Banks: To be or not to be
Some 30 to 40 Nigerian banks are not looking forward to New Year's Eve. They face the chop when a new minimum equity law comes into effect. Jato Thompson explains.
Nigerian banks, faced with the December 31, 1998 deadline by which they have to recapitalise and bring their equity base up to a N500m minimum, are finding themselves in a losing race with time. Banks had been given a 24-month period in which to reorganise their equity base but, with only seven months to go, a number are struggling.
Anxious bankers are now wondering if the monetary authorities will in fact go ahead and close down banks that fail to meet the deadline.
The same authorities, in what was widely regarded as a landmark move, liquidated 26 banks in one fell swoop late last year. and indications are that the December 31 deadline will see more banks fall by the wayside. Less than 30 of the remaining 82 banks in the country have so far been able to bring their paid-up capitals to the specified minimum of N500m. The remaining 52 (a clear 63% of what remains of the Nigerian banking industry), have not. They are experiencing varying difficulties, ranging from inability of existing shareholders to make up the amount by way of rights issues, to the lack of buyers for the shares now out on public offer.
The merger and acquisition option favoured by the central bank does not seem to appeal to the other banks which want to maintain their status quo. Perhaps they may reconsider as the ultimatum draws still closer.
The efforts to meet the capitalisation demand have become the major pre-occupation of the management and board of the banks. While the central bank's gesture in raising the minimum capital from the erstwhile N50m and N40m for commercial and merchant banks respectively to N500m was welcome in the case of commercial banks, analysts are raising fresh doubts regarding the wisdom of its blanket extension to the merchant banking sub-sector. The managing director of Prudent Merchant Bank plc, Mr S.O. Ogundipe, pointed out to African Business that an ideal merchant bank does not need huge capital since most functions and services they engage in are fee-based.
Mr Ogundipe, who established the Nigerian Merchant Bank in the mid 1970s and successfully managed it for about five years, is nevertheless critical of many merchant banks in Nigeria. He said that many have aped the commercial banks in terms of function and that this trend has simply been exacerbated by the N500m stipulation. He wants merchant banks to stick to their distinct role and not stray into the commercial bank area.
While sympathetic to the banks which are finding it difficult to meet the new capital requirement, the managing director of Gulf Bank Nigeria plc, Mr Babajide Rogers, insists that the larger equity base is essential if Nigerian banks are to become competitive internationally. The new ruling, he says, is welcome and in the best interest of the banking industry which has almost lost its traditional respect in society.
However, Mr Ogundipe also believes that the blanket requirement is a clumsy tool. Some banks, he says, will need more than N500m before they can be said to be adequately capitalised, others will need substantially less. Therefore, he argues, the best option would have been for the regulatory authorities to examine each case and advise on the minimum capitalisation level required for individual institutions.
A closer look at banks' recapitalisation programmes shows that they are primarily based on rights issue, private placement and capital market issue. The success of such methods will depend on whether the existing shareholders believe in a bank's plans, progress, activities, and whether it has been profitable in the past.
But problems abound. In terms of private placement, there is the need to decide whether this has to be done on an in-house basis, by personal contacts or by issuing houses. The shares will have to be priced and premium or discount has be determined. Again, the number of shareholders will have to be taken into consideration. If it is over 50, the bank must convert into a public limited company (plc).
Should the bank be quoted or not? If yes, then it has to be through the capital market. But given the low level of activity on the capital market it becomes very difficult for some banks to raise the required amount. These dilemmas have given sleepless nights to the management and board of some of the banks.
The current share glut in the market, coupled with the low disposable income of workers, have made the situation worse for those banks seeking to raise funds.
Others have been forging ahead. Owena Bank has just concluded an offer of 1.2bn ordinary shares of 50 kobo each at N1.30 per share, while the offer of International Merchant Bank (IMB) closed two months ago. First Bank plc recently raised N2bn from the market. The managing director of Union Bank of Nigeria plc, Alhaji Mohammed Yahaya, has said he will approach the capital market to raise the necessary sum.
Although capital market analysts are divided on whether or not the market is saturated with bank shares, it is obvious that with a large number of banks seeking funds from the market, only the few strong banks with well-known names are likely to succeed.
Some analysts believe that the spate of offers now coming from the banking sector will cause a glut, especially as other sectors, such as insurance, are also aggressively looking for funds.
Mr Alex Osunde, managing director of Enterprise Stockbrokers, on the other hand, does not see signs of glut at all. "I don't entertain any fear that the banks offers presently in the market, like that of IMB and Owena Banks, could be under-subscribed, considering the status of the banks," he said.
But Mr Alex Adeusi of Riverbonds said there is already a glut. Many banks may not be able to get full subscription of the shares on offer, he says and this could jeopardise their efforts to beat the December 31 deadline.
Come what may, a large number of bank executives will be looking for other jobs when 1999 begins.
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