FINANCIAL STABILITY REPORT – DECEMBER 2016
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FINANCIAL STABILITY
REPORT


December 2016


FINANCIAL STABILITY REPORT – DECEMBER 2016

Contents

FINANCIAL STABILITY REPORT – DECEMBER 2016
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Mandatory Registration of Commercial Paper Issued by Commercial Banks in Nigeria .. 58

FINANCIAL STABILITY REPORT – DECEMBER 2016
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FINANCIAL STABILITY REPORT – DECEMBER 2016
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List of Tables
Table 1. 6: Exchange Rate of Selected Countries (Value in currency units to US$): Dec.2015 and Dec.

Table 2. 8: Domestic and Foreign Portfolio Participation in Equity Trading in the second Half of 2016


List of Figures
FINANCIAL STABILITY REPORT – DECEMBER 2016
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List of Boxes


FINANCIAL STABILITY REPORT – DECEMBER 2016
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LIST OF ACRONYMS
AMCON
Asset Management Corporation of Nigeria
AML/CFT
Anti-Money Laundering and Combating the Financing of Terrorism
BDCs
Bureaux de Change
BOI
Bank of Industry
BRICS
Brazil, Russia, India, China, and South Africa
BVN
Bank Verification Number
CACS
Commercial Agriculture Credit Scheme
CAR
Capital Adequacy Ratio
CBN
Central Bank of Nigeria
COB
Currency Outside Banks
CR5
Concentration Ratio (of the five largest banks)
CRMS
Credit Risk Management System
DAX
Deutscher Aktienindex (German stock index of 30 major German companies)
DFIs
Development Finance Institutions
DMBs
Deposit Money Banks
EBAs
Eligible Bank Assets
ECB
European Central Bank
EDC
Entrepreneurship Development Centre
EGX CASE 30
Egypt Stock Exchange (Cairo and Alexandria Stock Exchange) 30 Stock Index
FAO
Food and Agriculture Organisation
FATF
Financial Action Task Force
FCs
Finance Companies
FGN
Federal Government of Nigeria
FMBN
Federal Mortgage Bank of Nigeria
FRACE
Financial Regulation Advisory Council of Experts
FSIs
Financial Soundness Indicators
FSR
Financial Stability Report
FSRCC
Financial Services Regulation Co-ordinating Committee
GDP
Gross Domestic Product
GIZ
Deutsche Gesellschaft fur Internationale Zusammenarbeit (German Society for International
Cooperation)
GSE
Ghanaian Stock Exchange
HHI
Herfindahl-Hirschman Index
ICE
Intercontinental Exchange
IFRS
International Financial Reporting Standards
IMF
International Monetary Fund
KYC
Know Your Customer
M1
Narrow Money Supply
M2
Broad Money Supply
MENA
Middle East and North African Countries
MFBs
Microfinance Banks
MICEX
Moscow Interbank Currency Exchange
MoUs
Memoranda of Understanding
MPR
Monetary Policy Rate
NBS
National Bureau of Statistics
NDC
Net Domestic Credit
NDIC
Nigeria Deposit Insurance Corporation
FINANCIAL STABILITY REPORT – DECEMBER 2016
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NIBSS
Nigerian Inter-bank Settlement System
NMRC
Nigeria Mortgage Re-finance Company Plc
NPLs
Non-Performing Loans
NSE ASI
Nigerian Stock Exchange All Share Index
NSE 20
Nairobi Stock Exchange 20-Share Index
NYMEX
New York Mercantile Exchange
OBB
Open Buy Back
OFIs
Other Financial Institutions
OPEC
Organisation of Petroleum Exporting Countries
ORB
OPEC Reference Basket
PAIF
Power and Aviation Infrastructure Fund
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
ROA
Return on Assets
ROE
Return on Equity
RTGS
Real-Time Gross Settlement System
S&P/TSX
Standards and Poor’s Composite Index of the Toronto Stock Exchange
SEC
Securities and Exchange Commission
SMEs
Small and Medium Enterprises
WAMZ
West African Monetary Zone
WEO
World Economic Outlook
WTI
West Texas Intermediate


