THE CHALLENGE FOR

AUDIT & CONTROL

UNDER UNIVERSAL BANKING:
- A ROLE RE-DEFINITION

Being a contribution to the official Journal of the Chartered Institute

of Bankers of Nigeria

By Olufemi Awoyemi
B.sc, ACA, ACITN, AMNIM, AIMC

Tuesday, November 14, 2000

Lagos
 THE CHALLENGE FOR AUDIT & CONTROL UNDER
UNIVERSAL BANKING
- A Role Re-definition

With or without Universal Banking, there exist infallible reasons to reposition the Audit and
Control function of a financial institution in such a way that will make it more efficient and more
responsive to the dynamics of the financial services provider mindset which the concept of
Universal Banking system to be adopted in Nigeria would only re-emphasise.

INTRODUCTION

Fast emerging as the major route to banking globally is the emergence of a multi-purpose banking
licence that encourages the direct conduct of a broad range of financial activities through a
structure known as Universal Banking.

An attempt at evaluating the concept of Universal Banking within the Nigerian context has
hopefully drawn up a case for a role redefinition of the Audit & Control function from the holistic
definition which sees it as the safeguard of financial records to that; which emphasises its
contribution to overall management efficiency – that of the Internal Consultant on Risk, Business
and Control issues.

Times have certainly changed!

The last decade has witnessed such profound changes in virtually all aspects of life leading to a
myriad of changes in how financial intermediation is and should be conducted. From recent
experiences in Nigeria, the changes can be seen from the following insights:

■
■ The new role expected from the capital markets in managing growth of the productive sectors
of the economy and the impact of privatisation of public enterprises.
■
■ The emerging realities of the new democracy, good governance, transparency, integrity and
the elimination of subsidies.
■
■ The evaporation of reverence for institution and authority and its replacement with value
perceptions.
■
■ The growing public demand for information and the right to know.

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The banking sub-sector of the financial services industry is also faced with the following changes:

■
■ Market definitional changes – intermediation and dis-intermediation at both ends of the
transaction value chain.
■
■ Emerging new models to cash management visibly seen in the successful introduction of
EPS/POS card based schemes serving as a front runner to the use of ATM’s, Telephone
Banking and E-payments.
■
■ The upcoming National Automated Clearing System (NACS) which would adjust the current
model and also emphasise the critical issue of cost per transaction and the development of
electronic means of providing low cost mass customisation services.
■
■ Reconciling the cultural differences in commercial and investment banking.
■
■ Emergence of forceful competition from hitherto non-traditional sectors such as retail service
providers, consulting firms, insurance companies, fund managers and specialised agencies.
■
■ The changing risk complexion within the financial services offering.
■
■ The rapid increase in technological changes.
■
■ Changing Profile of the customer.
■
■ Government emergence as a major player creating forceful competition for investable funds.
■
■ Reducing margins from traditional income generating areas coupled with an increasing
shareholders expectation for impressive results.
■
■ The changing ownership structure of most banks tilting from private to institutional/public
banks; government to entirely private; and local to foreign.
■
■ The era of the knowledge worker with the necessary skills and competence, sufficiently
empowered to provide the new level of value adding services to an increasingly discriminating
public for which the question of loyalty to institution is fickle, driven more by value perceptions
of service offering.
■
■ Increasing dearth in skills and competence to drive the new organisations being created at a
frenetic pace.

There appears to be an entire shift in mindset from the banker to the financial service provider
in meeting customer needs. Local and overseas economic and political developments have thus
helped to drive the point home that the realities have changed to create a new and different
operating environment.

BANK’S ROLE IN FINANCIAL INTERMEDIATION:

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The practice of financial intermediation is a strong premise upon which banking service is firmly
anchored. In the traditional sense therefore, banking business is with reference to commercial
banking, while other varieties that have emerged are exigencies of the evolving needs and new
challenges in the economy, which led to new practices emerging.

The niche or specialised banking system mandatorily imposed through legislation restricting or
delimiting activities for commercial and merchant banks had worked well for Nigeria prior to 1990.
The liberalisation of bank licensing under the Structural Adjustment Programme (SAP) introduced
in Nigeria in 1986, resulted in the growth of new banking firms, mostly in the investment banking
end. This was as a result of the liberal system, which encouraged distortions and created
enormous foreign exchange arbitraging opportunities for the banks.

