FINANCIAL STABILITY
REPORT


June 2014


Contents

iii


iv


List of Figures

v


List of Tables


Table 3. 10: Impact of FX Trading Shocks on ROA -Number of Banks with ROA in Respective
Table 3. 11: Impact of FX Trading Shocks on ROE - Number of Banks with ROE in Respective


List of Boxes

Appendix

vi

List of Abbreviations
ACL
Audit Command Language
AIPs
Approvals-in-Principle
AMCON
Asset Management Corporation of Nigeria
AML/CFT
Anti-Money Laundering and Combating the Financing of Terrorism
ASI
All Share Index (Nigerian Stock Exchange Index)
ATMs
Automated Teller Machines
BCEAO
Banque Centrale des Etats de l'Afrique de l'Ouest (Central Bank of West African
States)
BDCs
Bureaux de Change
BOA
Bank of Agriculture
BOFIA
Banks and Other Financial Institutions Act 1991 (as amended)
BOI
Bank of Industry
BRICS
Brazil, Russia, India, China, and South Africa
CACS
Commercial Agriculture Credit Scheme
CAR
Capital Adequacy Ratio
CBN
Central Bank of Nigeria
CIBN
Chartered Institute of Bankers of Nigeria
CIFTS
CBN Inter-bank Fund Transfer System
CR6
Concentration Ratio (of the six largest banks)
CRMS
Credit Risk Management System
DFIs
Development Finance Institutions
DMBs
Deposit Money Banks
EBAs
Eligible Bank Assets
EDC
Entrepreneurship Development Centre
eFASS
Electronic Financial Analysis and Surveillance System
FATF
Financial Action Task Force
FCs
Finance Companies
FCT
Federal Capital Territory
FGN
Federal Government of Nigeria
FMBN
Federal Mortgage Bank of Nigeria
FMDQ-OTC
Financial Market Dealers Quotation – Over the Counter Plc
FMF
Federal Ministry of Finance
FRACE
Financial Regulation Advisory Council of Experts
FSIs
Financial Soundness Indicators
FSRCC
Financial Services Regulation Co-ordinating Committee
GDP
Gross Domestic Product
GIZ
Deutsche Gesellschaft fur Internationale Zusammenarbeit (German Society for
International Cooperation)
HHI
Herfindahl-Hirschman Index
ICFA
Implied Cash Flow Analysis
IFRS
International Financial Reporting Standards
IFSB
Islamic Financial Services Board
IMF
International Monetary Fund
IOSCO
International Organisation of Securities Commission
vii

KYC
Know Your Customer
L/C
Letter of Credit
M1
Narrow Money Supply
M2
Broad Money Supply
MCP
Microfinance Certification Programme
MENA
Middle East and North African Countries
MFBs
Microfinance Banks
MoUs
Memoranda of Understanding
MPR
Monetary Policy Rate
NAICOM
National Insurance Commission
NDIC
Nigeria Deposit Insurance Corporation
NERFUND
National Economic Reconstruction Fund
NEXIM
Nigerian Export-Import Bank
NFIU
Nigerian Financial Intelligence Unit
NGAAP
Nigerian Generally Accepted Accounting Principles
NIBSS
Nigerian Inter-bank Settlement System
NIRSAL
Nigerian Incentive-based Risk Sharing System for Agricultural Lending
NMRC
Nigeria Mortgage Re-finance Company Plc
NPLs
Non-Performing Loans
NSE
Nigerian Stock Exchange
OBB
Open Buy Back
OFIs
Other Financial Institutions
PAIF
Power and Aviation Infrastructure Fund
PCBs
Private Credit Bureaux
PENCOM
National Pension Commission of Nigeria
PFAs
Pension Fund Administrators
PFCs
Pension Fund Custodians
PMBs
Primary Mortgage Banks
PoS
Point of Sale
PSV 2020
Payments System Vision 2020
RDAS
Retail Dutch Auction System
ROA
Return on Assets
ROE
Return on Equity
RTGS
Real-Time Gross Settlement System
SEC
Securities and Exchange Commission
SMEs
Small and Medium Enterprises
SMECGS
Small and Medium Enterprises Credit Guarantee Scheme
SQL
Structured Query Language
WAMZ
West African Monetary Zone
WDAS
Wholesale Dutch Auction System
WEO
World Economic Outlook
viii


Financial Stability
'Financial stability' is the resilience of the financial system to unanticipated adverse shocks,
while enabling the continued smooth functioning of the financial system's intermediation
process. A stable financial system contributes to broader economic growth and rising living
standards. The financial system performs one of the most important functions in the welfare
of citizens by supporting the ability of households and firms to hold or transfer financial
assets with confidence. Thus, the stability of the financial system and its adequate analysis
and reporting are important policy goals of the CBN.
ix

Governor’s Statement
I am delighted to present this statement on the Financial Stability Report (FSR) of the Central
Bank of Nigeria (CBN) for the half year ended June 2014. Coming, as it does, at the
commencement of my tenure as Governor of the CBN, I particularly welcome this
opportunity to commend the exemplary efforts made over the years, by my predecessors, to
initiate and sustain the various reform programmes that have resulted in the emergence of the
vibrant financial system we have in Nigeria today.
The crucial role played by financial system stability in the optimal management and control
of economic resources and the efficient performance of the financial system has become an
accepted and incontrovertible fact. A fundamental imperative for sustained financial system
stability is to have in place robust and efficient infrastructures, effective and timely
supervision and a very resilient financial system. This should be complemented by the ability
to undertake regular reviews, assessment and documentation of critical developments, with
the aim of highlighting and resolving emergent vulnerabilities as well as consolidating on
identified strengths. The FSR provides such a platform. I am pleased to note that this is the
9th edition in the series first published in 2010. I wish to commend the efforts that have
continued to sustain the regular un-interrupted publication of the FSR since its maiden issue.
As with previous editions, this Report provides a comprehensive survey of the key
developments in the Nigerian financial system during the review period: January–June, 2014
on the one hand, and the global economy on the other. These include developments in the
international financial markets, domestic macroeconomic issues relating to money and credit,
the foreign exchange and capital markets, as well as other financial institutions. Other
developments covered include real sector intervention issues and the regulatory/supervisory
activities of the CBN, as well as the reform of the payments system. Overall, this edition
succeeds enormously in providing an authoritative source of information and critical insights
into the current state of the financial system in Nigeria and the developments that have
impacted its emergence.
The issues highlighted in each edition of the FSR invariably define the broad direction for the
future course of action needed to promote the goals of financial system stability. In
recognition of this, let me seize this opportunity of the publication of the June 2014 edition
of the FSR to reiterate the Bank‟s resolve and commitment to sustain and build on the
various laudable initiatives that have impacted positively in shaping the Nigerian financial
system. In this regard, the CBN will continue to pursue, vigorously, the achievement of low
interest rates, stable exchange rates, a reduction in the funding gap in infrastructure financing
and also complement government‟s efforts in combating unemployment. Furthermore, the
Bank will continue its financial inclusion drive designed to improve access to financial
services by the unbanked. It will continue to collaborate with a broad spectrum of
stakeholders, including fiscal and other regulatory and law enforcement authorities.
Going forward, the Bank plans to focus on issues connected with the management of
expectations arising from Nigeria‟s new profile as Africa‟s biggest economy, following the
rebasing of her GDP; and the need to continue with the core mandates of the CBN,
x

complemented by the promotion of a vibrant development strategy. Though these issues
constitute major challenges, as already indicated in this edition, the outlook for the near term
is quite bright and I am confident that with the collective efforts of all the stakeholders, the
goal of sustained financial system stability will be attained.
On this note, I wish to recommend the FSR June 2014 edition, to all who have a stake in the
on-going drive to fully position the Nigerian financial system.


Godwin I. Emefiele
Governor
Central Bank of Nigeria

June 30, 2014.
xi

Executive Summary
Global output growth was expected to accelerate in 2014 from the weakness experienced in
2013. It is forecast to average 3.7 per cent in 2014, up from 3.0 per cent in 2013. While
growth is forecast for the US (2.0 per cent in May 2014), the Euro Area was forecast to
grow by 1.0 per cent in 2014, an increase from the dip of 0.4 per cent in 2013. Growth in
Germany, the biggest economy in the European Union, remained the key driver for the
overall Euro Area growth in the first half of 2014.

Global inflation was projected at 2.71 per cent in 2014. However, favourable price
movements of food and fuel would help contain the upward movement in the prices of major
commodities. Thus, global inflation was expected to remain low, compared with historical
averages.

The performance of international stock markets was positive in the first half of 2014, with the
indices of the developed and some emerging markets rising substantially. At the foreign
exchange markets, most of the currencies appreciated against the US Dollar during the period
under review.

In Nigeria, the GDP grew by 6.38 per cent in the first half of 2014, compared with 4.94 and
5.98 recorded in the first and second halves of 2013, respectively. The non-oil sector was a
key driver for the growth. The tight monetary policy stance of the CBN during the first half
of 2014 continued to moderate inflationary pressures, although the year-on-year inflation rate
rose marginally to 8.2 per cent. In the first half, banks‟ interest rates generally trended
upwards, with the exception of the 7-day maturity deposit rate which declined marginally,
owing to CBN‟s tight monetary policy stance. Provisional data showed that growth in broad
money supply (M2) was sluggish at the end of the first half of 2014. On the other hand,
narrow money (M1) fell by 6.07 per cent at end-June 2014, compared with the 5.50 per cent
decline at the end of the second half of 2013.

Credit to the economy continued to increase, as total bank loans and advances to the various
sectors grew by 7.86 per cent in the first half of 2014. However, the structure of bank credits
indicated that credit of short-term maturities remained dominant. Furthermore, the banking
industry remained dominated by a few major banks.

Towards the effective oversight of foreign subsidiaries of Nigerian banks, the CBN
participated in supervisory college meetings. In the first half of 2014, two foreign subsidiaries
of Nigerian banks were examined jointly by the CBN and the host supervisors. The purpose
of the examination was to ascertain the state of health of the subsidiaries. Also, a joint CBN
and NDIC risk assets assessment examination of all the domestic banks was conducted to
ascertain the quality of their assets and the adequacy of loan loss provisioning for the purpose
of considering their 2013 annual accounts.

xii

Meanwhile, the CBN, in collaboration with other stakeholders, embarked on developing
uniform underwriting standards to establish best practices in mortgage lending and prescribe
eligibility criteria for access to Nigeria Mortgage Refinance Company (NMRC) refinancing.
This followed the launching of the NMRC by the President and the subsequent issuance of an
approval-in-principle to the company by the CBN.

In the money market, rates remained relatively stable as the MPR remained unchanged at
12.0 per cent and fiscal injections sustained a constant flow of liquidity into the system.
Furthermore, authorised dealers were provided access to discount window operations,
repurchase agreements, and Open Market Operations (OMO) for their liquidity management
purposes. The country‟s external reserves at end-June 2014 stood at US$37.33 billion, which
could finance about 8.7 months of imports and was higher than the international benchmark
of 3 months.

At the foreign exchange inter-bank market, the Bank‟s intervention and fund flows from
autonomous sources helped contain excessive volatility in the market, and kept foreign
exchange rates within the target band at the official segment of the market. The capital
market was bullish as the major indicators trended upwards, reflecting investors‟ expectation
of favourable returns.

Following stress tests conducted on the industry at end-June 2014, banks were adjudged to be
more sensitive to credit concentration and exchange rate risks than other risks. Liquidity and
interest rate risks had tolerable effects, except in a few cases where volatility in interest rates
produced a large impact on account of duration mismatches in the tenored buckets. Overall,
the banking industry stress tests suggested that the industry is considerably resilient.

During the review period, the CBN analysed the report on the post-examination monitoring
exercise earlier conducted to evaluate the level of compliance of MFBs with examiners‟
recommendations. Supervisory letters had been issued to erring institutions and penalties
applied as appropriate, based on the outcome of the exercise.

The Bank continued to issue guidelines and implement policies and initiatives aimed at
increasing the safety, reliability and efficiency of the payments system. The key initiatives
pursued during the review period included the launching of an e-reference portal,
introduction of the bank verification number scheme, and the extension of the cashless policy
to the whole country.

It is expected that the services and manufacturing sectors would strengthen growth in Nigeria.
Furthermore, it is envisaged that, despite inflationary pressures, CBN‟s proactive monetary
policy measures would stem the liquidity surfeit arising from the accommodative fiscal
policy anticipated in the second half of the year.

This edition of the FSR is divided into five sections. Section One reviews global and
domestic economic and financial developments, highlighting key stability issues. Section
xiii

Two chronicles developments in the domestic economy, while Section Three covers
regulatory and supervisory activities. Key developments in the payments system are
highlighted in Section Four. Finally, Section Five provides the near-term outlook for financial
stability.

1.0
MACROECONOMIC DEVELOPMENTS AND FINANCIAL
SYSTEM STABILITY
1.1
Global Economic and Financial Developments

1.1.1 Global Output
Global output growth was revised downwards by 0.3 per cent to 3.4 per cent for 2014 (IMF
July, 2014) and 4.0 per cent in 2015, compared with 3.2 per cent in 2013. This was due to
the legacy of weak first quarter performance, particularly in the US, and the less optimistic
outlook for several emerging markets as well as disruptions in the Middle East and North
African (MENA) region and Eastern Europe. The US economy grew by 2.5 per cent in the
second quarter 2014, compared with 1.8 per cent in the corresponding period of the
previous year. However, output of the country contracted by 2.1 per cent in the first quarter
2014 partly due to a more-than-expected inventory overhang at the end of 2013. A
depressed demand caused by a harsher winter and a sharp decline in exports reduced output
in the first quarter.

Output growth in the Euro Area was projected at 1.1 per cent in 2014, from a contraction of
0.4 per cent in 2013. The economy grew by 0.7 per cent in the second quarter of 2014,
compared with 0.6 per cent in the second quarter of 2013. Unemployment rate remained
unchanged at 11.5 per cent in June 2014. In the UK, GDP growth was projected at 3.2 per
cent for 2014, compared with 3.0 per cent in the preceding year.

Domestic demand considerably moderated in China, reflecting the determination of the
authorities to rein-in credit growth and moderate real estate activities. Output growth was
projected at 7.4 per cent in 2014, down from 7.7 per cent in 2013. Buoyed by a recent fiscal
stimulus of US$81.4 billion, the economy grew by 7.5 per cent in the second quarter of
2014, compared with 7.4 per cent in the previous quarter.

In Russia, activities decelerated and demand weakened sharply, due to geopolitical
tensions. Other emerging market economies also recorded less-than-expected growth, due
to both weaker external demand, notably from the US and China, and, in many cases, softer
domestic demand and low investment growth.

For the MENA region, GDP growth was projected at 3.1 per cent in 2014, compared with
2.5 per cent in the previous year, mainly driven by investment in infrastructure. However,
the outcome continues to be threatened by the escalating regional tensions and the
challenging external environment.

In Sub-Saharan Africa (SSA), output growth was projected to remain at 5.4 per cent in
2014, the same as in the previous year. The robust growth was attributable to strengthening
global recovery, positive domestic supply-side developments and continuing fiscal
consolidation in a number of key countries.

