New banking model: Reshaping the fortunes of commercial banks


By STANLEY OPARA and ADEMOLA ALAWIYE   Monday, 13 Sep 2010


The desire to enthrone stability in the financial system and evolve a healthy sector necessitated the Central Bank of Nigeria’s recent review of the Universal Banking Model. STANLEY OPARA and ADEMOLA ALAWIYE examine the development and its effects on commercial banking.

The Central Bank of Nigeria, in 2002, through the Universal Banking Guidelines, authorised banks to engage in non-core banking financial activities, either directly as part of banking operations or indirectly through designated subsidiaries.

Eight years into this course that has been accepted and practised by all deposit money commercial banks in Nigeria, the CBN has finally put forward a revised model, which is intended to check the weaknesses and structural lapses identified in the Universal Banking Model.

For the CBN, this is the time to implement strategic measures that will prevent a re-occurrence of the crisis that recently bedeviled the Nigerian banking industry.

The primary objectives of the current reforms, according to the apex bank include, ”To ensure the protection of depositors’ funds by ring-fencing banking from non-banking business; Redefine the licensing model of banks and minimum requirements to guide bank operations going forward.”

The reforms, the CBN added, would help in ”effectively regulating the business of banks without hindering their growth aspirations, and facilitating more effective regulator intervention in public interest entities.”

By the CBN’s scope, conditions and minimum standards for commercial banks regulation No. 01, 2010, signed by the apex bank‘s governor, Mr. Lamido Sanusi,a commercial banking licence may be issued by the Governor upon such terms and conditions, which authorise the operation of a commercial bank on a regional, national or international basis.

According to Sanusi, ”A commercial bank with regional banking authorisation shall be entitled to carry on its banking business operations within a minimum of six and a maximum of 12 contiguous states of the federation, lying within not more than two geo-political zones of the federation, as well as within the Federal Capital Territory.

”A commercial bank with national banking authorisation shall be entitled to carry on its banking business operations within every state of the federation.

”A commercial bank with international banking authorisation shall be entitled to carry on its banking business operations within all the states of the federation, as well as to establish and maintain offshore banking operations in jurisdictions of its choice, subject to the approval of the CBN and compliance with regulatory requirements of host country.”

The Chief Research Analyst, International Corporate Research, Mr. Sanyaolu Kehinde, who spoke to one of our correspondents on telephone, said the move by the CBN to review the Nigerian banking model was a positive one if the regulator was ready to follow the initiative through.

He said that it should not be a fire brigade approach to addressing the financial sector challenges with the view to showing that the apex bank was really working.

According to him, the global financial crisis prevailed because the banking and financial sector failed as a results of universal banking models practiced in most economies of the world.

He said that in order to address the global problem, most countries were seriously considering segmentation of their banking models.

Kehinde said that with a properly segmented banking model, one segment of banking could fail, while the others continue to wax stronger, and as a result, the possibilities of failed financial system would not arise.

”For instance, if investment banking is affected, we can still have a vibrant retail banking segment. It is good for banks to specialise as this will help in managing potential financial crisis that may be underway,” he said.

The ICR analyst maintained, ”If you are good in retail banking, specialise in retail banking. If it is investment banking, specialise there. It won‘t be good for the retail banker to bring in the funds of lower risk, while the investment bankers uses same fund to invest in areas of high risk.”

However, the Managing Director, Lambeth Trust and Investment Company Limited, Mr. David Adonri, said the introduction of the revised banking model would solve the problems universal banking introduced to an extent.

According to him, ”The revised model will not arrest it completely but it will reduce the abuses that characterised by the universal banking model. The solution to the problems of universal banking is the proper enforcement of the rules and regulations guiding the new model by the apex body.”

He said that the adventure by banks into other areas like insurance and stockbrokerage added to the problems in the sector.

He explained, ”When the banks were sourcing for funds during the recapitalisation era, a lot of them had their public offerings oversubscribed, which made them move into other businesses like insurance because they had excess capital. This venture by banks into other businesses, however, burnt their fingers. It was inimical to their core banking business and it adversely affected them and the economy at large.”

The Chief Executive Officer, Mutual Alliance Investment and Securities Limited, Dr. Olakunle Ologun, described the new regime as being healthy for the banks.

He said, ”Universal banking has made the banks to engage in all sorts of business, including selling recharge cards. The business needed to be streamlined. If you are a merchant bank, then stick to merchant banking, while commercial banks should also engage in commercial banking and not going into stock broking.”

On the categorisation of banks, he said that it was important for the banks to attain critical mass in the area where they operated before moving to other areas, adding that it would give opportunity to small banks not to go down.

He said, ”It is evident that all banks cannot meet a uniform capital base. This will give opportunity to smaller banks to apply for regional licences, and later move on as national banks if the need arises.”

The President, Renaissance Shareholders‘ Association, Mr. Olufemi Timothy, said that the revised banking model was one of the solutions to the various problems in the sector, noting that universal banking exposed the banks to all sorts of risks.

He said, ”The revised banking model is not an end in itself but a means to an end. It is not the only solution but one of the solutions to the many problems in the banking sector. The universal banking opened them to all kinds of business, which was unprofessional. The revised banking model will make them to be more professional. They will focus more on core banking business.”

On categorisation, Timothy said that it was a right decision by the apex bank, adding that all banks could not be equal.

He said, ”Some banks don‘t have branches outside their region, so it will not make any sense for them to keep running so as to meet the requirements of a national bank. All banks should not be going for the same licence because they are definitely not equal.”

The guideline, which defines the new types of banking licences and permits activities and transition timelines for restructuring, experts believe, will ensure that commercial banks have an appropriate reporting structure, quality, procedure and technology to effectively and adequately identify, measure, monitor and report risks to the CBN.


Source: The Punch



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