The Nigerian banking market has become a hell for the consumers. It is now a seller’s market. Having spent most part of my professional life as an investment banker, rose through the ranks to become an Executive Director, responsible for Treasury and Financial Services, I can say that things have changed.
During my active working period, we worked as a team to interface with the best of corporate and high net worth clients. Also, I regularly interfaced with all supervisory agencies, Central Bank of Nigeria (CBN), Securities and Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE). As a front office staff, I worked with colleagues to provide services in which we charged fees and commission that were fair to both the customer and bank. It was a win-win situation.
In the then First City Merchant Bank Limited, founded by the indefatigable Otunba Subomi Balogun, our motto was “culture of excellence”. The excellence and culture were reflected in all aspects of ethic required for banking business which staff must abide by. There was no short cut. In my subsequent training and work with the Mike Adenuga’s Equatorial Trust Bank Limited and Devcom Merchant Bank Limited the culture of ethical banking was still reflected in the way we dealt with customers. I had the privilege of internship with merchant banks in the City of London, United Kingdom with broad working experience with banking institutions in United States of America which made me grounded in regulations, compliance and how banks should relate with customers in service delivery, compensation, fees and charges.
The era mentioned above was between 1990 and 2006, when we had more than ninety banks in the market place offering different products. The banking market was competitive but not perfect. Banking regulation and supervision was top notch. However, since 2007 to date the Nigeria banking market has changed from being competitive but to an oligopoly, where the buyers are at the mercy of the few sellers. In fact, due to high concentration ratio of the Universal banks, the market is tending to a monopoly, with exclusive non-competitive pricing. The banks have become collusive oligopolies where they collude, rather than compete and act like a monopoly to enjoy the benefits of higher profits. This article discusses the unfair practises being perpetrated by the banks under a collusive oligopoly situation, remedies available to the buyers of banking products and policy recommendations to the government of All Progressives Congress Party (APC) led by General Muhammadu Buhari.
In economic theory, an oligopoly is defined as a market structure with a small number of firms, none of which can keep the others from having significant influence and few firms dominate. In contrast, a monopoly is one firm, duopoly is two firms. A monopoly contains a single firm that produces goods with no close substitute, while an oligopoly market has a small number of relatively large firms that produce similar, but slightly different products. In both cases, there are significant barriers to entry for other enterprises. Firms operating under conditions of oligopoly are said to be interdependent with each other.
Oligopoly is a cartel and the cartel behavior of the oligopoly is that it reduces competition and can lead to higher prices and reduced output and services. Given the lack of competition, oligopolies may be free to engage in the manipulation of consumer decision making. The manipulative tendencies are what is currently reflective of the Nigerian banking market. The industry is dominated by a small number of large firms in which over 80percent of loan book is controlled by less than 20percent of the banks. All the banks sell either identical or slightly differentiated products, and the CBN has created significant barriers to entry, making it difficult to grant approval for new banks due to higher initial capital outlay. Minimum capital required to set up a bank is about N15 billion excluding set up cost. Therefore, the banks in Nigeria exhibit all known disadvantages of an oligopoly without any known advantages. The question then is why does CBN deliberately create or encourage bank oligopolies?
In all the banks, average lending rate is above 20percent as compared to 1percent in United Kingdom; 2percent in Canada; 2.25percent in South Korea, and 4.35percent in China. At 20percent lending rate, it is impossible to make use of the borrowed fund for any profitable business except gambling and lottery! Generally, in developed economies, interest rate is between 1-5percent. The borrowers in Nigeria are always under pressure of repayment due to other structural problems of harsh business environment. The so-called ease of doing business slogan is a theoretical idea in manuals of government agencies and does not reflect practical reality of what potential investors are facing. In a recent report, it was established that the cost of doing business in Nigeria ports is the highest in the world, while the ranking by World Bank on ease of doing business is 145 among 185 countries.
Other charges that are now common in the banks are service charge, commission on Automated Teller Machine(ATM), card maintenance fee, stamp duty, value added tax, limit on ATM withdrawals with multiple charges. The banks do not give interest on credit balance on current account and interest rate on deposit is far less than treasury bill (TB) rate. The banks have elevated their risk status even more than government, offering lower interest rate on deposit than government treasury bills. Treasury bill auctions are oversubscribed because of its attractive higher interest rate than the bank offers. In all these the CBN appears indifferent to consumer plights. Consumer protection and customer services are show room exercise to deceive the public. No records of feasible consumer protection by the supervisory agencies.