FINANCIAL STABILITY REPORT – DECEMBER 2016
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GOVERNOR’S STATEMENT
This issue of the Financial Stability Report highlights developments in the financial system
in the second half of 2016. Global expectations from the fall-out of the Brexit vote, the
recent US elections and the expected significant policy shifts dominate global economic
outlook. The trend in global output growth was attributable to the moderated headwinds from
the Brexit vote and the earlier expected monetary policy normalization in the US. However,
investment activities were low, especially in countries that were affected by the Euro Area
debt crisis. According to the IMF, global output growth is projected at 3.4 per cent in 2017
and 3.6 per cent in 2018, while the Euro Area is projected to grow at 1.6 per cent in 2017 and
2018, respectively.

Developments in emerging markets indicated a positive growth trajectory. The forecasts for
2017 and 2018 remain optimistic at 4.5 and 4.8 per cent, respectively. Economies in SubSaharan Africa (SSA) continued to be affected by headwinds and low commodity prices.
Inflation in the region rose sharply, reflecting the structural supply constraints and volatility
in foreign exchange. However, SSA is projected to grow by 2.8 per cent in 2017 and 3.7 per
cent in 2018 (IMF WEO).

In Nigeria, output performance remained benign at negative 1.5 per cent in 2016, although
the economy is expected to grow by 0.8 and 2.3 per cent in 2017 and 2018, respectively.
Generally, credit to the private sector grew during the review period but household credit
reduced marginally reflecting dwindling income and high domestic prices. The CBN will
continue to encourage lending to the critical sectors of the economy and provide incentives
for lending to SMEs and households.

The continued demand pressure on the naira and persistent supply constraints remained a
key challenge in the foreign exchange market. Inflationary pressures compounded market
conditions necessary to attract foreign capital required for the sustenance of exchange rate
stability.

The banking sector witnessed major challenges from the negative domestic output growth,
deteriorating macroeconomic indicators and global uncertainties. However, the banking
sector remained safe and resilient despite these challenges.


Godwin I. Emefiele, CON
Governor, Central Bank of Nigeria

FINANCIAL STABILITY REPORT – DECEMBER 2016
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FOREWORD
The projected pick-up in the global output growth may be dampened by the Brexit vote,
policy uncertainties in the US and volatility in international financial markets. Consequently,
this may have negative impact on the growth trajectory of developing and emerging
economies.

In Nigeria, the adverse macroeconomic conditions remained the major challenge to sustaining
economic growth and financial system stability. Specifically, the supply constraints and
demand pressure in the foreign exchange market, rising inflation and the declining output
growth have threatened the sustenance of price stability and attraction of foreign capital.
However, the strengthening of regulatory and supervisory measures has significantly
moderated the negative consequences of the prevailing economic conditions on the banking
sector and the financial system. The continued resilience of the banks was buttressed by the
results of the shocks scenario of the banking sector stress tests.

To address the challenges in the industry, countercyclical measures were adopted to ensure
that the banks remain resilient. Specifically, efforts were focused on ensuring that systemic
risks are curtailed and that banks continue to contribute to real sector growth. As Government
continues to address the adverse macroeconomic conditions, it is the goal of the CBN to
ensure that banks provide support for fiscal initiatives.

Microprudential and macroprudential supervisory tools will continue to be used in
surveillance and oversight of the banking sector. As appropriate structures are entrenched for
the implementation of Basel II and III and IFRS 9, it is expected that the overall capacity of
the banks to manage the risks in their business environment will be enhanced. It will also
help ensure that Nigerian banks have systems in place for prevention of money laundering
and financing of terrorism.

This edition of the Financial Stability Report is divided into five sections. Section One
reviews the global and domestic economic and financial developments. Section Two
discusses developments in the financial system, while Section Three covers regulatory and
supervisory activities and highlights key stability issues. Key developments in the payments
system are highlighted in Section Four and Section Five provides the outlook for financial
stability.

We welcome financial analysts and other stakeholders to read this Report and look forward to
useful feedback and suggestions.


