Lecture to the Sylvester Monye Foundation, Asaba, Delta State, July 9, 2010. By Sanusi Lamido Sanusi...

Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010.

By

Sanusi Lamido Sanusi

GovernorCentral Bank of Nigeria

Prepared by the Research Department of the Central Bank of Nigeria


Introduction The Banking Sector Reforms Immediate Impact of the Reforms

Outlook for the Economy Key Challenges Concluding Remarks

2


The mandate of the Central Bank of Nigeria is to:

Ensure monetary and price stability

Issue legal tender currency in Nigeria

Maintain external reserves to safeguard the international

value of the legal tender currency

Promote a sound financial system in Nigeria; and

Act as banker and provide economic and financial advice to

the Federal Government.

4


Having a sound financial system in any country is very critical to economic growth

Theoretical and empirical evidences confirm that Financial Sector development is growth enhancing

In recent years, the banking sector has witnessed series of reforms aimed at enhancing the banking system’s effectiveness and efficiency as well as positioning the banks to be more involved in promoting economic growth and development

The current reform is designed to build on the

successes of earlier reforms with the overriding objective of fostering financial stability.

5


After the consolidation, eight major interdependent factors led to an extremely fragile financial system that was tipped into crisis by the global financial crisis and recession

| 7

Global Financial

Crisis

Financial crisis in Nigeria

Asset bubble Banking

Consolidation

● When: 2005

● 89 to 25 banks

● Minimum capital requirement increased to N25bn

● Liquidity injection by CBN of N620bn in 2009

● Stock market collapse of 70% in 2008 to 2009

● ED’s for 8

banks replaced by CBN

Factors affecting the banking sector since consolidation

Macro-economic instability

caused by large capital inflows

Major weaknesses

in the business environment

Inadequate disclosure and transparency

Lack of investor and consumer sophistication

Uneven supervision and

enforcement

Critical gaps in regulatory

framework and regulations

8

2

3

7

1

6

54

Major failures in corporate

governance at banks

Unstructured governance & management

processes at the CBN

7


The reports of the special examination team carried out by CBN/NDIC

revealed that nine out of the 24 banks were in grave situation, prompting

immediate intervention by CBN

Non-performing loans in the ten banks totaled N1, 696 billion,

representing 44.38% of total loans.

Aggregate provisioning required in the ten banks amounted to N1,221.52

billion

Capital Adequacy Ratio in the ten banks ranged between (1.01) and

7.41%, which were below the minimum ratio of 10%

The additional capital injection required by the banks was N495.83 billion

One key aspect of earlier reforms was Universal Banking which allowed

banks to venture into different business which posed a serious challenge

to the regulators

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Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010.9

When the nine banks were identified to be in a grave situation, the CBN took proactive steps to prevent further deterioration, instead of suspending / revoking licenses or handing the banks over to the NDIC

The CBN’s initiatives to date include:

injecting N620 billion into the nine banks

replacing the chief executives/executive directors of eight of the banks with competent managers with experience and integrity

reaffirming guarantee of the local interbank market to ensure continued liquidity for all banks

guaranteeing foreign creditors and correspondent banks’ credit lines to ensure confidence and maintain important correspondent banking relationships

The capital injection enabled the nine banks to continue normal business operations and prevented a run on the banks


The current banking reform is meant to

encapsulate a holistic set of strategies

and initiatives designed to stabilize the

banking sector and promote long term

sustainable growth of the sector and

the economy as a whole.