In the Capital markets, listed companies violate rules of the exchange and cleverly hide under cloak of information technology to confuse shareholders. Annual financial reports are sent to shareholders in electronic format in a society where technology and internet penetration is less that 10percent. Based on Nigeria Accounting Standard Boards regulations, account are now published under International Financial Reporting Standards (IFRS). Although IFRS was designed to bring consistency to accounting language, practices and statements, and to help businesses and investors make educated financial analyses and decisions there exist differences between IFRS and other countries’ Generally Accepted Accounting Principles (GAAP). Under IFRS it is easier to declare huge paper profit as we commonly see in financial results of Nigeria banks. IFRS balance sheet and profit and loss statement might show a higher stream of revenue than GAAP’s. In addition to the United State (US) using GAAP, some countries use other standards. The Canadian GAAP is different from US and the adoption of IFRS for banks in Nigeria appears too early since unifying accounting standards worldwide is an ongoing process that requires public education. Canada and USA are still under GAAP till date
The difference between GAAP, IFRS and former IAS makes it difficult for fairly educated Nigerian shareholders to interpret audited financial reports since the implementation of IFRS in 2012. Shareholder must get a financial advisor to help interpret audited account at a fee to be able to get the full meaning and interpretation of what is sent as electronic financial reports. In most cases, due to poor internet penetration shareholders are always unable to access the audited financial statement sent electronically. The old IAS or the Nigeria Accounting Standard Board requirement would have sufficed for now.
The banking halls are expensively designed as if it is a furniture or boutique show rooms of Harrods of Knightsbridge, staffed with 5
questionable unskilled urbane cute ladies whose attire is like preparing for miss world audition. Some of the branches are constructed using the roman pillars carved with white marble, plaster of Paris and Italian Chandeliers. The cost of operations is absorbed by naïve shareholders whose dividend yield from investment in banking stock hovers around 3percent. Return on investment is perpetually negative when compared with above average borrowing rate of 20percent. Overall, the shareholders are worse off investing in banks’ shares. In all the institutions, management are mafia-like, being controlled by few influential owner managers who are on executive pay and perquisite never paid anywhere in the world.
The above summarises the typical Nigerian banking situation. The industry is dominated by capitalist elite with zero government ownership control or interest. In the past, government used to own majority interest in some of the institutions, making government involved in decision making which benefits the generality of the people. It is high time government revisited ownership of these institutions by acquiring majority control or nationalise some to enable the industry serve the people better. In United Kingdom, when the banks were failing, government rescued them to protect the general populace. In Nigeria, government only rescued the banks with public fund. The public continue to indirectly pay for malfeasance of bankers through Asset Management Corporation of Nigeria (AMCON).
The banking public and customers should gradually come together to rescue themselves from the oligopoly tendencies through class action. The shareholders’ associations should be well focused and reactive. Some of the banking aberration should be tested by class actions which can be instituted by either shareholders’ association and or Bank Customers’ association. The docility of bank customers must end. The CBN supervision and manpower as structured is designed not to deliver good service to the public, the leadership hierarchy is uncertain or predictable. We have had instances of governor of CBN spending one term, while others served two terms. In another case, the governor was sacked even before expiration of his tenure in first term without justifiable explanation or reasons to the public. At the lower CBN staff hierarchy, promotion criteria are very vague, recruitment process opaque to favour the children of the elite and political class. Therefore, you have a regulator whose staffers are in perpetual state of uncertainty in mind and promotion, hence compromise in bank supervision work. This is the right time for government to set up a new banking supervisory authority. The government should put in place an agency similar to Financial Conduct Authority of United Kingdom. The organisation can be called Nigeria Financial Supervision Authority (NFSA) whose role amongst others is to ensure honest, fair and effective financial dealing so that consumers and businesses get a fair deal for the whole economy. The supervision model of CBN is weak and cannot handle all kinds of atrocities being committed by banking publics, especially the sophisticated elite who are fleecing the economy through foreign exchange round-tripping and bad loans. The proposed NFSA will regulate the conduct of businesses in the financial market inclusive of prudential regulation. The prudential aspect of the regulation shall be carved from current CBN. All personnel of CBN in charge of prudential activities shall be transferred to the new agency.
In the history of failed bank since early 1990s, no CBN staff has been indicted publicly for bank failure, despite yearly supervision of the banks. What CBN does is to make management or bank owners the culprit without penalising staff who have been involved in the supervision prior to failure. Bank failure does not come overnight. It takes time for a bank to get to critical failing point. Both Nigeria Deposit Insurance Corporation (NDIC) and CBN are always involved in the supervision. What is needed is a penalty regime for bank examiners who are involved in investigation of any failed bank three years prior to the liquidation or take over by government agency. No bank should fail ordinarily if the supervision is right.
In conclusion, government should revisit capital barrier to entry to all aspects of banking businesses to make the market more competitive and prevent the current oligopoly tendencies. If implemented holistically, financial penetration and inclusion shall be a success. More mortgage, microfinance and credit unions shall be available to serve the public than the existing banking oligopolies. A new regulatory agency is needed to protect the public.
.Olajide–JohnBrowne is an expert in banking, investment and corporate governance. He is a Fellow of the Institute of Chartered Accountants and Chartered Institute of Taxation, Nigeria.