The global economic crisis and the nigerian financial system the way forward l.jpg
This presentation is the property of its rightful owner.
Sponsored Links
1 / 35

THE GLOBAL ECONOMIC CRISIS AND THE NIGERIAN FINANCIAL SYSTEM: THE WAY FORWARD PowerPoint PPT Presentation


  • 187 Views
  • Uploaded on
  • Presentation posted in: General

THE GLOBAL ECONOMIC CRISIS AND THE NIGERIAN FINANCIAL SYSTEM: THE WAY FORWARD. BY CHARLES MORDI DIRECTOR, RESEARCH DEPARTMENT BEING A PAPER DELIVERED AT THE 14 TH SEMINAR FOR FINANCE CORRESPONDENTS AND BUSINESS EDITORS, AT BENUE HOTELS, MAKURDI, JULY 16, 2009. OUTLINE.

Download Presentation

THE GLOBAL ECONOMIC CRISIS AND THE NIGERIAN FINANCIAL SYSTEM: THE WAY FORWARD

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


The global economic crisis and the nigerian financial system the way forward l.jpg

THE GLOBAL ECONOMIC CRISIS AND THE NIGERIAN FINANCIAL SYSTEM: THE WAY FORWARD

BY

CHARLES MORDI

DIRECTOR, RESEARCH DEPARTMENT

BEING A PAPER DELIVERED AT THE 14TH SEMINAR FOR FINANCE CORRESPONDENTS AND BUSINESS EDITORS, AT BENUE HOTELS, MAKURDI, JULY 16, 2009

CENTRAL BANK OF NIGERIA


Outline l.jpg

OUTLINE

1.0 Introduction

2.0Stylized Facts about the Nigeria Economy

3.0 Impacts of the Financial crisis on the Nigerian Financial System

4.0 Nigeria’s Response to Stabilize the Financial Sector

5.0 Way Forward

CENTRAL BANK OF NIGERIA


1 0 introduction l.jpg

1.0 Introduction

  • Conceptual Definition of Financial Crisis:

    • A situation where financial institutions or assets suddenly lose a large part of their value.

    • Types of Financial Crisis

      • Banking crises

        • Bank run (one Bank)

        • Systemic banking crisis (bank run on several banks)

        • Credit crunch (insufficient funds for borrowing)

      • Speculative Bubble and Crashes

        • Bubble (present price has higher value than future income)

        • Crashes (when there are many sellers and no buyers)

CENTRAL BANK OF NIGERIA


Introduction contd l.jpg

Introduction……Contd.

  • International Financial Crisis

    • Balance of payments or currency crisis

    • Sovereign Debt default

    • Sudden stop in capital flows and capital flight.

  • Wider Economic Crisis. Low/Negative GDP growth

    • Recession

    • Depression-prolonged recession

  • CENTRAL BANK OF NIGERIA


    Introduction contd causes of current financial crisis l.jpg

    Introduction……ContdCauses of Current Financial Crisis

    • The genesis of the current financial crisis could be traced to the default on sub-prime mortgage loans in the United States (US).

    • In the pre-2007 era, the US government encouraged financial institutions to lend to individuals that would not have otherwise qualified for housing loans. These loans were backed by the federal government.

    • This resulted in cheap borrowing and an unprecedented boom in the US housing market.

    CENTRAL BANK OF NIGERIA


    Introduction contd causes of current financial crisis6 l.jpg

    Introduction……ContdCauses of Current Financial Crisis

    • By 2005, 1 out of 5 mortgages were sub-prime lending in the US. The rates for the sub-prime were higher because they had Adjustable Rate Mortgages (ARMs) that were fixed for two years; thereafter the rates were marked to the Fed interest rates which rose substantially.

    • Home loans granted to people with questionable ability to pay back i.e. people with no income, no job and no assets (NINJA)

    • Weaknesses in the application of originate-to-distribute model, leading to compromises in underwriting standards

    • As interest rates on mortgage loans increased, the prices of houses fell, consequently the houses were valued less than the mortgage loans, thus default rate on loans increased.

