By Omoh Gabriel
Nigerian banks are fanning out their operations by establishing new branches abroad for increased profitability. Precisely, New York and London, two of the biggest financial hubs in the world, have become the investment havens for Nigerian banks. Also, the West Coast and sub-Sahara Africa are among the preferred spots. Both old and new generation banks operate offshore branches. International credit rating for Nigerian banks has improved tremendously as growth in credit lines for some Nigerian banks from abroad has been enhanced by as much as a factor of 10 in 2005.
The development is no doubt a fall-out of the banking consolidation that deepened the vaults of the banks. Success of Nigerian banks is receiving attention abroad with the latest recognition coming from International Trade Centre (ITC) in Geneva, Switzerland. Executive Director of the ITC, Mrs Patricia Francis in an interview recently said that transformation of the banking sector is an example of how the private sector can become the engine of growth in the country.
She suggested that the next step should be to use the banking industry as a case study on the possibility of resurrecting other sectors that would drive the Nigerian economy. She said, “Nigerian banks are some of the biggest and best. It is a demonstration of how the private sector has contributed to Nigeria and it should be used as a case study on how it can be done in other sectors.
While Nigerian banks that have foreign leverages, in terms of partnering with foreign funds managers are capitalising on the opportunity to own branches abroad, others are also planning to set up branches in Europe and the United States (US). Setting up branches abroad has become a norm with the banks, as it offers them a veritable means of winning the confidence of international investors and boosting CBN FSS 2020 dream.
Ghana continues to be an ideal investment destination to Nigerian investors. Even though over the years businessmen from Nigeria have invested heavily in the media and aviation industries in Ghana, their involvement in the banking industry in recent years has become the most pronounced.
All the Nigerian banks doing business in Ghana today are leading brand names in Nigeria; mostly, in the top 10 bracket. The massive size of the Nigerian domestic banking opportunities, and the fact that the Ghanaian population is about a fifth of that of Nigeria, market size alone could not have influenced the decision by these banks to invest in Ghana; good economic policies and prudential banking supervision may all have played a part. Ghana has been undergoing the process of financial sector restructuring and transformation as an integral part of a comprehensive programme to ensure that the country achieves emerging market status. Currently, leading banks in Nigeria, including Zenith, Intercontinental, UBA, and GTB have all established subsidiaries in Ghana.
Ecobank, the first regional player, has also expanded its Nigerian base by buying some of the banks that needed assistance. With its pan-African network in 25 countries, it is now positioned to increase its presence all over Central Africa. The traditional leaders of banking in Nigeria – First Bank, UBA, and Union Bank – have led the way in expanding their activities along the West African coast. They have been followed closely by a number of second generation banks.
The traditional giants had an advantage in that because they evolved from major international banking groups based in Europe, they already had the knowledge and marketing contacts in other West African nations. Newer banks like Zenith, Intercontinental, Oceanic, and GT Bank (formerly Guaranty Trust Bank) have entered the new markets without a historical base but with enhanced innovative ideas inspired by their successes at home. Union Bank has a full fledged subsidiary in the UK and South Africa while Gtbank as at today has four subsidiaries in the UK, Ghana, Gambia and Sierra Leone. First Bank on its part established FBN UK limited as the first off-shore financial of a Nigerian owned bank in the UK. FBN UK recently established a Paris branch office.
Zenith International Bank PLC has four off shore subsidiaries. The bank now operate full scale banking service in its tradition of excellence in Ghana, Sierra Leone, South Africa and London.
UBA apparently the most adventurous has nine off shore subsidiaries. It has UBA capital based in London, a subsidiary in New York and Grand Cayman Island. The bank has established its presence in Sierra Leone, Liberia, Cote D’Ivoire, Ghana, Cameroun and Uganda. In Ghana it has its head office in Accra and branches in Accra Centra, Tema, Kumasi, Takoradi and Abossey Okai. In the case of Afribank it has begun the process of setting up a subsidiary in Dublin, China, India and Ghana some of which will become operational in the current financial year. For Bank PHB it has started operation in the Gambia with four branches running while it has secured banking license to operate in Sierra Leone which the bank says will hopefully commence operation in the first quarter of 2009.