Through a number of policy measures however, some of the functional barriers between
commercial and merchant banks have been dismantled, with commercial banks being permitted
to undertake traditional merchant banking activities (e.g. leasing, investment advisory services
and other fee based services) and vice versa. All these happened without much structural
change to favour investment banks which carried on business with mostly short-term funds, no
chequeing account facilities, lacking access to the clearing house and the much needed low cost
and stable funds (i.e. Savings Accounts).

There exist in the market now banks (merchant and commercial), competing with little or no
differentiation in product and service offering; thus encouraging banks to reward their people for
finding creative means outside regulatory requirements to satisfy their customers who could be
less bothered with the legal definitions given to them by the regulatory framework. This has led to
sharp practices by some bank officials, operating, not entirely outside the management’s
knowledge. Profits have to be declared through creative destruction of values that underline the
very essence of the banking business.

It might be appropriate to pause here to allow you reflect on the above scenario and ponder on
how the Audit and Control function in banks have fared. The success index/rate here, I dare say,
would be a function driven more by the ability and extent to which individual banks subscribe to
self-regulation. In managing its need to survive the harsh realities of the economy vis-à-vis
regulatory requirements (better still – bottlenecks) defining how to play in the market place; banks
are often faced with challenges, which anyone that has worked in the inspectorate division, are
often looked upon to resolve.

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While it is in order to criticise the ‘exceptions’ in other units, it may be well to look at how this
traditionally honourable profession is structured to function to enable us deal with the causes of
those ‘exceptions’ we point out (which I dare say are fallouts of the gaps between business
realities and regulatory requirements). The legacy of the failed banks in Nigeria, the continuing
debate over the quality of risk assets being carried by banks and the obvious gaps in
customer/market demands vis-à-vis regulation are all pointers that all may not be well with the
way the function is positioned. We should not act out the role of the ostrich that buries its head in
the sand assuming that the sun is not there.

Thus, the question is how do we achieve the legal integration between commercial banking and
other forms of financial services that would facilitate the flow of financial intermediation without the
recourse to what I would term - ‘creative’ banking?

THE CURRENT SITUATION:

The financial services environment is characterised by an array of legislations on banking,

insurance and securities business with three separate apex regulatory authorities viz: CBN,
NAICOM and SEC respectively.

Separate licences must be obtained to engage in either while there does not exist a harmonised
requirement for all three businesses. The truth of the matter is that, current practices present a
scenario where the product offerings are seen as competing products for the same customers’
funds. Apart from the compartmentalisation, which the legal framework gives it, a further
compartmentalisation occurs within each sector to create sub-sectors i.e., discount house,
merchant, mortgage, development etc.

In the case of banking, internal supervision, taking its cue from the supervisory bodies have
focussed more on banking within regulatory definitions rather than on functional definitions. This
non-recognition of functional realities have led to gaps and arbitraging opportunities which market
participants have exploited either to their respective organisation’s advantage or either helped
themselves.

Currently, banks offer insurance products as an add-on service to their product offering without
any regulatory framework to avoid sub-optimisation or undue risk carriage by the banks that
expects the partnering insurance company to be fully compliant with NAICOM’s standards. In this

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analogy, the inspectorate function of the bank has no role and is not required to perform any
beyond ensuring that all documentations are in place and is ‘properly’ accounted for. Are the
potential claims reported as contingent liabilities, which may occur (or a percentage thereof)? Are
the products deposits per se or premium payment for a policy?

The watchdog role of the audit function in a virtual world also raises serious concern as most
product offerings would now have to be delivered through a multi-channel platform, some
electronic and most through multiple structures as emphasised by strategic partnering
arrangements. What audit approach would capture the risk inherent in these initiatives, which are,
albeit, customer driven? The inability to resolve the concerns expressed above have all but led to
the reluctance of the industry to move forward.

We now have a situation in our hands now where traditional back office functions are being
repositioned as business drivers and an intrinsic part of the day to day business management; the
inspection function should therefore not be an exception.

THE CASE FOR UNIVERSAL BANKING:

Simply put, universal banking concept implies the authority allowed a bank to decide its own
portfolio of businesses, and appropriate service delivery channels and infrastructure, yet within an
applicable regulatory framework (See box for the varying perspectives worldwide). Generally,
universal bank finds meaning under two principal dimensions, namely:

1. Integration of commercial and merchant (investment) banking i.e. ability of any one bank to
engage in a wide range of financial services including securities and insurance business.
2. Control and ownership of non-financial entities in addition to commercial and merchant
(investment) banking i.e. financial company linkages. This scenario envisages a situation
where banks own non-financial corporate entities and vice-versa.