Global economic activity was projected to strengthen moderately in the medium-term
amidst renewed market concerns about emerging market fundamentals. Cyclical
adjustments, insufficient institutional reforms and prolonged soft growth in the Euro Area
and emerging markets are among the medium term risks. Reversals of capital flows and

external funding and currency depreciation on the back of the Quantitative Easing (QE)
tapering by the US Federal Reserve are the additional risks. The main downside risks
include the inappropriate policies in addressing external vulnerabilities, security threats and
the impact of the Ebola Virus Disease (EVD) outbreak.

The prospects for global recovery gaining momentum remain good, particularly in the
second half of 2014. This was anchored on the view that the unexpected weakness in the
first quarter was transitory since the impact of the harsh weather and inventory correction
would disappear with appropriate policy measures, including China‟s fiscal stimulus.
Further, the key drivers supporting the recovery identified in the April 2014 WEO remained
in place, including moderating fiscal consolidation and a highly accommodative monetary
policy in many advanced economies.

Overall expectations are for global growth rates of 3.4 per cent in 2014 and 4.0 per cent in
2015. Recovery is gaining momentum in major advanced economies, notably in the US, as
temporary factors wane. In the Euro Area, growth is expected to strengthen to 1.1 and 1.5
per cent in 2014 and 2015, respectively. Japan, with a stronger-than-expected performance
in the first quarter, is set to grow higher at 1.6 per cent in 2014 before decelerating to 1.1
per cent in 2015, partly due to the planned tapering of its fiscal stimulus. In emerging
markets and developing economies, growth has also been projected to decrease from 4.7%
in 2013 to 4.6 per cent in 2014, before strengthening to 5.2 per cent in 2015.

China has turned to limited and targeted policy measures to boost activities, including tax
relief for small and medium term enterprises, accelerated fiscal and infrastructure spending,
and targeted cuts in bank required reserve ratios. Consequently, the country is projected to
grow by 7.4 per cent in 2014 before moderating to 7.1 per cent in 2015. However, in India,
Brazil, Mexico and Russia, currently burdened by domestic and regional tensions,
projections are expected to still remain weak. South Africa is also expected to stay sluggish
due to electricity constraints and labour conflicts.

Table 1. 1: Global Economic Growth (per cent)
Region/Country

(Q2)

(Q2)

World

Advanced Economies


1.3
1.8
2.4
United States

Euro Area

Japan

United Kingdom

Canada

Emerging Markets + Developing
Economies

China

MENA Region

Sub-Saharan Africa

Nigeria

Source: IMF WEO July 2014; Bloomberg 2014

1.1.2 Global Inflation
Global inflation remained benign, reflecting muted energy prices and abundant spare
capacities, particularly in emerging market economies. Inflation was 3.4 per cent in June
2013 before inching to 3.6 per cent in December 2013. The position was expected to be lower
at 3.2 per cent by end-2014. In the Euro Area and the United States, headline inflation is
expected to remain below longer-term inflation expectations, largely owing to lower
employment rates, with implications for adjustments in expectations and risks of a higher
debt burden and rising real interest rates.

In advanced economies, inflation was 1.8 per cent in June 2014, compared with 1.5 per cent
in the corresponding period of 2013, and is expected to end the year at 1.6 per cent. This
partly reflects the reductions in the labour force, owing to demographic trends as well as
discouraged workers dropping out of the labour force. The current performance, at about 1.0
percent on average, is lower than the target and longer-term inflation expectations.

Inflation in the US was 2.1 per cent in June 2014 compared with 1.8 per cent in the
corresponding period of 2013. All relevant inflation measures declined in the US in 2013,
with core inflation running at less than 1.0 percent, amidst continued fall in the
unemployment rate. However, inflation was expected to decline to 1.4 per cent by end-2014.

The Euro Area recorded 1.6 per cent inflation in June 2013 before decelerating to 0.5 per cent
in June 2014. Inflation is expected to be 0.9 per cent at end-2014, largely due to the recovery
from the recent drag of the sovereign debt and banking sector crisis in some member
peripheral economies. In the zone, inflation is on the decline and has moved closer to the
lower end of the range forecast provided by the European Central Bank (ECB) in the last few
years.

In Japan, inflation was 0.2 per cent in June 2013, compared with 3.6 per cent in June 2014,
owing to increases in the consumption tax. Consequently, inflation which increased with
stronger growth and the depreciation of the yen in 2013, has been projected to decelerate in
2014–15.

Inflation in the emerging market and developing economies was 5.3 per cent in June 2014
compared with 6.5 per cent in the corresponding period of 2013. The rate is expected to
remain at this level by end-2014 and 2015, owing to softer world commodity prices. Softer
commodity prices and tight monetary policy have helped lower inflation in these economies.

Table 1. 2: Global Inflation (per cent)
Region/Country
June 2013 June 2014

World

Advanced Economies

US

Euro Area

Japan

UK

Emerging and Developing
Economies

MENA Region

Sub-Saharan Africa

Nigeria

Source: US Bureau of Labour Statistics; IMF Financial Statistics Data Report July 2014

1.1.3 Commodities
Energy prices were somewhat flat on account of increasing supply above demand in most
markets. Crude oil prices were stagnant because of the continued supply surge in North
America. Non – Organization of the Petroleum Exporting Countries (OPEC) supplies
increased by 1.3 million barrels a day (mbd) in 2013, slightly faster than the 1.2 mbd growth
in global demand. The net growth of 1.2 mbd from the United States was mainly out of shale
oil and Canada‟s 0.2 mbd was mainly sands oil. Projections for growth in non-OPEC supply
were raised to 1.8 mbd in 2014, well above the 1.4 mbd level of demand. Crude oil prices
were held up because of mounting OPEC supply pressures, particularly from sanctions
against the Islamic Republic of Iran and disruption of supplies from Libya, Nigeria, Syria,
and Yemen. Oil demand was relatively weak in the fourth quarter of 2013. Thus, oil prices
were marked down during the outlook period, owing to expanding oil supply and weak
demand.

Metal prices remained generally flat since 2013, at about 30 per cent below the highs of early
2011, as most markets recorded surpluses, owing to large and rising stocks as well as steady
production gains. Global metal demand growth, especially in China, slowed in 2013, while
supply grew strongly. Futures prices indicated declining metal prices, reflecting continuing
diminishing surpluses in a number of markets.

Generally, softening commodity prices in the second half of 2013 may be a signal of the end
of the commodity price super-cycle. This is based on the slowdown in emerging market
economies, particularly China, and the increase in supplies, especially increased U.S. crude
oil production, a supply overhang in most base metals, and increasing grain supplies.
However, during the first quarter of 2014, some prices improved, with signs of strengthening
global activity.

1.1.3.1
Oil
The OPEC Reference Basket spot price was US$107.88 per barrel in June 2014, inching up
by US$2.03pb above the 2013 average. Similarly, the Bonny light spot price was
US$107.89pb in June 2014, compared with US$110.95pb in 2013. Oil demand outside North
America has slowed, particularly for diesel, partly owing to seasonal factors. OPEC expects
its share of the world oil market to shrink in 2015 for the third consecutive year, adjusting to
global demand. About 2.5 mb/d of OPEC output has been adjudged as output shortage from
Libya, Iraq, Iran and Nigeria. Should this portion of oil return to the market, OPEC may need
to restrain production further.

1.1.3.2
Food
Food markets recorded favourable production for most major crops. Global output for major
grains and oilseeds was projected to surpass demand growth. China was projected to harvest
increased production of wheat and corn, owing to favourable weather and increased global
rice supplies. Stocks also continued to gradually recover, notably corn. In early 2014,
concerns about the effects of adverse weather on South American harvests exerted some
upward price pressure. The United Nations FAO Food Price Index averaged 206.0 points in
June, 2014, down by 3.8 points or 1.8 per cent, from June 2013 (Table 1.3).

Table 1. 3: Global Food Price Index

June 2013
June 2014
Dec. 2013
% Dec - June
Food price index

Meat

Dairy

Cereals
196.1

192.9
7.31
Vegetable oil

Sugar

259.3
234.9
10.39
Source: Food and Agriculture Organisation of the United Nations

While confirming the generally favourable crop production and supply outlook for 2014/15,
the FAO Crop Prospects and Food Situation Report warned that many people around the
world could face a situation of food insecurity. FAO estimates that globally, 33 countries,
including 26 in Africa, were in need of external assistance, owing to a combination of
conflicts, crop failures and high domestic food prices.
1.1.3.3 Gold
The spot price of gold on June 30, 2014 was US$1,327.33 per ounce, compared with the
highest level of US$1,431.7 per ounce on August 28, 2013 and the lowest of US$1,192 per
ounce on June 28, 20131. The bullion price for August 2014 delivery rose by 0.57 per cent to
US$1,334.90 an ounce on the Comex, the highest for the most-active contracts in 2014.
Overall, gold gained about 6.2 per cent in price in the month of June 2014 and 10.0 per cent
during the first half of the year, as the violence in Iraq and tensions between Ukraine and
Russia boosted demand for haven assets.

1Sourced from Bloomberg.

Gold prices rose nearly 6 per cent in June, 2014 above the prices observed in May. Prices had
risen by 11.0 per cent since January 2014, outpacing gains for indexes of commodities,
equities and Treasuries. The recent slump in equities boosted demand for this precious metal
as a safe haven. Investor holdings in exchange-traded products backed by the metal have
rebounded. The jump in gold prices which came as turmoil in the Middle East and Eastern
Europe put investors on edge. Equities performed below expectations on concerns about
investments in Europe and the need for flight to safety. The latest was Portugal‟s Banco
Espirito Santo SA bonds which plunged to a record low after a parent company delayed debt
repayments on short-term notes, fuelling concerns that the Euro Area remained vulnerable to
financial shocks. Gold futures for August delivery rose 1.1 per cent and settled at $1,339.20
an ounce on the Comex in New York. Earlier, the price reached $1,346.80, the highest for a
most-active contract since March 19, 2014, according to data compiled by Bloomberg.

Prices of other metals fell by 2.9 per cent in May, 2014, partly due to concerns about slowing
demand in China. The largest decline was for uranium prices, which plunged 13.0 per cent,
following excess global supply and delays in restarting Japan‟s nuclear power plants. A
Japanese court had ruled in May, 2014 against restarting two reactors, following safety
checks on residential areas. Iron ore prices dropped by 12 per cent, as rapid increases in lowcost supplies from Australia and Brazil exceeded demand. Falling iron ore prices were
threatening China‟s high cost producers, but the extent/timing of possible closures is
uncertain. Aluminium prices fell by 3.0 per cent following continued oversupply conditions,
although prices jumped in late-May and early-June on expectations that Indonesia‟s export
ban might affect bauxite supplies. Partly offsetting these gains was a 12.0 per cent surge in
nickel prices, mainly owing to Indonesia‟s January 12th export ban on unprocessed ore.
However, nickel prices fell from their highs into early June as stocks were still at record
levels and severe market tightening was not expected until 2015 (IMF Commodity Market
Monthly, June 2014).

1.1.4 International Financial Markets

1.1.4.1 International Stock Markets
International stock markets recorded mixed results during the review period. While stock
movements in North America and Africa were generally positive, markets in Europe
remained weak. In North America, the Mexican Bolsa, S&P 500 and the Canadian S&P/TSX
Composite indices increased month-on-month over the same period by 3.3, 1.9 and 3.7 per
cent, respectively. In South America, the Argentine Merval index and Brazilian Bovespa
increased by 2.9 and 3.8 per cent, respectively, while the Columbian IGBC General indices
data were not available. Stock markets in Africa, notably the Nigerian ASI, South African
JSE All-Share, Ghanaian GSE All Share, and the Kenyan Nairobi NSE 20 increased monthon-month between May and June by 2.4, 2.6, 2.3 and 0.1 per cent, respectively. However, the
Egyptian EGX CASE 30 index decreased by 1.0 per cent.

In Europe, FTSE 100, CAC 40 and DAX indices decreased by 1.5, 2.1 and 1.1 per cent,
respectively, while Russia‟s MCEX increased by 3.1 per cent. In Asia, India‟s BSE Sensex,
Japan‟s Nikkei 225 and China‟s Shanghai Stock Exchange-A indices increased by 4.9, 3.6
and 0.5 per cent, respectively (see Table 1.4).

Table 1. 4: Indices of Selected International Stock Markets as at June 30, 2014
Country
Index
End-Dec,

30-May-

30-Jun-

YTD
%
Change
May 30 -
June 30
2014 %
Change
AFRICA


Nigeria
ASI

South Africa
JSE African AS

Kenya
Nairobi NSE 20

Egypt
EGX CSE 30

Ghana
GSE All Share


NORTH
AMERICA


US
S&P 500

Canada
S&P/TSX
Composite

Mexico
Mexican Bolsa
(IPC)


SOUTH AMERICA


Brazil
Bovespa Stock

Argentina
Merval

Colombia
IGBC General
13,071.27
NA
NA
NA
NA


EUROPE


UK
FTSE 100

France
CAC 40

Germany
DAX

Russia
MICEX


ASIA


Japan
NIKKEI 225

China
Shanghai SE A

India
BSE Sensex

Source: Bloomberg


1.1.4.2
Foreign Exchange Markets
Performance in the foreign exchange markets was generally mixed during the half year to
June 30, 2014. Five out of the16currencies surveyed depreciated against the US dollar,
reflecting continued investor appetite for dollar-denominated assets. In North America, the
Canadian dollar recorded an appreciation of 0.98 per cent, while the Mexican peso
depreciated against the U.S. dollar by 0.85 per cent. In South America, the Brazilian real and
the Colombian peso appreciated against the US dollar by 1.36 and 1.05 per cent, respectively.
However, the Argentine peso depreciated by 0.62 per cent on a month-to-month basis.

In Europe, the pound sterling and the Russian rubble appreciated by 3.45 and 2.71 per cent,
respectively, against the US dollar. The euro-US dollar exchange rate remained flat over the
May-June period. In the Asian market, the Japanese yen and the Chinese yuan appreciated
month-on-month by 0.43 and 0.81per cent, respectively, while the Indian rupee depreciated
by 1.81 per cent, against the US dollar.

Currencies in Africa, including the Nigerian naira and the Egyptian pound, remained
unchanged. Kenyan shillings appreciated by 2.63 per cent between May and June, 2014 while
the South African rand and the Ghanaian cedi depreciated month-on-month by 0.66 and 7.78
per cent, respectively, against the US dollar.

1.2
Domestic Developments
1.2.1 Output
The domestic economy remained strong in the first half of 2014. Real Gross Domestic
Product (GDP) recorded a growth of 6.38 per cent in the first half of 2014, compared with
4.94 and 5.98 recorded in the first and second halves of 2013, respectively. The development
was attributed to growth in the non-oil sector whose contribution increased from 88.27 per
cent to 88.71 per cent. The sector recorded a growth of 7.44 per cent in real terms, compared
with the growth of 8.18 and 8.62 per cent in the first and second halves of 2013, respectively.
Growth in the non-oil sector was driven, mainly by activities in manufacturing (14.71%),
construction (13.99%), services (7.22%) and trade (5.71%). In terms of sectoral contribution,
the service sector accounted for the largest share (36.62%) of real GDP, followed by industry
(21.85%) and agriculture (20.28%).