Oceanic bank has started full banking operation in Sao Tome e Principe and Gambia, in affiliation with Amalgamated Ghana, Union Bank of Cameroun. It has procured licences to start banking operation in Liberia, UK and Chad.
Bank PHB on its own has also bought a bank in Ghana and would begin ful banking operation by the 1st quarter of 2009. It has also secured a banking licence to operate in Liberia.
In Ghana and elsewhere, there have been some rumblings of dissent in the home-based banking sectors because of the extraordinary aggressiveness of the Nigerian new generation bankers. Fortunately, so far, there have been few if any serious problems. Instead, it appears that the Nigerian banking revolution has become an incentive for the better run Nigerian banks to extend their credibility into other parts of the continent and the world. The central bank recently reported that it had been keeping a close watch on the foreign activities of the Nigerian banks, and that they now had operations in over 20 countries within and outside Africa.
Some of the banks, notably First Bank and GTB, are also listed on the London Stock Exchange. It is increasingly becoming obvious that there will be more mergers and acquisitions as the reform strategies become more successful. Several of the banks now advertise routinely on the internet and on other global media such as the CNN. Zenith in particular is sponsoring Inside Africa, a CNN international magazine on happenings inside of Africa. Intercontinental on the other hand was on the trail of the Olympics, taking space on CNN.
Within the last three years, about eight banks have opened branches in United Kingdom and United States. United Bank of Africa (UBA), Zenith Bank, First Bank, Union Bank, Access Bank, Guaranty Trust Bank (GTB) have for some time had their own branches. Nigeria’s capital-rich banks are rushing to set up shop in London to meet growing demand for trade finance, tap into foreign investor interest in African securities and add prestige to their domestic operations.
Intercontinental Bank, one of the fastest growing in Nigeria, became the latest to join the fray on Monday, saying it had won approval from Britain’s financial market regulator to offer wholesale banking services through a London subsidiary. Intercontinental, which ranks among the 1,000 largest banks in the world, said the UK Financial Services Authority (FSA) had given it approval to provide trade finance services including letters of credit, collections and guarantees. “London will act as a strategic addition to Intercontinental Bank’s global expansion drive, providing international investors with access to investment opportunities on the African continent,” chief executive Erastus Akingbola said. He said more subsidiaries would open soon “to exploit identified business windows” in Africa, America, Europe, the Middle East and the Far East.
Access Bank has acquired a majority stake in three foreign-based African financial institutions in a bid to become a bigger regional player. Access bought a 90 per cent equity stake in Banque Privee du Congo and 75 per cent of Rwanda’s Bancor Bank. It has also acquired 88 per cent in Omnifinance Bank of Ivory Coast through a combination of a share purchase and an injection of fresh funds that raised the Ivorian bank’s capital base to more than $20 million.
Access said the takeover of Omnifinance will provide a platform to extend its network in Franco-phone West Africa and help it complete its coverage of the region’s two money zones. The acquisition of Rwanda’s No. 4 bank will enable Access to grow its market share in that country and expand into other East African countries such as Tanzania, Uganda and Kenya, the bank said. The takeover of the Congolese bank will facilitate its entry into Central Africa. The new deals take to six the number of Access bank’s foreign acquisitions.
The Bank of Zambia said recently that it had issued a banking licence to Access, which has pledged to invest an initial $7.5 million in the Southern African country. “We are impressed at the contributions of stakeholders towards the smooth integration of each bank,” Access group managing director Aigboje Aig-Imoukhuede said.
