Home
Bank Mergers and Market Concentration: Risks to Competition in Nigeria

Bank Mergers and Market Concentration: Risks to Competition in Nigeria

By August 5, 2025 Articles 0 Comments

In 2025, Nigeria’s banking sector is at a crossroads, with mergers and acquisitions (M&As) reshaping the industry. With 21 commercial banks operating in a dynamic economy, consolidation is a key strategy for banks to meet new capital requirements, boost competitiveness, and embrace digital transformation. However, these mergers raise concerns about market concentration, where fewer banks control larger market shares, potentially harming consumers and businesses. For Nigerian customers, this could mean higher fees, fewer loan options, and reduced innovation. This article examines why bank mergers are surging in Nigeria, how they lead to market concentration, the risks to competition, and solutions to ensure a fair banking sector for Nigerians.

Why Bank Mergers Are Happening in Nigeria

Nigeria’s banking sector has a history of consolidation, notably the 2004-2005 reforms under Central Bank of Nigeria (CBN) Governor Charles Soludo, which reduced the number of banks from 89 to 25. In 2025, mergers are driven by new CBN capital requirements, requiring banks to raise their capital base significantly. Smaller banks, unable to meet these thresholds alone, are merging to comply and avoid losing their licenses. This push aims to create stronger, globally competitive banks.

Economic pressures also fuel mergers. Nigeria’s economy, targeting a 1 trillion dollar GDP by 2030, faces challenges like inflation and naira depreciation. Mergers help banks pool resources to manage these risks and fund investments in digital banking, which 80 percent of banks plan to prioritize in 2025. For example, mergers enable banks to afford AI-driven fraud detection or mobile banking apps, appealing to Nigeria’s tech-savvy youth.

Regulatory changes further encourage M&As. The CBN’s 2024 recapitalization policy and relaxed merger scrutiny have created a favorable environment. Banks are also merging to expand geographically, targeting underserved regions like Northern Nigeria, where banking access remains low. These factors make mergers a survival strategy, but they risk concentrating market power.

Understanding Market Concentration

Market concentration measures how much of the banking sector is controlled by a few institutions. The Herfindahl-Hirschman Index (HHI) is a key tool, summing the squared market shares of banks. An HHI below 1,000 indicates a competitive market, while above 1,800 signals high concentration, prompting regulatory review. In Nigeria, mergers like the 2005 consolidation increased HHI in some regions, reducing competition in local markets.

The CBN and Federal Competition and Consumer Protection Commission (FCCPC) monitor concentration using HHI, focusing on deposit and loan market shares. Mergers between banks with overlapping markets, like those in Lagos or Abuja, can push HHI above 1,800, limiting customer options. New 2024 guidelines also consider factors like interest rates, loan access, and service quality, reflecting Nigeria’s unique banking needs, such as affordable credit for small businesses.

Risks to Competition in Nigeria

Bank mergers in Nigeria pose several risks to competition, impacting customers, businesses, and the economy.

Fewer Choices and Higher Costs for Nigerians

When mergers reduce the number of banks, customers face limited options. In concentrated markets, banks can raise loan rates or charge higher fees for services like ATM withdrawals or transfers. A study of past Nigerian mergers found that concentrated markets led to higher loan rates, affecting small businesses and traders in cities like Onitsha and Kano. This can strain Nigeria’s informal economy, where many rely on affordable credit.

Challenges for Smaller Banks and Fintechs

High concentration creates barriers for smaller banks and fintechs, which are vital to Nigeria’s financial inclusion goals. Large banks like Zenith or UBA can leverage their scale to offer lower rates or advanced apps, sidelining smaller players like microfinance banks. Fintechs, despite growing 197 percent in investments from 2020 to 2023, struggle to compete with merged banks’ resources. This limits innovation in digital payments, a key service for Nigeria’s unbanked population.

Systemic Risks from Larger Banks

Mergers creating megabanks increase systemic risk, where the failure of one bank could disrupt Nigeria’s financial system. The 2005 consolidation aimed to reduce insolvency, but larger banks often take riskier bets to boost profits. Social media discussions in 2025 highlight fears that a megabank failure could echo the 2008 global crisis, impacting Nigeria’s economy, already strained by currency challenges.