The oil sector recorded a decline of 1.23 per cent in the first half of 2014, compared with the
decline of 13.77 and 12.34 per cent, respectively, in the first and second halves of 2013. The
decline was attributed to low production levels. Further analysis indicated that the
contribution of the oil sector to the GDP in the first half of 2014 stood at 11.29 per cent,
compared with 12.16 and 10.43 per cent recorded in the first and second halves of 2013,
respectively.

Figure 1.1: Gross Domestic Product by Sector (N billion)

Table 1.5: Changes in Real GDP by Sector (per cent)

Sector
H1 2013
H2 2013
H1 2014
Manufacturing
21.89
21.71
14.71
Construction
13.96
14.49
13.99
Services
8.82
9.89
7.22
Trade
5.91
7.33
5.71
Agriculture
2.52
3.24
4.54
Crude Petroleum, Nat. Res. and Solid Min.
-13.53
-12.06
-1.04

Figure 1. 2: Share of Oil and Non-oil Sectors in Real GDP (%)

H1 2013
H2 2013
HI 2014
Oil
Non-oil


H1 2013
H2 2013
HI 2014
Agriculture
Crude Petroleum & Natural Gas and Solid Minerals
Manufacturing
Construction
Trade
Services

Figure 1.3: Sectoral Share in Total GDP (%)

H1 2013
H2 2013
H1 2014
Agriculture
Crude Petroleum, Nat. Res. and Solid Min.
Manufacturing
Building and Construction
Trade
Services
Percentages

1.2.2 Inflation
The domestic general price level continued to be moderated by the tight monetary policy
stance of the CBN during the first half of 2014. Inflation rose marginally, but remained at
single digit during the period. Year-on-year headline inflation rose to 8.2 per cent in June
2014, from 8.0 per cent at end-December 2013. Also, core and food inflation rose to 8.1 and
9.8 per cent, respectively, at end-June 2014, from their respective levels of 7.9 and 9.3 per
cent at end-December 2013 (Figure 1.4).

Figure 1. 4: Inflationary Trend (Year-on-Year)

FIRST HALF 2013
SECOND HALF 2013
FIRST HALF 2014
Per cent
Head line (Y-o-Y)
Core (Y-o-Y)
Food (Y-o-Y)


1.2.3 Interest Rates
Banks‟ interest rates generally trended upwards in the first half of 2014, with the exception of
the 7-day deposit rate which declined marginally to 4.81 per cent from 4.82 per cent. This
reflected, largely, the continued monetary tightening stance of the CBN as the Bank
maintained its policy rate at 12.00 per cent. The average term deposit rate rose to 8.57 per
cent, from 6.42 per cent in the second half of 2013. Similarly, the average savings rate rose to
3.35 per cent from 2.46 per cent, while the rates for other deposits of various maturities rose

to a range of 8.31–9.98 per cent in the first half of 2014, from a range of 4.82–7.73 per cent
in the second half of 2013 (Figure 1.5).

The average inter-bank call and open-buy-back (OBB) rates stood at 10.44 and 10.99 per
cent, respectively, in the first half of 2014, down from 12.87 and 13.01 per cent in the second
half of 2013, respectively. Similarly, the average prime lending rate fell by 0.09 percentage
point to 16.73 per cent, while the average maximum lending rate rose by 1.24 percentage
points to 25.76 per cent in the review period, from 24.52 per cent in the second half of 2013.
Thus, the spread between the average maximum lending and the average term deposit rates
stood at 17.19 percentage points, indicating a 0.91 percentage point below the level in the
second half of 2013. With inflation at 8.20 per cent in June 2014, most deposit rates and all
lending rates were positive in real terms. The positive real rate of return on deposits is an
incentive to save, providing an opportunity for capital accumulation and enhancing the ability
for banks to build a sustainable long-term loanable funds base.

Figure 1. 5: Money Market Interest Rates and MPR

FIRST HALF 2013
SECOND HALF 2013
FIRST HALF 2014
per cent
Call
OBB
MPR


Figure 1. 6: Lending and Deposit Rates

FIRST HALF 2013
SECOND HALF 2013
FIRST HALF 2014
percentage point
Per cent
Saving
Prime
Maximum
Avterm Dep.
Spread (Max-Avtrm) rhs


1.2.4 Fiscal Operations
Federal Government‟s retained revenue stood at N1,771.27 billion in the first half of 2014,
against the budget estimate of N2,134.0 billion, while expenditure was estimated at
N2,096.37 billion, compared with N2,616.1 billion budgeted for in the first half of 2014.

Consequently, the fiscal operations of the Federal Government resulted in an overall deficit
of N325.10 billion or 0.8 per cent of GDP, as against the proportionate budget deficit of
N482.1 billion for the first half of 2014 and N443.53 billion for the corresponding period of
2013. The deficit was financed mostly through domestic borrowings (Figure 1.7).

Figure 1. 7: Federal Government Fiscal Operations


-1000
-500

FIRST HALF 2013
SECOND HALF 2013
FIRST HALF 2014
N Billion
Retained revenue
Total Expenditure
Budget balance

2.0
DEVELOPMENTS IN THE FINANCIAL SYSTEM
2.1
Monetary and Credit Developments2
Provisional data showed that growth in broad money supply (M2) was sluggish at the end of
the first half of 2014. Over the level at end-December 2013, M2 grew by 1.66 per cent to
N15,928.4 billion at end-June 2014, compared with 0.7 per cent at the end of the
corresponding period of 2013. This increase reflected, largely, the 0.88 per cent rise in net
domestic credit of the banking system, which more than offset the decline in net foreign
assets and other assets (net) of the banking system during the review period.

Narrow money (M1) fell by 6.07 per cent at end-June 2014, compared with the 6.49 per cent
decline at end-June 2013.The decline was attributed, largely, to the 19.67 and 2.53 per cent
fall in currency outside banks (COB) and demand deposits, respectively. As a ratio of total
monetary assets, COB stood at 7.29 per cent, compared with the 7.20 per cent recorded at the
end of the corresponding half of 2013.

Figure 2. 1: Trend in Monetary Aggregates


2.1.1 Aggregate Credit to the Economy
Net domestic credit (NDC) to the economy grew marginally by 0.88 per cent to N15,173.6
billion at end-June 2014, compared with N15,040.7 billion at the end of the second half of
2013. This reflected the 2.75 per cent growth in claims on the private sector (CP), which
more than off-set the 21.89 per cent fall in claims on the Federal Government (CG) (Figure
2.2).

2 The analysis is based on the revised CBN Monetary Survey.

End June 2013
End Dec. 2013
End June 2014
Dec-12
M2
M1
COB

Figure 2.2: Credit to the Economy
-5,000


H1, 2013
H2, 2013
H1, 2014
NDC
CP
NCG
N billion

2.1.1.1 Claims on the Federal Government
Net claims on the Federal Government declined by 21.89 per cent to negative N1,790.2
billion at end-June 2014, in contrast to the growth of 40.14 per cent recorded at the end of the
second half of 2013. This development, relative to the preceding half year reflected, mainly,
the decline in the banking system‟s holdings of government securities. The fall in net claims
on the Federal Government tended to enhance private sector credit availability. This
development is expected to further promote the emergence of a vibrant private sector.

2.1.1.2 Claims on the Private Sector
Credit to the private sector increased by 2.75 per cent to N16,963.8 billion at end-June 2014,
compared with the growth of 8.96 per cent recorded at the end of the second half of 2013.
The growth in private sector credit reflected, largely, the 3.18 per cent rise in claims on the
core private sector3.

2.1.1.3 Consumer Credit
Consumer credit grew marginally by 3.49 per cent to N809.8 billion in the first half of 2014,
compared with the growth of 0.8 and 24.50 per cent in the first and second halves of 2013,
respectively. As a ratio of credit to the core private sector, consumer credit constituted 4.49
per cent, the same as in the second half of 2013 (Figure 2.3).


3Excludes the state and local governments

Figure 2.3: Consumer Credit


FIRST HALF 2013
SECOND HALF 2013
FIRST HALF 2014
Consumer Credits
Growth over preceding Half Year (%) rhs
Ratio of Credit to Core private sector (%) rhs

2.1.2 Sectoral Classification of Private Sector Credit
Total bank loans and advances to the various sectors of the economy grew by 7.86 per cent to
N10,830.1 billion in the first half of 2014, compared with 13.88 per cent growth in the second
half of 2013. Credit to the oil and gas sector accounted for the highest share of 24.33 per cent,
followed by manufacturing (13.15%). The agriculture, forestry and fishing category absorbed
3.84 per cent of total bank credit in the first half of 2014, indicating a 0.6 percentage point
increase over the 3.23 per cent recorded in the second half of 2013 (Table 2.1).
Figure 2.4: Sectoral Allocation of Credit


N' Billion
Dec. 2013
June. 2014

Table 2. 1: Sectoral Distribution of Credit

Dec. 2013
June 2014
Sector
N' Billion
Per cent
N 'Billion
Per cent
Oil and gas

Manufacturing

General: Household Consumer
Goods (Personal)

General: Hospitality/Leisure and
Religious

Information and communication

General commerce

Governments

Real estate

Construction

Agriculture, forestry and fishing

Finance and insurance

Transportation and storage

Capital market

Power and energy

Professional, scientific and
technical activities

Education

Administrative and support
service activities

Human health and social work
activities

Activities of extra-territorial
organizations and bodies

Mining and quarrying

Water supply, sewerage, waste
mgt. & remediation activities

Arts, entertainment and
recreation

Public utilities

Total


2.1.3 Reserve Money
Reserve money (RM) declined by 15.04 per cent to N4,723.1 billion at end-June 2014, from
the level of N5,558.9 billion at end-December 2013, in contrast to the growth of 12.6 per
cent recorded at the end of the first half of 2013.This was, however, lower than the indicative
benchmark of N5,106.90 billion. This development relative to the level at end-December
2013, reflected the 10.1 and 33.1 per cent decline in net foreign and net domestic assets,
respectively, of the CBN. The corresponding decline in the uses of reserve money was
attributed to the fall in both currency-in-circulation and bank deposits with the CBN which
recorded 15.7 and 14.7 per cent, respectively.

2.1.4 Maturity Structure of Bank Deposits and Credits
The structure of bank credits in the first half of 2014 indicated that credit of short-term
maturities remained dominant. Credits maturing within one year accounted for 56.6 per cent,
compared with 52.6 per cent at the end of the second half of 2013. The medium-term (≥1yr
and < 3yrs) and long-term (3yrs and above) maturities stood at 16.8 and 26.6 per cent,
compared with 19.1 and 28.3 per cent, respectively, at the end of the second half of 2013
(Figure 2.5).

Similarly, deposits of below one-year maturity constituted 95.6 per cent (of which 72.7 per
cent had maturity of less than 30 days), compared with 97.2 per cent at end-December 2013.
Further analysis showed that the medium and long-term deposits constituted 3.4 and 1.1 per
cent, compared with 2.8 and 0.003 per cent recorded at end-December 2013, respectively
(Figure 2.6).

Figure 2.5: Distribution of Bank Loans and Advances by Maturity

H1, 2013
H2, 2013
H1, 2014
Per cent
Short term
Medium term
Long term

Figure 2.6: Maturity Structure of Bank Deposits

H1, 2013
H2, 2013
H1, 2014
Short term
Medium term (%) rhs
Long term (%) rhs
proprotion %
proprotion %

Apart from the consequences of a maturity mismatch, such as illiquidity, the continued
dominance of short-term maturities remains a constraint to the ability of banks to create longtenored risk assets and limits lending to the real sector which is crucial for economic
development. This also portends refinancing and re-pricing risks for the system.

2.1.5 Market Structure of the Banking Industry
The banking industry, in the first half of 2014, remained dominated by a few major banks.
The average market share of deposits and assets of the six largest banks (concentration ratio–
CR6) stood at 52.85 and 51.48 per cent, compared with 52.23 and 50.68 per cent,
respectively, in the second half of 2013. Similarly, during the review period, the average
market share of the largest bank, in terms of deposits and assets, stood at 14.80 and 13.69 per
cent, compared with 15.13 and 13.71 per cent, respectively, in the second half of 2013.
However, the banking industry remained competitive in both deposits and assets as revealed
by their average Herfindahl-Hirschman Index (HHI) of 789.21 and 752.06, respectively, (on a
scale of 10,000), compared with 790.57 and 742.06 in the second half of 2013 (Figure 2.7).

Figure 2.7: Market Concentration Ratios of Banks (Assets and Deposits)

H1, 2013
H2, 2013
H1, 2014
HHI
CR
CR( Assets)
CR(Deposits)
HHI (Deposits) rhs
HHI (Assets)rhs

2.2
Cross-border Collaboration
The CBN provided technical assistance to supervisors from other jurisdictions on the
regulation and supervision of development finance institutions, during the review period. It
also participated in Supervisory College meetings aimed at enhancing effective oversight of
cross-border operations of the banking groups.

During the review period, two banks divested from their subsidiaries in West and East Africa,
while one, which had been given approval to operate in Southern Africa, was yet to
commence operations. Two other subsidiaries were subjected to regulatory actions and were
taken over by the regulator in one jurisdiction. However, one subsidiary had been returned to
its parent, while the other remained under the direct control of the host supervisor.

Table 2. 2: Distribution of Offshore Subsidiaries of Nigerian Banks
Region
Subsidiaries
Representative Offices &
Branches
Dec 2013
Jun 2014
Dec 2013
Jun 2014
West Africa

-
-
The Rest of Africa

Europe, N/ America& Asia

Total

In their quest for profit maximization, risk diversification, increasing business opportunities,
among other reasons, Nigerian banks sustained their cross-border operations. However, these
operations exposed the Nigerian financial system to regional contagion risk. The major
supervisory thrust in managing the contagion risk is the timely exchange of information
amongst home and host regulatory authorities. This is facilitated through the execution of
memoranda of understanding, the activities of the College of Supervisors and cross-border
examinations. In addition, the CBN is developing a framework for cross-border crisis
management.

2.2.1 The College of Supervisors
During the review period, the 15th and 16th Meetings of the College of Supervisors were held
in The Gambia and Ghana, respectively. The CBN also hosted the maiden College of
Supervisors for the parent and the banking subsidiaries of a Nigerian bank, in Abuja. The
meeting gave all supervisors an opportunity to exchange information and engage the top
management of the bank on their strategies and commitments to the jurisdictions in which
they operated.

2.2.2 Cross-border Examination
The maiden examination of two foreign subsidiaries of Nigerian banks was undertaken by the
CBN and host supervisors during the review period.

The College of Supervisors of the West African Monetary Zone (CSWAMZ) adopted a
resolution specifying a maximum period of two (2) months for finalization and issuance of
supervisory reports.

2.3
Non-Interest (Islamic) Banking (NIB)
The CBN, in conjunction with the Islamic Financial Services Board (IFSB), conducted a
workshop in Abuja for capacity building, on the following IFSB Standards:

Fundamentals of Islamic Banking,

Takaful (Islamic Insurance) Principles,

Guiding Principles on Risk Management for Takaful Undertakings,

Guiding Principles on Liquidity Risk Management, and

Guiding Principles on Stress Testing.

