United bank of Africa (UBA) is a public limited company incorporated in Nigeria in 1961 and got their headquartered in Lagos. It is one of africa's leading financial institutions offering universal banking to more than 8 million customers across 750 branches in 19 African countries and a presence in New York, London and paris. UBA is rapidly evolving into a pan-Africa full service financial institution. UBA is the product of the merger of nigeria's third and fifth largest banks, namely the old UBA and the former standard trust bank plc, and subsequent acquisition of the erstwhile continental trust bank limited. The union emerged as the first successful corporate combination in the history of Nigerian banking.
RISKS FACED BY THE INSTITUTION
The degree of uncertainty in the Nigerian financial sector cannot be underestimated. The depositors and indeed the nation as a whole faces different types of risks caused by various factors ranging from non-performing loans, margin loans or lending, diversion of deposits, political and government instability, under-utilisation of resources and a host of others.
United bank for Africa accounts for almost one third of the depositors in the country. This is because of its strong financial standing and reputation. This therefore makes the bank to be the most prone to the factors highlighted above.
NON- PERFORMING LOAN
Non-performing loan is one in which banks gives out loans which are not protected. In other words, indiscriminate loans without security to friends, families, politicians, government officials and phoney companies owned by the banks executives.
These non-performing loans which used to be the bank of the Nigerian banking industry. Though has reduced drastically as the strong growth of the last three years empowers banks to write off some bad loans while liquidity in the system enables more loans beneficiaries to honour their repayment commitments. A report on the Nigerian banking industry published recently by standard and poor (SP), a leading international rating agency which rates one hundred and ten sovereign states, however, considers the Nigerian banking industry to be high risk despite this soothing news. The low ranking of the banking system in Nigeria reflects the high operational and credit risks facing the very young and increasingly competitive banking sector.
The issue of non-performing loans and margin recently took its toll on some of the other commercial banks, excluding UBA, Whereby their managing directors and other top executives and non-executive were sacked and are currently facing court charges.
Marginal lending has become one of the most contentious and infamous subjects in the Nigerian financial sector over the last two years. It became an unavoidable issue following the dramatic falls in the market capitalisation experienced on the Nigerian stock exchange.
The issue was brought to the fore when the governor of the central bank of Nigeria sacked the executives directors of eight of the country's twenty -four commercial banks citing, inter alia, problems associated with overly-risky or excessive margin lending.
The ongoing global financial crisis which began in the united states and later spread to Europe, has adversely affected other economies including African economies and in particular, the Nigerian capital market. It is worth not, that the downturn in Nigeria was not just as a result of the indirect contagion from the united states originated sub-prime mortgage crisis but it was perhaps also due to acute weaknesses in the risk management culture in nigeria's financial sector. What is required now is an embracement of a Holistic Risk Management philosophy; which embeds robust risk management techniques into the financial culture of Nigeria.
What is margin lending and how does it work.? Margin lending is a method of borrowing in order to invest in shares. It is a loan from a lender(who also sometimes acts as the broker) to a borrower (investor) that basically operates as a margin account. The loan is secured against tradeable securities purchased by the borrower.
There are some similarities between the causes of the American sub-prime mortgage crisis and Nigeria's margin lending crisis. Both crisis were created partly as a result of a cheap and readily available credit that a fuelled a culture where compensation incentives overshadowed prudent credit underwriting strategies as well as robust risk management considerations.
The genesis of nigeria's present financial crisis began with the highly successful bank recapitalisation exercise which ended in December 2005, and foreign capital investment, which led to favourable economic conditions and rapid GDP growth. As equity market prices rose, the expectation that stock prices would continue to rise became cemented in the investing public consciousness. Lack of adequate regulatory and risk management framework was one of the key causes of the banking crisis. For instance, regulatory capital charges should have included market risk charges rather than just credit risk charges because margin loans are exposed to both market and capital risks.
REMEDIES : LIQUIDITY INJECTION BY THE CENTRAL BANK OF NIGERIA.
The central bank of Nigeria reviewed downward both the cash reserve ratio and minimum liquidity ratio of banks from four percent to ten percent and forty percent to twenty five percent respectively and the monetary policy rate from 10.25percent to 6 percent, since the crisis began. Also, it allowed banks to buy back their securities and extended the discount window to 365 days, as opposed to overnight lending when accessed in the past regulatory intervention. Diving to the reportedly- crystallised risks caused partly by the risks associated with margin lending, regulatory authorities, most notably the CBN, took some drastic actions including injecting several billion dollars worth of public funds into banks, dismissal of chairmen and chief executive directors and non-executive officers of erring banks.
In making decisions, policy makers must balance competing interests of different areas of the economy including price stability, financial sector supervision, free market economies, legal property rights and making the country safe and conducive for both local and foreign imvestors.