    CENTRAL BANK OF NIGERIA


    Introduction contd causes of current financial crisis7 l.jpg

    Introduction……ContdCauses of Current Financial Crisis

    • The magnitude of the repossession that followed coupled with the mortgage company’s inability to renegotiate loans led to the collapse of the government backed mortgages

    • Owing to the wide spread defaults, house prices began to fall due to huge foreclosures.

    • Banks and financial institutions repackaged these debts with other high risk debts and sold them to worldwide investors creating financial instruments called Collateralized Debt Obligations (CDO)

    CENTRAL BANK OF NIGERIA


    Introduction contd causes of current financial crisis8 l.jpg

    Financial derivatives called Mortgage-Backed Securities (MBS), which derive their value from mortgage loans spread the risk to financial institutions and investors around the world.

    Major Banks and financial institutions borrowed and invested heavily in MBS and reported losses of approximately US$435 billion as of July 17, 2008.

    Introduction……ContdCauses of Current Financial Crisis

    CENTRAL BANK OF NIGERIA


    Introduction contd causes of current financial crisis9 l.jpg

    Introduction……ContdCauses of Current Financial Crisis

    • First stage - "liquidity constraints," leading to difficulties in raising funds in the US.

    • Second stage-"credit contraction." this exerted strong downward pressure on the economy.

    • Third stage - financial contagion arising from inter- linkages of the world financial system-Economic Recession

    CENTRAL BANK OF NIGERIA


    Introduction contd effects l.jpg

    Introduction……ContdEffects

    • The stock markets capitalization recorded unprecedented losses, as at end-December 2008.

      • London 31.3%

      • New York 33.84%

      • Frankfurt 40.4%

      • Sydney 41.3%

      • Tokyo 42.1%

      • Paris 42.7%

      • Hong Kong 48.3%

      • Singapore 49.2%

      • Mumbai 51.9%

      • Shanghai 65.2%

      • Nigeria 45.2%

    CENTRAL BANK OF NIGERIA


    Slide11 l.jpg

    2.0 Stylized Facts about the Nigeria Economy

    CENTRAL BANK OF NIGERIA


    Stylized facts about the nigeria economy l.jpg

    Stylized Facts about the Nigeria Economy

    • Economic growth averaged 6.3 per cent between 2006 and 2008, projected to fall in 2009

    • Inflation rate fell from 8.5 per cent in 2006 to 6.6 per cent in 2007, it however increased to 15.1 in 2008 due to worldwide high food and energy prices

    • Reduced Foreign exchange inflow due to drop in the price and volume of crude oil sold

    • Economy dependent on a crude oil as a major source of foreign exchange

      • Crude oil accounts for

        • about 90% foreign exchange earned

        • 65% of government revenue

    CENTRAL BANK OF NIGERIA


    Stylized facts about the nigeria economy13 l.jpg

    Stylized Facts about the Nigeria Economy

    • Import dependent

    • A Emerging financial sector

      • 2 domestic banks among the top 500 banks in the world

    • Susceptible to oil shocks

      • International crude prices

    • Low non-oil exports

    • Decrease in volume of oil exports mainly due to restiveness at the Niger Delta

    CENTRAL BANK OF NIGERIA


    Stylized facts about the nigeria economy14 l.jpg

    Stylized Facts about the Nigeria Economy

    • Poor and dilapidating infrastructure

    • Low level of financial sector integration into the global economy

    • Central Bank of Nigeria remain the major source of FX in the official market

    • Wide margin between lending and saving rates

    • Exchange rate Depreciation

    CENTRAL BANK OF NIGERIA


    Overview of the nigeria economy cont macro economic indicators l.jpg

    Overview of the Nigeria Economy Cont.Macro-Economic Indicators

    CENTRAL BANK OF NIGERIA


    Slide16 l.jpg

    3.0 Impact of the Crisis on the Financial Sector of the Nigerian Economy

    CENTRAL BANK OF NIGERIA


    Nigeria financial market comprises l.jpg

    Nigeria Financial Market Comprises:

    • Financial Sector Regulators

      • The Central Bank of Nigeria

      • The Nigerian Deposit Insurance Corporation (NDIC)

      • The Security and Exchange Commission (SEC)

      • The National Pension Commission (PENCOM)

      • The National insurance Commission (NAICOM)

      • The Federal Mortgage bank

    • Deposit Money Banks

    • Discount Houses

    • Microfinance Banks

    • Finance Companies

    • Bureaux de change

    • Nigeria Stock Exchange (NSE)

    • Primary Mortgage Institutions

    • Development Finance Institutions

    • Insurance Companies

    CENTRAL BANK OF NIGERIA


    Impact of the crisis on the financial sector of the nigerian economy the capital market l.jpg

    Impact of the Crisis on the Financial Sector of the Nigerian EconomyThe Capital Market

    Capital market downturn caused by foreign investors’ divestment and panic sales by local investors

    Stock market crash of All-Share Index (ASI) and Market Capitalization (MC) by 67.2 and 61.7 per cent, respectively, between April 2008 and March 2009

    Reduced capitalization of companies predisposing them to takeovers

    Weak source of financing to listed companies

    CENTRAL BANK OF NIGERIA


    Banking sector l.jpg

    Banking Sector

    • Limited foreign trade finances for banks drying-up of credit lines for some banks

    • Liquidity & Credit crunch in the domestic economy

    • Tightness in the balance sheet of banks and counter party risks vis-à-vis external reserves

    • Higher provision for loss by banks could reduce profitability and lending.

    • Increase unemployment rate as a result of low profit

    CENTRAL BANK OF NIGERIA


    Banking sector20 l.jpg

    Banking Sector

    • Exchange rate exposure

    • Counterparty exposure

    • Interest rate spread on the increase

      • Prime lending

      • 16.08% end 2008

      • 18.95% Feb 2009

    CENTRAL BANK OF NIGERIA


    Money market l.jpg

    Money Market

    • Increase in Interest Rate

      • As funds dry up, Liquidity squeeze sets in, the financial market, interest rates resets higher in the money market:

        • Higher interest on deposits as investors move from the stock market

        • Higher lending rates to cover risk in economic downturn

  • Increased demand pressure in the foreign exchange market

  • Depreciation of the Foreign Exchange rate

    • Exchange rate depreciated from N117 to N135 per US dollar as at end of Dec 2008

  • Wide supply and Demand gaps

  • High outflows and low inflows of foreign exchange into the economy

  • CENTRAL BANK OF NIGERIA


    Slide22 l.jpg

    CENTRAL BANK OF NIGERIA


    Exchange rate 2001 2008 l.jpg

    Exchange Rate (2001-2008)

    N146/$

    N121/$

    CENTRAL BANK OF NIGERIA


    Bond market l.jpg

    Bond Market

    • Increased preference to use bonds for fund raising

    • Increase patronage in fixed income securities by investors

    • Higher rates on bonds

    CENTRAL BANK OF NIGERIA


    Slide25 l.jpg

    4.0Nigeria’s Response to Stabilize the Financial Sector

    CENTRAL BANK OF NIGERIA


    Responses by the monetary authority l.jpg

    Responses by the Monetary Authority

    • Reduce MPR by 50.0 basis points from 10.25 to 9.75 per cent and later to 8.0 per cent

    • Reduce CRR from 4.0 to 2.0 per cent and liquidity ratio from 40.0 to 30.0 per cent currently 25 per cent

    • Expanded discount window facility from overnight to 360 days, interest rate not exceeding 500 basis point above the MPR

    • Buying and selling of securities through the two-way quote by the CBN

    CENTRAL BANK OF NIGERIA


    Responses by the monetary authority27 l.jpg

    Responses by the Monetary Authority

    • Aggressive mop up suspended as monetary authority embraced relaxed monetary policy.

