structure of the “consolidated banks” comprises those that “stand alone”, to two to nine “merge banks”. The programme had resulted in the shrinkage of the number of banks from 80 to 25 through merger/acquisition involving 76 banks which altogether account for 93.5% of the deposit share of the market.

However, in a paper the governor delivered on the 16th January, 2005,titled “the outcome of the Banking sector Recapitalization and the Under Capitalized Banks”. The Governor revealed that 25 banks emerged from 75 banks, out of 89 banks that existed as at June, 2004. He gave a list of “14 banks”  that failed to meet the new capital requirements this way in the exercise of the powers conferred upon them by the banks and other financial institutions Acts, the operating licenses of the 14 banks are hereby revoked.

Problems created by the Consolidation of the financial institutions of the banking sector

It is apparent from the structure of the 25 banks that scaled the hurdle, acquisition and takeovers were the formula followed rather than mergers and acquisition.

Some of the 70 banks that made up the 25 consolidated banks were not better than the 14 that failed to cross the hurdle.

The structure of the 25 banks that emerged after the consolidation exercise appeared lop sided

Five months after the take-off of the consolidation exercise, most of the 25 banks were still struggling with post merger challenges.

The way the banking sector reacted to the consolidation also leaves much to be desired of the 25banks, only 11 or thereabouts were able to post a double digit share price i.e. from 610.00  and above.

A critical look at the structure of the consolidated bank would leave one in doubt that it is made up of three groups, irrespective of the fact that they all have the same share capital –Big, Medium or Small or A,B and C.

The consolidated banks are still groaning under the weight of high costs of consolidation and bad debts.

More serious is the regulatory authorities’ inability to carry all the banks along prior to the exercise.

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