The first dimension is strongly favoured for our operating environment for now and would form the
platform for further observations on this subject. The adoption of any particular model or variant
would depend largely on the prevailing regulatory authority’s response to the economic
environment, the stage of development of the economy and level of financial sophistication.

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Universal banking in its general sense is not alien to the Nigerian Banking System. We already
have existing in Nigeria, situations where banks own securities or/and insurance companies with
separate and sometimes, not distinct management structures. In most cases however, they exist
as subsidiaries to the banks without any reporting implications.

Before the advent of merchant banks in Nigeria in the 1960s, the then existing Banks were
actually operating to a large extent as Universal Banks.

Universal banking as presented here therefore does not suggest that a bank should necessarily
engage in all service offerings, which its new licence would permit. Rather, the position is for
each bank to identify its core competence area coupled with its identified market focus, determine
what product and service mix would best help it actualise its corporate objectives.

What is the scope envisioned for universal banking in Nigeria?

Central to the rationale of the advocacy for universal banking is the issue of the wide range of
activities, which may be permissible under the arrangement, and the economies of scale and
scope derivable therefrom.

The wider range of services would necessarily embrace the following:

❁ Financial intermediation as currently provided by retail (commercial) banking outlets.

❁ Funds management;
❁ Investment (merchant) banking services;
❁ Financial advisory service including financial consulting;
❁ Unit trusts;
❁ Mutual funds;
❁ Mortgage finance;
❁ Securities trading including derivatives (options, hedges, bonds etc);
❁ Underwriting business (brokering, issues, swaps etc);
❁ Insurance (life and general);
❁ Trusteeship accounts, and;
❁ Pension funds.

What the above represents therefore is the alignment of financial services options along a
common stream i.e. allowing one single bank to meet the total financial needs of a customer,
lending credence to a lifecycle proposition that ensures that a single customers’ financial needs

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By ‘Olufemi Awoyemi
can be adequately anticipated, appreciated and responded to in a cost effective manner and for
which he is also rewarded. This further confirms the value link in customer relationship
management (CRM) and profitability.

By implication, it is possible for a bank to own a single entity that combines all these functions or
enter into strategic partnering arrangements to meet these needs. Further possibilities are:

❁ Mergers and Acquisitions;

❁ Diversification; and
❁ Internationalisation or overseas partnering

Since processing cost has been a contentious issue in the pricing of financial services, it is
expected that the consequence of universal banking would lead to a higher potential for bank’s
internal returns through the synergy achievable from the integration made possible through a
multi-purpose banking arrangement.

Whether the adoption of an all-purpose bank would lead to better returns for the organisation (as
against niche players) or not, remains an open question. It is however generally, agreed that the
consumer would be better for it.

The basic argument is that a portfolio of different services can be produced and marketed by the
banks more cheaply than if each is supplied separately, although this position is not unassailable,
the following economies of scope have been identified:

■
■ Through diversification, fixed costs (branch network, technology, etc) can be shared
between services. There may also be personnel and skills to be derived from a bank’s
reputation.
■
■ Access to information about multiple customer base creates competitive advantage that
may be utilised in other services by banks;
■
■ The branch network and other delivery channels established by the bank (telephone and
internet banking, home visits, ATM’s e-cards etc) can be used to supply a wide range of
services given the substantial fixed costs of delivery systems.
■
■ Several services can be marketed simultaneously, and the bank may gain both a
marketing advantage and a reputation or image advantage in being seen to be offering a
wide variety of services.

• The Challenge for Audit & Control under Universal Banking • 8

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 ■
■ To the extent that risks on alternative products or services are not perfectly correlated,
economies in risk management can be secured within a diversified portfolio of services
and products.

AUDIT & CONTROL: THE NEED FOR A REDEFINITION OF ROLE

A major challenge raised by all these dramatic changes in the banking industry directly affects the
Central Bank and the regulation of financial activity. The strenthg of the new competitive
environment and the explosion of new technologies makes it unfeasible to continue with the
constraints which it imposes on banks, albeit artificially. Deregulation becomes a necessary
responses, a response with far reaching consequences for the industry as a whole.

Deregulation (guided or aided) together with the compelling forces of change will lead to less
profitable banking in the immediate short run with a higher degree of risk which might lead to
some banks needing assistance and bail-outs by competitors or the Central Bank. The risk
associated with the level and degree of expression allowed the banks may further increase the
risk profile of the banking system.

