CBN to phase out universal banking by September 2011

The Central Bank of Nigeria (CBN) will in the next 18 months phase-out the universal banking model which allows deposit money banks combine commercial banking and investment banking, enabling them offer a wide range of financial services.

With the adoption of the new model, each deposit money bank would be required to recapitalize according to its new business model and will be further issued a separate and specific license to guide its operations. CBN has also begun the review of prudential guidelines on banks which were last reviewed in 1990 and going forward, the guidelines will be appraised every five years to suit the changing environment of the Nigerian financial sector. Samuel Oni, CBN’s director of banking supervision, who announced this shortly after the 298th Bankers’ Committee meeting on Monday in Abuja also said that the review of the current edition of the guidelines would be completed before December 31, 2010.

Oni further affirmed that the plan to phase out universal banking was in line with the International Financial Reporting Standards and global best practices. Oni addressed journalists in company of Rejinald Ihejiahi, group managing director, Fidelity Bank plc; Kehinde Durotsinmi-Etti, group managing director-designate, Skye Bank plc, and Rilwan Bello-Osagie, managing director, First Securities Discount House Limited. Sanusi Lamido, Governor , CBN

Justifying the new plan, Oni explained that the recent reforms in the sector revealed that the model which had been adopted over the years, authorizing banks to carry out all manner of financial services had exposed them to high operating risks. With the new model, CBN would now group deposit money banks into services -international banking; regional banking, national banking and Microfinance banking. Oni noted that any bank that wants to go into any of these banking services would be issued a separate license to guide its operations.

CBN, he said, would work with all stakeholders including, the Corporate Affairs Commission (CAC), the Securities and Exchange Commission (SEC), the Nigerian Deposit Insurance Corporation (NDIC) and the National Insurance Commission in order to work out the best way to recapitalize the banks following the adoption of the new model.

“We have decided to ensure that the quality of the banks is enhanced, given this as a background, we will come up with a model that we believe would support that kind of stability.

“We are clearly reviewing the universal banking model and we are coming up with a structure that would help us make banks to do business in terms of assisting the economy.

“So on the basis of that, we have come out with a holding structure model for the financial sector and what that means is that we are advocating a structure we think will allow banks to transform all their subsidiaries into a non-operating holding company in which the bank would become a subsidiary of that non-operating financial holding company.

“We are going to be looking at how to work out the details in terms of the transition arrangement from what we presently have and we are going to have sufficient time of between 18 to 24 months to transmit into that framework. “We want a situation where banks will concentrate in banking activities and the way we will be doing it is that we will be issuing separate licenses to each model of banking. In order words, we will discontinue with the universal banking licensing regime.

“This means that we will issue a license for commercial, microfinance, regional, national, international, mortgage and investment banking businesses. We also recognize that there would be some specialized banking, like non-interest banking, agriculture banking and a separate license would be given for this purpose,” Oni stressed.

Also at the meeting, the Bankers’ Committee adopted the recommendations made by the apex bank at the last monetary policy committee meeting.

The committee, however, called for tax incentives whenever corporate bonds are issued by deposit money banks.

Source: http://www.businessdayonline.com/index.php?option=com_content&view=article&id=9292:cbn-to-phase-out-universal-banking-by-september-2011&catid=1:latest-news&Itemid=18

This means more job losses. Departments will be phased out.
Good Lord, Help us.

What's the rationale for this?

This means more job losses. Departments will be phased out.
Good Lord, Help us.

@okeymadu
You are missing something. New opportunities will emerge for those who want to open new banks. At least new jobs will be created.

Seun:

What's the rationale for this?

The Introduction of Islamic banking.

The disintegration of the "mega-banks".

A step towards the pre-Soludo era where everyone owned a bank.

Let them do what they wish. As long as it doesn't compound our problems.

Soludo didnt introduce Universal banking!!

whats the point calling a bank a mortgage bank when all its credit is going to oil and gas or stock market transactions?

@Seun. SLS wants specialization and equally demands Nigerian banks to build up capacity.
The rational is for experts to manage areas where they can positively add value.

@mogentle. Yes new banks will emerge, but how long will it take them to begin to employ at the rate at which u envisage?
when an existing banks shield, for example shield 50 workforce, how long do u think the new now will take to develop the absorbtive capacity to employ that large. Remember specialized banking does not require large workforce rather it requires core experts,
even our universities curriculum werent designed to train graduates in such areas,
Abeg, I know wan talk, Mind you , I like SLS.