The workshop was attended by regulatory agencies including: the CBN, the Nigeria Deposit
Insurance Corporation (NDIC), the National Insurance Commission (NAICOM), the National
Pension Commission (PENCOM), and the Securities and Exchange Commission (SEC).

In the same vein, the CBN, in conjunction with the Islamic Council of the United Kingdom
and Enhancing Financial Innovation and Access (EFInA) - a non-Governmental organizationsponsored by the British Government through the Department for International Development
(DFID) and Bill and Melinda Gates Foundation, organized a training session for the CBN
Financial Regulation Advisory Council of Experts (FRACE) members as well as the
Advisory Council of Experts (ACE) of the non-interest financial institutions. The training
covered some aspects of Islamic and conventional finance.

2.4
Other Financial Institutions (OFIs)
There were 4,291 OFIs in Nigeria at end-June 2014, compared with 3,858 at end-December
2013. This number comprised six (6) Development Finance Institutions (DFIs), 40 Primary
Mortgage Banks (PMBs), 925 Microfinance Banks (MFBs),64 Finance Companies (FCs) and
3,256 Bureaux de Change (BDCs).
Table 2. 3: Other Financial Institutions Licensed by the CBN
Institution-Type
Number
Dec 2013
June 2014
Development Finance Institutions

Primary Mortgage Banks

Microfinance Banks

Finance Companies

Bureaux de Change
2,889
3,256
Total
3,858
4,291

Total assets of the sub-sector fell to N1,372.2 billion at end-June 2014, from N1,444.6 billion
at end-December 2013, reflecting a decrease of 5.0 per cent. Similarly, the paid-up capital
and net loans/advances decreased by 3.65 and 4.02 per cent to N446.4 billion and N663.5
billion, respectively, at end-June 2014, from N463.3 billion and N691.3 billion at endDecember 2013. Total deposits decreased by 2.1 per cent to N462.5 billion at end-June 2014,
from N472.4 billion at end-December 2013.
2.4.1 Microfinance Banks (MFBs)
The total assets of MFBs rose to N280.76 billion at end-June 2014, from N270.90 billion at
end-December 2013, representing a 3.64 per cent increase. Similarly, the paid-up capital and
shareholders‟ funds of MFBs increased by 7.79 and 16.17 per cent to N72.65 billion and
N84.76 billion at end-June 2014, from N67.40 billion and N72.96 billion, respectively, at
end-December 2013. The increase in capital was due largely to the recapitalization of some
MFBs in compliance with regulatory directives.

Total deposit liabilities and net loans &advances also increased by 6.3 and 0.4 per cent to
N144.4 billion and N129.5 billion at end-June 2014, compared with N135.9 billion and
N129.0 billion, respectively, at end-December 2013. The rise in deposit liabilities was
indicative of increased public confidence in the operations of the MFBs, while the marginal
growth in net loans and advances showed an improvement in mission-focus on the part of the
operators. Reserves also increased to N12.1 billion at end-June 2014, from N5.6 billion at
end-December 2013, due mainly to share premium arising from new issues and retention of
profits by the MFBs.
2.4.1.1 Microfinance Certification Programme (MCP)
The MCP entered its third phase of implementation during the review period. During this
phase the subsidy on tuition paid by the CBN and the NDIC was withdrawn, while the CBN
continued the coordination of the programme. Candidates for the certification programme
were hence expected to be responsible for full payment of their tuition and examination fees.
Meanwhile, the Chartered Institute of Bankers of Nigeria (CIBN) had examined and certified
391 operators, bringing the total certified operators to 2,593.

2.4.2 Primary Mortgage Banks (PMBs)
The number of PMBs in operation remained at forty (40) at end-June 2014, although their
composition had changed. Following the approval of the application for upgrade of three (3)
State PMBs to National status, the number of National PMBs increased to ten (10) at endJune 2014, from seven (7) at end-December 2013, while the State PMBs decreased from
thirty-three (33) to thirty (30).

The total assets of PMBs decreased by 14.5 per cent to N413.7 billion at end-June 2014, from
N484.0 billion at end-December 2013. This was due to the non-inclusion of the assets of the
16 PMBs that had applied for conversion to other forms of financial institutions.
Accordingly, the paid-up capital, deposit liabilities and loans and advances of PMBs
decreased by 14.1, 11.2 and 12.5 per cent to N129.0 billion, N146.3 billion and N137.8
billion, respectively, at end-June 2014. However, aggregate reserves improved by 570.18 per
cent, from negative N5.7 billion at end-December 2013 to N26.8 billion at end-June, 2014
and shareholders‟ funds rose to N155.8 billion at end-June 2014, reflecting an increase of 7.7
per cent.

2.4.2.2 The Nigeria Mortgage Re-finance Company (NMRC)
Following an approval-in-principle (AIP) granted to the NMRC in 2013, the company was
launched on January 16, 2014, as a public-private partnership arrangement. The company is
expected to provide second-tier mortgage liquidity refinancing for mortgage operators.
Twenty-two (22) shareholders had invested N7.05 billion as deposits for shares. Furthermore,
an additional sum of N2.88 billion is expected to be called up as the second tranche of the
investment from both domestic and multilateral investors. This would increase the company‟s
total equity contribution to N9.93 billion.

2.4.2.3 Uniform Underwriting Standards
The CBN, in collaboration with other stakeholders, is developing uniform underwriting
standards to provide best practices in mortgage lending and prescribe eligibility criteria for
access to NMRC refinancing. The standards would also promote efficiency and mitigate the
legal and operational risks in the sector.

2.4.3 Finance Companies (FCs)
The CBN licensed three (3) finance companies (FCs), bringing the total number to 64, from
the 61 at end-December 2013.

As part of the reform initiatives in the FC sub-sector, new guidelines were issued for the
industry in the first half of 2014 to reposition it to meet the financial needs of the public, and
deliver credit to the informal sector and small scale borrowers. The significant changes
introduced by the guidelines included:
Increase in the minimum capital from N20 million to N100 million;
Increase in the size of their boards of directors from a minimum of three (3) to five (5)
and a maximum of seven (7) to nine (9). Furthermore, FCs are required to have a
minimum of one (1) and a maximum of two (2) independent directors and a majority
of non-executive directors;
Identification of non-permissible activities comprising deposit taking; non-financial
activities, such as trading, construction and project management, capital market
activities, and foreign exchange transactions, except through their correspondent
banks/authorized dealers; and
Expansion of the supervisory purview of the CBN to include all companies rendering
finance lease services, which shall hence be required to apply for FCs licence.
All existing operators are expected to comply with the new requirements before endSeptember 2015.
The total assets of FCs decreased to N102.73 billion at end-June 2014, from N103.05 billion
at end-December 2013, representing a decline of 0.31 per cent. Similarly, total borrowings
decreased by 2.43 per cent to N57.78 billion at end-June 2014, from N59.22 billion at endDecember, 2013. Their paid-up capital increased by 7.62 per cent to N15.81 billion at endJune 2014, from N14.69 billion at end-December 2013. Furthermore, loans and advances,
and reserves increased by 8.29 and 20.34 per cent to N50.55 billion and N4.32 billion,
respectively, at end-June 2014, reflecting improved operational performance of the
institutions.
2.4.4 Bureaux de Change (BDCs)
The number of licensed Bureaux De Change (BDCs) at end-June 30, 2014 was 3,256 as
against 2,889 recorded at end-December 2013, an increase of 12.70 percent which resulted
from the issuance of 367 new licences.

2.4.5 Development Finance Institutions (DFIs)
In its efforts to reposition the DFIs for effective contribution to real sector and economic
development, the CBN, in collaboration with the World Bank, developed draft regulatory and
supervisory guidelines to facilitate the entrenchment of best practices to enable the
institutions to achieve their mandates. The guidelines, which provide a framework for the
regulation and supervision of the operations of Wholesale DFIs (WDFIs) and Retail DFIs
(RDFIs), were exposed to stakeholders for comments during the review period. The
guidelines also provide incentives for private investors to operate DFIs.

2.5
Financial Inclusion
The CBN continued to implement measures aimed at increasing access of the underbanked to basic banking and other financial services during the period under review.
In particular, the Bank conducted on-site verification of the status of compliance of
banks and OFIs with the financial inclusion provisions in the CBN AML/CFT
Regulation. The verification exercise was conducted on 22 banks and 57 microfinance
banks. The key findings were as follows:


Seventeen banks and 12 MFBs had commenced the implementation of the KYC
requirements;

Banks that implemented the policy had, so far, opened over 102,537 new tier one and
119,846 tier two accounts; and

Based on the overall analysis of the compliance status of the financial institutions,
seven banks and three MFBs were categorized as fully compliant, seven banks and
nine MFBs as partially compliant, while eight banks and 45 MFBs were noncompliant with the requirements.

The Bank will continue to monitor the implementation of the measures to enhance
financial inclusion in Nigeria.

2.5.1 Financial Literacy

Financial Literacy and Consumer Protection Sensitization Campaign
The Bank conducted a Financial Literacy and Consumer Protection Sensitization campaigns,
using the mass media and organised workshops in seven states spread across the six
geopolitical zones. The Bank also engaged six tertiary institutions on a workshop entitled,
“Financial Literacy: A Tool for Economic Empowerment”.

National Baseline Survey
The CBN conducted the data collection phase of the Baseline Survey on Financial Literacy.
A total of 13,320 randomly selected respondents were interviewed.

2014 Global Money Week
During the review period, the CBN and the Bankers Committee, in collaboration with other
stakeholders, observed the 2014 Global Money Week which aimed at raising awareness on
Financial Literacy.

2.6
Financial Markets
2.6.1 The Money Market
In the first half of 2014, activities in the money market reflected the liquidity surfeit in the
banking system, with authorised dealers indicating preference for collateralized transactions.
Money market rates remained relatively stable, with the MPR remaining unchanged at 12.00
per cent, while fiscal injections sustained a constant flow of liquidity into the system. Money
market operators continued to access discount window operations, repurchase agreements
and Open Market Operations for their liquidity management.

The monthly weighted average inter-bank call rate ranged from 10.00 to 10.67 per cent. In
March 2014, no activity was recorded at the call segment of the inter-bank market, due to
liquidity surfeit in the system and the risk aversion of operators. The open-buy-back (OBB)
rate ranged from 10.47 to 11.94 per cent during the review period. The OBB and inter-bank
call rates closed at 10.50 and 10.52 per cent, respectively, at end-June 2014, compared with
11.16 and 10.86 per cent at end-December 2013.

Figure 2. 8: Movements of Money Market Rates

2.6.2 The Foreign Exchange Market
Activities were relatively calm in the first half of 2014, except on February 20, 2014 when
market players reacted to changes in the Bank‟s leadership. This resulted in a sharp but
temporary depreciation of the naira at the inter-bank segment, largely because the Bank‟s
July 2013
August

September

October

November

December

January

February

March

April 2014
May 2014
June 2014
Inter-bank

OBB

SDF

MPR

SLF


Inter-bank; OBB, SDF, MPR and SLF Rates (%)

intervention at the foreign exchange inter-bank market as well as inflows from autonomous
sources contained the effects and kept foreign exchange rates within the target band at the
official segment of the market. Some volatility was, however, observed at the BDC segment.
The exchange rate at the RDAS spot was stable as it averaged N157.31/US$ during the
review period. It opened at N157.29/US$ in January and remained at that level, except in
February when it rose temporarily to N157.31/US$.
The average foreign exchange rate at the RDAS spot and inter-bank segments depreciated by
0.01 and 2.31 per cent to N157.29/US$ and N162.82/US$, respectively, during the first half
of 2014.The average BDC foreign exchange rate appreciated by 2.53 per cent to close at
N167.17/US$ at end-June 2014.
Figure 2. 9: Monthly Average Exchange Rates of the Naira to the US Dollar


2.6.3 The Capital Market
The All Share Index (ASI) and Market Capitalisation (MC) trended upwards in the first half
of 2014. This reflected investors‟ expectations of favourable returns, based on the financial
performances of listed companies. Meanwhile, in their efforts to deepen the market, the
regulators embarked on developing a ten-year master plan for the market, entrenching market
discipline, facilitating compliance with rules and regulations, enhancing integration within
the West African sub-region, and attracting more participants to the market.

2.6.3.1 The Bond Market
Total bonds outstanding at end-June 2014 were valued N6,314.32 billion, compared with
N6,187.91 billion at end-December 2013, reflecting an increase of 2.04 per cent. FGN,
agency, sub-national and corporate bonds constituted 69.21, 18.68, 9.07and 3.04 per cent,
respectively, of the outstanding bonds at end-June 2014.

Jul 2013
Aug
Sep
Oct
Nov
Dec
Jan 2014
Feb
Mar
Apr
May
Jun
Foriegn Exchange Rate
RDAS-SPT (incl. 1% comm.)
Inter-Bank
BDC

FGN Bonds
New issues and re-openings comprising FGN Bonds series 1 and 3 were auctioned during the
review period. Total FGN Bonds offered for sale were valued N460.00 billion, while public
subscriptions and sales amounted to N1,171.52 billion and N552.97 billion, respectively. The
huge subscriptions were attributed to the high level of liquidity in the banking system and
investors‟ preference for low risk, long-term instruments.
The level of liquidity in the banking system increased the demand for FGN bonds in the
secondary market as evidenced by the decline of yields on FGN bonds compared with endDecember 2013 (Figure 2.10). However, with headline inflation at 8.20 per cent, which was
lower than the average FGN bond yield of 11.53 per cent at end-June 2014, the bonds
remained attractive to investors. The yield curve was upward-sloping reflecting investors‟
demand for higher returns on long-dated assets.
Figure 2. 10: FGN Bonds Yield Curves


Source: FMDQ-OTC Plc

Agency Bonds
There was no bond issuance by FGN agencies, whilst bonds valued N13.30 billion were
redeemed by AMCON during the review period. Consequently, total outstanding bonds
issued by FGN agencies stood at N1,179.41 billion, of which AMCON issued N853.44
billion, FMBN N30.56 billion and Local Contractors Receivables Management (LCRM)
Limited4 N295.41 billion.

4LCRM is a special purpose vehicle established by the Debt Management Office.


Bond Yields (%)
Time-To-Maturity (years)
Dec-2013
Jun-2014
Jun-2013

Sub-National Bonds
In the first half of 2014, three state governments issued bonds valued N15.00 billion,
compared with two state governments that issued bonds valued N99.50 billion in the second
half of 2013. During the review period, the Lagos State Government redeemed its N50.00
billion tranche 1 bond. Thus, the total of outstanding bonds held by 16 state governments
stood at N572.90 billion at end-June 2014, compared with N607.90 billion5 held by 14 state
governments at end-December 2013.
Table 2. 4: Sub-National Bonds Issued in the First Half of 2014
State
Government
Bond Features
Value (N Billion)
Issue Date
Kogi
14.50% Fixed Rate 7-Year
5.0
Jan-2014
Ekiti
15.00% Fixed Rate 7-Year
5.0
Jan-2014
Nasarawa
15.00% Fixed Rate 7-Year
5.0
Jan-2014
Total

15.00

Source: FMDQ-OTC PLC
Corporate Bonds
One corporate organization issued a bond valued N4.50 billion during the review period,
compared with three corporate bonds valued N10.60 billion issued in the preceding period.
The value of total outstanding corporate bonds at end-June 2014 was N192.17 billion.
2.6.4 The Equity Market
The NSE ASI closed at 42,482.49 at end-June 2014, reflecting an increase of 2.79 per cent
above the 41,329.19 recorded at end-December 2013. Market capitalisation closed at
N14,031.66 billion, representing an increase of 6.06 per cent above the N13,230.25 billion
recorded at the end of the preceding period. There were five new issues valued N129.63
billion.

