Will Bank Reforms Trigger Golden Era? Will the Successful Reform of Nigeria's Banking Industry-An Exercise Which Had Been Considered 'Impossible' before It Actually Happened-Now Prove to Be the Catalyst This Country Needs to Establish an Economy Worthy of Its Size and Talent? Neil Ford Discusses

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The government of President Olusegun Obasanjo has promised a great deal but delivered rather less over the past seven years. A comprehensive package of economic reforms has been formulated but the government has struggled to implement it in the face of entrenched interests and a legacy of decades of misrule.

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Yet there is one sector where genuine progress seems to be being made. Despite the inclusion of some of the largest financial institutions on the continent, the Nigerian banking sector was widely derided for its inability to support the rest of the economy and for the sheer volume of financial irregularities. Now, however, well targeted reforms have not only been drawn up but are being put into practice and there are real hopes that the fortunes of the industry are being turned around.

No matter how strong or talented a leader may be, they can achieve little on their own. In practice, Obasanjo must hand over the task of overhauling each strand of the Nigerian economy to someone who can commit themselves fully to the task. The failure of a particular privatisation or low growth rates cannot be blamed on the president directly, although of course his judgement in appointing heads of key parastatals or privatisation programmes can be laid open to scrutiny.

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In the case of the Nigerian banking sector, however, Obasanjo certainly seems to have chosen well. Professor Charles Soludo was given the twin tasks of leading the Central Bank of Nigeria (CBN) and designing and implementing plans for reforming the banking sector.

As was covered in last month's African Business, his efforts have been declared a huge success, just 18 months into the job. The Banker magazine's decision to honour him with its Global Central Banker of Year award speaks volumes, particularly as he becomes the first African central banker ever to receive the award. The key plank of Soludo's strategy and the banking reforms is the Banks and Other Financial Institutions Act. One of the greatest criticisms of the Nigerian banking sector has been the large number of banks operating in the country. Not only did this reduce the strength of the sector, making individual institutions less capable of financing investment in the economy as a whole, it also made regulation more difficult and allowed unscrupulous businessmen to set up banks for doubtful purposes.

The CBN warned that the sector had been "tainted by corruption and mismanagement" and that it needed to remove the "fragile and uncompetitive".

In order to counter this problem and to improve international perceptions of the industry, Soludo used the Banks Act to increase the requirement on minimum financial holdings from N2bn to N25bn ($190m).

He warned that any banks that failed to achieve this target by the start of January would have their licences revoked and face liquidation.

Despite complaints from some banks that the capital threshold had been set too high and that they had too little time to put their house in order, most sought to merge with other financial institutions in order to acquire sufficient size to survive. Just six Nigerian banks had funds exceeding N25bn prior to the introduction of the new regulations.

The weak weeded out

In conjunction with the rapid process of mergers and acquisitions, the new requirement reduced the number of banks in Nigeria from 89 in June 2004 to a far more manageable 25 by January. (The surviving banks are listed in the table, right).

Soludo announced: "In the interest of the credibility of the reform agenda and in the interest of the general public, we have decided to take some decisive steps." When 14 banks failed to meet the deadline, the CBN began the process of instructing the courts to liquidate them.

The 14 had tried to merge into two separate groups of eight and six but even then they were unable to demonstrate sufficient financial muscle. …