To attempt resolving the emerging dilemma and having articulated the broad needs for Universal
Banking in Nigeria in (See Box), let us examine the role for the audit and control function as it
plays its custodian role in the financial service industry..

For this purpose, I have embraced, as the major driver for Universal Banking in Nigeria, the need
to deepen banking practices through the creation of public safety nets, encourage the co-
ordination of all business entered into by banks with a view to eliminating ‘creative banking’ as
currently known, introduce self regulation as an indication of corporate worth and pre-requisite for
corporate governance and enthrone the much required market discipline needed to assure the
investing public.

The roles would have to shift based on the following facts:

Supervision of the entire financial service offering of a bank

The chief inspector of the bank whom I would choose to call the Head of Audit and Control, would
have to wear two hats – that of the internal consultant to the bank, one who is sufficiently

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knowledgeable about the happenings in the market place and equally competent to steer the
bank away from non-compliance with statutory provisions; and that person who ensures that the
banks systems and procedures, driven by the need to meet customer demands are not in conflict
with control objectives i.e. legal, regulatory and professional practices which defines current best
practice.

In fulfilment of this role, the implementation of the 25 Core Principles for effective banking
supervision issued by the Basle Committee on Banking Supervision in September 1997 becomes
imperative.

The CBN’s supervisory function would have to be restructured to embrace the technological
advancements prevalent in (if not ahead of) the industry. On-line functionalities and inter-
operability of systems either through consortiums or inter-bank relationships would have to be
tracked, this time, not from an historical perspective. It now becomes all embracing.

Enthronement of a Sound System and Public safety Net

Under the new dispensation, a strong safety net of effective supervision, introduction of deposit
insurance schemes for the users of other components of the financial services industry in the
event of insolvency and lastly, CBN’s appreciation of its role as the lender of last resort.

For the Audit and Control function of a bank, it has to restructure itself and seek collaborative
working relationship with the risk management group in confirming that all necessary steps have
been taken to protect the bank from such risk as financial exposure, contingent risk of associated
firms, electronic business failures, systemic transaction failures amongst others and seek to
manage relationships with the central co-ordinating authority to establish that the bank has a
sound system and strong safety net in place.

Self-Regulation through Positive Assurance

Given the wide range of permissible activities, a pre-requisite for sound management would be
the ability of the financial service provider to complement statutory regulation through effective
self-regulation. This requires probity, transparency and accountability, which are far from being
visible in the Nigerian Financial System. The Audit and Control function should champion the buy-
in for rules and regulations that promote healthy competition and put peer pressure on other
market players.

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An approach, which I believe may be exploited along these lines, is the concept of “Positive
Assurance” practiced by the leading companies of the world. The concept encourages the
collective responsibility approach to managing risk by sharing the responsibility for ensuring the
integrity of the whole financial system of the organisation between the audit function and line
managers.

The line managers agree with the audit function various business issues and usual
exceptions/problems and controls in form of action plans are formulated. In this regard, the Audit
& Control functions role is to measure the sensitivity of risk associated with transactions from this
unit, trail the transactions and act as a supervisory body to the unit’s transactions. Where
business exigencies would result in a shift or departure from existing framework, the Audit &
Control function is contacted to provide sound advice, devise a way out or confirm the
organisations inability to engage in that line of transaction.

Exceptions under this approach should and must form a veritable input into discussions about the
business strategy.

Responsive Corporate Governance

The high leverage position of most banks, considering the capital base (as adjusted for by non-
performing loans) vis-à-vis the depositor’s funds mobilised to sustain operations gives a clear
indication of the premium the investing public places on any particular financial institution.

Based on the insurance claim analogy used earlier on which emphasises the potential increase in
the overall risk profile of multi-purpose banks, the exposure to price risk in the securities business
in addition to the traditional credit risk goes a long way in expanding the safety net.

The Audit & Control function of banks would have to champion the institution of responsive
corporate governance within the organisation. Borrowing from the Internet solution to virus attacks
and security breaches, financial institutions would have to create “firewalls” between different
activities undertaken as well as ensure the “ring-fencing” of risks in their operations. A more
qualitative responsibility would be bestowed on the function as it positions itself to answer
questions on risk management and conflict of interest situations rather than ask the questions.