Finbank on its part has bought 70 per cent stake in Arab Gambia Islamic Bank of Gambia which it intend to leverage on its experience to introduce Islamic banking products. The bank also has plans for immediate expansion into other countries in the sub region. Before now, expansion was limited to countries in West Africa where banks have gone to establish their subsidiaries in order to tap from the regional market.
The efforts paid off as Zenith Bank and Intercontinental Bank, among several others, are increasing their branch network. Subsequently, banks began to set up branches abroad. The development is attributed to a number of factors, chief of which is to mobilise deposits from foreign investors’ especially from Nigerians in the Diaspora angling for business opportunities at home. Other reasons for establishing offshore branches include ensuring that the level of foreign participation in the Nigerian banking industry is increased by way of equity. This will, subsequently, boost the efforts of the Federal Government at encouraging foreign exchange inflow and CBN FSS2020. It is also an avenue to increase and finance trade.
But as Nigerian banks continue to jostle for offshore banking, the lending rate has been identified as a major threat to their survival. A financial expert, Dr. Biodun Adedipe said that Nigerian banks faces a fresh set of challenges in terms of their lending activities. In his view “ If a Nigerian bank wants to grant credit to a business based in Ghana, for example, the bank has to be abreast of the country risk in both Nigeria and Ghana. The sovereign risk of Ghana and Nigeria become important variable in the decision to grant or decline the loan request”
In general, the challenges of offshore branching he noted can be summarized as: banking and general business practices in the host countries. He further identified regulatory and other legal requirements as another challenge, stressing that risk exposure peculiarities and acceptable management strategies are factors that must be taking into consideration when going into offshore banking.
According to him “ Return on investment, which is a typical consideration even in domestic branching, where banks look out for how long it will take the new branch to break even.
The fear that staffing could become an issue is unfounded because it is not any different than domestic branching where a few experienced staff are moved to the new location, and new staff are recruited from existing banks in the location or fresher already inducted and ready for deployment are posted to the new branch”. He admitted that there are obvious benefits to offshore branching by Nigerian banks, saying “
If those branches are profitable additions to the group, investors will enjoy enhanced shareholder value – higher consolidated profit that boosts dividend payout and stock price appreciation that drives capital gains. For customers whose business and other legal activities transcend Nigeria, processing of their transactions becomes easier, and a window of opportunities are opened”.
Continuing on the benefits of offshore banking to Nigerian banks, Adedipe said “The employees will have the opportunity of skills transfer through interactions with contemporary players, especially where the offshore branch is in a more sophisticated jurisdiction. For the banks directly, there will be reduced dependence on correspondent banks and the cost and image implications of that. If the businesses of the banks and their customers expand thereby, offshore branching will surely expand the national economy”
On the benefit to the economy, he declared that the contribution to GDP growth can only push Nigeria further in the twin objectives of the vision 2020, that is Nigeria as the financial hub of Africa and the Nigerian economy among the first 20 economies in terms of US $ GDP by 2020. On offshore banking and marketing communication, he stated that the communications mix targets any or a combination of: brand, product and company. It aims, according to him is to enhance: brand equity, product effectiveness; and company performance.
The need for caution on the part of the banks was emphasised recently by action taken against bank in international operation by regulators. A number of international banks have reached settlement with regulators on breaches of banking regulations in foreign countries.. Merrill Lynch, Goldman Sachs and Deutsche Bank were the latest banks to reach a settlement with US regulators over the sale of risky securities before the financial meltdown currently rocking the international community. The banks have agreed to buy back billions of dollars in auction-rate securities and pay fines, after allegations that they misled investors. Of the three firms Merrill Lynch paid the highest fine of $125m (£66m). Other banks that have reached similar settlements with regulators include Morgan Stanley and JP Morgan Chase. New York Attorney General Andrew Cuomo has been leading the probe, with the support of federal and state regulators. The banks have been accused of marketing the financial products, called auction-rate securities, as much safer than they were. Investors were told that auction-rate securities would return more than money market investments and be easy to sell.