Foreign portfolio investments in the market were valued N302.52 billion, while total sales
amounted to N402.63 billion, reflecting a net outflow of N100.11 billion at end-June 2014.
Foreign investors dominated the market, with a 60.29 per cent share of the total equity trades.
This represented an increase of 11.05 percent over the end-December 2013 level.

The performance of the market during the period under review was influenced largely by
developments in the global economy, performance of listed companies, the stance of
regulators towards market developments and new listings. Although there was a slowdown in
the first quarter, increased market activities, and the listing of two companies in the second
quarter, resulted in improvements in the major capital market indices.

In furtherance of its objective of addressing low market activities and boosting investor
confidence, the SEC introduced the risk-based approach to supervision and the net liquid

5Revised

capital rule. In addition, electronic mail filing of quarterly returns by capital market operators
commenced in the first quarter of 2014. This development has ensured timely rendition of
returns and effective detection of red flags for risk mitigation purposes.

2.7
Real Sector Interventions

2.7.1 Risk Mitigation/Insurance Schemes

2.7.1.1 The Nigerian Incentive-based Risk Sharing System for Agricultural Lending Plc
Nigeria Incentive-based Risk Sharing System for Agricultural Lending(NIRSAL) Plc, which
was established to de-risk agricultural lending and unlock financial resources for agricultural
value chain development in Nigeria, issued four Credit Risk Guarantees (CRGs) valued
N2.06 billion to four counterparties during the review period, compared with 23 CRGs
valued N3.051 billion issued in the second half of 2013. It also guaranteed N5.66 billion
accessed by 24 agro-dealers and paid N163.83 million as interest drawback to 116 projects
under the Growth Enhancement Scheme of the Federal Ministry of Agriculture and Rural
Development.

Table 2.5: CRGs Issued by NIRSAL (Jan – June 2014)
S/N
Focus Area
Number of
Projects
Amount (N)
(%)

Agro Processing

2,020,059,000
98.18

Crop Production

37,500,000
1.82

Total

2,057,559,000

The company trained 12,830 cocoa and cotton farmers and conducted a train-the-trainer
refresher training programme for West African Cotton Company Ltd (WACOT) staff and 44
agricultural extension staff.

2.7.1.2 The Agricultural Credit Guarantee Scheme
A total of 35,413 loans, valued N5.93 billion granted by six commercial and 46 microfinance
banks were guaranteed during the review period. Compared with the 33,667 loans valued
N5.84 billion guaranteed in the second half of 2013, the outcome in the first half of 2014
showed an increase of 5.19 and 1.54 per cent respectively, in number and value of loans
guaranteed.

The increases in the first half of 2014 were attributed to a number of factors, including the
following:
Increase in the number of participating microfinance banks;
Prompt processing and payment of interest drawback claims which encouraged more
farmers to patronize the scheme; and

Intensity of farming activities in the northern part of the country that peaked with the
rains in the first half of the year.

2.7.1.3 The Small and Medium Enterprises Credit Guarantee Scheme
The Scheme, established to fast-track the development of the Nigerian economy by
guaranteeing bank credits to small and medium enterprises (SMEs), continued to play a
critical role in facilitating funding for start-ups, although with reduced momentum. In the first
half of 2014, the number of facilities guaranteed decreased by 76.47 per cent to 4, valued
N155.23 million, from 17 facilities valued N896.78 million that were guaranteed in the
second half of 2013, reflecting an 82.69 per cent decrease in value. The observed low
patronage was attributed to the market interest rate charged under the scheme as against other
schemes with lower interest rates.

2.7.2 Credit Support Schemes

2.7.2.1 The Commercial Agriculture Credit Scheme
The Bank continued to finance large projects in the agricultural value chain through the
Commercial Agriculture Credit Scheme (CACS) established in 2009. During the review
period, a total sum of N8.18 billion was disbursed to 17 projects through eight banks,
compared with N9.90 billion disbursed to 16 projects in the second half of 2013, through 13
banks. This reflected an increase of 6.25 per cent in number, and a decrease of 17.40 per cent
in value, of the projects financed. An analysis of the total funds disbursed also showed that
marketing, production and processing accounted for 19.0, 38.0, and 43.0 per cent,
respectively.

The recoveries from the projects for the second half of 2013 stood at N6.92 billion, while the
figure for the first half of 2014 stood at N8.72 billion, representing a 26.0 per cent increase.

2.7.2.2 The Power and Aviation Intervention Fund
The Fund, established to stimulate and sustain investment in the power and aviation sectors
of the economy, through the provision of long-term credits suitable for infrastructure projects,
contributed to enhancing the quality of credits in the banking industry by refinancing existing
facilities and granting new ones.

During the review period, N508 million was disbursed to one aviation project, compared with
N11.628 billion disbursed to five projects in the second half of 2013. In the first half of 2014,
N19.77 billion was paid back by borrowers under the Scheme.

2.7.2.3 The SME Restructuring and Refinancing Fund
The Fund was established to fast-track the development of the manufacturing sector of the
Nigerian economy by facilitating access to credit by manufacturers, improving the financial
position of banks, generating employment and increasing foreign exchange earnings, among

others. The total amount disbursed under the Fund in the first half of 2014 stood at N17.8
billion while N28.98 billion was disbursed in the second half of 2013.

2.7.2.4 The Micro, Small and Medium Enterprises Development Fund (MSMEDF)
The Revised Microfinance Policy, Regulatory and Supervisory Framework for Nigeria,
stipulates that “a Microfinance Development Fund shall be set up, primarily to provide for
the wholesale funding requirements of Microfinance banks/institutions (MFBs/MFIs)”.
Consequently, the CBN launched the Fund with N220 Billion in 2013 to address the funding
gap in the Micro, Small and Medium Enterprises (MSME) sub-sector in Nigeria. The Fund is
aimed at enhancing access to financial services by operators in this sub-sector through the
provision of wholesale funds to Participating Financial Institutions (PFIs).

In the first half of the year, the CBN carried out the following activities within the purview of
the above Fund:
Amended the Fund‟s operating guidelines to include banks as PFIs, while excluding
the refinancing facility and interest drawback components; revised SME: Micro
Enterprises borrowing ratio to 50:50 from 80:20; and earmarked two per cent of the
Fund for persons with disabilities;
Signed an MoU with the Kano State Government for its participation under the Fund;
Conducted a capacity building programme for 60 CBN and NDIC staff and 120
Officers of 44 PFIs in March, 2014; and
Approved the utilization of N33.2 billion from the PAIF repayments as take-off fund
for the MSMEDF.

2.7.3 Entrepreneurship Development Centres (EDCs)
A total of 3,101 participants were trained by the new Entrepreneurship Development Centres
(EDCs) located in Maiduguri, Makurdi and Calabar in the first half of 2014. This number
surpassed the target of 3,000 trainees set for that period. This also resulted in the creation of
2,703 jobs. In addition,904 of the beneficiaries accessed credits from banks for start-ups and
expansion of existing businesses.

Meanwhile, the process of transferring ownership of the first phase EDCs located in Kano,
Lagos and Onitsha to the host states has been completed, in line with the policy establishing
the Scheme.

2.8
The External Sector
The level of gross external reserves decreased to US$37.33 billion at end-June 2014, from
US$42.85 billion at end-December 2013, reflecting a decline of US$5.52 billion or 12.88 per
cent. Notwithstanding the decline, this level of external reserves could finance 8.7 months of
imports.

Analysis of the external reserves indicated that the CBN, the FGN and the Federation
holdings were US$29.87 billion, US$3.66 billion and US$3.80 billion, respectively, at endJune 2014, compared with US$36.94 billion, US$2.62 billion and US$3.29 billion,
respectively at end-December 2013. Analysis of holdings by currency showed that 79.78 per
cent of the external reserves were held in US dollars, 6.73 per cent in euro, 4.10 per cent in
renminbi, 2.42 per cent in pound sterling, and 6.94 per cent in Special Drawing Rights (SDR)
at end-June 2014, while 0.03 per cent of the reserves were held in other currencies.

Total inflow of foreign exchange during the review period amounted to US$22.89 billion,
compared with US$21.32 billion recorded in the second half of 2013, showing an increase of
US$1.57 billion or 7.36 per cent which was due to the increase in crude oil and gas revenues.
Similarly, total outflow rose to US$28.50 billion in the review period, from US$23.46 billion
in the second half of 2013, reflecting an increase of US$5.04 billion or 21.48 per cent.
Consequently, there was a net outflow of US$5.61 billion compared to US$2.14 billion
recorded in the second half of 2013.

3.0
REGULATORY AND SUPERVISORY ACTIVITIES

3.1
Macro-Prudential Supervision

3.1.1 Financial Soundness Indicators

3.1.1.1 Asset Based Indicators
The asset quality in the banking sector showed a slight decline in the review period,
compared with the position at end-December 2013, as the ratio of NPLs to gross loans
increased by 0.3 percentage point to 3.5 per cent at end June 2014 (Figure 3.1 and Appendix
1).

Figure 3.1: Banking Industry NPLs to Gross Loans


The ratio of core liquid assets to total assets decreased by 5.1 percentage points to 11.4 per
cent at end-June 2014, from 16.5 per cent at end-December 2013. Similarly, the ratio of
liquid assets to short-term liabilities declined by 5.6 percentage points to 13.1 per cent at endJune 2014 as compared with 18.7 per cent at end December 2013.

3.1.1.2 Capital-based Indicators
The ratio of regulatory capital to risk weighted assets stood at 16.4 per cent at end-June 2014,
showing a decrease of 0.7 percentage point below the level at end-December 2013. Similarly,
the ratio of Tier 1 capital to risk weighted assets, which stood at 16.1 per cent at end-June
2014, was 1.0 percentage point below the level at end-December (Figure 3.2). Also, the
industry non-performing loans (net of provisions) to capital declined to 5.6 per cent at endJune 2014 from 5.8 per cent at end-December 2013.


End June 2013
End Dec 2013
End June 2014
Percentages

Figure 3. 2: Banking Industry Capital Adequacy Indicators


3.1.1.3 Income and Expense-based Indicators
The ratio of interest margin to gross income declined by 1.6 percentage points to 63.3 per
cent during the review period, from 64.9 per cent at end-December 2013. In the same vein,
the ratio of non-interest expense to gross income decreased by 3.5 percentage points to 65.4
per cent at end-June 2014, from 68.9 percent at end-December 2013. The decrease in this
ratio signifies an improvement in the operations of the sector, particularly the reduction in
operational cost. However, the ratio of personnel expenses to non-interest expense rose by 1.7
percentage points to 38.2 per cent, from 36.5 per cent at end-December 2013.

3.2
Banking Industry Stress Tests

3.2.1 The Liquidity Stress Test
Liquidity stress tests were conducted at end-June 2014 using the Implied Cash Flow Analysis
(ICFA) and Maturity Mismatch/ Rollover Risk approaches to assess the resilience of
individual banks and the banking industry to liquidity and funding shocks.

3.2.1.1 Implied Cash Flow Analysis (ICFA)
The ICFA assessed the ability of the banking system to withstand unanticipated substantial
withdrawals of deposits, short-term wholesale and long-term funding over 5 days and
cumulative 30 days, with specific assumptions on fire sale of assets. The test assumed
gradual average outflows of 3.8, 5.0 and 1.5 per cent of total deposits, short-term funding and
long-term funding, respectively, over a 5-day period (Test 1.1) and a cumulative average
outflow of 22.0, 11.0 and 1.5 per cent of total deposits, short-term funding and long-term
funding, respectively, on a 30-day balance (Test 1.2). It also assumed that the assets in Table
3.1 would remain unencumbered after a fire sale.

End June 2013
End Dec 2013
End June 2014
Percentage
Regulatory capital to risk-weighted assets
Tier 1 capital to risk-weighted assets

Table 3. 1: Percentage of Assets Unencumbered after Fire Sales
Item
No
Assets
%
Unencumbered

Cash and cash equivalent

Current account with CBN

Government bonds, treasury bills and other
assets with 0% risk-weighting
66.5

Certificates of deposit held
66.5

Other short-term investments

Collateralized placement and money at call

7.
CRR

The ICFA revealed that the industry liquidity ratio (LR) declined to 10.80 and 6.20 per cent
from 49.76 per cent after the 5-day and cumulative 30-day shocks, respectively. Under each
of the two shock scenarios, the LRs of 17 banks were below the 30.0 per cent minimum
threshold. Seven banks also recorded negative LR following a cumulative 30-day shock. Of
these banks, six were among those categorised as “large banks”.6

Table 3. 2: Implied Cash Flow Analysis
Total Number of Banks
tested
Number of Banks with < 30% liquidity ratio
June 2014

June 2014
Mar 2014
Dec 2013
Sept. 2013
System
LR (%)
Liquidity
Shortfall to
make 30% LR
(N‟ billion)
Test 1.1: Implied Cash Flow Test ( 5-Day shock)
Day 1

30.96

Day 2

26.40
427.74
Day 3

21.45
954.43
Day 4

16.80
1,458.66
Day 5

10.80
1,940.57
Test 1.2: Implied Cash Flow Test (30-Day shock)

6.20
2,312.61


6 Banks with assets over N1 trillion

Figure 3. 3: Individual Banks and Industry Pre-shock Liquidity Ratio Positions7


Figure 3. 4: Industry Position after 5-day and Cumulative 30-day Shocks


Figure 3. 5: Individual Bank Position after 5-day and Cumulative 30-day Shocks


7Bank 23 was excluded from Figures 3.4, 3.5 and 3.6 because it was an outlier.

Bank 1
Bank 2
Bank 3
Bank 4
Bank 5
Bank 6
Bank 7
Bank 8
Bank 9
Bank 10
Bank 11
Bank 12
Bank 13
Bank 14
Bank 15
Bank 16
Bank 17
Bank 18
Bank 19
Bank 20
Bank 21
Bank 22
Industry
Per cent
Jun-13
Dec-13
Jun-14
-5

Pre-Shock
After Day 1
After Day 2
After Day 3
After Day 4
After Day 5
After cum 30
days
Per cent
Jun-13
Dec-13
Mar-14
Jun-14
-20

10 11 12 13 14 15 16 17 18 19 20 21 22
Per cent
Banks
5-Day
30-Day
Pre-shock

3.2.1.2 Maturity Mismatch/Rollover Risk
The Maturity Mismatch/Rollover Risk approach assessed funding maturity mismatch and
rollover risk for assets and liabilities in the 0-30 and 31-90 day buckets, with assumptions on
the availability of funding from CBN and intra-group as described below:

i.
Test 2a: Descriptive Maturity Mismatch assumed that the baseline mismatch remained
but that 5 per cent of total deposits would be made available from the CBN and the
intra-group;

ii.
Test 2b: Static Rollover Risk assumed that 80.0 and 72.0 per cent of the funding in the
0-30and 31-90 day buckets would be rolled over, with no possibility to close the
funding gap from other buckets. However, 5 per cent of the total deposits would still
be available from the CBN and the intra-group; and

iii.
Test 2c: Dynamic Rollover Risk made the same assumption as in 2b above, but with
the option of closing the liquidity gap from other buckets.

