Banking Regulations to Kill Corporate Discipline

Published on 6th December 2005

The much hyped about banking industry had not experienced problems until recently when the Central Bank tightened supervisory mechanisms and revised policies encircling ownership. The latter does not allow shareholders with over 5% equity to take part in management. These moves, other than enhancing corporate discipline in the industry, seem to be geared towards cutting down on the number of players.

Going by the international standards, it is evident that our banking industry is extraordinarily big, and our closer matches have had their streamlining efforts already bearing fruit. Canada, for instance, has only ten major banks serving a population of over 31.75 million in spite of their larger economy and higher productive population. Their less income gap may have more service needs. Surprisingly, ten is enough. Retail outlets usually provide extra cash needs. Under such situations, all one needs is to ask for the extra cash he/she needs from the retail store cashier against the credit card while out for shopping. Stress free. Ha?

The South African counterparts, slightly slower GDP growth rate of 3.0% (compared to Kenya’s 4.5%) and a population of about 45.3 million (compared to Kenya’s 32 million) offers an ideal situation that calls for more banks. It is therefore contrary to expectations that this population is only served by four major banks.

Turning to West Africa, Nigeria is the typical case of an industry that has gone berserk. With a population of about 132.79 million and 89 operating banks, one would say that citizens have a honeymoon as far as service delivery is concerned but this is not the case. With their growth rate put at -0.9%, the banking industry may not be a characterization of a decent growth economy. Since 1999, the government granted new banking licenses and revoked others to bring the number of banks to 89. The Nigerian Central Bank is pushing to further trim the industry into 22 stable banks. Some measures taken by the government have greatly influenced the industry.

According to the U.S. Department of Commerce, (2005 Index of Economic Freedom), “The Central Bank Governor and banking executives agreed in 1999 to a small and medium Industries Equity Investment Scheme. The scheme required all banks to set aside 10% of before-tax profit as the sector’s contribution to the government’s efforts to stimulate the growth of SME’s”.

“This is quite in good faith.” Or so, one may argue, but then, what institution with a profit motif wants to be put under forced corporate social responsibility? This is a perfect case of double taxation in the short run.

Another bigger saga (still by the Nigerian Government) is the 2001 introduction of universal banking, which allowed the banks to engage in money market activities and insurance services. Portfolio diversification is always perfect, but not when it goes out of hand. Recent statistics ranked Nigeria highly, as far as corruption, money laundering and electronic crimes are concerned.

The U.S. Department of Commerce further describes the regulatory system as “inconsistent” and the court systems as “slow and ineffective”. The underlying relationship between weak regulation and a large number of banks has been evidenced in the number of international bank crimes that have put Nigeria on the international map as far as money laundering is concerned.

Back here, our banking industry is quite robust. At forty-eight, the appetite could still grow if given the opportunity, but thanks to the Central Bank’s stance to stiffen the regulation mechanism.

My worry at the moment is that the more the banks, (going by the trend), the harder it is to regulate and consequently is the exposure to more crime. The strongest and most developed banking sector in the Baltic States is Estonia. Its banking sector, according to the U.S. Department of Commerce was 86.7% foreign owned. The government has no stake in any bank. The U.S Department of Commerce describes Estonia’s financial sector as “modern and efficient”.

So, what is the fuss about non-merger wars for banks in Kenya and Nigeria? Clearly, having many banks, or encouraging local ownership of banks is not the solution to economic growth. Neither is it the solution to breaking the income gap or having a booming SME Sector. I believe that having a well-established system; all else aside, is most crucial.

Having a well defined macro-economic policy and a strong regulation system is most vital, whereas the policy shall enhance growth, the proper regulation mechanism will work to ensure crime rates are zeroed in and interest rates are kept at affordable lows (one digit).

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