FINES PAID SO FAR
UBS: $150m
Merrill Lynch: $125m
Citigroup: $100m
Morgan Stanley: $35m
JP Morgan: $25m
Goldman Sachs: $22.5m
Deutsche Bank: $15m
Under the latest deal with Mr Cuomo, Merrill Lynch said it would repurchase up to $12bn in auction rate securities as well as pay the $125m fine. Deutsche Bank meanwhile has a $15m fine to pay and must buy back some $1bn of the investments. Goldman Sachs has a $22.5m fine and has agreed to buy back $1.5bn in securities. Earlier this year, Citigroup and Swiss banking giant UBS reached a settlement to buy back $26bn of the securities. Following the latest settlement Mr Cuomo said: “This has been a great day of progress,” adding that a number of banks were still being investigated.
Expert say as Nigerian banks move offshore especially to US and Britain they have to learn to play by the rules as one fine can cause distress in some of the banks.
Recent years have seen an increased importance of international trade in goods and financial services. To facilitate such trade, many banking institutions have also become international. Banks expand internationally by establishing foreign subsidiaries and branches or by taking over established foreign banks. The internationalisation of the banking sector is facilitated by the liberalisation of financial markets worldwide. Developed and developing countries alike now increasingly allow banks to be foreign owned. Financial liberalisation of this kind proceeds on the premise that the gains to domestic market participants from foreign entry outweigh any losses to domestic banking institutions. Several authors have addressed the potential benefits of foreign bank entry for the domestic economy in terms of better resource allocation and higher efficiency.
Besides employing expatriates with sound knowledge of banking operations in Europe, technology was deployed to improve transactions abroad. On-line transactions were introduced abroad to stimulate the interest of depositors. The technology ensures connectivity between the branches in Europe, United States and their head offices in Nigeria. Trade and commerce were introduced on-line with a view to win foreign patronage. New businesses were also developed to improve trade relations in Europe. This involved trade missions that ensure that banks’ foreign officials visit Nigeria for the development of trade and commerce vis sa vis.
The former Managing Director/Chief Executive Officer, Union Bank of Nigeria (UBN)Plc, Dr Godwin Oboh, recently in an interview lends credence to this assertion, saying that it is necessary to acquaint officials with the business environment in the country. Oboh, during the visit of a delegation of Union Bank, United Kingdom to Lagos, said the bank was in the UK to do business with various people, and it’s officials must understand the business environment in Nigeria. The Union Bank chairman said that the bank is in the United Kingdom, the market centre in the world and as such, it must maintain integrity and good ethical standards.
Also, a senior official of the bank, Mr Akinsola Akinwumi, said that Union Bank, UK would operate its business with high sense of integrity to contribute effectively to the growth of the economy.
Akinwumi said that Union Bank of Nigeria was set to recapitalise the United Kingdom operations to have a bigger market, coupled with the fact that the bank would partner with the Federal Government on Vision 2020.
The bank’s objectives are laudable as banks that have operations in Europe have strong capital bases that enable them to attract bigger portfolios. Institutions such as Citi Bank Group, China Agricultural Development Group, and Standard Bank Group have assets and turnover worth several billions of dollars. These banks have grown to become big players in the global economy.
Also, they have a pedigree of dominating the banking sector at the continental level, with each boasting of assets and profit that equal that of the entire banking industry of other countries. This has provided enough leverage for them to operate well in countries abroad and further contribute to their economies.
The Governor, Central Bank of Nigeria (CBN), Prof Chukwuma Soludo attested to the achievements of the banks, claiming that Nigerian banks are strong and reliable.
According to him, the 24 banks now boast of 28 million accounts, quite significant for the nation’s banking industry. Though the achievements recorded by the nation’s banking industry are worthy of emulation, the banks are yet to have the capacity to lead Africa and subsequently make significant impact in Europe. The Deputy Chief Executive Officer, IBTC/Chartered Bank, Mrs. Shola David-Bora, said that Nigerian banks that are expanding beyond their regions do not have the capacity to record success in the markets abroad.
