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Analysts express concern over five new banks




There is growing anxiety over entry of five new banks into the banking sector in view of the declining economic fortunes of the country and shrinking size of the market as well as the dominance of the older and bigger banks. With just five Tier-1 capital banks controlling more than 75% of the market share of the banking sector, some analysts have expressed fears about the viability of the five new banks that the Central Bank of Nigeria recently approved for operations.

In separate discussions with BusinessHallmark, some analysts said they think that the move is a right gesture coming at a wrong time. In their assessments, they are of the opinion that given the very structure of the economy the financial services sector needs to be properly adjusted and recalibrate for stability and performance.

They said financing high ticket deals should be the focus of Tier-1 banks but you find operators doing whatever that brings money in all the time. There is need to do some restructuring in terms of areas of focus for banks, analysts said at a meeting in Lagos at the weekend.
It may be recalled that the apex bank recently approved licenses for new operators with varying interests. The approval came on the heel of the need to bring some unbanked population into the fold. Although they are private interest, some people think it has wider impact than the market really thinks.

It was gathered that the economy has not been performing very well, and that the case for new banks is a misplaced priority. Stakeholders are 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 banks is less than what Zenith or GTB declared in 2018, it signals that barrier to compete is strong.

In less than two years, two systemically important banks 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.

“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”, a financial expert who prefers anonymous told BusinessHallmark.

Few years ago erstwhile CBN governor, Prof. Charles Soludo introduced recapitalisation that saw the numbers of banks in operation reduced significantly from 89 to 25. 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 4times the previous swap rate. What that means in real term is that the value of banks in dollar denominated assets have decline 4times 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).

On the consumer end financial service segment, the capital requirement for microfinance banks as amended by the CBN in 2018 with structural differences are N200 million for single location operators, N1 billion for license for operators that want to cover a state and N5 billion for National Microfinance bank respectively. For merchant banks, the minimum paid-up share capital is N15 billion.

“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 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 of 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”.

BusinessHallmark roundtable review of the sector discovered that banks are making money from interest earnings assets, which come 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 3.5% cost of funds in 2018, with cost to income ratio at 5% 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 are specialized banking 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 BusinessHallmark.

“However, the banking sector needs some disruptive entrants with strategy and financial capability to change the existing 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.

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