Regulatory risks in Nigerian banking

Let me start with three “case studies”-on June 17, 2014, Businessday published a report titled, “FBN Holdings moves to acquire merchant banking license”. The crux of the report was a presentation by Group CEO of FBN Holdings, Bello Maccido at the NSE on the group’s 2013 financial performance. Maccido informed his audience that FBN Holdings suffered estimated revenue loss of N32.5 billion in 2013 due to regulatory policies- increase in Cash Reserve Requirement (CRR) on public sector funds, revised banking charges, removal of charges on ATM transactions and increase in AMCON levy from 0.3% to 0.5% of total assets. As a consequence of the AMCON levy increase alone, FBN paid N13.6billion in 2013 against N7.4billion in 2012.

On July 30, 2014 the same newspaper published a similar report in respect of a different bank- “UBA succumbs to regulatory headwinds as H1 profit down 19.57%”. Based on UBA’s 2014 half year financials, the newspaper noted that regulatory charges are “taking a toll on the bottom-line performance of UBA Group” listing AMCON charges and monetary tightening as examples. The AMCON charge accruable to “Banking Sector Resolution Cost Fund” is a sinking fund created by the AMCON Act of 2010 which mandates banks to contribute 0.5% of their total assets on a yearly basis. The consequence of these “regulatory headwinds” was that UBA’s profit before tax fell by 19.57% to N28.89 billion fromN33.24billion in the corresponding period of 2013, and net income fell 19.57% to N22.85billion against N28.41 billion in 2013.

A final illustration also from Businessday on August1, 2014, “Regulatory induced costs squeeze Fidelity Bank’s H1 Profits…as pre-tax profit down 15.72%”. In Fidelity’s case pre-tax profit declined to N9.43billion compared with N11.19 billion in the first half of 2013. The reflective reader will have realised that if we took any of the nation’s Banks, the storyline is invariably likely to be the same.

Now let’s provide some background starting with the increase in CRR on public sector deposits and later also on private deposits. This was a policy adopted by CBN as a measure to ensure stability of the Naira as it came under severe pressures in the FX market. It has taken the new CBN Governor, Godwin Emefiele only a few weeks, probably days in office to realise that the problem was probably its own creation – a lax regulatory regime for Bureaux de Change (BDC’s) which propelled licensing of thousands of BDCs, many owned by the same proprietors who accessed billions of dollars providing a window for speculators, money launderers, other sundry exporters of capital and plausibly a window for terrorism finance as well! The CBN is already in the process of plugging this significant leakage, with almost immediate positive effects on FX market demand and supply dynamics, exchange rate stability and foreign resources accretion! The morale of the story is that the CBN under its former governor, Lamido Sanusi was penalizing banks in billions of Naira for a problem probably created and which could have been easily curtailed by itself!!!

Let’s consider CBN’s policies on ATMs and ATM charges, which have also cost banks significant revenues and profits. In furtherance of its objectives regarding payments system deepening, the CBN has sought to encourage e-payments and e-commerce initiatives including ATMs, POS(Point of Sale Terminals) deployment, cashless banking, on-line payments and other such initiatives. However, CBN policies have been contradictory, inconsistent and unstable- pushing banks to invest in ATMs and POSs; then licencing consortia with exclusive rights to deploy ATMs in public locations and forcing banks to remove their ATMs in hotels, airports, malls and other locations except their branches; then reversing itself when it found the ATM consortia lacked the capital to effectively do what it sought to achieve in terms of ATM pervasiveness; and then removing the small N100 charge on third party ATM transactions, effectively penalising the banks which followed its counsel and invested heavily in ATM deployment to the benefit of those who did not!

Finally, the AMCON levy which cost First Bank almost N14billionof shareholders legitimate earnings in 2013 is effectively an additional tax imposed by the CBN with the concurrence of a legislature which enacted the CBN’s intent into an AMCON Act without questioning the fairness of asking financial institutions to pay for the cost of rescuing  their failed competitors. I do not know of any legal, equitable or economic principle that supports such taxation that penalizes an institution that manages its affairs prudently by asking it to bear the resolution cost of another whose directors and managers ensured its failure. This tax also effectively means the banks and not CBN/NDIC bear the cost of CBN’s banking industry resolution strategy which in my opinion was an unduly costly approach.

I believe there are three fundamental philosophical questions that the new CBN governor will have to answer-is the imperative of macroeconomic policy in Nigeria today stability or growth and employment? In direct relation to this article, the CBN must resolve whether it operates a paradigm of banking sector “socialism” or seeks a profitable and sustainable financial services industry? Finally the CBN must decide if it is the job of the regulator to prescribe business strategy for all banks thus creating a homogeneous (and commoditized) industry or if strategy is a firm-level activity while the regulator prescribes and enforces minimum operational and regulatory standards? The new governor’s early pronouncements suggest an interest in pursuing growth and employment, but his inclination to the two other posers will be deduced as events unfold.

Opeyemi Agbaje