The reform is based on four pillars. 10


Enhance the quality of banks

• Regulatory framework reform

• Risk based supervision• Consumer protection• Corporate governance• Disclosure and

Transparency

Establish financial stability

• Financial stability committee

• Macro prudential issues

• Capital market development (as alternative to bank funding)

• Counter-cyclical fiscal policies

Enable healthy financial sector evolution

• Competitive banking industry structure

• Improved cost structure of banks through cost control and business process outsourcing

• Reliable and secure payment systems

• Greater financial inclusion

• Improving Financial infrastructure: credit bureaus and registrars

Ensure the financial sector contributes to the real

economy

• Improving Effectiveness of existing development finance institutions

• Examination of critical issues for economic development (e.g. power, port, railways)

• Leveraging on CBN’s role as an adviser to the Government on economic matters

• Greater engagement with the Banking Industry


Setting up an appropriate institutional framework

Strengthening the institutions AMCON

CBN restructuring

Improving disclosure and transparency Risk Based Supervision

IFRS

Full disclosure / Common year end

Developing and Improving new regulation that takes on board lessons from the recent crisis

Review of Universal Banking

Margin lending

Prudential guidelines

Corporate Bonds

Enhancing the Developmental role of CBN SME Interventions (Credit Guarantee Scheme)

Power/Manufacturing Intervention (N500bn)


Asset management companies have been used in various countries around the world with considerable success

The Asset Management Corporation of Nigeria (“AMCON”) has been conceptualised as a resolution mechanism

AMCON is designed to stimulate the recovery of the financial system by:

acquiring NPL’s from the banks

assisting banks in improving their capital and liquidity positions

Banks transfer their bad loans into AMCON in exchange for bonds issued by AMCON and guaranteed by the Federal Ministry of Finance

AMCON is an integral part of the recapitalisation process

The AMCON bill is currently being considered by the National Assembly

13


Strong Corporate Governance in banks

Effective competition in the Industry

Efficient Financial Intermediation

Provision of diverse financial products to cater for segmented markets

Improved financial flow to real sector

Strong and sustained customer confidence in the system

14


Q4 2009 Gross FDI Inflow of N102.42billion

Gross inflows of FDI likely to Improve in 2010 as Q1 inflows stood at N84.78 billion

Inflows is toward share equities, banking, telecom, manufacturing and oil and gas sectors.

Gross FDI Flows into Nigeria (N’bn)

15


Ex-Im Bank exposure to Nigerian banks increased from $403 million to $1billoin

IFC is increasing its position in Nigerian banks

European Investment Bank increases its exposure to Nigerian banks by an additional $150 million

16


Weighted average inter-bank rate and other key money market rates fallen to below end-December 2008 level by end-August 2009 after the sharp increase between January and July 2009

Inter-bank rate and other key money market rates moderated significantly in recent times

17


Capital Market Developments

18


Monetary and credit aggregates underperformed

This is not peculiar to Nigeria as other countries faced similar outcomes due to the global financial crisis

Monetary and credit aggregates underperformed

21


Headline inflation declined steadily from 15.1% end-2008 to 11.0% end-May 2010

Food inflation fell gradually from 18.0% end-2008 to 12.3% end-May 2010, while non-food (core) inflation followed the same downward trend except in March 2009

Steady decline in various measures of inflation

22


120.0000

130.0000

140.0000

150.0000

160.0000

170.0000

180.0000

190.0000

02/0

1/0

915

/01/

0928

/01

/09

10/0

2/0

923

/02

/09

06/0

3/0

919

/03

/09

01/0

4/0

914

/04

/09

27/0

4/09

11/0

5/09

22/0

5/0

905

/06

/09

18/0

6/0

901

/07

/09

14/0

7/0

927

/07

/09

07/0

8/09

20/0

8/0

902

/09

/09

15/0

9/0

928

/09

/09

09/1

0/0

922

/10

/09

04/1

1/0

917

/11/

0930

/11/

0911

/12

/09

28/1

2/0

911

/01

/10

22/0

1/1

004

/02

/10

17/0

2/1

003

/03/

1016

/03

/10

29/0

3/1

013

/04

/10

26/0

4/1

010

/05

/10

21/0

5/1

004

/06

/10

17/0

6/10

30/0

6/10

Naira

Foreign Exchange Market Rates Naira/ US Dollar (January 2009 - June 2010)

INTERBANK BDC W/RDAS (incl. 1% comm.)

