CONSOLIDATING THE GAINS OF THE BANKING SECTOR REFORMS

CONSOLIDATING THE GAINS OF THE BANKING SECTOR REFORMS By Sanusi Lamido Sanusi Governor Central Bank of Nigeria Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010.

OUTLINE Introduction The Banking Sector Reforms Immediate Impact of the Reforms Outlook for the Economy Key Challenges Concluding Remarks Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 2

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

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. Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 4

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. Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 5

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

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 Banking Consolidation ● When: 2005 ● 89 to 25 banks ● Minimum capital requirement increased to N 25 bn Major failures in corporate governance at banks Lack of investor and consumer sophistication 8 2 7 3 6 4 Inadequate disclosure and transparency Unstructured governance & management processes at the CBN Global Financial Crisis Financial crisis in Nigeria Asset bubble Uneven supervision and enforcement ● Liquidity injection by CBN of N 620 bn in 2009 ● Stock market collapse of 70% in 2008 to 2009 ● ED’s for 8 banks replaced by CBN 5 Critical gaps in regulatory framework and regulations Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 7 | 7

FINDINGS OF THE SPECIAL EXAMINATION � 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 N 1, 696 billion, representing 44. 38% of total loans. � Aggregate provisioning required in the ten banks amounted to N 1, 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 N 495. 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 Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 8

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 q The CBN’s initiatives to date include: Ø injecting N 620 billion into the nine banks Ø replacing the chief executives/executive directors of eight of the banks with competent managers with experience and integrity Ø reaffirming guarantee of the local interbank market to ensure continued liquidity for all banks Ø guaranteeing foreign creditors and correspondent banks’ credit lines to ensure confidence and maintain important correspondent banking relationships q The capital injection enabled the nine banks to continue normal business operations and prevented a run on the banks Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 9

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. Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 10

PILLARS OF THE BANKING SECTOR REFORM 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 Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 11

REFORM STRATEGIES Ø Setting up an appropriate institutional framework Ø Strengthening the institutions Ø Ø AMCON Ø CBN restructuring Improving disclosure and transparency Ø Risk Based Supervision Ø IFRS Ø Full disclosure / Common year end Developing and Improving new regulation that takes on board lessons from the recent crisis Ø Review of Universal Banking Ø Margin lending Ø Prudential guidelines Ø Corporate Bonds Enhancing the Developmental role of CBN Ø SME Interventions (Credit Guarantee Scheme) Ø Power/Manufacturing Intervention (N 500 bn) Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 12

ASSET MANAGEMENT CORPORATION OF NIGERIA q Asset management companies have been used in various countries around the world with considerable success q The Asset Management Corporation of Nigeria (“AMCON”) has been conceptualised as a resolution mechanism q AMCON is designed to stimulate the recovery of the financial system by: Ø acquiring NPL’s from the banks Ø assisting banks in improving their capital and liquidity positions q Banks transfer their bad loans into AMCON in exchange for bonds issued by AMCON and guaranteed by the Federal Ministry of Finance q AMCON is an integral part of the recapitalisation process q The AMCON bill is currently being considered by the National Assembly Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 13

EXPECTED BENEFITS OF REFORMS q Strong Corporate Governance in banks q Effective competition in the Industry q Efficient Financial Intermediation q Provision of diverse financial products to cater for segmented markets q Improved financial flow to real sector q Strong and sustained customer confidence in the system Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 14

RESTORATION OF CONFIDENCE IN THE FINANCIAL SYSTEM Gross FDI Flows into Nigeria (N’bn) Q 4 2009 Gross FDI Inflow of N 102. 42 billion Gross inflows of FDI likely to Improve in 2010 as Q 1 inflows stood at N 84. 78 billion Inflows is toward share equities, banking, telecom, manufacturing and oil and gas sectors. Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 15

RESTORATION OF CONFIDENCE… Ex-Im Bank exposure to Nigerian banks increased from $403 million to $1 billoin IFC is increasing its position in Nigerian banks European Investment Bank increases its exposure to Nigerian banks by an additional $150 million Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 16

RESTORATION OF CONFIDENCE… Ø Inter-bank rate and other key money market rates moderated significantly in recent times Weighted average interbank 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 Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 17

RESTORATION OF CONFIDENCE… Capital Market Developments Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 18

RESTORATION OF CONFIDENCE… Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 19

RESTORATION OF CONFIDENCE… Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 20

