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Universal banking: Experts bemoan fate of banks’ capital market subsidiaries

By Michael Eboh
Following the planned review of the current universal banking model by the Central Bank of Nigeria (CBN), experts have expressed concerns over the fate of the capital market subsidiaries of banks.

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According to the experts who spoke with Vanguard, the future of banks’ capital market subsidiaries remained bleak and will affect the growth of the market.

The experts are of the opinion that the attempt by the Central Bank of Nigeria to introduce niche banking in which banks may either focus on their core banking area of competence or set up a holding company to manage the bank and their non banking subsidiaries, will see a number of the subsidiaries folding up, merging with others, or ending up being acquired by stronger operators.

They also noted that a number of activities in the capital market would be affected negatively, such as the issue of underwriting, registrars’ activities and issuing house function, as the huge financial backing of the banks would be absent making it very difficult for operators in these activities to carry out their functions.

The CBN had in March, announced its plans to review the universal banking practice, while operators, under the new arrangement, would be expected to apply for and get separate licenses for each model of banking operations, such as commercial banking, micro finance, mortgage banking and investment banking.

According to the CBN, the new structure is part of the ongoing reforms to reconfigure the banking sector and to ensure that commercial banks focus on their traditional business, while ensuring that depositors’ funds are not endangered. It further stated that the new arrangement would protect commercial bank activities from pressures from non-core banking activities, allowing banks to concentrate in the provision of their normal and core banking activities.

Dr. Martin Oluba President/Chief Executive Officer, ValueFronteira Limited stated that the actions of the CBN have heightened uncertainty and inactivity in the economy and will affect the ability of the subsidiaries to take advantage of the financial strength of the banks.

He said, “In the first instance, CBN’s argument for the planned suspension of universal banking is clearly weak and suspect, when placed in current contexts.

The current framework has everything that the central bank and other regulators within the industry need to support the propagation of sustainable high levels of corporate governance, which in conjunction with appropriate policies is what is needed to deliver system stability and safety of depositors’ funds.

“The immediate implication on the market is what we are experiencing. The foggy and circuitous debuting of CBN’s reform programmes have heightened uncertainty and economic inactivity.

“Beyond this stage, the relaxed relationship between the banks and their subsidiaries in some cases -which will be significant – may affect, to some extent the prospects of these subsidiaries, leveraging the financial strengths of the banks for improved performance. This will, of course, feed into the overall market performance. The extent of impact will in_turn be influenced by the accompanying policy specifics.”

Oluba called on the CBN to increase its relationship with other regulating agencies covering the subsidiaries and fast track the implementation of the consolidated regulatory framework to ensure effective monitoring and supervision.

“On the whole,” according to him, “ I really do not think that abolition of the current system is a wise decision. Now that companies need all the relief that they can get is not when they ought to be exposed to more corporate structural adjustment costs.

“Secondly, what the CBN should do is to strengthen its relationship with other related regulating agencies for most of these subsidiaries to ensure monitoring and supervisory efficiency and effectiveness. The consolidated supervision concept is a very good idea and ought to have been advanced and strengthened.”

Also, Mr. Femi Awoyemi, Chief Executive Officer, Proshare Nigeria, said, “Subsidiaries, affiliates and associated companies will have to be reined in or extricated from pure banking operations under different models to meet the demands of the new regulatory regime.

“It should be noted that a combination of regulatory/supervisory inertia coupled with misapplication of the concept by banks created the condition under which deposit-based banks got entangled in linked and synergetic businesses which, left unregulated or effectively supervised created conditions that impacted on the outcomes we have.

“It is hoped that not a few institutions will have to revisit their business strategy and models to meet this development.”

Speaking in the same vein, Mr. Seye Adetunmbi, Chief Responsibility Officer, Value Investing Nigeria noted that the abolition of universal banking may resort to the sale and liquidation of the capital market subsidiaries of the banks to new investors, especially subsidiaries with inadequate asset base.

He said, “With the segregation of specialised functions applicable to respective banks, the subsidiaries would have to be sold to new investors, especially those ones with good asset base stands better chance, while those in bad shape would have to be liquidated.

However, he lauded the policy, noting that it would enhance professionalism and bring about a better and healthy competitive banking environment.

He said, “If the universal banking policy is reversed ultimately by CBN, it should enhance professionalism in the finance and banking sector. Every institution would be able to focus on its competent areas.
“The jack of all trade approach that was prevalent under the universal banking practice, the ‘rat race’ of wanting to get every bite of activities in the market made some banks lose focus on their traditional functions.

“Its implication on the market is a level playing field for all ranks of market operators to a great extent. The market place would be more competitive, the matter of institutional backing advantage over others. “Every firm would strive to create a niche for itself since mega briefs would no longer be taken for granted, it is now going to be a matter of what you have got to offer in terms of proficiency and best practice.

“In essence, the long-term advantage outweighs any short-run discomfort to the constituents of the subsidiaries provided the new policy can be sustained.”

Meanwhile, that CBN had denied abolishing Universal Banking. According to Mr. Tunde Lemo, Deputy Governor, Operations, “We are not abolishing universal banking system.

We are going to have a new regulatory structure that will ensure that banks no longer have opportunities to move depositors‘ funds to very risky proprietary business. “We are going to compartmentalise banking activities in different compartment. If you are doing commercial banking, stay so.”


Disclaimer

Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.