Stabilizing exchange rate

23


April '10 May '10

No. N' Million No. N' Million

Non-intervened banks 7,682 127,270 10,069 145,885

Intervened banks

1,947 18,189 2,272 27,922

Total 9,629 145,459 12,341 173,807

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Increased new credit


BUSINESS LINES N' M % of Total

1Oil & Gas 57,420.28 33.04

2Manufacturing 40,640.39 23.39

3Transportation & Storage 30,184.06 17.37

4General 21,771.28 12.53

5General Commerce 17,804.97 10.25

6Government 6,367.37 3.66

7Construction 5,699.94 3.28

8Real Estate Activities 4,379.41 2.52

9Professional, Scientific & Technical Activities 2,874.93 1.6510Agriculture, Forestry & Fishing 2,597.98 1.50

11Finance & Insurance 1,177.01 0.68

12 Information & Communication 725.30 0.42

13Education 613.42 0.35

14Human Health & Social Work Activities 554.11 0.32

15Activities of Extraterrirorial Organisations & Bodies 303.20 0.17

16Capital Market 116.71 0.07

17Administration & Support Service Activities 56.75 0.03

18Arts, Entertainment & Recreation 4.00 0.00

19Power & Energy - 0.0020Public Utilities - 0.00

21Water Supply, Sewerage, Waste Mgt, etc - 0.00

Total 173,777.73 100.00

25

New credits by banks along economic sectors May, 2010


Overall output in 2010 expected to be higher than 2009 Q1 ’09 – 4.50% Q2 ’09 – 7.22% Q3 ’09 – 7.07% Q4 ’09 – 7.44% 2009 – 6.66% Q1 ‘10 – 7.23% 2010 – 7.75% (NBS projection)

27


Economic growth has been robust, however, major challenges remain: Generation of employment opportunities Weak link between the major growth

drivers, particularly agriculture, and manufacturing sector, hence, the manufacturing sector remains an insignificant contributor to growth

There is need to address the following binding constraints to growth:

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Physical infrastructure constraints: Electricity and transport – there is need to

deepen the deregulation process to attract private investors

Need to review allocation of responsibility for infrastructure development among different levels of government

Inadequate Access to finance: Regulatory interventions to develop all sectors of credit

market, from microfinance to larger corporations Acceleration of credit market reform such as dispute

resolution mechanism, credit bureau regulation, and leasing laws

Development of the public-private partnership framework, legal framework for rental markets, etc

Reducing the high lending interest rate Efforts in all these areas are being fast tracked

30


Investment Climate Simplification of the approval process for

new business development Capacity building in various areas of the

economy Provision of adequate security for lives

and property Tackling the issue of corruption

Existence of Skill Gap: Prioritizing technical and vocation

education training Equipping enterprise and industrial clusters

to develop capacitiesHigh Cost of Inputs

Replacement of import bans with tariffs Deepening the ports reforms

31


Growing banking system liquidity is still desirable

Thus: Fiscal stimulus remains critical to support

CBN actions to fast-tracking recovery process

Urgent need to inject fresh funds into the banks affected by regulatory actions

Ring-fencing/removal of ‘toxic assets’:Establishment of asset management

company (“AMC”) 32


Realising the limits of monetary policy There is need to strike an appropriate balance

between monetary and other policies There is a limit to what monetary policy can

do to deliver economic growth Other complimentary policies must be in

place.Banking sector reform should not be an end in

itselfIt is a necessary but not a sufficient condition

for economic growth and developmentcomplementary reforms in other areas of the

economy is absolutely necessary33

Lecture to the Sylvester Monye Foundation, Asaba, Delta State, July 9, 2010. By Sanusi Lamido Sanusi...

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Transcript of Lecture to the Sylvester Monye Foundation, Asaba, Delta State, July 9, 2010. By Sanusi Lamido Sanusi...