Why banks should dump universal banking

THE PUNCH Newspaper- Martin Alawiye

AS the Central Bank of Nigeria’s banking sector reform enters its second stage, the major focus is on policies that will prevent a re-ocurrence of the crisis that led to the apex bank’s intervention.

In line with this, there have been reports that the CBN will soon put in place a new banking regime to address the problematic era of universal banking, and also define the roles of different banks, either as commercial banks or merchant banks.

Following the recent global financial crisis, a number of countries that practised universal banking have traced the failure of their markets to the difficult regulatory challenges posed by the multiple capacities of banks under the system.

Consequently, current global financial reforms are geared towards de-aggregation of functions. For example, the United States of America is seriously considering the reversal of the 1999 Gramm-Leach-Bliley Act, which repealed substantial sections of the Glass-Steagall Act of 1993 that prescribed the separation of functions.

In Nigeria, under universal banking, financial institutions can operate simultaneously in the money market and capital market, where short-term and long-term funds are traded respectively. This made some banks that lacked proper risk management and good corporate governance to abuse depositors’ funds.

The Chief Executive Officer, Lambeth Trust and Investment Company Limited, Mr. David Adonri, said universal banking was a by-product of the deregulation of the Nigerian financial services industry in the wake of the implementation of the Structural Adjustment Programme of the International Monetary Fund in the 1980s, adding that, ”Universal banking enabled financial institutions to scale the prohibitive barriers that restricted their operations to only certain services in the industry.”

He added, “In Nigeria, universal banking has been a source of instability and manipulation in the capital market. The massive incursion of money market institutions into the capital market made operators to derail from the capital market‘s mission as a platform for long-term capital formation into a short-term speculative arena.

“Subsequently, any policy review aimed at ending universal banking in Nigeria would be welcomed as a great relief.”

Prior to the era of universal banking and recapitalisation, commercial banks maintained their roles and functions as commercial banks, while investment banking was left in the hands of the merchant banks. However, when banks embraced universal banking, post- consolidation, the big banks created units that traded in virtually all business segments including investment banking, retail banking, securities trading, insurance and even microfinance.

Even when depositors were skeptical about the future of some banks, former Governor of the CBN, Prof. Chukwuma Soludo, assured depositors that their money was safe, and that all the 25 banks were strong enough to withstand any shock.

According to the Deputy General Manager, Foresight Securities and Investment Limited, Mr. Sam Ailenbuade, “A bank should not turn to a ‘Jack of all trades’ because it is running universal banking. Banks should concentrate on their core areas. If you are running a commercial bank, then stick to your role as a commercial bank. The new policy, if properly implemented will help in curbing the problems of banks. The situation where banks run up and down, and knock their heads is not ideal. We have long been expecting this. The banks that will be operating as investment banks should also look in other directions. They should look for areas to invest in the rural areas so as to develop the areas too. They should not just restrict their services to urban areas.”

A banker, who craved anonymity, said, “We cannot say as far as this country is concerned, any policy introduced will work effectively because when former Governor of CBN, Soludo, came with his N25bn recapitilisation policy, the idea was that banks would be so big that nothing could shake them, but look at what happened last year, where some of these banks were shaken to the root if not for the CBN’s timely intervention.”

He further said that the idea of universal banking shifted the attention of banks, saying, ”Right from time, the idea of retail banking and merchant banking had been clear but when universal banking came, everybody shifted focus and banks were just doing everything that could bring them enormous profit to the extent that some aspects of their operations were not being regulated.”

He emphasised that CBN needed to learn from the past crisis, adding that, ”The regulators should do all the necessary research before coming out with any policy. The banking sector as a sensitive area should not be used as an experimental ground for policies.”

Prior to the banking sector consolidation of 2005, the minimum capital adequacy ratio and liquidity ratio were 10 per cent, and 30 per cent respectively, for Nigerian banks. These ratios are based on the percentages of banks’ capital, liquid assets and cash reserve to their deposit liabilities/risk assets.

For sound banking, these ratios, which define solvency and liquidity, must be maintained above minimum prescribed levels. Justification for maintenance of capital by banks is derived from the necessity for banks as debtors to provide collateral security for their customers‘ deposits. Hence, capital adequacy is measured in relation to banks’ deposit liabilities as percentage or ratio and not as fixed amounts.

According to Adonri, ”A probable reason for recapitalisation during the consolidation exercise might be that by nature, banking has peculiarities that call for extraordinary intervention. So, as precaution, regulatory control, prescription of liquidity and minimum capital requirement becomes essential conditions if financial crisis in the economy is to be forestalled. However, the imposition of a uniform capital base of N25bn on all banks, irrespective of size of operation and volume of their deposit liabilities, was a misnomer.”

A top official of the CBN had said that, “When we have put the structure in place, some banks may want to be known all over the globe. In other words, they may be structured to do international banking, and so may require more than N25bn capital, maybe N100bn. Some may want to be national, to do business across the country. This group may require N25bn, while others will clearly not need up to that.”


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