Ordinarily, consolidation makes a position of power or success stronger so that it is more likely to continue.
Several enterprises
have utilised consolidation by way of mergers, acquisitions, and
combinations to avert failure or grow their businesses. However, it is a
risky double-edged sword that could mar the fortunes of enterprises if
improperly conceived.
The case of
Nigeria’s banking industry is a vivid illustration of how forced
consolidation can derail the orderly growth of an entire industry.
Experience has shown that consolidations that work are those driven
internally by enterprise peculiar needs rather than industry wide
imposition by external forces.
In context of free
market economy, consolidations are treated with utmost suspicions as
they could engineer emergence of monopolies or oligopolies which stifle
competition to the detriment of consumers. For economic sectors where
unfettered competitions precede the attainment of perfect market,
anti-trust regulators resist combinations that could breed monopolies.
Soon after
consolidation of Nigeria’s banks and emergence of 25 mega banks out of
the 89 that hitherto existed, monetary regulators were forced to
introduce Microfinance Banks (MFBs) to fill the void that arose from
constriction. Today, there are over 400 MFBs servicing the neglected
needs of Small Scale Enterprises that generally had no access to credits
from the mega banks.
A similar fate
awaits retail clients in the stockbroking industry if consolidated into
fewer numbers of firms. The few emergent large firms will set
prohibitive minimum requirements which retail investors cannot meet,
thus denying a large segment of Nigerian investors’ direct access to
investment opportunities in the nation’s capital market. It is common
knowledge that before global meltdown, several large stockbroking firms
set N5 million as minimum investment entry requirement to open
investors’ stockholding accounts.
The stock market is a
mass market. Its capital formation power is derived from mass
participation driven by investors’ confidence which stockbrokers work
strenuously to cultivate. Large number of stockbroking firms in a
country as populated as ours constitute the vital bridges that connect
an equally large number of diverse investors who are remotely located to
the capital market. With fewer stockbrokers, the bridges will also be
fewer.
Odife reform panel
on the capital market even advocated multiple stock exchanges and
capital trade points to bring capital formation mechanism close to the
grass root in Nigeria. Had his recommendations been implemented, several
more stockbroking firms would have been required to trade on those
platforms. Odife’s expansionary reform, geared towards growth of the
capital market and the economy at large, remain superior as remedy to
challenges that beset the market today, rather than moves to consolidate
into monopolies and elitism.
In recent past,
consolidation of Stock Exchanges was a popular reform theme in the
global capital market. This worked against establishment of multiple
stock exchanges in Nigeria. However, to date, all major European stock
exchanges and Asian stock exchanges have failed to consolidate into one
entity.
As a result, global
competition among stock exchanges has continued with undiminished
intensity. China is even establishing more stock exchanges with
fanatical zeal. Major stock exchanges including London, Frankfurt,
Paris, Hong Kong, Tokyo etc have maintained their individual identities
because the cultures and structures of capital markets and economies
they serve differ from place to place.
Between banking and stockbroking
Renewed threat by
government after previous hesitation to consolidate capital market
operators in Nigeria with possible increase of minimum capital base of
stockbroking firms from N70 million to N1.5 billion, has stimulated
public debate about desirability of the move at this time when the
capital market is just recovering from a major catastrophic meltdown.
In spite of the now
evident disaster consolidation wreaked on the banking sector,
stakeholders are surprised that the bandwagon effect continues to haunt
other sectors of the finance industry, fundamental differences between
banking and stockbroking notwithstanding.
For clarity, banking
is a trade in which the relationship between the banker and his
customer are Debtor and Creditor respectively. In contrast, stockbroking
is a profession in which the relationship between the stockbroker and
his client is Agent and Principal respectively.
The capital base of a
bank is security required to mitigate the risk of non performance of
risk assets created from customers deposit liabilities because the risk
assets are owned by the bank. Whereas, in stockbroking, the assets
purchased for investor clients are owned and registered in names of the
investors.
Because stockbrokers
do not create risk assets, their need for capital is only limited to
infrastructure they require to efficiently deliver their professional
services. All over the world, professional service providers including
stockbroking firms, carry unlimited liabilities and mitigate their risks
with fidelity guarantee insurance. It is for this reason that the
highest capital requirement for stockbroking in India prescribed by
Bombay Stock Exchange is equivalent of N2 million. Other 22 stock
exchanges in India prescribe lesser amounts. India is about the fifth
largest economy in the world. The country has a large population and
similar neo-colonial economic heritage as Nigeria, yet its capital
requirement for stockbroking firms is so infinitesimal compared to
Nigeria’s current N70 million.
Although
consolidation could lead to large entities and economies of scale up to
the point of diminishing returns, there is no concrete evidence that
size alone is panacea for cost effectiveness, efficiency of service
delivery, and profitability.
Today, Nigeria’s
finance industry is replete with several distressed large stockbroking
firms, failed rescued big banks, succeeding and strong small banks and
stockbroking firms.
The competitive
future of Nigeria can only materialise if market mechanism determines
free entry and free exit of economic enterprises under effective market
friendly regulatory framework.
Adonri is the CEO, Lambeth Trust Investment Company Ltd, Lagos