Another major concern is that of managing conflicts of interest and insider dealings within the
Universal Banking Structure. Possible areas of conflict are:
■
■ Deposit mobilisation and securities funding & Lending and underwriting business

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■
■ Securities business and lending for the accounts of customers and for the banks own account
(as currently being practiced in the UK)

The issue of double standards which have plagued the Chief Inspectors for some time now, would
now be an issue at the front table of all chief executives, who would require the support of the
Audit & Control function to resolve.

Skill and Competence Requirement

The Audit & Control function would have to embrace other non-technical person requirement for
the very conduct of its day-to-day responsibilities.

Whilst it would continue to emphasise quality accounting and auditing skills, it is becoming
apparent that that this two requirements are insufficient to discharge the functions required of
today’s Chief Inspectors. At a minimum, the Chief Inspector would have to be sufficiently
competent on the two areas identified above and equally competent in the areas of Information
Technology, Business strategy & development, process management and people management.

He would have to be able to manage the control implication in each of this areas, determine and
identify risk points in the business chains and set about providing quality information for executive
consideration. A key need now is the ability of the Audit & Control personnel to achieve a buy-in
to changes in procedure and processes in tandem with the operations group. A lot of inter-
personal skills are now required from him in the management of the function.

A natural extension of this new reality is the need for the Audit & Control head to be at the cutting
edge of information technology – both in its usage and in its applicability. The users of the banks
services are in most cases, more technology friendly than the banks which seeks to introduce
these initiatives, the inspectorate, in fulfilling its control function must be well versed in strategic
deployment of IT controls as a minimum to an effective discharge of its functions.

Efficient Market Information

In furtherance of the government’s policy of deregulation and liberalisation of the economy, the
principle of a free market which emphasises free entry and free exit would be have to be pursued
in the financial services sector leading to a review of accounting and disclosure requirements.

Under this scenario, reputation would be driven more by the level of reliability placed on the
quality of information disclosed to the market and investing public. The converse could result in a
loss of confidence and patronage. This intrinsic market disciplinary mechanism would go a long

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way to help instil in bank’s management the need to take seriously the audit reports written by its
inspectorate function.

CONCLUSION

By way of synthesis, the main conclusions reached concerning the business facilitation and
confidence-assuring role, which the Audit & Control function is set to provide, is the minimum
required to guarantee the integrity of the financial service sector, even as banks prepare
themselves for the advent of Universal Banking in Nigeria.

However, and I would like to conclude on this note, Inspite of the merits of universal banking, it
must be noted that generally it is not a panacea to bank failure and does not guarantee success
of the banks. The most critical guarantee of success for a bank and indeed for any kind of
business endeavour is the quality of management.

It is therefore an enlightened opinion that the favourable and satisfactory discharge of the Audit
and Control function would play a major role in ensuring that the quality of management required
is in place and maintained. This is the Inspectorate’s unwritten fiduciary relationship with the
investing public, their own quota to the economic development of our various institutions and our
country.

END

BOX ‘I’
Variants of Universal Banking models are briefly described below:

German:
Universal Banking means that banks are permitted to offer all the various kinds of financial
services. This includes classical banking activities, like the credit and deposit business, as well

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as investment services, securities placement and brokerage, and even insurance activities, real
estate trading and others. German universal banks also hold stock in non-financial firms.

United Kingdom:
The universal banking model in the UK implies that banks are able to offer the full range of
financial services to corporate and personal customers: commercial and investment banking,
securities trading and brokering, derivatives trading, underwriting, fund management and
insurance. It also implies the absence of regulatory barriers restricting the allowable range of
banks’ business and forcing a compartmentalisation of functions and institutions. The big
universal banks in the United Kingdom are equally referred to as “bancassurers”.

Korea:
Universal banking is the offering of financial services to corporate and personal customers.
However, the Banking Act of Korea governs the range of services and products of universal
banking in Korea, especially in the area of securities related businesses.

Japan:
Universal banking is the banking system in which banks can establish close relations with their
corporate customers through many channels, including bank loans and shareholding. Article 65
of the Security and Exchange Act of 1948 prohibited banks from underwriting securities and it
established a strict separation of banking business and security business in Japan. This is to say
that Universal Banking did not exist in strict sense in post-war Japan.

Switzerland:
Universal banking which summarises in meaning as the offering of wide range of financial
services to customers includes deposit taking, lending, underwriting, the distribution of new issues
of debt and equity securities, securities trading and brokerage, investment management, fee-
based advisory activities, foreign exchange transactions, and a wide range of derivative
instruments related to risk management such as options, futures, forward contracts, and swaps.
Universal banking in Switzerland allow earnings diversification and economies of scale and scope
on the cost side, and to a certain extent, on the revenue side.