Under this test, assets in the 0-30 day bucket were adequately funded in two of the three
scenarios used (2a and 2b).There was deterioration in the 31-90 day bucket under the Static
Rollover Analysis Test (Test 2b) and the Dynamic Rollover Risk Test (Test 2c) (See Figure
3.6).

The test results revealed that although the banking system was resilient as at June 2014, it
was less so compared with the position in the second half of 2013.

Figure 3. 6: Rollover Risk, Baseline and Post-shock Funding Gap


< 30 days
31-90 days
>90 -180
days
>180 - 360
days
>1-3 years
> 3 years
Baseline (N'billion)

Test 2a (N'billion)

Test 2b (N'billion)

Test 2c (N'billion)


N Billion

3.2.2 The Solvency Stress Test
The test captures the characteristic nature of individual banks‟ balance sheets and macro-
prudential concerns, using the bottom-up and top-down approaches, specified in the modified
IMF solvency stress test model. Assessment of the resilience or otherwise of the Nigerian
banking system was done by applying a series of exceptional but plausible shocks and
scenarios, which effectively translated the single factor and multifactor shocks into bank
balance sheets.

The exercise covered the 23 banks, using the following risk channels: credit, liquidity,
interest, foreign exchange rates, and foreign exchange trading risks. The resilience of the
banking system was assessed against defined benchmarks with reference to 10.0 per cent
CAR, 30.0 per cent liquidity ratio, 5.0 per cent NPLs, as well as significant declines in return
on assets (ROA) and return on equity (ROE).

For systemic and peer assessment, the banks were classified into three broad groups, based on
their asset size. Large banks were those with assets equal to or greater than N1 trillion (>N1
trillion); medium banks are those with assets equal to or greater than N500 billion, but less
than N1 trillion; and small banks were those with assets less than N500 billion, respectively.

A.
Baseline (Pre-shock) Position
The baseline (pre-shock) CAR for the banking industry, large, medium, and small banks
stood at 16.43, 16.90, 14.43 and 16.06 per cent, respectively, which reflected 0.77, 3.62, and
2.27 percentage points decrease for the banking industry, medium, and small banks below
their December 2013 positions. Large banks showed 0.66 percentage point increase over the
December 2013 position of 16.24 per cent (Table 3.3).

Table 3. 3: Baseline CAR

Banks

Banking
Industry
Large
Medium
Small
June 2014(%)

December

Percentage
Point Change


Similarly, the pre-shock liquidity ratios for the industry, large, medium, and small banks were
49.91, 47.17, 59.03and 54.82 per cent, respectively, reflecting 1.11, 3.58, 3.27, and 13.65
percentage points decrease below their respective December 2013 ratios of 51.02, 50.75,
62.30 and 68.47 per cent (Table 3.4).

Table 3. 4: Baseline Liquidity Ratio

Banks

Banking
Industry
Large
Medium
Small
June 2014 (%)

December 2013 (%)

Percentage Point
Change


Figure 3. 7: Number of Banks in CAR Buckets

Figure 3. 8: Number of Banks in LR Buckets

Figure 3. 9: Baseline (Pre-shock) CARs and LR (%)

Banks with CAR ≥15% Banks with CAR ≥10%
but < 15%
Banks with CAR < 10%
but> 5%
Banks with CAR ≤ 5%
but> 0%
Banks with CAR ≤0%
Banks with CAR ≥15%
Banks with CAR ≥10% but < 15%
Banks with CAR < 10% but> 5%
Banks with CAR ≤ 5% but> 0%
Banks with CAR ≤0%

≥40%
<40% but ≥30%
<30% but ≥20%
<20%
≥40%
<40% but ≥30%
<30% but ≥20%
<20%

Jun 2014 CAR
Dec 2013 CAR
June 2014 Liquidty Ratio
Dec 2013 Liquidity Ratio
Banking Industry
Large Banks
Medium Banks
Small Banks

The pre-shock ROA of the banking industry, large, medium, and small banks were 1.41, 1.53,
1.34 and 0.78 per cent, respectively. These reflected respective decreases of 0.90, 1.51, 1.08
and 1.24 percentage points over December 2013 positions. On the other hand, the ROE for
these broad groups of banks declined to 9.50, 10.56, 9.63 and 4.29 per cent, respectively, in
June 2014 from 19.83, 22.14, 20.40 and 17.56 per cent in December 2013. These reflected
decreases of 10.33,11.58,10.77 and 13.27 percentage points, respectively (Tables 3.5 and
3.6).

Table 3. 5: Baseline ROA

Banks

Banking
Industry
Large
Medium
Small
June 2014 (%)

March 2014 (%)

December 2013 (%)

Percentage Point Change
Btw June and December


Table 3. 6: Baseline ROE

Banks

Banking
Industry
Large
Medium
Small
June 2014 (%)

March 2014 (%)

December 2013 (%)

Percentage
Point
Change btw June and
Dec 2013


A.
Analysis of the Results
At end-June 2014, nine (9) banks were classified as large, four (4) as medium and 10 as
small, based on their asset size.

1.
Credit Risk
Except for banks in the small group, all other groups remained resilient to credit risk as their
CARs were above the 10 per cent threshold, even after the shock of a 200 per cent rise in
NPLs. Under this scenario, 17 banks maintained CARs above the 10 per cent threshold, while
no bank, and 3 other banks had <5 but ≥0 per cent, ≤10 but ≥5 per cent, and <0 per cent
CARs, respectively.
Table 3. 7: General Credit Risk Shocks

Banks’ CAR After Shocks
Single Factor Shocks
All
Large
Medium
Small
Baseline CAR

Shock 1av-50% NPLs increase

Shock 1avi-100% NPLs increase

Shock 1avii-200% NPLs increase


The banking industry, large, medium, and small groups of banks, showed significant
resilience to credit concentration risk, as their CARs remained above 10.0 per cent under the
shocks and scenarios presented in Table 3.7. However, this was not without its challenges as
the banking industry‟s exposure to the top five corporate borrowers remained significant.

2.
Interest Rate Risk
The results of the stress tests on the net positions of interest sensitive instruments relative to
ROAs and ROEs, revealed that the banking industry and the broad groups of banks were
resilient to interest rate risk. This is because their pre-shock positions (in terms of capital
impairment, ROAs and ROEs) decreased only marginally. However, small banks‟ indices
improved as they were net-takers of funds after the most strained shocks of 1,000bps
downward parallel shift in the yield curve were applied (Figures 3.10 and 3.11).

Figure 3. 10: Impact of Interest Rate Risk on CAR


Figure 3. 11: Impact of Interest Rate Risk on ROA and ROE


Baseline CAR
Impact of 1000bps downward parallel shift in yield curve
on CAR
All banks (23)
Large banks (9)
Medium banks (4)
Small banks (10)

Baseline ROA
Baseline ROE
Impact of 1000bps
downward shift in
yield curve on ROA
Impact of 1000bps
downward parallel in
yield curve on ROE
All banks (23)
Large banks (8)
Medium banks(5)
Small banks (10)

Table 3. 8 : Impact of Selected Shocks on CAR, ROA and ROE

Banks
Most Severe Shocks (500to 1000bps)
Banking
Industry
Large
Medium Small
Baseline ROA (%)

Baseline ROE (%)

Baseline CAR (%)

Interest Rate Volatility (Impact on CAR)
Shock 5b iii (500bps downward parallel shift in yield
curve)

Shock 5b iv (1000bps downward parallel shift in yield
curve)


Impact of Parallel Shift in Yield Curve Shocks on ROA
Interest Rate Volatility


Shock 5biii (500bps downward parallel shift in yield curve)

Shock 5biv (1000bps downward parallel shift in yield
curve)

Impact of Parallel Shift in Yield Curve Shocks on ROE
Interest Rate Volatility


Shock 5biii (500bps downward parallel shift in yield curve)

Shock 5biv (1000bps downward parallel shift in yield
curve)


3. Exchange Rate Risk
The banks showed significant resilience to foreign exchange rate risk as their capital
deteriorated (falling below the regulatory minimum) only after a shock of 50 per cent
exchange rate appreciation was induced on their net foreign assets. At this point, nine banks
which had baseline CAR above 10.0 per cent, slipped below the 10 per cent minimum
regulatory benchmark (Table 3.9).

Table 3. 9: Number of Banks with CAR under Restricted Scenarios
<0%
≥0 &<5
≥5 &<10
≥10 &<15
≥15
Baseline

Shock 4bi (10% appreciation of the Naira)

Shock 4bii (20% appreciation of the Naira)

Shock 4biii (50% appreciation of the Naira)

Shock 4biv (100% appreciation of the Naira)

4. FX Trading Risk
The results of the tests showed that the banking industry was resilient to FX trading risk
relative to the baseline position. The banks‟ pre-shock positions, in terms of impact on both
ROAs and ROEs, changed only marginally, even after an induced 100 per cent decline in FX
trading income. This was due mainly to the low proportion of FX trading income relative to
other income sources.

Table 3. 10: Impact of FX Trading Shocks on ROA -Number of Banks with ROA in Respective
Buckets
<0%
≥0&<1% ≥1<2% ≥2≤5% >5%
Impact of FX Trading Shocks on ROA
Baseline ROA

FX Trading Income Volatility
Shock 7ai (10% decline in FX trading Income)

Shock 7aii (20% decline in FX trading Income)

Shock 7aiii (50% decline in FX trading Income)

Shock 7aiv (100% decline in FX trading Income)

Table 3. 11: Impact of FX Trading Shocks on ROE - Number of Banks with ROE in
Respective Buckets

<0%
<5%
<10%
<15%
>15%
Baseline ROE

FX Trading Income Volatility
Shock 7ai (10% decline in FX trading Income)

Shock 7aii (20% decline in FX trading Income)

Shock 7aiii (50% decline in FX trading Income)

Shock 7aiv (100% decline in FX trading Income)

In summary, banks were adjudged to be more sensitive to credit concentration and exchange
rate risks than to other risks. Liquidity and interest rate risks had tolerable effects, except in a
few cases where volatility in interest rates produced a large impact on account of duration
mismatches in the tenored buckets. Overall, the banking industry stress tests suggested that
the industry was considerably resilient.

3.2.3 Contagion Risk Analysis
The contagion risk analysis assessed interbank exposures and their impact on the
interconnectedness of financial institutions that could lead to the transmission of shocks to
the whole banking system. A network analysis tool, which relied on exposures in respect of
interbank placements, takings, and money-at-call (with emphasis on unsecured transactions)
was used to test the degree of interconnectedness among the institutions. The analysis
revealed that nine (9) institutions were central in the network as they had three (3) or more
bilateral exposures. Also, the contagion risk through interbank exposure was limited as the
CARs of all the net placers and that of the industry were within the prudential requirements
(Table 3.12).

Table 3. 12: Results of Contagion Risk Analysis on Net Interbank Unsecured Exposures
Description
Placing Banks
Bank 2
Bank 9
Bank 11
Industry
Baseline CAR (%)

Post-Test CAR (%)

Net Placement (N‟ Billion)
8.15
17.45
4.94
Nil

Figure 3. 12: Tiered Structure of Unsecured Placements

Note: Node colour representation (Blue= Lenders and Red= Borrowers; Purple= Borrower and Lender)

3.3
Supervision of Banks and Other Financial Institutions
3.3.1 Banks

A joint CBN and NDIC risk assets assessment examination of all the banks was conducted to
ascertain the quality of their assets and adequacy of loan loss provisioning for the purpose of
considering their 2013 annual accounts. Also, the CBN commenced the computation of
consolidated prudential ratios for banking groups. Consequently, banks are now required to
calculate all prudential ratios on a consolidated basis.

The key challenges in the banking industry remained weak corporate governance and
inadequate risk management practices. The rating of the control functions generally trended
towards „needs improvement‟, owing to non-implementation of some previous examiners‟
recommendations. Improvements were, however, noted in the internal audit and financial
analysis functions of most banks. In order to ensure effective compliance by banks, the CBN
created a Monitoring and Compliance Division.

3.3.1.1 Foreign Exchange Examinations
The CBN examined the foreign exchange activities of banks during the review period to
ascertain the extent of compliance with extant foreign exchange laws and regulations. The
major infractions by banks included: delay in issuing certificates of capital importation;
rendition of inaccurate and incomplete returns; non-compliance with approved Net Open
Positions, and inadequate documentation for imports. Appropriate sanctions were applied on

the erring banks. A special investigation was also conducted on the foreign exchange
operations of banks to determine the aggregate foreign exchange sold to BDCs. The
investigation revealed that the BDCs sourced most of their foreign exchange from banks that
obtained a significant proportion of their foreign exchange from official sources. Corrective
measures were taken to address this development.

In order to address the inadequate information technology skills faced by on-site examiners,
the CBN conducted a special in-house training on ACL, SQL and advanced Excel. The
training greatly improved the ability of examiners to conduct effective analysis of spooled
banks‟ operational back-up data in foreign exchange examinations.

Spot checks were conducted on AML/CFT compliance and utilization by banks of the
proceeds of Eurobonds/other foreign loans for on-lending. The aim of the latter was to
confirm the creation or existence of assets that would serve as a repayment source for foreign
obligations at maturity and how the banks were managing the foreign exchange risk
associated with such transactions.

3.3.2 Other Financial Institutions
3.3.2.1 Microfinance Banks (MFBs)
A total of 367 MFBs were examined at end-June 2014, which represented 40 per cent of the
existing 925MFBs. The examination revealed improvements in the operations of
microfinance banks and a higher level of risk management practices.
During the review period, the CBN analysed the reports on the post-examination monitoring
exercise earlier conducted to evaluate the level of compliance of MFBs with examiners‟
recommendations. The exercise revealed that 115 or 20 per cent of the 567 evaluated MFBs
implemented not less than 60 per cent of examiners‟ recommendations, 153 or 27 percent
implemented between 40 and 59 per cent of the recommendations, while the remaining 299
or 53 per cent implemented not more than 39 per cent of the recommendations. Accordingly,
supervisory letters were issued to all erring institutions and penalties applied as appropriate.
The low level of compliance with examiners‟ recommendations was being addressed through
periodic monitoring.
3.3.2.2 Finance Companies (FCs)
Supervisory letters were issued to the 61 FCs earlier examined in the last quarter of 2013.
The highlights of the examination reports are as follows:
Three FCs categorized as marginal were required to take necessary corrective actions
to restore their prudential ratios to the prescribed minima;
Thirty FCs categorized as unsound and/or insolvent were directed to recapitalize to
restore their adjusted capital to a minimum of N20 million stipulated in the previous
guidelines within 90 days and take necessary actions to restore other prudential ratios
to the prescribed minima; and

Two FCs undergoing restructuring were granted 180 days to complete the
restructuring exercise, failing which their licences would be revoked.
3.3.2.3 Bureaux-de-Change (BDCs)
The CBN constituted a task force for the regular monitoring of foreign exchange utilization
by BDCs. During the review period, spot-checks were conducted on 68 BDCs by the task
force. The exercise revealed serious regulatory issues in the operations of BDCs. It indicated
that BDCs had weak and ineffective operational structures, with adverse consequences for the
conduct of monetary policy.

