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Running Head: Universal Banking


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Universal Banking

            Banking system in several European countries where commercial banks make loans, underwrite corporate debt, and also take equity positions in corporate securities. For example, in Germany commercial banks accept time deposits, lend money, underwrite corporate stocks, and act as investment advisors to large corporations. In Germany, there has never been any separation between commercial banks and investment banks, as there is in the United States.  (Ingo Walter 1993)

           History of banking is closely related to the history of money. As monetary payments became important, people looked for ways to safely store their money. As trade grew, merchants looked for ways of borrowing money to fund expeditions. The first banks were probably the religious temples of the ancient world, and were probably established sometime during the 3rd millennium B.C. Banks probably predated the invention of money.  (Jordi Canals 1997)

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           Deposits initially consisted of grain and later other goods including cattle, agricultural implements, and eventually precious metals such as gold, in the form of easy-to-carry compressed plates. Temples and palaces were the safest places to store gold as they were constantly attended and well built. As sacred places, temples presented an extra deterrent to would-be thieves. There are extant records of loans from the 18th century BC in Babylon that were made by temple priests to merchants. By the time of Hammurabi's Code, banking was well enough developed to justify the promulgation of laws governing banking operations.   

           The growth of the Nigerian banking industry following the deregulation of the financial system has been momentous reaching its peak in 1993. The deregulation policy of the early 90’s led to a leap in the number of banks from 41 in 1985 to 120 by the end of 1993. The political imbroglio of 1993 dealt a heavy blow on the industry and the economy at large, and that triggered off series of events, and this worsened the financial situations of banks. Several banks could not survive that era and many of them went under.

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           Consequently there was deteriorating conditions of many of the banks that survived and which met the five key parameters for measuring the health of banks, that is, Capital Adequacy, Asset Quality, Management Competence, Earnings and Liquidity (CAMEL). The distress of several banks in the mid ‘90s led to declining confidence and rising need for clients to be more pragmatic in their choice of banks. It is, therefore, not surprising that Nigerian banks in the late ‘90s started the introduction of far-reaching innovations and survival strategies such as re-engineering, restructuring and downsizing. (K. Thomas Liaw 2005)

           Towards the end of the last millennium, First Bank of Nigeria which happened to be the biggest bank in Nigeria as at then was re-engineered for improved performance in the 21st century. The introduction of the universal banking system in the year 2000 was the first step taken by the Central Bank of Nigeria towards shaping and redefining banking in Nigeria. Banking practices started to witness fundamental changes and heightened competitions which made weak banks highly vulnerable. It was not long before some banks began to manifest distress symptoms which further eroded public confidence.

           The discernible sub-sectors in the Nigerian financial services industry are banking, insurance, capital markets, investment management, real estate, and regulatory. Financial services companies are concentrated in Lagos and national companies dominate the various sub-sectors. Except for the banking industry, the majority of the operators in the financial services industry are small-sized companies (Shelagh Heffernan 2005). There is a dearth of long-term funds in the industry and the real estate sub-sector is relatively insignificant.

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           While the banks, capital markets and investment management companies seem to be well capitalised, the insurance industry is plagued by under-capitalisation. Competition is high across all sub-sectors but more so in the banking sub-sector. Entry barriers are high for banking, moderate for insurance and low for investment management and capital market activities.

           The banking sector is currently undergoing major restructuring. In July 2006, the Governor of the Central Bank of Nigeria (CBN), Professor Charles C. Soludo announced banking sector reforms. The first phase of the reforms is designed to ensure a diversified, strong and reliable banking sector, which will ensure the safety of depositors money, play active developmental roles in the Nigerian Economy and become competent and competitive players both in the African and global financial systems, while the second phase will involve encouraging the emergence of regional and specialised banks. (Roy C. Smith, Ingo Walter 2006)

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            Under the reforms, banks must now hold minimum financial reserves of 25bn naira ($190m; £110m), compared with 2bn naira previously with full compliance by the end of December 2006. The reforms have led to a series of mergers and takeovers as businesses tried to build up sufficient financial reserves to escape sanctions. As a result of the process the number of banks operating in Nigeria has shrunk from 89 to 25. (New York University Salomon Center  1996)

           Universal Banking is banking that includes investment services in addition to services related to savings and loans. The universal banking system currently operating in Nigeria enables most banks offer a wide range of services covering core banking areas such as lending, treasury, trade finance, private banking and financial advisory services. Some of the products and services include: asset based finance, structured trade finance, equipment leasing, finance leases, loan syndication, advances, bonds, guarantees, cash management, mutual funds, company flotation, capital reconstruction and restructuring, mergers and acquisitions, project finance, custodial services, and trust services among others. (K. Thomas Liaw 2005)

           The advantages of this type of banking system have been debated. Universal banking permits better use of customer information and allows banks to sell more services under one roof as a Financial Supermarket. The main disadvantage is that universal banking permits concentration of economic power in a handful of large banking institutions that hold equity positions in companies that are also borrowers of funds. (Roy C. Smith 2003)

