Sustaining Competition in Banking Reforms

Over the short period of Nigeria’s reform programmes, competition has proven to be the best way to keep prices in our economy lower over time – the telecom sector, aviation and entertainment; particularly the film industry had attest to this. Although, much cannot be said on the prospects of competition in the education sector, its stagnancy and economic dearth could not be unconnected to corruption, weak and inefficient management of policies and strategies. The financial industry, particularly the banking sector had gone through series of reforms aimed at strengthening the economy.

From indigenization to capitalization and consolidation in recent past, through liberalization to present day post consolidation reforms like the institutionalization of banking ethics and the acquisition of toxic assets from banks’ books. The chain of policies considered to safe guard the nation’s critical sector is seen to be drawing political and personal interests.
 
Nigeria’s banking sector could be seen to be operating an Open Market Operation (OMO) which allows “players” to hoop in out at will. However, the ideal competition would be the scenario where small lenders are allowed to play a vital role in the banking sector; they can compete vigorously with the big banks by offering cheaper interest rates on loans. This puts pressure on the big banks to keep their interest rates to borrowers lower over time so that they don’t lose customers. The government should introduce bank guarantees for small lenders to secure Nigeria’s financial system and support access to credit. Without this action, our “big banks” would continue to lend less and interest rates for borrowers would remain higher. This had led to lower economic growth and higher unemployment in Nigeria.
 
Although the challenges facing the Nigerian banking sector can’t be solved overnight, the Central Bank of Nigeria’s support and commitment for local competition could be better than the application of outright sale of “failed banks” to foreign investors. As it stands today with the CBN intending on sale rather than allowing competition to outgrow the banking crisis, it would be fair to say that the economy may be faced with high cost of money and service usage as experienced in the early stage of the Global System for Mobile Telecommunication (GSM) before the entrance of local competition which brought succour to the telecom industry. Like the GSM competition brouhaha, the banking sector should be open to such competition and small players supported with legislation to compete, or by a temporal de facto nationalization – government injection of preferred shares; government injection of common shares; government purchase of subordinated debt; government issuance of government bonds to be placed on the banks’ balance sheet; government injection of cash; government credit lines extended to the banks; and government assumption of government liabilities.
 
In spite of the heavy spent during the political electioneering, Nigeria could be seen to be stabilising the economy in its inflation index even though a negative progress is experienced in Composite Food Index (CFI). With the rate of inflation dropping by 2% in June 2011, there could be a geometric increase by August in inflation if the cash balance policy of commercial banks is not addressed. What’s more? The recent hike in cash balance for savings (deposit) accounts by some commercial banks has discouraged many low income earners whose new wage, when effective, will definitely increase cash supply in hand and thereby waging up inflation in a surviving economy. Although the regulators may see Micro Finance Institutions MFIs) as an alternative competitor for the commercial banks, the continuous dearth in knowledge and practice in the sub-sector by the operators which resulted to financial losses and damages is still fresh in the minds of depositors.
 
Although there is continuous “gang war” against the non-interest banking regime introduced by the Apex Bank, proponents opposing to this product should buy a little insight from Europe where top banks like HSBC, Citigroup, Lloyds TSB run units and branches throughout of England. The non-interest banking system could be the needed product that will boost entrepreneurship and support saving culture among the majority poor Nigerians; unlike the conventional commercial savings products of some banks that require N500,000.00 as opening cash requirement for savings accounts, and some stipulating N25,000.00 as minimum cash balance in savings account (even though Nigerians are yet to earn N18,000.00 as minimum wage), the Islamic banking will encourage the mass public (90 per cent) of banking customers with zero based banking products that will boost free enterprise, and in turn reduce unemployment.
 
Although the hike in Monetary Policy Rate (MPR) from 8% to 8.75% is aimed at checkmating the possible rise in inflation ahead the increased cash expense in August, more may not be achieved as depositors may prefer to avoid the banks to reduce “cash lost” on increased bank charges and high deposit balances on savings accounts; many would opt for “self deposits” in the absence of a virile banking alternative. Perhaps, this era may deem suitable for the Apex bank to drive in the competition in its banking reforms by opening the gate for small lenders to complement the Microfinance Institutions (MFIs) in providing banking services for the many low income earners. Knowing that banks will now charge higher interest rates on loans, small lenders, MFIs and non-interest banking products could serve as a last resort for borrowers. More so, guaranteed government bonds for MFIs will go a long way in strengthen their operations and build confidence on MFIs customers.
 
 
As the competition seems to be strengthened by Asset Management Corporation of Nigeria (AMCON) through its plan to unleash about N1.6 trillion to N1.7 trillion into the rescued banks, the need for all banks to concentrate in sole banking business may provide the needed itch to put confidence on their state of health. Without government’s taken up the assets or putting more capital in (the failing banks), the best option would have been to liquidate these banks; but in a distress and illiquidity situations, there could be a high tendency for the failing banks to dispose precious or valuable assets at their forced sales value to enhance cash inflows to abate illiquidity. However, a crisis save option for these banks could be acquisition and/or merger; more so, divesting from insurance, mortgage, company registrar, and issuing house businesses by banks will provide a clear bases for accessing their liquidity and efficiency to compete vigorously in the banking reform era.
 
Although the Apex bank did not specify a plan B in its ongoing reform programme, the separation of retail and investment banking activities on failing banks could spark up competition and set a rebirth in commercial banking. Never-the-less a form of de facto nationalization, narrow banking and limited purpose banking – where retail deposits would be 100% backed by “safe, liquid assets” (government bonds of short-to-medium maturity) and isolation from other banking activities (lending) could be a pacesetter for a virile competition.  Limits on proprietary trading and investing – retail banking would be allowed to be combined with investment banking activities that do not entail proprietary trading
 
With the continuous chaos in the global financial system and its severe impacts on the banking sector with many banks suffering large losses and necessitating the need for bail outs, a twin approach in merger and participation by foreign banks could strengthen the banking reforms. While merger can be seen to reduce competition, it increases efficiency by eliminating duplication and increases the banks’ capital base for better financing; this will le
ad to a concentrated system with relatively few “large banks” with aggressive risk taking. However, a suitable competition could be the penetration of foreign banks to take over banks associated with low profits and high interest rate margins. Although this is feared by local banks, successful competition across the globe is seen to be a policy of intense concentration of foreign banks governed by internationalization and consolidation to check monopoly. In any situation, bank customers would prefer a competition that will guarantee their deposits, and keep lending rates and other charges lower as enjoyed in other sectors where competition really paid off.
 
 
Salim Salihu Muhammed
[email protected]

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