5 July 2009

Nigeria: Country's Bank Ownership Structure


Lagos — As was widely reported the Governor of the Central Bank, Sanusi Lamido Sanusi, recently granted an interview to Financial Times of London during which it was reported that the Governor said he was going to allow foreign interest unhindered ownership of Nigerian bank.

I must confess that I was not privileged to peruse the content of this interview as I had led a team from the Chartered Institute of Bankers' of Nigeria to accredit the departments of Banking and Finance at Osun State College of Technology, Esa-Oke, I have no doubt that most compatriots would recall the prodigious gentleman; Bola Ige of blessed memory, who made that town famous and Osun State Polytecnic, Iree when the interview was reported. But on the last day of our stay at Iree I received calls from not less than three media houses all wanting to know my opinion regarding this liberalisation and since my return to Lagos I have since responded to one e-mail interview from Newswatch Magazine on the same matter amongst others. I was informed by the various media houses that the immediate past administration at the Central Bank had pegged foreign interests in Nigerian banks to ten per cent. I did not quite remember that that was the situation and therefore decided to do some referencing.

As could be gleaned from the content of the Code of Corporate Governance in Banks which was released post the Consolidation exercise in the section on ownership of banks it says; 'The recent practice of free non restricted equity holding ( in banks in the country) has led to serious abuses by individuals and their family members as well as governments in the management of banks. However to encourage a private sector led economy, holdings by individuals and corporate bodies in banks should be more than government's. It is also recognised that individuals who form part of management in which they also have equity ownership have a compelling business interest to run them well. Such arrangement should be encouraged. Government direct equity holding in any bank shall be limited to 10% as from the end of 2007. An equity holding by any investor of above 10% is subject to CBN's approval.' May be there is a pronouncement somewhere to the effect that foreign interests are particularly targeted regarding their holding in the big banks in the Country. What I surely recall is that this is another aspect of policy which has been of a flip-flop nature as the restriction had been imposed and sometimes removed in reaction to the exigencies of macro Economic developments. But what should drive policy position in such matters should be better anchored on international best practice as the reality of the global nature of world economy has been amply demonstrated by the recent global financial meltdown and Nigeria should not and must not formulate policy as if it as an Ireland on its own even if one is prepared to admit that exceptionally considering peculiar circumstances we could attempt to balk the global trend.

Any attempt to restrict ownership by foreign interests could be due to the fact that historically foreign banks in the country have been single minded about the profit motive to the neglect of the important development role of banks. Foreign banks in the past discriminated against Nigerian economic agents in the extension of bank credit and had adopted a rather short term perspective in doing business and have not and would not bother to extend credit to the real sector of Agriculture, Manufacturing and Mining. The records show that at some point in the past we had expatriate banks, private indigenous banks, Regional banks, state Government and Federal Government owned banks with the expatriate banks in the period before and just after flag independence dominating banking business. For quite a long while the foreign banks were run from the metropolis until just after independence when local boards were constituted for such banks with a sprinkling of some citizens on the board.

The need to ensure that the country complemented flag independence with economic muscle and following the discrimination which some prominent Nigerians suffered prompted the establishment of wholly Nigerian owned banks. The first of such banks to be established was the National Bank of Nigeria which was established in 1933. This was followed by the establishment of the African Continental Bank in 1947 by Dr Nnamdi Azikiwe, Cooperative banks of Eastern and Western Nigeria where established with public funds to provide agricultural credit. And after the Nigerian civil war the state governments joined the fry to establish counterpart banks to facilitate their development objectives. In this connection; New Nigerian Bank, Mercantile Bank and Pan African Bank were established respectively in 1970,1971 and 1970. The then six Northern states acquired the Bank of the North which hitherto did business in partnership with some Lebanese interests.

Federal Government interests in banks commenced with the establishment of the Central Bank in 1959 just before independence which was followed closely with the establishment of the Investment Company of Nigeria in the same year. This Bank later metamorphosed to become the Nigerian Industrial Development Bank. And following the then policy of the Federal Government to control the commanding heights of the economy under the Indigenisation Decree the Federal Government proceeded in 1972 to acquire 40% interests in the three largest foreign owned banks ; Barclays Bank, standard Chartered Bank and United Bank for Africa. At the time of this acquisition these banks did the bulk of banking business in the country. The acquisition was subsequently extended in 1976 to all foreign owned banks in the country and the level of the ownership was then increased to 60%.

Empirical evidence has shown that the ownership structure of bank across the globe is varied. For instance bank ownership in Pakistan is highly varied. The banking sector comprise; foreign controlled, family owned and some state owned banks, while some banks operated as part of industrial/commercial groups while a number have exposures to non bank financial sector through ownership and control. In the USA the increased Foreign Direct Investment in the 1990s increased the demand for international banking and this contributed to the banks increasing international presence and the foreign ownership of assets. And studies confirmed what should be expected a priori that government ownership of banks around the globe is large and pervasive but higher in countries with low level of per capita income, backward financial systems, interventionist and inefficient government and poor property rights. It was also discovered that while ownership is highly correlated to performance in developing countries, it is not the case, as should be expected in industrialized countries.

I do not personally believe in controls which tend to restrict. Experience has shown that they are often difficult to enforce. You only succeed in challenging economic agents to be ingenious in circumventing such restrictions. It is often better to give incentives for people to support a particularly course; a sort of win-win approach. And I think we would be lucky to attract Portfolio investment against the backdrop of the global financial crisis and therefore we should support the policy thrust to liberalise investments in our banks so that we can optimize on the widely acknowledged benefits of such developments not the least of which will be the importation of best practice across board. Nigerian banks are also establishing subsidiaries in the sub-region and beyond and this is one more reason for us to embrace international best practice in this matter. Government should hold more than ten percent equity in banks except we are excluding development banks which often are owned 100% by Government.

Chizea wrote from Lagos

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