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  • More efficient capital allocation: In consequence of their dense branch net and their broad offer of investment and financing possibilities universal banks are better enabled than any other economic subject to open capital resources and to supply the economy with financing funds that correspond to the requirements of the markets.
  • Customer relations: Extensive consulting and advisory services as a result of the all-in-finance aspect and a broad information basis about the personal and economic situations of the customers helps to intensify the customer-bank relationship.
  • Cross selling potentials and more favorable conditions to acquire new customers by the advantage of immediate vicinity. Particularly in some states of the USA the establishment of branches is prohibited by law, in other states it is allowed only to a limited extent.
  • Possibility of a more efficient exploitation of capacities in the field of technical organization.

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  • Conflicts of interests between bank and investor: For banks savings deposits are a financing possibility at a favorable rate of interest; private investors, however, would usually prefer investments in securities to realize higher interest earnings.
  • Risk of concentration processes; but in spite of a decreasing number of banks, especially of private banks, neither a suppression strategy of big universal banks against smaller competitors nor a cartelization is to constate in the banking sector.
  • Potentials of influence: In particular big banks - as a result of their broad offer of financial products - are to be expected to have special influence possibilities on other economic subjects. But, whether this influence is brought to bear depends especially on the intensity of competition among the universal banks.

           The insurance sub-sector offers insurance cover for various types of risks. Most non-life businesses cover risks such as fire, burglary, marine, accident, engineering, workmen's compensation and loss of income; while most life businesses offer life assurance and increasingly pension administration and funds management services. The composite business is growing rapidly with significant number of insurance companies now underwriting both life and non-life risks. (Shelagh Heffernan 2005)

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           The financial services industry is highly regulated by the following bodies: The Central Bank of Nigeria, Nigerian Deposit Insurance Corporation, National Insurance Commission, Securities & Exchange Commission, Corporate Affairs Commission and the Federal Ministry of Finance. PricewaterhouseCoopers is actively providing a wide range of services to the leading companies in the Nigerian financial services industry.

           The challenges of globalization has made it imperative for business entities all over the world, to take advantage of the limitless opportunities that this phenomenon offers to expand the scope of their businesses as they move outward their home countries. Brazil had experienced the international expansion of European banks, and built synergistic mutual relationships that have brought economic transformation and rapid development to the country. (T. R. Gourvish, Agnes Pogany, Alice Teichova 1994)

           The Nigerian banks cannot be different. Though some banks like Union Bank of Nigeria Plc, First Bank of Nigeria and United Bank for Africa started their international expansion long ago, much has not been heard until recently, when there is an increasing wave of banks clamouring to expand beyond the shores of Nigeria.

           Nigerian banking system has come of age. Over the years, top Nigerian banking executives have been trained abroad, and many have also gathered international experience that would come into play as they compete globally. Mr. Bamiji Atanda, a chartered accountant, said “Nigerian banks have well trained professionals with diverse competencies that would come into play in their international business management as they compete globally, adding that “there are many ‘Soludos’ who are ready to take on the world in global banking competition in which they are going to engage or already engaged (Roy C. Smith, Ingo Walter 2006). He stressed” that in spite of all odds and political instability, Nigerian banks have excelled in the circumstances they have found themselves. They have done creditably well. The world is waiting to see Nigerian banks perform excellently abroad as they move out. However, they can present and represent Nigerian brand as they conform to global best practices, and showcase the mental acumen of managerial excellence of well managed world class bank.

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Universal Banking: International Comparisons and Theoretical Perspectives by Jordi Canals; Publisher: Oxford University Press, USA (March 18, 1997).

Universal Banking in the United States: What Could We Gain? What Could We Lose? By Anthony Saunders, Ingo Walter; Publisher: Oxford University Press, USA (October 19, 1993).

Universal Banking: Financial System Design Reconsidered by New York University Salomon Center; Publisher: Irwin Professional Publishing (January 1996).

Is universal banking justified? By J.-K. Kang; Publisher: Elsevier (April 1, 2007).

Universal Banking in the Twentieth Century: Finance, Industry and the State in North and Central Europe by T. R. Gourvish, Agnes Pogany, Alice Teichova; Publisher: Edward Elgar Publishing (November 1994).

The Business of Investment Banking: A Comprehensive Overview by K. Thomas Liaw; Publisher: Wiley; 2 edition (December 30, 2005).

Modern Banking by Shelagh Heffernan; Publisher: Wiley (January 18, 2005).

Global Private Banking and Wealth Management: The New Realities by David Maude; Publisher: Wiley (August 30, 2006).

Risk Management in Banking, 2nd Edition by Joel Bessis; Publisher: Wiley; 2 edition (March 15, 2002).

Global Banking by Roy C. Smith, Ingo Walter; Publisher: Oxford University Press, USA; 2 edition (February 25, 2003).

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