Shola while speaking at the Investors’ forum of Ecobank Transnational Incorporated (ETI) recently said that it would take a long time for the banks to achieve their objectives in such markets.
She, however, said that Ecobank Transnational Incorporated has the capacity to operate well in developed markets due to its size and turnover in Africa. “The Ecobank Transnational Incorporated module is difficult to copy. Many Nigerian banks that are expanding beyond their regions would need a longer period of time to achieve their objectives in those new markets” She said.
Also, the banks have to contend with the problems of opening more branches. The development, according to Sunny Nwosu, a shareholders’ leader became necessary in order to have a fair size of the market abroad. Nwosu said that foreign banks have the pedigree of setting up more branches in the country and that Nigerian banks must do the same thing. This may be difficult to achieve due to the fact banks wishing to open up branches abroad have to pass through the rigours of getting approval of regulatory authorities in Europe and United States.
Speaking recently on Nigerian banks foreign quest Lagos Governor Babatunde Fashola said that Nigerian banks contribute 61 per cent of the gross domestic product (GDP) in West Africa.
The governor disclosed this in Lagos at a retreat organised by the Association of Corporate Affairs Managers of Banks (ACAMB). The theme of the retreat was “Offshore Banking and the Challenges of Corporate Communication”. Represented by the Commissioner for Tourism and Culture, Sen. Tokunbo Afikuyomi, the governor said that Nigerian banks are the pride of West Africa.
He urged banks in Lagos State to partner with the government to ensure that the state moved forward economically.
Fashola said this was necessary because 80 per cent of the banks in the country have their headquarters in Lagos, adding that the state should benefit more from the banks. He also said that in an effort to open offshore branches, the banks should show Nigeria’s positive contributions to the outside world. The President of the Chartered Institute of Bankers Nigeria (CIBN), Dr Erastus Akingbola, said that the banking reform of 2005 produced structured and sustained economic development.
He said that the reform had made Nigerian banks more competitive and active players in the global market. Akingbola appealed to banks’ corporate affairs managers to boost the image of Nigerian banks to the outside world at all times. “If we must succeed as banks and as an industry globally, our media practitioners must support our course,” he said.
A study by the World Bank has long encouraged banks to look off shore. Studies by Levine (1996), Walter and Gray (1983), and Gelb and Sagari (1990)). Levine (1996) specifically mentions that foreign banks may (i) improve the quality and availability of financial services in the domestic financial market by increasing bank competition, and enabling the application of more modern banking skills and technology, (ii) serve to stimulate the development of the underlying bank supervisory and legal framework, and (iii) enhance a country’s access to international capital.
As yet, little cross-country systematic evidence exists that these presumed benefits of an internationalisation of the banking sector indeed materialise. The literature, however, contains several case studies of financial liberalisation episodes. McFadden (1994) reviews foreign bank entry in Australia, and finds that this has lead to improved domestic bank operations. Bhattacharaya (1993) reports specific cases in Pakistan, Turkey, and Korea, where foreign banks helped to make foreign capital accessible to fund domestic projects.
Pigott (1986) describes the policies that have made increased foreign bank activity possible in nine Pacific Basin countries, and he provides some aggregate statistics on the size and scope of foreign banking activities. Using aggregate accounting data, Terrell (1986) further compares the banking markets of 14 developed countries (8 of which allow foreign bank entry) for 1976 and 1977. Interestingly, countries that allow foreign bank entry on average experience lower gross interest margins, lower pre-tax profits, and lower operating costs. Terrell (1986), however, does not control for influences on domestic banking other than whether or not foreign banks are permitted to enter. The study finds that the entry of foreign banks reduces the profitability of domestic banks, while there is some evidence that the non-interest income and the overall expenses of domestic banks are also negatively affected by foreign bank entry. There is no stopping the Nigeria bank offshore foray now.
