CONSOLIDATING THE GAINS OF THE BANKING SECTOR REFORMS

1. CONSOLIDATING THE GAINS OF THE BANKING SECTOR REFORMS By Sanusi Lamido Sanusi Governor Central Bank of Nigeria Prepared by the Research Department of the Central Bank of Nigeria

2. OUTLINE • Introduction • The Banking Sector Reforms • Immediate Impact of the Reforms • Outlook for the Economy • Key Challenges • Concluding Remarks 2

3. INTRODUCTION

4. INTRODUCTION 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

5. INTRODUCTION… • 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

6. BANKING SECTOR REFORMS

7. Global Financial Crisis WHAT WENT WRONG – POST CONSOLIDATION • 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 Factors affecting the banking sector since consolidation Macro-economic instability caused by large capital inflows Major weaknesses in the business environment 1 8 Unstructured governance & management processes at the CBN Major failures in corporate governance at banks Banking Consolidation Financial crisis in Nigeria Asset bubble 2 7 Lack of investor and consumer sophistication 3 6 Uneven supervision and enforcement • 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 banksreplaced by CBN 4 5 Inadequate disclosure and transparency Critical gaps in regulatory framework and regulations 7

8. 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 FINDINGS OF THE SPECIAL EXAMINATION 8

9. CBN INTERVENTION • 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 9

10. OBJECTIVE OF THE REFORM • 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

11. PILLARS OF THE BANKING SECTOR REFORM 1

12. REFORM STRATEGIES • 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)

13. ASSET MANAGEMENT CORPORATION OF NIGERIA • 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

14. EXPECTED BENEFITS OF REFORMS • 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

15. RESTORATION OF CONFIDENCE IN THE FINANCIAL SYSTEM 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

16. RESTORATION OF CONFIDENCE… 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

17. RESTORATION OF CONFIDENCE… • Inter-bank rate and other key money market rates moderated significantly in recent times • 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 17

18. RESTORATION OF CONFIDENCE… Capital Market Developments 18

19. RESTORATION OF CONFIDENCE… 19

20. RESTORATION OF CONFIDENCE… 20

21. RESTORATION OF CONFIDENCE… • 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

22. RESTORATION OF CONFIDENCE… • Steady decline in various measures of inflation • 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 22

23. RESTORATION OF CONFIDENCE… • Stabilizing exchange rate 23

24. RESTORATION OF CONFIDENCE… • Increased new credit 24

25. RESTORATION OF CONFIDENCE… • New credits by banks along economic sectors May, 2010 25

26. OUTLOOK FOR THE ECONOMY

27. OUTLOOK FOR THE ECONOMY • 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

28. KEY CHALLENGES

29. KEY CHALLENGES • 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: 29

30. KEY CHALLENGES… • 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

31. KEY CHALLENGES... • 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 capacities • High Cost of Inputs • Replacement of import bans with tariffs • Deepening the ports reforms 31

32. KEY CHALLENGES… • 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

33. KEY CHALLENGES… • 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 itself • It is a necessary but not a sufficient condition for economic growth and development • complementary reforms in other areas of the economy is absolutely necessary 33

34. Thank you for listening 34