United States:
Universal banking here simply means a market based financial intermediation system as against
a bank-based model, which emphasises the relative importance of long-term debt in companies’
total debt. American banks operate a more specialised form of banking, not becoming giant
institutions with an enormous but slow reacting internal organisation.

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According to the research work conducted by Jordi Canals (Universal Banking: International
Comparisons and Theoretical Perspectives, 1997), “Bank presence on companies’ supervisory
boards is basically limited to the three largest German banks (Deutshe Bank, Dresdner, and
Commerzbank). These banks, not always the largest lenders to the companies concerned,
generally possess small holdings in the equity of the companies they invest in.

Generally speaking, German companies finance themselves by a much lower proportion of bank
debt than Japanese or Spanish companies. They rely much more on generated cash flows.

Third, the evidence of recent decades shows that only on very rare occasions do German banks
intervene in the restructuring of companies. Therefore, it can hardly be said that their role in these
process is critical.

Forth, there is no direct relationship between the number of votes a bank has on a supervisory
board and its influence in the company’s decisions. When the controlling shareholder is a bank, it
incurs a greater risk due to the concentration of investment in a particular company”.

BOX‘II’
The Need for Universal Banking in Nigeria:

Historically, commercial banking was established in Nigeria to facilitate colonial economy –

anchored on imports and exports with little emphasis on raising finance for long-term industrial
projects. This continued through the early years of independence when the first merchant bank –
Nigeria Acceptances Limited (now NAL Merchant Bank) was licensed in 1960. Its primary focus
was acceptance business: i.e. discount of trade bills drawn by Nigerian Exporters and British
Exporters and later added issuing houses on the creation of the Lagos Stock Exchange.

Subsequently, the Banking Decree of 1969 drew the line between commercial banks and
merchant banks.

The huge dollar inflows from petroleum which facilitated wholesale international trade attracted a
number of foreign banking institutions to seek merchant banking licence in Nigeria and later came
the indigenisation decrees which created great opportunities in share issue business.

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As a result of the calibre of staff, lean structure and relative efficiency, marketing support from
parent companies, petrodollar and urban based modern economy, the merchant banks then
performed relatively better. Sourcing deposit was not really an issue at that time.

However, with the onset of economic depression, share issue waned. The deregulation of forex
market as part of financial liberalisation and deregulation come to the rescue. Many Nigerians
sought licences as merchant banks, most of which were with the objective of benefiting from
profits derivable from forex allowance, real price of which was heavily subsidised by government.

With the economy on decline and competition rising, opportunities for substantial long-term capital
raising diminished. The Nigerian economic situation has not made any long-term deposit possible
in the last 10 years or so.

Merchant banks could not cope due to limited branching, lack of access to float through
chequeing account and membership of clearing house. Until 1989, merchant banks maintain
accounts with CBN and use CBN cheques for day-to-day transactions.

Commercial banks with bigger, cheap and stable deposits coupled with good management
excelled. Shareholders of merchant banks begin to clamour for returns equivalent to the ones
delivered by commercial banks especially given the capitalisation arrangement since 1997, which
prescribed uniform capital requirement for both merchant and commercial banks.

For now, there apparently is not enough business for the number of merchant banks as the
Nigerian economy is weak and its capital market, shallow. Furthermore, commercial banks have
gradually encroached on the business of merchant banks.

A major reason for Universal Banking in Nigeria is the need to deepen banking practices, which
will evolve with the influx of foreign banks into Nigeria. With globalisation, this should necessarily
happen, as it is the trend in other parts of the world (See Box ‘III’). More foreign banks will be
encouraged to open shops in Nigeria wholly or by buying into existing institutions if the regulatory
environment is less restrictive and future banking crisis and distress will be lesser and more
controllable.

Another reason is the increasing financial sophistication and need of the modern day bank
customer who would be better off with a one-stop financial centre.

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 BOX ‘III’
Impact of Globalisation on Banking - Trends:

Latin America has opened up its financial system to foreign investment so much that over half of
all bank assets now belong to foreign controlled institutions.

Asia is also opening up to foreign investment in the financial system and in the next one year it is
estimated that foreign institutions will control at least 40% of the banking systems of Thailand,
South Korea and Indonesia.

The story is the same in Eastern Europe – German, Dutch, Irish and Austrian banks now control
over half of all bank assets in Poland and in Hungary, foreigners have almost a 90% market share
of the banking industry.

