Cross-border expansion of Nigerian banks: has it improved the continent’s regulatory and supervisory frameworks?

Nigerian banks expanded into other African countries following the 2004 consolidation that increased minimum capital requirements more than tenfold. Most banks expanded their operations domestically and internationally by increasing branch networks in the domestic market and opening subsidiaries abroad. United Bank for Africa (UBA) and Access Bank combined are operating in more than 20 countries on the continent. Cross-border expansion has taken place through the setup of subsidiaries, thus adding to the number of banks in host countries.

In the case of Nigeria, we have five foreign-owned banks out of 23 banks in the country, namely, Citibank, Ecobank, Stanbic IBTC, Standard Chartered and Nedbank. While four of the banks have been operating for a while in Nigeria, Nedbank was just granted a license and only started operation this year. Therefore, what we have is a financial system where the number of Nigerian banks operating branches in other African countries far exceeds that of the foreign banks operating in Nigeria.

Economic theory would suggest that such cross-border expansion would have many benefits, both for the expanding banks and for the recipient banking system. The main benefits for the parent company would be risk diversification and greater profit opportunities for shareholders. The recipient banking systems, on the other hand, would benefit through increased intermediation and improved efficiency resulting from technological advancement, reduced interest rates and efficiency improvements due to increased competition.

Most countries have welcomed the expansion of Nigerian banks in their jurisdictions, as they are helping to deepen the banking sector on the continent through branch network expansion, the introduction of new financial products and the strengthening of the regulatory and supervision framework through the introduction of consolidated supervision and joint supervision of bank branches, which have helped to affect knowledge- and information-sharing among supervisors.

There is ample evidence in the economic literature that cross-border expansion can also impose a cost on domestic banks in host countries, whose market share is threatened by the new entrants and who could take more risks with adverse consequences for the stability of the banking sector. This could include behaviours such as potential adverse selection of clients for domestic banks due to the migration of less risky clients to the foreign banks who offer new and innovative products and services.

While the expansion has helped host countries expand their banking sectors and increase intermediation in their respective home countries, the poor risk framework at the beginning of the expansion and the effect of the financial crisis put a strain on some Nigerian banks, resulting in the failure of some, including Oceanic Bank, which had expanded to seven countries before the crisis. This necessitated broad-based reform in the Nigerian banking sector that has benefited countries with Nigerian bank presence.

The central bank implemented consolidated supervision and developed a framework for cross-border supervision implemented in 2010. The framework sets as a precondition for the presence of Nigerian banks in other countries the execution of Memoranda of Understanding (MMoU) with the host country. In Nigeria, all banks, whether local or foreign, are treated equally and are subjected to the same prudential and supervisory regulation. In case of liquidity crisis, the Central Bank of Nigeria is the lender of last resort to all banks. While the function of supervision of banks rests with the central bank, other agencies supervise nonfinancial institutions; therefore the need for coordination between the central bank and other regulatory bodies is essential. This paper will examine the effect of the cross-border expansion of Nigerian banks in the West African Monetary Zone (WAMZ), which includes: The Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leone. These countries were selected because 10 Nigerian banks operate in these countries and they have the most collaborative relationship in the area of supervision and regulation with the Nigerian authority. This close collaboration is helping to strengthen information-sharing through formal arrangements such as, MMoU, joint supervision and development of common regulatory and supervisory framework for the zone. The paper will cover the period 2005–12 to capture the period before and after the cross-border expansion of Nigerian banks and explore the notion that the presence of foreign banks helps build a domestic banking supervisory and legal framework, and enhance overall transparency in both home and host countries.

By Sarah O Alade, Deputy Governor, Central Bank of Nigeria.

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