O. J. Nnanna, Ph. D.
Deputy Governor, Financial System Stability
FINANCIAL STABILITY REPORT – DECEMBER 2016
xi

EXECUTIVE SUMMARY
Output growth in the global economy remained slow in 2016 due to uncertainties in some
advanced economies, several emerging markets and developing economies. Consequently,
global output growth remained at 3.1 per cent in both 2016 and 2015, but lower than the 3.4
and 3.6 per cent projected for 2017 and 2018, respectively.

Inflation remained a challenge for emerging market and developing economies due mainly to
domestic demand pressures and supply shocks. However inflation in most advanced
economies was moderate, though it experienced an upward movement in many of the
countries, except for Japan where there was a slight dip in the inflation rate. Crude oil prices
showed a moderate recovery in the review period to a level above $50pb at end-December
2016. Similarly, food prices rose, with most components of the FAO Food Price Index
showing increases.
International stock markets showed a mixed performance across the different regions of the
globe. While market indices in Europe and America showed increases, many African stock
markets experienced a decline in the second half of 2016. In Asia, economic conditions in
China were among the factors that impacted the performance of many Asian stock markets in
the review period.

Monetary policy rates of most central banks were fairly stable. In the foreign exchange
markets, most currencies depreciated against the US dollar with the exception of the Russian
ruble and the South African Rand which appreciated in the second half of 2016.

In Nigeria, there was poor output performance as the growth rate remained negative. This
was largely attributed to low oil prices, the impact of the insecurity in some parts of the
country and foreign exchange shortages. Inflationary pressures persisted as headline inflation
year-on-year remained double digit.

The economy recorded a net foreign exchange inflow, representing a 12.21 per cent rise
above the level in the first half of 2016. Similarly, the total foreign exchange transactions
through the Bank resulted in a net inflow. However, the external reserves declined marginally
in the second half of 2016.

Money supply expanded during the review period as the growth in broad money supply, M2,
was mainly driven by the significant growth in narrow money components such as demand
deposits with banks and currency outside banks. Aggregate credit to the economy also
increased in the review period.
The Bank maintained its contractionary monetary policy stance in the second half of 2016 in
order to stimulate capital inflow, reduce demand pressures in the foreign exchange market
and tackle rising inflation. Activities in the money market reflected largely the tight liquidity
in the banking system.
FINANCIAL STABILITY REPORT – DECEMBER 2016
xii

Activities in the equities market remained subdued as the key indices decreased compared
with the preceding period. This arose mainly from the uncertainties in the macro-economy,
poor corporate performance due to tougher operating environment and rising operating costs,
as well as depressed household demand. However yields in the fixed income market
increased, and hence attracted investors to that market.

The Bank continued to operate its risk mitigation and insurance schemes as well as the credit
support schemes with the main aim of providing support to the real sector.
Key financial soundness indicators showed a decline in asset quality as the ratio of nonperforming loans (NPLs) to gross loans deteriorated in the second half of 2016 by 2.3
percentage points, compared with the levels at end-June 2016. Capital adequacy indicators
declined marginally, but remained above the regulatory thresholds.

A solvency stress test of the banking industry at end-December 2016 showed that the
resilience of banks to moderate and severe shocks deteriorated marginally during the review
period. Although the sector is more exposed to credit concentration and default risks, there
were no significant systemic threats.
The result of examinations conducted in the review period confirmed the resilience and
soundness of banks in the face of daunting challenges. Other regulatory activities of the
Bank included the issuance of a guideline on Recovery and Resolution Plans for domestic
systemically important banks and the guidance notes on the implementation of IFRS 9.
The Bank continued the implementation of the PSV 2020, registering a majority of account
holders in the banking system under the BVN scheme, which has proved to be effective in
fraud prevention and investigation.
The outlook is positive, despite current challenges. It is expected that with the
implementation of the Government’s Economic Recovery Plan, the country will return to the
path of growth in 2017.
FINANCIAL STABILITY REPORT – DECEMBER 2016