BOX ‘IV’
Universal Banking in Nigeria: Contending Issues

Here is a brief highlight of certain contending issues, which must necessarily be addressed:

■
■ Do we need universal banks or specialised banking?
■
■ Should banks be in insurance business? What are the implications?
■
■ Perceived and real threat to the stability of the financial system vis-à-vis our recent experience
with liberalisation and reforms.
■
■ How do we raise and diversify the level of competence and skills within the shortest period of
time?
■
■ How do me mitigate failure arising from the high risk of the investments made by some banks
based on the combination of a highly recessive business cycle and excessively high interest
rates?
■
■ How does the public react to universal banking?
■
■ How prepared is the regulatory and supervising authorities?
■
■ What method of changeover is envisaged and time frame?
■
■ How real is the existence of significant economies of scale and what influence does it bear on
the decision to diversify?

• The Challenge for Audit & Control under Universal Banking • 17

By ‘Olufemi Awoyemi
■
■ How do we deal with the conflicts and problems arising from the different cultures, traditions
and working practices of the different facets of the new banks?
■
■ How do we integrate other banking practices i.e. Islamic Banking?
■
■ Harmonisation of regulatory framework; CBN/NSE/SEC/FMBN/NAICOM etc.
■
■ Capital requirements of banks
■
■ Reform of the payment system and clearing house arrangements.
■
■ Operational cost/Technology cost
■
■ Ownership structure of Banks and need for internationalisation and strategic alliances.

BOX ‘V’
Bank Fraud & Theft Highlights

Here is a brief highlight of Fraud and theft cases reflecting worldwide developments:

■
■ Not surprisingly, the Internet has been a fertile ground for fraud; it allows fraud promoters to
mimic legitimate business more convincingly – reach potential victims more efficiently and at
far less cost – than any other medium.
■
■ Federal prosecutors in the in the US charged two men with conspiracy to commit securities
fraud in what was alleged to be the latest example of internet fraud when they published false
news stories about stock prices on the internet and sold their shares when the prices rose.
■
■ The entire US auditing profession is to be investigated after the publication of a report
commissioned by the US Securities and Exchange Commission, exposing rampant violation
of share ownership regulations by partners and staff at PWC, the world’s biggest auditor.

Although the SEC has no jurisdiction over the big international accounting firms outside the
US, it said it had identified problems that ‘suggest not only lack of sufficient global safeguards,
but also a systematic failure by professionals within certain firms to adhere to even their own
firm’s existing controls”.
■
■ Merrill Lynch, the US investment bank, is investigating an alleged fraud involving the illegal
transfer of $40m of one of its client’s funds into a Swiss bank account. The client is the bank’s
largest in the Middle East – Arab International Bank – and the funds were sent to a UBS
Geneva account in six tranches between 1996 and 1998.

• The Challenge for Audit & Control under Universal Banking • 18

By ‘Olufemi Awoyemi
 Internal documents pinpoint problems with Merrill Lynch’s internal supervision and
management controls which contributed to the alleged fraud. The documents reveal an Arab
International bank employee who died three months before the transactions were conducted
ordered five of the six fund transfers. One or more Merrill Lynch employees – including
managers in London, approved all of the transfers – none of who spotted that an unauthorised
employee originated it.

Although the SEC has no jurisdiction over the big international accounting firms outside the
US, it said it had identified problems that ‘suggest not only lack of sufficient global safeguards,
but also a systematic failure by professionals within certain firms to adhere to even their own
firm’s existing controls”.
■
■ The head of Britain’s three intelligence agencies have held an unprecedented summit in
response to the rising threat from international organised crime. The heads of M15, M16 and
GCHQ assembled for the first time in secret session to brief Prime Minister Tony Blair that
international gangs may now be the biggest threat to national security. Blair has responded by
agreeing to a request by the agencies to divert resources from counter-espionage and
counter-terrorism to combat the escalating financial crimes.

M16 will expand its operations against drug traffickers; M15 is expected to double the
PSD10m it spent last year on fighting serious crimes while GCHQ is to step up interception of
computerised transactions linked to money laundering and fraud, and international telephone
traffic between gangs.

