THE EFFECT OF N25BILLION MINIMUM CAPITAL BASE ON THE BANKING SECTOR IN NIGERIA

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THE EFFECT OF N25BILLION MINIMUM CAPITAL BASE ON THE BANKING SECTOR IN NIGERIA

CHAPTER ONE

INTRODUCTION

The central bank of Nigeria announced a new capital requirement for Nigeria banks of 25 billion Naira (about US & 181milion) this reflects an increase of from its previous 2billion Naira (Us & 14.5 million) The banks governor has explained that by this he plans to encourage merger and acquisition among the 89 banks currently operating in the country to consolidate and strengthen the nations banking industry. He also hoped that this development would ignite investors confidence on the banks force down interest rate which currently pages at 35% thereby making funds cheaply available to borrowers. The directive to increase the capital base of Nigerian bank in an attempt to make banking more stable . The perception was that a number of small banks were too prone to unaccountability and corruption it is likely that many banks would merge and Nigeria would end up with a relatively small number of better capitalized more accountable banks. These banks would be able to make more longer terms loans that before enhancing Nigerians ability to finance developed project locally part of the challenge is to build confidence in the process if banking in Nigeria clearly the banking system in Nigeria is evolving that is its’ in a transition phase between being a basically short term local colonial system to a bigger operation that can be seen as a facilitator of western style development it seems clear that there is a whole lot of money in the informal sector” that the banking industry would like to see get deposited. It seems likely that the reorganization of Nigerian banks will lead to a drop in real estate value for some time because less mortgage money will be available. But ultimately the hope is that Nigeria banks will have the where withal to finance large projects that hither to have always had to go abroad for capita.

However this discussion on the effect of N25billion minimum capital base on the banking sector on Nigeria was objected by so some people and organizations. The Nigerian senate committee on financial services opposed this new legislation arguing that it would lead to massive distortions in certain area of the economy. They expressed their worry over the likely effect of the directive. As events unfolded however it dawned on the bankers as well as the stakeholder of banks that the professor of economic had already made up his mind as he was not very willing to shift ground.Instead of accommodating other views he concentrated on providing more facts to betters his demand for the N25 billion new capital base. The new capital base of N25 billion comprised paid up capital and reserves unimpaired by losses the CBN government professor Charles Soludo said adding that the only legal mode of consolidation allowed are mergers and outright acquisition/ takeovers. A mere group arrangement is not acceptable for meeting the N25billion.

However the increase in capital requirement for licensed banks to a new minimum base of N25billion is intended to radically redefine the financial services industry land scope on Nigeria. The stated objectives of consolidation of the banking sector include ensuring that fewer but stronger banks emerge by the effective date of December 2005. to meet the challenge of the new capitalization within the tight line and achieve CBN’S objectives of industry consolidation many banks will explore mergers and acquisitions. In anticipation of he spate of mergers and acquisitions activity CBN has published a guideline to facilitate mergers and acquisitions transactions within the industry as well as outlined a number of incentives to encourage the consummation of mergers and acquisitions deals. Discussions and negotiation towards consummating mergers and acquisitions deal in advance of the stipulated deadline have commenced. While the focus is on creating the optimal ‘deal’ in terms of financial operational and governance arrangements the consideration of post-deal realties that impact on the deals’ ability to deliver superior value need to being now, The reality of the global experience is that consolidation activities driven by the imperative of growth are increasing but investors remain skeptical of the value creation potential of mergers and acquisitions deals. Research has shown that the most successful mergers and acquisitions are those that effectively integrate the synergies of the parties to not only achieve growth but also create shareholder value. Focusing on post- merger integration issue at ht pre-merger stage of the deal is key factors in consummating mergers and acquisitions deals that create value for shareholders.

Expectedly discussions and negotiations towards consummating merger and acquisitions deals in advanced of the stipulated deadline have commenced. While form the perspective of CBN as a regulator of the financial service industry the objective of bigger stronger banks is clear surely the emerging bank have additional objectives that include superior value creation in addition to growth financial operational and governance arrangements consideration of post deal realities especially regarding how such could impact ability to deliver superior value when it is most critical. In the ongoing effort among banks to rapidly consolidate and meet the capitalization deadline there is a real threat that a reliance on rules of thumb and dusty benchmark and outdated approaches may be adopted. In essence there should not be separate mergers and acquisitions and post merger integration processes but a holistic approach to the deal from strategy to target identification and valuation to integration. This involves looking downstream at business information and it (information technology)system core processes and the nuts and bolts of how things work and in getting people who know how to design and implement changes to these systems and processes involved up front especially during the valuation stage. What is needed is on organized and logical approach that includes all of the necessary steps and activities but which is flexible enough to match the unique requirements of the deal. The entire focus of the process should be on value creation rather than on integration alone

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