The Entry of Foreign Banks into The Domestic Financial Environment In Nigeria: Gains and implications

The recent announcement by the central bank of Nigeria (CBN) to ease restrictions on foreign ownership of banks in Nigeria was welcomed with mixed feelings in different quarters. Currently, foreign ownership of domestic banks is restricted to just 5% or less. This prevented inflow of foreign capital into the Nigerian financial environment. The recent announcement by the CBN to ease restrictions must be carefully analyzed before onward acceptance before outright acceptance by the Nigerian public. The decision to ease restrictions appears to be borne out of deperation considering the recent turmoil in the capital market. Foreign ownership of banks should not just be allowed because of a shortage of liquidity in the system.

Foreign ownership of banks comes with a lot of benefits. The success of foreign bank ownership in emerging economies like Argentina, Colombia and Peru highlights benefits that can be replicated in Nigeria. The benefits of foreign bank ownership includes; improvement in the financial rating of domestic banks, access to foreign capital (liquidity), improvement in capital adequacy (CAMEL framework), improved risk management policy and loan portfolio, improved loan absorption etc. Foreign ownership of domestic banks in Nigeria will inevitably lead to the transfer of resources like improved manpower, management, expertise and better policies to the domestic banks. As a result, there is no doubt as to the improved competitiveness of domestic banks. This represents both quantitative and qualitative benefits for domestic banks.

In spite of the obvious advantages of foreign ownership of domestic banks, it would be foolhardy to ignore possible negative implications. For one, while foreign ownership will expose Nigeria's financial environment and economy to the gobal landscape, there is also the danger of macro-economic pressures that may occur as a result. This is more likely to occur bearing in mind that financial and risk management policies in Nigeria are yet to keep up with the recent expansive consolidation exercise in the banking sector. Another risky implication is that there is a danger of for potential foreign banks to snap up the 'lower-risk' clientele from the available domestic banks. This may result in reduced competitivenes of the higher risk banks. Furthermore, the domestic banks that do not meet the requirements of foreign banks may witness a reduction in their overall asset quality. These implications need to be properly assess from the onset of such a policy.

Finally, while foreign bank ownership of banks in Nigeria have obvious advantages, there are possible negative implications. One obvious advantage of foreign participation is that it would go a long way in reducing deposit reliance by domestic banks which puts marketing staff on pressure.

Subject stream to be continued..........