Impact on Jobs and Communities

Concentration from mergers can harm Nigeria’s labor market. Research shows mergers reduce wages by about 0.1 percent and hiring by 0.7 percent in affected regions, with women facing greater job insecurity. In Nigeria, where banking jobs are a key employment source, mergers closing rural branches in places like Ogun or Kaduna can limit economic opportunities for local communities.

Anticompetitive Practices

Merged banks with significant market power may engage in anticompetitive behavior, such as raising fees or restricting credit. For Nigeria’s small and medium enterprises (SMEs), which contribute 48 percent to GDP, reduced credit access due to mergers can hinder growth. The FCCPC’s 2018 Act aims to curb such practices, but enforcement remains a challenge in concentrated markets.

Regulatory Framework in Nigeria

Nigeria’s banking mergers are regulated by the CBN, FCCPC, and Securities and Exchange Commission (SEC) under laws like the Companies and Allied Matters Act (CAMA) and Federal Competition and Consumer Protection Act (FCCPA). These bodies assess mergers using HHI and ensure they align with public interests, such as financial inclusion and SME support.

In 2024, the CBN introduced stricter capital requirements, pushing banks toward mergers. However, its proposal to ease merger scrutiny sparked debate, as it could lead to higher concentration. The FCCPC’s 2023 guidelines tightened oversight, emphasizing consumer protection and competition. This mixed regulatory approach creates uncertainty, as banks navigate conflicting signals.

The CBN’s open banking framework, set for 2025, aims to boost competition by allowing fintechs to access bank data. However, without strong enforcement, large banks may dominate this space, limiting its benefits. Nigeria’s regulators must balance consolidation with competition to protect consumers and SMEs.

Case Studies of Nigerian Mergers

The 2005 Consolidation

The 2005 banking consolidation, led by CBN Governor Charles Soludo, reduced Nigeria’s banks from 89 to 25 by raising the capital base to 25 billion naira. While this strengthened banks like First Bank and GTBank, it increased concentration in urban markets, raising loan rates for SMEs. Rural areas saw branch closures, reducing financial access for millions.

Recent Mergers (2008-2013)

Post-2005, mergers like Stanbic Bank and IBTC Chartered Bank formed Stanbic-IBTC, further concentrating the market. By 2013, Nigeria had 21 banks, with larger institutions dominating deposits. These mergers improved efficiency but limited competition in regions like Lagos, where a few banks controlled over 60 percent of the market.

Solutions to Mitigate Risks

To address market concentration risks, Nigeria can adopt several strategies to maintain competition.

Enhanced Regulatory Oversight

The CBN and FCCPC should refine HHI calculations to include fintechs and microfinance banks, reflecting Nigeria’s diverse financial landscape. Monitoring digital banking trends, like mobile app usage, can help assess competition more accurately, ensuring mergers don’t harm consumers.

Supporting Fintechs and Microfinance Banks

The CBN’s sandbox program, allowing fintechs to test products, should expand to support startups in digital payments and lending. Grants or tax breaks for microfinance banks in rural areas, like Jigawa or Borno, can boost competition and financial inclusion for Nigeria’s unbanked.

Transparent Merger Processes

Public hearings during merger approvals, as required in 2024, can ensure banks address community needs, like SME lending. The CBN should publish merger impact reports, detailing effects on fees and services, to build trust among Nigerians.

Asset Divestitures

Banks should sell non-core assets, like underperforming branches, to fund digital upgrades without increasing concentration. This can also create opportunities for smaller banks to expand, balancing market power.

Financial Literacy Programs

Banks and the CBN should invest in educating Nigerians about banking options, especially in rural areas. Programs teaching consumers to use fintech apps or compare loan rates can empower them to seek competitive services, reducing the impact of large banks’ dominance.

Conclusion

Bank mergers in Nigeria’s 2025 landscape are driven by capital requirements, economic pressures, and the need for digital transformation. While they strengthen banks, they risk market concentration, leading to fewer consumer choices, higher costs, barriers for fintechs, systemic risks, and job losses. The CBN and FCCPC face the challenge of regulating mergers to balance growth with competition, especially for SMEs and rural communities. By enhancing oversight, supporting smaller players, ensuring transparency, and promoting financial literacy, Nigeria can foster a competitive banking sector. A fair and innovative banking industry is crucial for Nigeria’s economic growth and financial inclusion goals in 2025 and beyond.

SIMILAR POSTS OR OTHER POSTS YOU MIGHT BE INTERESTED IN

Related Posts

Add a Comment

Your email address will not be published. Required fields are marked *