RESTORATION OF CONFIDENCE… Ø Monetary and credit aggregates underperformed This is not peculiar to Nigeria as other countries faced similar outcomes due to the global financial crisis Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 21

RESTORATION OF CONFIDENCE… Ø 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 nonfood (core) inflation followed the same downward trend except in March 2009 Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 22

RESTORATION OF CONFIDENCE… Ø Stabilizing exchange rate Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 23

RESTORATION OF CONFIDENCE… Ø Increased new credit April '10 No. Non-intervened banks N' Million 7, 682 47 Intervened banks 9, 629 Total May '10 127, 270 1, 9 18, 189 No. N' Million 069 10, 145, 885 2, 272 27, 922 145, 459 12, 341 173, 807 May April 0 20, 000 40, 000 60, 000 Non-intervened banks (N' Million) 80, 000 100, 000 120, 000 Intervened banks (N'Million) 140, 000 Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 160, 000 24

RESTORATION OF CONFIDENCE… Ø New credits by banks along economic sectors May, 2010 BUSINESS LINES 1 Oil & Gas 2 Manufacturing 3 Transportation & Storage 4 General 5 General Commerce 6 Government 7 Construction 8 Real Estate Activities 9 Professional, Scientific & Technical Activities 10 Agriculture, Forestry & Fishing 11 Finance & Insurance 12 Information & Communication 13 Education 14 Human Health & Social Work Activities 15 Activities of Extraterrirorial Organisations & Bodies 16 Capital Market 17 Administration & Support Service Activities 18 Arts, Entertainment & Recreation 19 Power & Energy 20 Public Utilities 21 Water Supply, Sewerage, Waste Mgt, etc Total N' M % of Total 57, 420. 28 40, 640. 39 30, 184. 06 21, 771. 28 17, 804. 97 6, 367. 37 5, 699. 94 4, 379. 41 2, 874. 93 2, 597. 98 1, 177. 01 725. 30 613. 42 554. 11 303. 20 116. 71 56. 75 4. 00 - 173, 777. 73 Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 33. 04 23. 39 17. 37 12. 53 10. 25 3. 66 3. 28 2. 52 1. 65 1. 50 0. 68 0. 42 0. 35 0. 32 0. 17 0. 03 0. 00 100. 00 25

OUTLOOK FOR THE ECONOMY Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010.

OUTLOOK FOR THE ECONOMY Ø Overall output in 2010 expected to be higher than 2009 § § § § Q 1 ’ 09 – 4. 50% Q 2 ’ 09 – 7. 22% Q 3 ’ 09 – 7. 07% Q 4 ’ 09 – 7. 44% 2009 – 6. 66% Q 1 ‘ 10 – 7. 23% 2010 – 7. 75% (NBS projection) Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 27

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

KEY CHALLENGES Ø Economic growth has been robust, however, major challenges remain: Ø Generation of employment opportunities Ø 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: Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 29

KEY CHALLENGES… Ø Physical Ø Ø 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 q Inadequate Ø Ø Ø 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 Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 30

KEY CHALLENGES. . . q. Investment Climate Ø Simplification of the approval process for new business development Ø Capacity building in various areas of the economy Ø Provision of adequate security for lives and property Ø Tackling the issue of corruption q. Existence of Skill Gap: Ø Prioritizing technical and vocation education training Ø Equipping enterprise and industrial clusters to develop capacities q. High Cost of Inputs Ø Replacement of import bans with tariffs 31 Ø Deepening the Monye ports. Foundation reforms Lecture to the Sylvester , Asaba, Delta State, July 9, 2010.

KEY CHALLENGES… ØGrowing banking system liquidity is still desirable Thus: Ø Fiscal stimulus remains critical to support CBN actions to fast-tracking recovery process Ø Urgent need to inject fresh funds into the banks affected by regulatory actions Ø Ring-fencing/removal of ‘toxic assets’: Ø Establishment of asset management company (“AMC”) Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 32

KEY CHALLENGES… v Realising the limits of monetary policy Ø There is need to strike an appropriate balance between monetary and other policies Ø There is a limit to what monetary policy can do to deliver economic growth Ø Other complimentary policies must be in place. v Banking sector reform should not be an end in itself v It is a necessary but not a sufficient condition for economic growth and development v complementary reforms in other areas of the economy is absolutely necessary Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 33

Thank you for listening Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010. 34