Consequently, the CBN revised the guidelines for the operation of BDCs by increasing the:
Minimum paid-up capital to N35 million;
Application, licensing and annual renewal fees to N100,000, N1 million and
N250,000, respectively; and
Mandatory cautionary deposit to N35 million.

Furthermore, membership of the Association of Bureaux De Change Operators of Nigeria
(ABCON) would no longer be mandatory, while multiple-ownership of BDCs by
promoters/directors was prohibited. All BDCs were required to comply with the new
guidelines, latest by July 31, 2014.

3.3.3 Framework for Crisis Resolution
Following the approval of the Systemic Policy Partnership/Oliver Wyman (SPP/OW) Report
by the Financial Services Regulation Co-ordinating Committee (FSRCC) at its 50th Meeting
on December 17, 2013, the implementation of the Report had commenced with the
establishment of the Project Management Office (PMO).

The PMO identified potential implementation challenges, formed work streams and proffered
strategies for addressing them to guide the work streams and the PMO towards effective and
efficient performance.

3.4
Compliance with International Standards
3.4.1 Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT)
In its effort to address the challenges of money laundering and terrorist financing, the CBN
has increased its level of co-operation and collaboration with domestic and international
stakeholders through exchange of information, conducting joint examinations, and organizing
joint training programmes. Such stakeholders include:
(i)
Office of the National Security Adviser (ONSA);
(ii)
NFIU, EFCC, Special Control Unit against Money Laundering (SCUML);
(iii)
US Department of State and US Embassy;
(iv)
US Department of Treasury, International Narcotics & Law Enforcement (INLE);
(v)
US Internal Revenue Service (IRS);

(vi)
Inter-Governmental Action Group Against Money Laundering in West Africa
(GIABA); and
(vii)
Other central banks, including the Bank of Ghana, and the South African Reserve
Bank (SARB), etc.

Meanwhile, the CBN sustained its function of issuing regulations intended to safeguard the
Nigerian financial system against the abuses of financial crime, including money laundering,
terrorist financing and other illicit financial transactions.

3.4.2 Implementation of Basel II/III
Following the issuance of six Guidance Notes on the implementation of Basel II to banks and
discount houses in December 2013, Basel II implementation gained momentum during the
period under review with the commencement of a parallel run of Basel II with Basel I.
Although the parallel run was originally planned to last for six months, the Bank had to
extend the period to nine months. Thus, the parallel run was expected to end on September
30, 2014, with full implementation of Pillar 1 of Basel II, effective October 1, 2014. Banks
and discount houses had commenced submission of their Internal Capital Adequacy
Assessment Process (ICAAP) Reports, in line with regulatory requirements. The CBN, in
collaboration with the NDIC, carried out a sensitization exercise for bank examiners on the
review of ICAAP Reports towards enhancing capacity for effective implementation of Basel
II and III.

As part of the implementation process, the CBN adopted the Basic Indicator Approach for
calculating capital requirements for operational risk and the Standardised Approach for credit
and market risks in the first two years. It was expected that an effective rating system would
have been developed in the country by the end of the period. Banks were also required to use
the period to build adequate, reliable data and gain necessary experience for the migration to
the more advanced approaches.
Towards the full adoption of Basel II and III in October 2014, a review of the impact of the
initial implementation on the banks‟ capital, as measured by their capital adequacy ratios and
other relevant indicators, was undertaken. It showed that despite the additional capital charge
for operational and market risk, the banks largely met the minimum capital requirements.

3.4.3 International Financial Reporting Standards (IFRS)
Banks, discount houses, credit bureaux and some other financial institutions issued IFRS -
compliant financial statements for the year ended December 31, 2013.The CBN and the
banks continued to build capacity on IFRS to enhance supervision and the quality of
reporting. Furthermore, the CBN completed the test-run and deployment of a new IFRS-
compliant regulatory reporting system, the Financial Analysis (FinA).

Banks have so far published two IFRS-compliant annual financial statements. At end-June
2014, banks were reporting on both the old NGAAP-based electronic Financial Analysis
Surveillance System (e-FASS) and the IFRS-compliant FinA.

During the review period, a joint CBN/NDIC IFRS Implementation Technical Committee
issued a Report on the review of optional exemptions elected and accounting policies
adopted; implementation of information technology systems to support IFRS-based financial
reporting and review of impairment methodology; and the first IFRS financial statements.
Lapses observed in respect of the first IFRS financial statements and the accounting policies
were rectified during the review of banks‟ 2013 financial statements.

Following the implementation of IFRS by significant public interest entities, the ad-hoc
committee on IFRS implementation of the FSRCC was dissolved and its residual activities
transferred to the FSRCC‟s Harmonisation and Coordination Sub-Committee. As reporting
entities, some member agencies of the FSRCC, including NDIC, NAICOM, CAC, and NSE,
commenced the implementation of IFRS.

3.4.4 Competency Framework for the Nigerian Banking Industry
The Competency Framework (CF), which prescribes the minimum requirements for directors
and officers engaged to perform control functions seeks to ensure that they possess the
qualifications, skills and experience relevant to their jobs. The CBN conducted an industry
Baseline Assessment which indicated that of the 5,258 directors and officers who perform
control functions, about 35 per cent were considered to have met the minimum requirements
of the Framework.

Lack of relevant professional certifications was the major reason why most directors and
officers failed to meet the minimum requirements. The institutions were requested to submit
proposed remedial action plans for their directors and officers who were found deficient. The
CBN will continue to monitor effective compliance with the Framework by banks and
discount houses.
3.4.5 Regulation of Financial Holding Companies
In furtherance of the implementation of the banking model introduced in 2010, the CBN
issued guidelines to facilitate the regulation, supervision and operation of financial holding
companies in Nigeria.
3.4.6 Nigerian Sustainable Banking Principles
The CBN issued the reporting template for the Nigerian Sustainable Banking Principles on
March 6, 2014, and banks have since commenced implementation of the principles.
Templates for quarterly returns were designed to enable the CBN to monitor the progress of
implementation at individual bank and industry levels, and banks had started rendering the
returns.
3.5
The Asset Management Corporation of Nigeria (AMCON)
Total outstanding bond liabilities of AMCON stood at N4.67 trillion at end-June 2014, of
which N866.73 billion would be due for redemption in October 2014. The Corporation
continued to meet payments due on its maturing bonds from the sinking fund set up for that
purpose and from recoveries. It also repurchased bonds worth N13.295 billion during the
period, bringing the net amount due for redemption in October 2014 to N853.44 billion. This

amount represents the balance of AMCON bonds held by the private sector, banks and other
entities. The Corporation had, in December 2013, redeemed its Series 1 bonds totalling
N1.699 trillion. The CBN continued to hold AMCON bonds with a total face value of N3.80
trillion, earlier restructured into a 10-year Note at 6 per cent coupon.
During the period under review, AMCON made total recoveries of N130.60 billion
(comprising - cash of N20.99 billion; property settlement of N26.78 billion and securities
settlement of N82.83 billion).
The balance of Eligible Bank Assets (EBAs) purchased by the Corporation stood at N1.613
trillion at end-June 2014, compared with N2.37 trillion at end-December 2013 and N2.72
trillion at end-June 2013. Restructured loans amounted to N428.654 billion at end-June2014,
indicating an increase of N54.30billion or 14.5 per cent, over the level of N374.35 billion at
end-December 2013. The development indicated that borrowers were finding it difficult to
meet their credit obligations to the Corporation, thus increasing its credit risk.
Twenty one banks paid their contributions to the Sinking Fund for year 2013. AMCON‟s
funding model showed that it would be able to redeem fully its outstanding bond exposure to
the CBN within the next ten years from the sale of acquired banks, loan recoveries, asset
sales and the contributions to the Banking Sector Resolution Cost Fund.

3.6
Key Risks in the Financial System

3.6.1 Credit Risk
The industry NPL ratio increased to 3.50 per cent at end-June 2014, from 3.23 per cent
recorded at end-December 2013, indicating a deterioration in the quality of bank assets.
Although the industry ratio was within the regulatory limit of 5 per cent, six banks failed to
operate within the prescribed threshold. Total NPLs also grew by 16.93 per cent to N379.01
billion at end-June 2014, from N324.13 billion at end-December 2013.

The average prime and maximum lending rates of 16.73 and 25.76 per cent respectively were
high. This significantly limited access to credits and contributed to NPLs as well as the high
cost of doing business in the country.

The high level of credit concentration persisted, as the top 50 and 100 borrowers accounted
for 31.52 and 40.77 per cent of gross credit, respectively, at end-June 2014, compared with
31.88 and 40.51 per cent, respectively, at end-December 2013.

With inflation at 8.2 per cent, Nigerian Treasury Bills rate, ranging from 9.98 to 11.93 per
cent for 91 days tenor, continued to yield a positive real rate of return; hence, crowding out
investments from the real sector of the economy.

Figure 3. 13: Trend of Banking Industry NPLs


3.6.2 Liquidity Risk
All banks exceeded the minimum liquidity ratio of 30 percent with the industry average of
42.66 per cent. Liquidity risk was moderated, attributable to the effects of monthly statutory
allocations to the various tiers of government by the Federation Accounts Allocation
Committee (FAAC). Thus, the Bank continued to incur high costs in managing excess
liquidity in the system in order to achieve its monetary policy objectives.

3.6.3 Market Risk
Most interest rates increased during the period under review, reflecting the sustained tight
monetary policy stance of the Bank towards containing the excess liquidity in the system.

The exchange rates were generally stable in the RDAS, interbank and BDC segments, but
were characterized by a wide spread (N10+) between the RDAS and BDC segments. The
wide margin created arbitrage opportunities, with negative implications for exchange rate
stability and the external reserves. The Bank‟s interventions in the FX market to preserve the
value of the naira resulted in the depletion of the external reserves by US$5.52 billion to
US$37.33 billion by end-June 2014. Market risk was accentuated by the high level of
volatility in oil receipts and potential reversal of foreign portfolio investments (FPIs) owing
to developments in the domestic and advanced economies.

3.6.4 Operational Risk
The key operational risks faced by the banking industry included insecurity, frauds and
forgeries. Reported incidents of fraud and forgeries continued to rise, increasing from 3,917
in the second half of 2013 to 5,197 in the first half of 2014. However, the value involved
declined from N31.49 billion in the second half of 2013 to N16.82 billion in the first half of
2014. Similarly, consequent losses declined from N2.08 billion in the second half of 2013 to
N1.72 billion in the first half of 2014.

A recent international development that has serious operational risk implications for Nigerian
banks is the US Foreign Account Tax Compliance Act (FATCA) of 2010. FATCA is aimed at

Nov
'10
Mar
'11
Jun
'11
Dec
'11
Jun
'12
Dec
'12
Jun
'13
Dec
'13
Jun
'14
Per cent
NPLs %

boosting revenue generation by the US Internal Revenue Service (US-IRS) through the
targeting of the income of US citizens with substantial interests in foreign financial
institutions (FFIs). These entities are required to report the income of US citizens directly to
the US-IRS or through the FIRS. Countries are expected to comply with this legislation with
effect from July 2014.

In the event of non-compliance by Nigeria, 30 per cent of funds transferred to US-based FFIs
by Nigerian FIs will be withheld until the US Government is satisfied that such funds are not
taxable benefits of US citizens. Given this scenario, FATCA has exposed Nigeria to
operational and reputational risks that may undermine the stability of financial institutions. In
order to address this issue, an inter-agency committee is working out modalities for
compliance with the FATCA.

Improved AML/CFT risk-based supervision/examination processes and the earlier delisting
of Nigeria from the FATF grey list helped to boost public confidence in the banking system.

3.6.5 Emerging Key Risks
In addition to the traditional sources of risk to the banking system, highlighted above, some
of the emerging risks to financial system stability include:
Impact of declining oil prices on government revenue;
Geopolitical risk arising from the insurgency in the North-East;
Political risk due to 2015 elections;
Inflation risk, arising from the higher election-year spending;
Asset prices stagnation that could result from sudden capital flow reversals;
Risks surrounding the current high interest rates environment;
Depletion of the external reserves; etc.

3.7
The Financial Services Regulation Co-ordinating Committee
The Financial Services Regulation Co-ordinating Committee (FSRCC) continued to provide a
useful forum for interaction and coordination by the regulatory authorities in the Nigerian
financial system.

As part of efforts to build capacity among the financial system regulators, the FSRCC in
collaboration with the Toronto Leadership Centre, Canada, organized a workshop on Macroprudential Surveillance for staff drawn from member agencies.

In pursuance of its expanded mandate on issues relating to the activities of illegal fund
management firms, the Committee sought the assistance of the Nigeria Police to obtain a
court order to close the operations of one of them which operated in different locations in
Nigeria, freeze its bank accounts and prosecute the directors. The Federal High Court had
also appointed liquidators for 18 illegal fund management firms which had earlier been
closed.

3. 8
Customers’ Complaints
The Bank received 438 new complaints from customers against financial institutions in the
first half of the year. The figure showed an increase of 43.61 per cent over the 305complaints
received in the second half of 2013. The total refunds to customers amounted to N4.03 billion
and US$226,476, compared with N1.48 billion and US$194,000 recorded in the second half
of 2013 (Table 3.13).

Table 3. 13: Complaints Received and Resolved, January - June 2014
Months
No. of new
complaints received
against FIs
Refunds (N)
Refunds
(US$)
No. of cases
resolved
January

159,194,123.67
50,116.78

February

1,663,067,538.79
126,358.77

March

155,666,901.13
50,000.00

April

269,133,079.16
-

May

1,645,778,813.78
-

June

132,793,602.70
-

Total

4,025,634,059.23
226,475.55

The number of complaints resolved included some of the outstanding complaints from the
previous period.

The complaints received from customers were related to ATM issues, excess charges,
dishonoured cheques and guarantees, fraud, non-crediting of accounts, cheque conversion,
and unauthorized deductions, among others.

3.8.1 The Consumer Complaints Management System
The Consumer Complaints Management System (CCMS) is an application developed by the
Bank for the management of consumer complaints in the financial services sector.
Meanwhile, the Bank conducted training sessions for internal and external stakeholders on
the use of the CCMS.

3.8.2 Market Conduct
As part of its efforts to resolve consumer complaints and promote public confidence in the
financial system, the CBN conducted spot checks to ensure banks‟ compliance with the
provisions of the Revised Guide to Bank Charges during the review period. This resulted in a
refund of N291.76 million to customers by four banks, being shortfalls in the interest paid to
them. One bank refunded N143 million to customers, being excess commission on turnover
(COT) over the maximum prescribed by the Revised Guide to Bank Charges.

The Bank extended the timeline for the resolution of customers‟ complaints on excess
charges and loans from 14 to 30 days to allow for more effective resolution of cases.

