In their reactions to the apex bank decision to licensed five new banks in Nigeria, some analysts have expressed fears about the viabilities of the new financial institutions.
In separate discussions with MarketForces Africa, some analysts think the move is a right gesture but in a very wrong time.
In their assessment, they are of the opinion that the very structure of the economy, and by extension the financial service sector need to be properly adjusted and recalibrate.
The questions the analysts raised is that, “how would they compete” and what niche are these banks planning serve”?
It may be recalled that the apex bank recently approved licenses for new operators with varying interests.
The approval came on the hinds of the need to bring some unbanked population into the fold. Though it is a private interest, some think it has wider impacts than the market really think.
It was gathered that the economy has not been performing very well, that the case for new banks is a misplaced priority, an Economist told MarketForces Africa.
Other stakeholders are also of the view that instead of proliferation of light weight banks, there is need to strengthen the existing ones.
“In a situation where aggregate profit of seven (7) banks is less than what Zenith or GTB Plc declared in 2018, signal that barrier to compete is strong along deposit money taking and lending cluster”, MarketForces Africa gathered from experts.
What is CBN thinking? In less than two years, two systemically important banks (SIBs) lost their licenses to operate as an entity.
The defunct Skye bank Plc was taken over by the apex bank in a bid to salvage the remnant to protect the financial services sector from shock.
Few months after the birth of Polaris Bank Limited, the remnant of the defunct Skye Bank Plc, Diamond Bank Plc sought early lifeline from Access Bank Plc in a merger and acquisition deals.
That Polaris Bank Limited has not been able to attract investors till date is an indication that there is pressure in the financial services sector.
“Instead of issuing more licenses, the apex bank should really consider recapitalisation and regrouping banks by primary focus.
If you look at the financial service sector, you would observe that top five banks accounts for the whole market share in the sector.
That tells you that big balance sheets has become a factor in the industry, then smaller banks should be restructure to focus their energies, analysts told MarketForces Africa.
Few years when erstwhile CBN governor, Charles Soludo introduced recapitalisation that saw the numbers of banks in operation reduced significantly.
The recapitalisation project changed the architecture in the banking sector; but some observers, academia and professional communities think it should not have ended there if there was a strong vision.
“If you observe, that recapitalisation was done when Naira paired dollar at less than N100. As today, we are talking about four times the previous swap rate.
What that means in real term is that the value of bank in dollar denominated assets have decline four times than what was achieved in the previous recapitalisation exercise”.
The minimum capital requirement for a regional bank is N10 billion, while for National banks was set at N25 billion and international banking license demands N50 billion, according to the Banks and Other Financial Institutions Act (BOFIA).
“Effectively, No Nigerian banks can do what a smaller South Africa bank can do.
“Unfortunately for us, the size of Nigerian economy is big, with a ballooning population size.
“If you then look at the financial service sector to gross domestic product, below 10%, then you would know the reason the economic growth continues to underperforming population growth.
The equilibrium point to find, the missing link is a strong financial service sector”.
Analysis of the number shows that the top five banks in Nigeria is not up to a bank in South Africa.
Though, some stakeholders are downplaying this on the basis of different economic structure and sophistication.
Some Broadstreet experts said that owning a bank in Nigeria is the easiest way to create fortune.
Many banks have abandoned their primary objective to creating assets by lending to relevant economic agents.
“The new oil in the last few years has been fixed interest rate market, and banks are taking position significantly.
“Lending? Government deals would be preferred to private sector irrespective of estimated returns on investment on projects”.
MarketForces Africa roundtable review of the sector discovered that banks are making money from interest earnings assets, which comes by lending or from investment in fixed interest rate instrument.
Since 2016, many banks have developed cold feet with lending due to high default rate.
“When an economy is not performing, banks performance tends to be low.
“The reason is that those who borrowed these funds would have challenges on the supply side because household income would have been affected.
“Reduced disposable income often translate to decline aggregate demand. Then, corporate sales budget would be unfavourably affected, then default rate would be high”.
The fixed income has been providing shock absorbers for many banks that have cash to spare in the fixed interest rate market.
Those in the retail end with large deposit taken are achieving more in terms of profitability than smaller size as cash reserve ratio locked down their loanable funds.
Average Tier 1 banks recorded c.4% cost of funds in 2018, with cost to income ratio at 5-6% compare with small size banks.
Some analysts say that the environment is not ripe for more banks. Those that enter the market in the recent time are struggling to survive.
They say what Nigeria needs specialized banks that would focus on consumer or personal lending which some instant credit vendors are already doing.
The bank of the future must be lean, agile and responsive apart from being adequately capitalised, Jide Famodun, Strategy Consultant at LSintelligence told MarketForces Africa.
“However, the banking sector needs some disruptive entrants with strategy, and financial capability to change the exiting market structure.
“…and redefine how banks should operate in an environment where significant numbers of people are living below $1.25 per day”, Famodun said.