The fastest growing areas of criminal activity in the UK are:

❁ The “red mafia” – a term covering Russian and eastern European gangs having siphoned
billions of dollars from the former soviet union through fraud, extortion and smuggling now
being invested in London property and in stocks and shares.
❁ Alabanian gangs engaged in human trafficking, prostitution, arms dealing and drug
smuggling.
❁ Turkish drug barons are tightening their grip on the heroin trade by flooding the market
with cheap imports and assassination of opponents.
❁ Cigarette smuggling by Asian gangs has reached epidemic levels and is estimated to cost
the treasury PSD 1.7billion in Jan/Feb 2000 alone.
❁ West African criminal gangs in Britain are rapidly expanding their operations from credit
card and advance-fee fraud to other criminal operations, including welfare fraud across the
European Union.

• The Challenge for Audit & Control under Universal Banking • 19

By ‘Olufemi Awoyemi
 ❁ The Italian mafia was behind an attempt to break into the Lloyd’s insurance market earlier
this year by buying up brokerages.
■
■ President Bill Clinton recently approved $30billion spending for America’s intelligence
services, which have been given increased powers to seize the assets of drug traffickers.
■
■ The Russian government is to consider measures to control the flight of capital from the
country, including taxing all transfers of money to pay for imports. This is intended to curb the
practice of over invoicing for imports as an illegal way of transferring exchange earnings out of
the country.
■
■ Barclays, Citibank and ABN Amro are considering legal action against two top European rivals
(UBS and BNP, the biggest banks in Switzerland and France) to recover huge losses from an
alleged PSD300million fraud by a fugitive Indian metals trader, Mr. Madhav Patel. The fraud
involved fake metals cargoes and finance obtained via forged documents.
■
■ Deutshe bank has collected its second largest fine from British regulators in three years, with
a PSD1.5m penalty for its role in the Sumitomo copper trading scandal. This comes on top of
the PSD2m the bank had to pay in April 1997 in connection with the activities of its fund
manager, Peter Young.
Deutsche bank, it was claimed, failed to check thoroughly the motive of the client on whose
instructions it bought substantial amounts of copper as well as failing to report on the large
positions it had built up.
■
■ The Financial Action Task Force (FATF) which groups 26 large countries, is expected to draw
up a list of around 20 criteria to define non-cooperative countries it intends to put on the
“name and shame” list. It also plans to impose further financial sanctions that may require
banks and other financial institutions to report all transactions above certain level of the non-
compliant jurisdictions as suspicious, where at the moment, they would do so only if there
were some reasons for suspicion.
■
■ The ringleader of a counterfeiting gang that flooded Britain with fake PSD50m was jailed
recently for 12 years. Between 1993 and 1998, two out of every fake notes in circulation were
produced by the gang.
■
■ A counterfeiting technique known as skimming is more popular than ever in the UK where
credit card fraud soared by 40% last year. Organised criminals have fuelled the rise to a
record PSD190m and may go higher.

• The Challenge for Audit & Control under Universal Banking • 20

By ‘Olufemi Awoyemi
 References:

1. Universal Banking: International Comparisons and Theoretical Perspectives, by Jordi Canals

1997

2. Universal Banking in the United States: what could we gain? What could we lose? by
Saunders, Anthony M., 1994

3. Towards Universal Banking- Risks and Benefits for Transition Economies by Buch, C. 1997

4. Universal vs. Specialised Banks by Steinherr, A. 1996

5. Conflict of Interest in Universal Banking: Evidence from Post-Issue performance of IPO firms
by Ber, Y. and Yafeh, Y. 1997

6. Universal Bankis and the European Banking System: Prospects and Problems by Paulet, E.
1996

7. Seminar Papers on the Challenges of Universal Banking in Nigeria organised by Pharez,

November 23, 1998. (Contributors: Mr. Victor Odozi, Mr. G. A. Ogunleye, Dr. Bodun Adedipe,
Dr. Lawrence Osa-Afiana and Mr. Nebolisah Arah)

8. Universal banking in the twentieth Century by Teichova, Alice. 1994

9. Universal banking and the Financing of Industrial Development by Charles W. Calomiris. 1995

10. Financial Systems Design: Universal Banking Considered - Burr Ridge, III: Richard D. Irwin by
Saunders Anthony and Eds. Ingo Walter. 1996

11. Fraud & Theft Alert, Jan & Feb 2000 edition. Vol. 9 No.1 & 2

12. Central Bank of Nigeria Regulatory Framework documentation and public pronouncements on
the subject.

13. Various Newspaper contributions on the topic.

• The Challenge for Audit & Control under Universal Banking • 21

By ‘Olufemi Awoyemi