Pro Anti:

The Introduction of Islamic banking.

The disintegration of the "mega-banks".

A step towards the pre-Soludo era where everyone owned a bank.

I don't think the rationale for this is the introduction of Oslamic banking, Soludo had already started the process of introducing Islamic banking before he was replaced.

Here's the rationale given by CBN

Recent reforms in the sector revealed that the model which had been adopted over the years, authorizing banks to carry out all manner of financial services had exposed them to high operating risks. With the new model, CBN would now group deposit money banks into services -international banking; regional banking, national banking and Microfinance banking. Oni noted that any bank that wants to go into any of these banking services would be issued a separate license to guide its operations.

The CBN board must believe that the current model has completely broken down. For the sake of simplicity I'd say, it would be difficult if not impossible to carry out the abuses recently uncovered by Sanusi and others under the new system.  This new CBN action is a terrible slap in Soludo's face.

There will be need to revisit the the 25Billion minimum capital base, There is no rational for someone who wants to, for instance run an investment bank, to deposit 25billion with CBN.
Another poster for CBN!

Why do the so called experts need a law preventing Universal Banking before they can excel in the own area of expertise?

Was their any law preventing insurance companies and mortgage banks operating while these Universal Banks existed?

There is simply no benefit for this. This new policy is more ideologically driven than it has to do with economics.

Sanusi is simply an Islamic Scholar scared of Mega Banks and Success. This is what this is all about. Who says specialist financial institutions can't exist alongside Universal Banks?

im no banker, but isn't he simply trying to separate banks that combine traditional commercial banking with high-risk investment banking to protect customers? isn't this what  triggered the recession in U.S?
I dont see whats islamic about it.

Gekko:

im no banker, but isn't he simply trying to separate banks that combine traditional commercial banking with high-risk investment banking to protect customers? isn't this what triggered the recession in U.S?
I dont see whats islamic about it.

You are quite correct.

Gekko:

im no banker, but isn't he simply trying to separate banks that combine traditional commercial banking with high-risk investment banking to protect customers? isn't this what  triggered the recession in U.S?
I dont see whats islamic about it.

what is traditional banking? Intermediation
Is there any Bank in the developed world right now that does nothing but Intermediation. I don't know of one.

The money which people deposit on Bank will be used to finance other businesses to make profit, this is how Banks make the money they pay as interest to depositors. The Morgage companies will also need loans from Banks to finance Mortgages.
So the end result is the same thing except that Banks have simply been prevented from engaging in developing new Businesses.

Whatever you do their will be risk in Business. So we will see where are this noise of risk management wil take us. All Sanusi's policies are retrogressive.

He accused Banks of being too big and Bankers of being larger than life. Well now we have a CBN Over playing its hands, destroying the economy and banks and taking over the role of Banks in the economy.

After destroying Banks the CBN now want to finance Power projects on its own, NNPC is running abroad to seek loans, Dangote paid off his loans in Nigeria only to run to South Africa  to seek loans.

Slowly but surely Sanusi is killing our economy.

authorizing banks to carry out all manner of financial services had exposed them to high operating risks.

Doesn't it work the other way round? i thought diversification reduces risk and specialization increases it?

OYB_MEND:

what is traditional banking? Intermediation
Is there any Bank in the developed world right now that does nothing but Intermediation. I don't know of one.

The money which people deposit on Bank will be used to finance other businesses to make profit, this is how Banks make the money they pay as interest to depositors. The Morgage companies will also need loans from Banks to finance Mortgages.
So the end result is the same thing except that Banks have simply been prevented from engaging in developing new Businesses.

Whatever you do their will be risk in Business. So we will see where are this noise of risk management wil take us. All Sanusi's policies are retrogressive.

He accused Banks of being too big and Bankers of being larger than life. Well now we have a CBN Over playing its hands, destroying the economy and banks and taking over the role of Banks in the economy.

After destroying Banks the CBN now want to finance Power projects on its own, NNPC is running abroad to seek loans, Dangote paid off his loans in Nigeria only to run to South Africa  to seek loans.

Slowly but surely Sanusi is killing our economy.

go back and read his article.

his reforms is going to be in line with global practices and i think you should wait till they draw a framework before you prematurely draw conclusions.