4.0 THE PAYMENTS SYSTEM

4.1 Developments in the Payments System
The Nigerian payments system witnessed the following significant developments during the
review period:

4.1.1 Introduction of the Bank Verification Number Scheme
In conjunction with the Bankers‟ Committee, the CBN introduced the above Scheme in
February 2014 as part of its efforts to address the challenges of a unique identifier in the
Nigerian banking industry. The implementation of the Scheme is expected to increase the
effectiveness of the “Know Your Customer” (KYC) requirement and reduce operational and
credit risks, among others (Box 2).

4.1.2 E-Reference Portal
An industry e-reference portal was developed and implemented for efficient processing of
customers‟ account references. The portal is intended to digitise manual requests for
confirmation of customers‟ account references so that requests received from other banks
could be verified online and promptly.

4.1.3 Cashless Policy
The Bank abolished fees on cash deposits above the thresholds stipulated in the cash-less
policy. It also conducted a sensitization exercise in preparation for the take-off of the policy
in the remaining 30 states of the Federation. This was expected to broaden the adoption of
electronic means of payment.

4.1.4 International Money Transfer and Card Services
The Bank revised the Guidelines for Card Issuance and Usage in Nigeria with a view to
providing minimum standards and requirements for the operations of payment cards. This
would require issuing banks, processors and operators of card schemes to ensure optimum
security and efficiency. In addition, the Bank issued Guidelines on International Money
Transfer services in Nigeria which specify minimum standards and requirements for offering
inbound and outbound international money transfer services.

4.2
Payments System Vision 2020
In continuation of its implementation of the Payments System Vision 2020 (PSV 2020), the
Bank, in conjunction with the Nigeria Export Processing Zones Authority, drafted guidelines
for the operations of banks in the free trade zones (FTZ). The objective of the Guidelines was
to prescribe detailed regulatory and supervisory requirements necessary to promote efficient
and sustainable banking services in Nigeria‟s FTZs.

4.3
Large Value Payments
Inter-bank transfers through the new Real-Time Gross Settlement (RTGS) System increased
to 323,414 transactions, valued N78,011.68 billion at end-June 2014 from 200,918

transactions valued N56,610.69 billion at end-December 2013.This reflected an increase of
60.97 and 37.80 per cent in volume and value, respectively, and increased confidence in the
usage of this mode of payment.

4.4
Retail Payments

4.4.1 Cheques Clearing
Cheques cleared decreased to 7,144,340 valued N3,710.67 billion, respectively in the first
half of 2014, compared with the level of 8,257,330 and N4,073.15 billion in the second half
of 2013. The decrease was attributed to customer preference for electronic and other payment
channels.

4.4.2 NIBSS Instant Payment
The volume and value of NIBSS Instant Payment (NIP)rose to 16,839,648 and N9,137.76
billion in the first half of 2014, from 11,186,930 and N6,666.17 billion in the second half of
2013, indicating increases of 50.53 and 37.08 per cent, respectively. The increase in the use
of the channel was attributed to the growing awareness of the scheme, as well as users‟
preference for its quicker settlement cycle.
4.4.3 NIBSS Electronic Fund Transfer Transactions
The volume and value of NIBSS Electronic Fund Transfer (NEFT) transactions decreased by
14,260,732 and N7,356.90 billion in the first half of 2014, compared with 16,115,171 and
N7,569.17 billion in the second half of 2013, indicating declines of 11.51 and 2.80 per cent,
respectively. The declines were due to preference for NIP, being an instant payment platform.

4.4.4 Electronic Card Payments
The volume and value of electronic card (e-card) transactions rose to 199,284,309 and N1,
944.56 billion in the first half of 2014, from 176,448,606 and N1,763.98 billion in the second
half of 2013, reflecting increases of 12.94 and 10.24 per cent, respectively (Table 4.1). This
development indicated increased public confidence in the use of e-cards.

Data on various e-payment channels for the period under review indicated that Automated
Teller Machines (ATMs) remained the most patronised payment mode, accounting for 89.67
per cent of the total volume, followed by mobile payments, 4.61 per cent, and POS terminal
with 4.58 per cent. The internet was the least patronised, accounting for only 1.14 per cent of
the total. Similarly, in value terms, ATMs accounted for 85.26 per cent; POS, 7.18 per cent;
mobile payments, 5.96 per cent; while the web (Internet) accounted for 1.60 per cent (Table
4.1).

Table 4. 1: Electronic Card Transactions

Payment
Channel
Number of
Terminals
Number of Transactions
%
Change
(Volume)
Value of Transactions
%
Change
(Value)
Dec

June

Dec 2013
June 2014
Dec 2013
(N Billion)
June 2014
(N Billion)
ATMs

POS

Mobile

Internet
(Web)

Total


5.0
OUTLOOK
According to the IMF World Economic Outlook (WEO) update of April 2014, global activity
has broadly strengthened and is expected to improve further in 2014–15. The recovery will be
stronger in advanced economies, with prospects for improved performance. This recovery
would be driven largely by fiscal coordination and consolidation as well as expected increase
in inventory demand. Output growth in the emerging market economies is expected to
improve as a result of stronger exports to advanced economies. However, the combined effect
of capital flow reversal and currency depreciation could lower net investments in the
emerging market economies.

Global inflation is expected to remain contained, particularly in advanced economies, in an
environment of moderate commodity prices and economic recovery. In most advanced
economies, although headline inflation rates are now below their central banks‟ target levels,
inflation expectations, as reported in survey data and financial market indicators over the
medium to long term, would remain anchored. The outlook for global inflation is strongly
influenced by developments in commodity prices and, more importantly, in energy prices.

Nigeria‟s output growth for the second half of 2014 is expected to remain resilient in spite of
disruptions in agricultural activity on account of insurgency in some parts of the country.
Domestic demand would continue to drive the services and manufacturing sectors, while the
strengthening of growth in advanced economies would bolster external demand. Although
there are signs of domestic inflationary pressures, the pass-through effect of foreign prices on
domestic inflation is expected to be dampened as global inflation expectations have remained
well anchored. In addition, proactive monetary policy measures would stem the liquidity
surfeit, arising from the accommodative fiscal policy anticipated in the second half of the
year. Consequently, domestic inflation would remain reasonably contained within its recent
historical average.

Money market rates in Nigeria are expected to remain stable in the second half of 2014, albeit
at a lower level than was recorded in the first half of 2014, owing to increased electioneering
expenditure. Expectations of increased liquidity surfeit in the system would be counterbalanced by tight monetary policy in order to maintain price stability.

However, with the tapering of the quantitative easing programme by the Federal Reserve
Bank, foreign investors might gradually exit the capital market, with adverse implications for
domestic financial stability.

With respect to the payments system, the full implementation of the Bank Verification
Number scheme by the deadline of December 31, 2014 is expected to significantly minimise
the incidence of fraud and forgeries, thereby, reducing operational risk and enhancing the
stability of the financial system. Meanwhile, the National Payments System Strategic Board,
comprising 19 members from both the public and private sectors, and chaired by the
Governor of the CBN, will be inaugurated which should provide strategic direction to the
national payments system.

With the renewed support for the real sector interventions of the CBN in the areas of
agriculture, gas-to-power, and micro, small and medium enterprises, it is expected that total
bank credit to agriculture, forestry and fishing, as well as power and energy, will continue to
improve significantly above their first half-year levels of 3.84 and 3.95 per cent respectively.
That outcome will, no doubt, have the overall impact of substantially reducing Nigeria‟s food
import bill on rice, sugar, wheat and fish, and complement government‟s efforts at ensuring
the delivery of additional power for economic development. The gas-to-power intervention
programme, which is expected to come on stream in the second half of 2014, will ensure an
increase in the number of power projects beyond the existing 36 under PAIF, enhance the
potential generating capacities of these projects above the current level of 847.4 MW and add
more than the present 440.1 MW of electricity to the national grid by end-December 2014.
In conclusion, the relative stability attained in the financial system in the first half of 2014 is
expected to be enhanced during the rest of the year, with the pursuit of more reform measures
to address emerging challenges.

Box 1: New Nigerian Interbank Offered Rate Determination

The mechanics for the determination of the Nigerian Interbank Offered Rate (NIBOR) were
reviewed, in keeping with the financial benchmarks established by the International
Organisation of Securities Commissions (IOSCO).

Interbank Offered Rate (IBOR) is a daily reference rate that is generated, based on the
interest rates at which banks offer to lend unsecured funds to counter-parties in the interbank
market. It is a wholesale rate adopted by different countries around the globe as the
benchmark for pricing financial transactions.

The basis and process for fixing the rate are similar across countries, although named
differently in various jurisdictions. Thus, it is called the Nigerian Interbank Offered Rate
(NIBOR) in Nigeria, Mumbai Interbank Offered Rate (MIBOR) in India, Shanghai Interbank
Offered Rate (SHIBOR) in China, Singapore Interbank Offered Rate (SIBOR) in Singapore,
Euro Interbank Offered Rate (EURIBOR) in Europe, Emirates Interbank Offered Rate
(EIBOR) in The United Arabs Emirates, Norwegian Interbank Offered Rate (NIBOR) in
Norway, Tokyo Interbank Offered Rate (TIBOR) in Japan, Hong Kong Interbank Offered
Rate (HIBOR), and London Interbank Offered Rate (LIBOR), among others.

The LIBOR Scandal of 2012 informed the re-examination of the mechanics for the
determination of interbank offered rates generally. The basic principles recommended by
IOSCO for the computation and presentation of benchmarks used in financial markets further
underscored the need for doing so. The nineteen principles are categorized broadly under
governance, quality of the benchmarks, quality of the methodology, and accountability.

In Nigeria, the paucity of trades in some segments of the NIBOR benchmarks necessitated
the recent reform. Consequently, the Financial Markets Dealers Quotation Over-the-Counter
PLC (FMDQ-OTC) undertook a review of the NIBOR determination process, focusing on:
the benchmark definition, underlying philosophy, calculation methodology; tenors, and the
basis for the selection of participating or contributing institutions. The outcome was the
reduction in the number of benchmark tenors for reference to four, namely, overnight, one-,
two- and three-month tenors, to reflect the realities in the domestic money market.

Box 2: The Bank Verification Number (BVN) Scheme

The absence of a unique identifier in the Nigerian banking industry has been a major
challenge inhibiting the effectiveness of the Know Your Customer (KYC) principle, with
negative consequences on the growth of credit cards and other credit-related products. To
complement the existing means of identification of customers, which include: the driver‟s
licence; the International Passport; the National Identity Card; and the Permanent Voter‟s
Card; the CBN, in collaboration with the Bankers‟ Committee, recently introduced the
requirement of the Bank Verification Number (BVN) with biometric solution, as a unique
identifier for all bank customers.
The BVN initiative is expected to revolutionise the payment system in the country. In
addition to providing a unique identifier, the BVN scheme is targeted at addressing
cybercrime, ATM and other types of financial crimes as well as avoiding loss of customers‟
funds through compromising Personal Identification Numbers (PIN) and identity theft.
At the point of enrolment for BVN, a bank customer is required to walk into any of the
bank‟s branches with a valid means of identification, fill and submit the BVN Enrolment
Form, and present self for data capturing (such as fingerprint, facial Image, etc.) Thereafter,
an acknowledgment slip with the transaction ID will be issued to the customer. Within
24hours the system confirms the enrolment and a unique BVN is generated. The customer
will immediately receive an SMS notification with the BVN.
This enrolment process is done only once and BVN will be linked to all the customer‟s bank
accounts across Nigeria.
Meanwhile, a deadline of end-June 2015 has been set for customers to comply with the BVN
requirement.

Box 3: Reforms in the BDC Sub-sector

As part of the on-going banking sector reforms to strengthen and reposition the financial
system to effectively perform its role of promoting economic development, the CBN, in the
first half of 2014 reviewed the operations of the BDC Sub-sector. BDCs were introduced by
the Bank in the early 1990s to, among other objectives:
Provide access to foreign exchange for small-scale end users;
Serve as a tool for effective management of the naira exchange rate;
Assist in combating illegal financial activities;
Facilitate economic activities; and
Provide economic data for policy decisions.
In recent times, the CBN observed that BDC operations had negated the objectives for which
they were established, thereby, exposing the financial system to systemic risk. In order to
correct the observed deficiencies, the CBN reviewed the modalities for their operations. The
following are the highlights of the review:
The minimum capital requirement for the operation of BDCs in Nigeria was reviewed to N35
million;
The mandatory cautionary deposit was reviewed to N35 million, which would be deposited in
a non-interest yielding account in the CBN upon a grant of Approval-in-Principle;
Application fee increased to N100,000;
Licensing fee raised to N1 million;
Annual renewal fee increased to N250,000; and
Ownership of multiple BDCs is no longer permissible.


Old
New
Capital Requirement
N10 million
N35 million
Mandatory
Cautionary
Deposit
US$20,000
N35 million
Application Fee
N10,000
N100,000
Licensing Fee
N100,000
N1 million
Annual Renewal Fee
N10,000
N250,000
Multiple Ownership
Not prohibited
Prohibited

All existing BDCs, including those operating with a final approval letter, were expected to
comply with the mandatory cautionary deposit, latest by July 31, 2014. Furthermore,
membership of the Association of BDC Operators of Nigeria is no longer mandatory. BDCs
that comply with the revised guidelines are expected to be well-capitalized and properly
structured to contribute to economic growth and development of Nigeria.

Following the measures above, the CBN was in the process of issuing guidelines for
international money transfer operators to carry out inward and outward money transfer
services in Nigeria. The compliant BDCs are expected to serve as agents, on a fee basis, to
the international money transfer operators. At end-June 2014, BDCs were making
encouraging efforts towards compliance.

Box 4: Highlights of the Governor‟s Strategic Vision for the CBN

A gradual reduction in key interest rates, and inclusion of the unemployment rate in
monetary policy decisions.
Maintain exchange rate stability and aggressively shore up foreign exchange reserves.
Strengthen risk-based supervision mechanism of Nigerian banks to ensure overall
health and banking system stability.
Build sector-specific expertise in banking supervision to reflect loan concentration of
the banking industry.
In view of inadequate trigger thresholds from a macro-prudential perspective,
consider and announce measures to effectively address this anomaly.
Abolish fees associated with limits on deposits and reconsider ongoing practice in
which all fees associated with limits on withdrawals accrue to banks alone.
Introduce a broad spectrum of financial instruments to boost specific enterprise areas
in agriculture, manufacturing, health, and oil and gas.
Establish a Secured Transaction and National Collateral Registry, as well as establish
a National Credit Scoring System that will improve access to information on
borrowers and assist lenders to make good credit decisions.
Build a resilient financial infrastructure that serves the needs of the lower end of the
market, especially those without collateral.
Renew vigorous advocacy for the creation of commercial courts for quick
adjudication on loans and related offences.

Appendix 1: Selected Financial Soundness Indicators of the Nigerian Banking Industry
Indicators


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1. Asset-based Indicators
NPL to gross loans

Liquid assets (core) to total assets

Liquid assets (core) to short-term
liabilities

Return on assets (ROA)

2. Capital-based Indicators
Regulatory capital to risk-weighted
assets

Tier 1 capital to risk-weighted assets

NPLs net of provisions to capital

Return on equity

3. Income and Expense-based Indicators
Interest margin to gross income

Non-interest expenses to gross income

Personnel expenses to non-interest
expenses

* (All figures are in percentages)
Note:*FSIs are computed, based on IMF guidelines. ** Provisional