The political and government interference also contribute largely to failure in the nations financial institution. Some of the so-called politicians who are connected to the government in power use their influence, though with the collaboration of the executive officers of the bank to obtain unguaranteed loans. Also due to the unstable nature of the Nigerian political terrain, depositors more often than not are sceptical about the safety of their money in the banks and are quick to withdraw their money if any uncertainty is perceived and thereby bringing a shock on the system. The United Bank for Africa in its wisdom has gone a long way in the management of the various risks highlighted above. It has not only shored its capital base but has recruited capable hands into its fold irrespective of colour or country of origin. In particular is the employment of a risk officer from south Africa, Andre J. Blaauw. He has been very instructive in the management of risks over and above the minimum required for credit risk. A market risk is the risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will increase due to the change in value of the market risk factors. The four standard market risk factors are stock prices, interest rates, foreign exchange rates and commodity prices.
The management of market risk is highly complex to limit the size of market risk exposures, it should allow traders to take to achieve profit targets. A bank needs to have an understanding of the size of potential loss that can be incurred under extreme market volatility . As nobody has a crystal ball, we can only rely on statistics. Deriving variance/co-variance parameters from historical market rates data, we can estimate for a given statistical confidence limit what the maximum potential loss in a downside scenario could be, for example using the value at risk(VaR) approach, i can estimate the maximum loss on a trading portfolio at a 99percent statistical confidence limit to be n more than 1bn naira. This means that is 1percent that the actual loss, if planned, will be more than 1bn naira. We can now have a VaR limit of 1bn naira place a limit loss at that level with daily market risk monitoring and control.
BASEL 1 AND 11 MARKET FRAMEWORK
When basel 1 accord was concluded in 1988, no capital requirements were described for market risk. Nevertheless, the controllers later recognised the risks to a banking industry if enough capital is held to hold the attention of vast sudden losses from very large exposures in capital markets. During the mid 90's suggestion were arranged for an amendment to the 1988 accord, demanding for more capital over and above the minimum order for credit risk. Finally a market risk capital acceptable framework was accepted for implementation in 1998.
The 1998 basel 1 accord make minor improvements to provides a menu of approaches for knowing the market risk capital needed, ranging from a simple to having more than basic knowledge and advanced approaches. Under the advanced the internal model approach). Banks were given the chanced to calculate the capital requirement for market using their internal models.
The basel 11 framework was put into effect worldwide in 2008 value the requirements for market risk management by putting oversight rules, disclosure, management of counterparty risk in trading portfolio etc. Andre blaauw as chief risk officer to direct the new risk management team, during 2008 re-engineered their credit risk management and started tools of highly developed and complex market risk measurement and reporting tools. He worked to move towards basel 11 compliance by the end 2009,which acquires a major of all the financial and operating risk monitoring.
THE SOUTH AFRICAN EXPERIENCE
United bank of Africa(south African) was one of the early adopters of the 1998 market risk market risk amendment to basel 1. Banks started to fund in market risk great skill and systems from the late 90's. The bank regulators makes a stronger or more secure supervision approach to the involvement of market risk. The development of strong market risk capabilities participated to the development of the south African capital markets. Recently attributed the resilience of the south African financial system during the current global financial crisis to the inmost part of the country's capital markets. The south African economy is the 20th largest in the world, the Johannesburg stock exchange with a market capitalisation of around $5400bn is ranked 14th largest in the world. The state of being noticeably different when compared the market capitalisation of the stock exchange of SSA's second largest economy is about $40bn.
REGULATORY REQUIREMENTS FOR MARKET RISK
After the amendment of 1998 to the 1988 basel 1 accord for market risk which has not be put into effect yet in Nigeria. As a result, there is no clear regulatory capital requirement for market risk taken in banks' ownership trading activities. Other than in other countries, stockbrokers capital needed are not smart enough of risks they take in proprietary trading. Market risk capital needed in other countries have lifted the development of the derivatives markets. Limited market risk management used in Nigeria has also limited in growth derivatives, the key tools in mitigating market risk.
UBA stockbrokers limited is a subsidiary of the leading financial institution in west Africa with a balance sheet size in excess of one trillion naira. ($8b). Over six million presently customers operates among the two active economies in the sub-region- Nigeria and Ghana. They have more than seven million retailer outlet presence in newyork and caymsuch interest dividends and insurance claims. The use of credit rating describes their function: investment grade, Credit rating(international long term, AAA to BBB, short term F1 to F3.) the credit rating of UBA is kind of favourable.
Overall, market risk management practices in Nigeria is under developed and lagging other emerging markets. The market risk is UBA is much favourable in the banking sectors in west Africa.
- Adolphus J. Toby : journal of financial management; Analysis : January 2008
- Andre J. Blaauw : market risk management in Nigeria. Standards and poor (S&P).
- Group structure UBA website.
- UBA annual report 2008.
- List of countries with UBA Presence.
- Ugonna Maduagufor, Global Depository Receipts, Stock market (june 2008).
- UBA report as at april 30 2010.