Gekko:

go back and read his article.

his reforms is going to be in line with global practices and i think you should wait till they draw a framework before you prematurely draw conclusions.

I know whats available in global practice

Barclays, HSBC, Santandier, etc were not prevented from engaging in mortgage or insurance business because of the global recession.

By the way its been up to 8 months since the reforms started. I find it curious that you think I should still be waiting for the framework of about an 8 month old reform programme.

are we acting before planning here?

Doesn't it work the other way round? i thought diversification reduces risk and specialization increases it?

Ideally, one would expect diversification to reduce risk.  For example, a diversified investment portfolio is typically less risky than one that consists of say, investment in stocks of only one company. Well, diversification did not prevent recent banking problems - according to the CBN, it contributed to them.

In this case, CBN seems to be talking about the operational risks. Aparently, CBN blames exposures to these operational risks for the recent banking problems  - trillion naira non performing loans, 90% or more of bank loans going oil and gas or stock market transactions, and various abuses of the system e.t.c.  CBN probably believes that the said problems could be significantly reduced if not eliminated by the new scheme. Time will tell if the CBN is right.

Seun:

What's the rationale for this?

In addition to what okeymadu has said, the advent of universal banking made our banks become jacks of all trades. No more specialization. Every bank with universal banking license began to go into various areas of banking, which required specialized skills. Most of them went into investment banking, gave loans to their investment banking subsidiaries, invested heavily in stocks, when the stock market went on free fall, they lost billions, hitting the whole group. It goes on and on.

But like someone said, if universal banking is to be reversed, then the 25 billion capital base needs to be reviewed. Specialized banks don't need that much. This was the beginning of teh fall of IBTC. They obtained universal banking license without operating it(they remained investment banking institution). But by virtue of the fact that they had idle universal banking licence, they were captured by the 25 billion capital base, meaning they had to merge as well. The struggled to merge with Chartered bank and acquired Regent bank. They couldn't get their feet in commercial banking, they began to struggle. The man was left with no option tahnto sell teh bank to Standard bank of South Africa. Not even the coming of the continental giants has been able to help much as they still struggle in commercial banking.
This, I think, is why Atedo Peterside will never forgive Soludo.

OYB_MEND:

I know whats available in global practice

Barclays, HSBC, Santandier, etc were not prevented from engaging in mortgage or insurance business because of the global recession.

By the way its been up to 8 months since the reforms started. I find it curious that you think I should still be waiting for the framework of about an 8 month old reform programme.

are we acting before planning here?

like i said im no banker, what i got from the article is that he is attempting to shine some light on the dark shadowy areas of banking where high risk banking, trading etc intersects with commercial banking.  The plan to reform was announced just recently and the deadline is 18months after drawing up a viable solution working in conjunction with all the stakeholders in banking.  I see no reason to raise alarm until they present their plans.

Jarus:

In addition to what okeymadu has said, the advent of universal banking made our banks become jacks of all trades. No more specialization. Every bank with universal banking license began to go into various areas of banking, which required specialized skills. Most of them went into investment banking, gave loans to their investment banking subsidiaries, invested heavily in stocks, when the stock market went on free fall, they lost billions, hitting the whole group. It goes on and on.

But like someone said, if universal banking is to be reversed, then the 25 billion capital base needs to be reviewed. Specialized banks don't need that much. This was the beginning of teh fall of IBTC. They obtained universal banking license without operating it(they remained investment banking institution). But by virtue of the fact that they had idle universal banking licence, they were captured by the 25 billion capital base, meaning they had to merge as well. The struggled to merge with Chartered bank and acquired Regent bank. They couldn't get their feet in commercial banking, they began to struggle. The man was left with no option tahnto sell teh bank to Standard bank of South Africa. Not even the coming of the continental giants has been able to help much as they still struggle in commercial banking.
This, I think, is why Atedo Peterside will never forgive Soludo.

interesting - so we actually have bank mds that can face up to reality and exit to save their companies

Jarus:

In addition to what okeymadu has said, the advent of universal banking made our banks become jacks of all trades. No more specialization. Every bank with universal banking license began to go into various areas of banking, which required specialized skills. Most of them went into investment banking, gave loans to their investment banking subsidiaries, invested heavily in stocks, when the stock market went on free fall, they lost billions, hitting the whole group. It goes on and on.

