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The Return of Merchant Banks

02 Dec 2012

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Mallam Sanusi Lamido Sanusi

The planned kick-off of merchant banking in Nigeria next year following the approval granted two banks by the Central Bank of Nigeria will make it easy for depositors to differentiate among banks, based on their functions and specialisation, without banks having to embark on the cut-throat competition and marketing blitz witnessed in the immediate-past banking era, writes Eromosele Abiodun…

A  few years ago the Nigerian banking sector had specialised banks that provided specialised products that suited the need of their customers. Banks were allowed to source the amount of capital that was consistent with their chosen area of specialisation. At that time, apart from the roles played by the central bank in the international trade, there were two other licensed banks that supplemented its rates. They were the commercial bank and the merchant banks. The commercial banks were referred to as retail banks because of the nature of their operations. They operated through a network of branches throughout the country and had broad deposit base, that is commercial banks accept deposits from all, and not from particular sources (the deposits are usually called demand deposits).

The second category of the licensed banks was the merchant banks, which were wholesale bankers in the sense that their deposits were usually in very large blocks. They operated from few branches in the commercial centers of this country. They also accepted deposits from the public and private co-operations as well as wealthy individuals; their functions included medium and long-term financing, investment, management of unit trust, debt factories equipment leasing and issuing and acceptance of bills of exchange.

As regards international trade, the merchant banks acquired a reputation for fast and efficient processing of international business transactions such as foreign exchange for companies engaged in importing and exporting of capital goods, the merchant banks provide services which include the processing of remittance and documentary draft for collection and letters of credit.  However, all that changed in 2004 when the Central Bank of Nigeria (CBN) under Prof. Chukwuma Soludo phased out merchant banks following the advent of universal banking.

But since the emergence of Mallam Sanusi Lamido Sanusi as CBN Governor, there have been momentous changes in the Nigerian banking scene. Many of these changes may appear as reversals of the Soludo-era banking consolidation policies. One of the more recent reversals of past banking policies is the announcement by the CBN of the phasing out of the universal banking system after about 10 years of its implementation. Universal banking allows the banks in Nigeria to perform the roles of commercial banking, investment banking, and to participate in other allied activities like insurance, mortgage, and stock-broking. The objective of universal banking is to make the banks a one-stop shop for all financial needs of their customers.

Universal Banking
The age of universal banking, fuelled by bank consolidation, led to rapid expansion in the size of the average Nigerian bank. It was an era characterised by increase in financial innovations, number of financial products, and aggressive incursion of banks into insurance, mortgage and capital markets. However, the rapid expansion of the banks also brought about potential risks not only to the banking sector, but also the overall economy. For instance, the rapid expansion of the banks led to the notion that the banks ‘are too big to fail” with all the attendant information asymmetry problems. The banks also abandoned the core business of banking, and focused on ancillary services that yielded higher rates of returns. It was also during this era that banks resorted to aggressive marketing strategy to differentiate themselves from one another. The experience with universal banking in Nigeria has not been quite salutary. Banks easily abused the process and used it as a conduit for the diversion of depositors’ funds from the banks as equities into subsidiaries that became shells and pipes for siphoning funds. It is in this regard that many observers are quick to commend the efforts of the CBN Governor to change from universal banking to specialised banking.

Merchant Banks Return
To set the ball rolling, the CBN last week granted merchant banking license to South African’s FirstRand Merchant Bank and First Securities Discount House Limited (“FSDH”).
FirstRand Bank is a subsidiary of the First Rand Group, which is a financial services provider in South Africa. The group has its headquarters in Johannesburg, South Africa.

Director of Corporate Affairs of CBN, Mr. Ugo Okoroafor, who made this know at the annual conference of Finance Correspondents Association of Nigeria (FICAN), explained that the licencing was in line with CBN’s new banking model.
According to him, “The banks have met the minimum capital base for merchant banking, which is N15 billion.”  He said FirstRand is partnering with a local firm and would commence operation early next year with a capital base of N16 billion while FSDH will cease operations as a discount house, and now function as merchant bank.

He also indicated that several other institutions have applied for merchant bank licence and the apex bank would like to see more regional banks and community banks that will take care of the interest of small and medium businesses.

He said: “Foreign investors have a renewed confidence in Nigeria hence the investment by FirstRand. We need the growth in Foreign Direct Investment, FDI, rather than foreign portfolio investment. We need people to come and invest physically so that this country can grow and create employment.

“We need to continuously grow our excess crude account reserves since Nigeria is depending on oil as the only major source of revenue and the oil will soon dry. So we need to save for the rainy days.”
Okoroafor expressed satisfaction with the level of cooperation between the monetary authority and fiscal authority in the country, saying, “The era of fiscal dominance is coming to an end. There is now collaboration between fiscal authority and monetary authority.”

Reacting to the development, the Managing Director, FSDH Group, Mr. Rilwan Belo-Osagie, said, “FSDH is excited by this development as it will enable the company to offer a broader range of services to its clients thereby deepening its client relationships and expanding its frontiers. Whilst the company does not underestimate the challenges that it will face, it is, however, confident that with its corporate culture of customer orientation, high performance, image-building, collaboration and learning, all obstacles that may come its way can be surmounted.

“FSDH is particularly grateful to the Central Bank of Nigeria, in respect of this approval and believes that this is a strong indication of the apex bank’s belief in the company’s capabilities. FSDH would like to seize this opportunity to welcome its stakeholders to the continued experience with FSDH Merchant Bank Limited, the bank said.

Belo-Osagie, had in a chat with newsmen at the company’s Annual General Meeting (AGM), said, “If the licence is granted, we intend to expand our operational scope and take advantage of greater opportunity to enhance our present competencies in securities trading, asset management, financial advisory services and investment banking.”

Expert’s View
Managing Director and Chief Executive Officer of Emerging Capital Limited, Mr. Chidi Agbapu, said the move by the CBN is a good development that will enhance the banking sector.

He argued the move will ensure the development of a banking system that is stable and sound. He said banks in the new era would self select themselves to aspects of the financial system in which they have comparative advantage. “It will therefore become very easy for depositors to differentiate easily among these banks, based on their functions and specialisation, without the latter having to embark on the cut-throat competition and marketing blitz that was witnessed in the immediate past banking era. Under the proposed regime, banks will no longer have to compete to be the biggest, but will source the amount of capital that will be consistent with their chosen area of specialisation. Perhaps, this will also reduce the number of banks that are ‘too big to fail’ and allow banks that are poorly run to fail without posing any significant threat to the larger body of the banking system. This will mitigate the need to use taxpayers’ money to bail out inefficient and poorly run banks, “he said.

Tags: Business, Nigeria, Featured, Merchant Banks

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