    • Adoption of a +or -3 per cent band for exchange rate movement

    • Reduced banks’ foreign exchange net open position from 20.0 to 10.0 per and later to 1.0 per cent of shareholders’ funds

    • Reintroduction of the Retail Dutch Auction System (RDAS)

    • CBN suspended daily inter-bank foreign exchange market to ward off speculative attacks on the domestic currency

    CENTRAL BANK OF NIGERIA


    Responses the security and exchange rate commission l.jpg

    Responses the Security and Exchange Rate Commission.

    • Five market makers to provide continuous liquidity and stabilize stock prices,

    • Strict enforcement of listing requirements with zero tolerance for infractions

    • Downward movement of share prices pegged at 1%, upward movement remains at before it was restored to 5% either way

    • Recapitalizations of security companies

    • Reduction in transaction fees

    • De-listed moribund companies; & released rules on share buy-back with limit of 15.0%

    CENTRAL BANK OF NIGERIA


    Responses by the federal government l.jpg

    Responses by the Federal Government

    • A Presidential Advisory Team on capital market was set up to reverse the declining fortunes of the Nigerian capital market

    • 2009 Budget Review:

      • Oil price benchmark reduced from US$59.00 to US$45.00 per barrel

      • Allocation to state governments reviewed

      • Projects prioritized

    • Economic Management Team mandated to come up with measures to curb the contagion effect of the global financial meltdown on the domestic economy

    CENTRAL BANK OF NIGERIA


    Slide30 l.jpg

    5.0The Way Forward

    CENTRAL BANK OF NIGERIA


    The way forward l.jpg

    The Way Forward

    • Priority areas for domestic financial institutions

      • Ensure access to liquidity

      • Recapitalizing weak but viable institutions

        • Assessment of the quality of assets and robustness of the funding,

        • Funding may be from government and private sources

        • Establishment of viable business plan and risk management process

          • Help to reduce uncertainty and public skepticism

      • Resolving failed institutions

        • Orderly closure or mergers

      • Identifying and dealing with distressed assets

        • Establishment of a standardized methodology for the valuation of illiquid securitized credit instruments

    CENTRAL BANK OF NIGERIA


    Way forward l.jpg

    Way Forward

    • Tightening of regulation and supervision

      • Keep vigilance on early warning signals through vigorous examinations

      • Encourage banks to strengthen and reduce bank specific contingency plans

      • Greater coordination between the regulatory and supervisory agencies

      • Appropriate corrective actions

    • Collective action required to reduce overall risk in the banking system.

      • Greater domestic cooperation between regulators

      • Greater international cooperation required to avoid the exacerbating cross-border strains

    • Need for financial institutions to embrace transparency on activities and products

      • Full and transparent disclosure of impairment in bank’s balance sheet

    CENTRAL BANK OF NIGERIA


    Way forward33 l.jpg

    Way Forward

    • Adoption of the International Financial Reporting Standards (IFRS)

    • Review of all relevant laws relating to the financial sector to strengthen regulatory capacity

    • Greater emphasis on e-FASS as a tool for banks’ returns analysis for speedy identification of early warning signals

    CENTRAL BANK OF NIGERIA


    Way forward cont l.jpg

    Way Forward Cont.

    • Capacity Building for Financial System staff professionalism (Knowledge, skills)

    • Greater emphasis on enforcement of Code of Corporate Governance

    • Introduction of Asset Management Companies (bad banks)

      • To clean out the balance sheet of financial institutions

    • Restoring confidence based on clarity, consistency and reliability of policy responses

    CENTRAL BANK OF NIGERIA


    Slide35 l.jpg

    I Thank You All For

    Listening!

    CENTRAL BANK OF NIGERIA


  • Login