But like someone said, if universal banking is to be reversed, then the 25 billion capital base needs to be reviewed. Specialized banks don't need that much. This was the beginning of teh fall of IBTC. They obtained universal banking license without operating it(they remained investment banking institution). But by virtue of the fact that they had idle universal banking licence, they were captured by the 25 billion capital base, meaning they had to merge as well. The struggled to merge with Chartered bank and acquired Regent bank. They couldn't get their feet in commercial banking, they began to struggle. The man was left with no option tahnto sell teh bank to Standard bank of South Africa. Not even the coming of the continental giants has been able to help much as they still struggle in commercial banking.
This, I think, is why Atedo Peterside will never forgive Soludo.

Is it impossible to have specialized financial institutions working along side universal banks?

Must it be either or? if you asked me to choose between Banking in Nigeria 2005 - 2009 and before then I will choose 2004 - 2009.
I don't know why we have to destroy everything we build.

At this rate we are going to witness a situation where every 5years we will have new banking ideologies because at the rate we are going, whoever takes over from Sanusi will have to engage in a totally new sets of reform.

OYB_MEND:

Is it impossible to have specialized financial institutions working along side universal banks?

Universal banking licence essentially permits you to go into any aspect of banking., basically commercial and investment banking. A GTB needs no special licence to establish Guaranty Trust Asset management Ltd, an Afribank needs no licence to have a subsidiary as Afri capital Ltd, a Zenith bank needs no licence to run a Zenith Capital Ltd, with consolidated reporting.

The terrains, and even the skills, depart markedly. The investment banking terrain is more volatile and require tighter regulatory supervision.
Pre-Universal banking, we had them separate. We had merchant and investment banks handling investment banking, and commercial banks doing their own business too. Until late 90s, investment banking in Nigeria was not that developed.

Universal banking, in the main, merges investment and commercial banking under a single licence. But it does not cover specialized financial institutions like Agric banks, industrial banks etc. So with or without universal banks, specialized financial institutions are not affected.

Sanusi reform is what is practised globally.Banks are meant to assist the economy to grow but not to declare frivolous profits at the detriment of the poor depositors.Commercial banking must be seperated from the high-risk investment banking in other to protect the depositors.The total over hauling of the banking sector will help the economy to grow rapidly.Ride on Sanusi and never look at their side.

Jarus:

Universal banking licence essentially permits you to go into any aspect of banking., basically commercial and investment banking. A GTB needs no special licence to establish Guaranty Trust Asset management Ltd, an Afribank needs no licence to have a subsidiary as Afri capital Ltd, a Zenith bank needs no licence to run a Zenith Capital Ltd, with consolidated reporting.

The terrains, and even the skills, depart markedly. The investment banking terrain is more volatile and require tighter regulatory supervision.
Pre-Universal banking, we had them separate. We had merchant and investment banks handling investment banking, and commercial banks doing their own business too. Until late 90s, investment banking in Nigeria was not that developed.

Universal banking, in the main, merges investment and commercial banking under a single licence. But it does not cover specialized financial institutions like Agric banks, industrial banks etc. So with or without universal banks, specialized financial institutions are not affected.

You still have not told me why we have to outlaw Universal Banking lisences. Why can we have both Universal Banks and licences for Specialist Financial Institutions. Such that both can co-exist in the economy just like in every other developed economies?

Jarus:

In addition to what okeymadu has said, the advent of universal banking made our banks become jacks of all trades. No more specialization. Every bank with universal banking license began to go into various areas of banking, which required specialized skills. Most of them went into investment banking, gave loans to their investment banking subsidiaries, invested heavily in stocks, when the stock market went on free fall, they lost billions, hitting the whole group. It goes on and on.

But like someone said, if universal banking is to be reversed, then the 25 billion capital base needs to be reviewed. Specialized banks don't need that much. This was the beginning of teh fall of IBTC. They obtained universal banking license without operating it(they remained investment banking institution). But by virtue of the fact that they had idle universal banking licence, they were captured by the 25 billion capital base, meaning they had to merge as well. The struggled to merge with Chartered bank and acquired Regent bank. They couldn't get their feet in commercial banking, they began to struggle. The man was left with no option tahnto sell teh bank to Standard bank of South Africa. Not even the coming of the continental giants has been able to help much as they still struggle in commercial banking.
This, I think, is why Atedo Peterside will never forgive Soludo.

The 25billion capitalization isnt enuff good reason for IBTC to go under. They simply rode the tide and drowned with the tide
Lehman brothers is no more cos of this. Atedo should be grateful his company was good enuff for Standard bank to buy into.
However, do you think Atedo still has the millions he got from the merger/buyout?
i dont thnk so cos feelers have it that he re-invested most of what he got back into the market. sad

Trust me at this rate, there will be a new set of reforms to cancel Sanusi whenever he leaves.

You know who looses in such atmosphere of instability?

You and I.

OYB_MEND:

You still have not told me why we have to outlaw Universal Banking lisences. Why can we have both Universal Banks and licences for Specialist Financial Institutions. Such that both can co-exist in the economy just like in every other developed economies?

How many times do you want me to say this? This si why I choose who I argue with on NL.
Universal banking operates with specialized banks like Agric banks, industrail developemnt banks etc. What universal banking licence permits you to do is to engage in both commercial and investment banking activities. Phasing out universal banking means a Zenith bank cannot use its licence to operate Zenith Capital, Zenith asset Management etc again. Investment banking has different arms[wealth management,stockbroking, financial advisory, corporate finance (M&A) etc].

The specialization CBN is talking about here is not that of agric or industrial banks(that are known as specialized/development banks) but distinction between commercial and investment banking. That is the area universal banking covers, reversal of which means both will now be separate. If a bank wants to be an investment bank, it will obtain licence for that and commercial banking becomes ultra vires for it. Ditto for a bank that obtains commercial banking licence.

With universal banking phased out, commercial, investment and development banking will all still exist in the economy, but we know where A bank belongs and where B belongs.

@Topic
i'll agree with OYB MEND in a lil way

i'll take the banking era of 2004-2009 as against what we had before 2004 and i dont think the reason why these banks are having probs is not solely because of the stockmarket crash/or the losses of their investment arms. Series of operational inefficiencies, executive lethargy, unprotected dealings in the volatile oil trading and of course some exposure to the capital market all contributed to where they are right now.

If universal banking has brought about an unprecedented growth in the sector, why go back to what we used to have?
the last time i checked, global brands are embracing the universal banking thingy to leverage economies of scale and risk diversification.
why have a strictly commercial bank when the present sturcture ensures improved margins as a result of the information assymetry that exist amongst the interdependent groups. If sanusi feels this wound engender better operational performance as against wealth creation, then lets see where this leads.

sleek417:

The 25billion capitalization isnt enuff good reason for IBTC to go under. They simply rode the tide and drowned with the tide
Lehman brothers is no more cos of this. Atedo should be grateful his company was good enuff for Standard bank to buy into.
However, do you think Atedo still has the millions he got from the merger/buyout?
i dont thnk so cos feelers have it that he re-invested most of what he got back into the market. sad

I'll say it's partly Atedo's fault really, given the fact that he went ahead to obtain universal banking licence, rather than stay within his primary constituency of investment banking. He might have bitten more than he can chew as
IBTC did not go under, mind you, they were only forced to go into terrain they were unprepared for and not specialized. The acquisition of universal banking licence and subsequent inevitable merger with Chartered Bank, forced them into an unfamiliar terrain of  commercial banking. It was difficult competeing with the Zeniths, UBAs, UBNs and GTs of this world that already had strong footing in the commercial banking market. They struggled, but it was just difficult. He had no choice than to leave the scene.

Jarus:

I'll say it's partly Atedo's fault really, given the fact that he went ahead to obtain universal banking licence, rather than stay within his primary constituency of investment banking. He might have bitten more than he can chew as
IBTC did not go under, mind you, they were only forced to go into terrain they were unprepared for and not specialized. The acquisition of universal banking licence and subsequent inevitable merger with Chartered Bank, forced them into an unfamiliar terrain of commercial banking. It was difficult competeing with the Zeniths, UBAs, UBNs and GTs of this world that already had strong footing in the commercial banking market. They struggled, but it was just difficult. He had no choice than to leave the scene.

Does it take a lot to acquire commercial bankers to drive the expansion?
i agree he wasnt prepared for the universal banking thingy but what does it take to really build expertise and play the turf with the companies you listed. Its a shame tho hes not in the scene anymore
i'll still doff ma hat for him anyways cos i dreamnt of becoming like him while still in School. I dont think i intend ending like him tho

He still ended honourably, to me. You can't force somebody to go into an area he doesn't like.