1.0
MACROECONOMIC DEVELOPMENTS AND FINANCIAL SYSTEM
STABILITY
1.1
Global Economic and Financial Developments
1.1.1
Output
Global economic recovery was weak in 2016 following uncertainties in some advanced
economies, particularly the United States and the United Kingdom, as well as several
emerging market and developing economies. Although global output growth remained
unchanged in 2016, several commodity exporting economies experienced persistent negative
growth (recession), while political uncertainties in the US and UK further slowed the global
economic recovery. At end-December 2016, global output remained at 3.1 per cent same as at
end-December 2015, lower than 3.4 and 3.6 per cent projected for 2017 and 2018
respectively (IMF’s World Economic Outlook, January 2017 Update). The marginal growth
experienced by a few countries at end-December 2016 when compared with end-December
2015, was due largely to some recovery in manufacturing output, while others that witnessed
unexpected slowdown during the year were mostly influenced by idiosyncratic factors. There
are doubts surrounding these projections, given the uncertainties of the economic policy
stance of the incoming US government and its consequences on the rest of the world.

In advanced economies, output growth was 1.6 per cent at end-December 2016, lower than
1.8 and 1.9 per cent at end-June 2016 and end-December 2015, respectively. The growth in
advanced economies was projected at 1.9 per cent for 2017 and 2.0 per cent for 2018. The
decline in growth in advanced economies at end-December 2016 was accounted for by the
drop in output in the US and Canada.

In the United States, growth was 1.6 per cent at end-December 2016, lower than 2.2 and 2.4
per cent achieved at end-June 2016 and end-December 2015, respectively. The US growth is
projected at 2.3 and 2.5 per cent for 2017 and 2018, higher than the 1.6 per cent at endDecember 2016. In the UK, output growth increased from 1.7 per cent at end-June 2016 to
2.0 per cent at end-December 2016 despite the uncertainties of the Brexit in 2016. Output
growth in the UK is projected at 1.5 and 1.4 per cent for 2017 and 2018, respectively. Output
growth in Japan was 0.9 per cent at end-December 2016, compared with 0.3 and 0.5 per cent
at end-June 2016 and end-December 2015, respectively, but projected at 0.8 per cent in 2017
and 0.5 per cent in 2018.

Output growth in the Euro area was 1.7 per cent at end-December 2016, same as at endDecember 2015, but higher than 1.6 per cent recorded at end-June 2016. The slight increase
over the June 2016 level was attributed to the moderated headwinds from the Brexit
referendum and earlier expected monetary policy normalization in the US. However,
investment activities were low, especially in countries that were affected by the Euro Area
debt crisis. In the Euro Area, output growth was projected at 1.6 per cent in 2017 and 2018.

Growth in emerging market and developing economies at end-December 2016 was 4.1 per
cent, the same as at end-June 2016. This was slightly higher than 4.0 per cent at endFINANCIAL STABILITY REPORT – DECEMBER 2016

December 2015, and was projected at 4.5 per cent in 2017 and 4.8 per cent in 2018. In China,
output growth was 6.7 per cent at end-December 2016, higher than the 6.6 per cent recorded
at end-June 2016, but expected to reduce to 6.5 and 6.0 per cent in 2017 and 2018,
respectively.

In the Middle East and North Africa (MENA) region, output growth was 3.8 per cent at the
end of the second half of 2016, as against 3.4 per cent at the end of the first half of 2016, but
projected at 3.1 per cent in 2017 and 3.5 per cent in 2018.

Output growth in Sub-Saharan Africa (SSA) was projected to increase significantly to 2.8 per
cent in 2017 and 3.7 per cent in 2018, from 1.6 per cent at end-December 2016. The growth
rate in the first and second halves of 2016 remained unchanged. In Nigeria, output growth
improved from negative 1.8 per cent recorded at end-June 2016 to negative 1.5 per cent at
end-December 2016. The Nigerian economy remained in recession in 2016, due to low oil
receipts and inadequate power supply, among others. However, the IMF projected Nigeria’s
output growth to increase to 0.8 and 2.3 per cent in 2017 and 2018, respectively (Table 1.1).

Table 1. 1: Global Economic Outlook
Region/Country
Year-on-Year

Dec. 2014
Dec. 2015
Jun. 2016
Dec. 2016
2017*
2018*
World

Advanced Economies

United States

Euro Area

Japan

United Kingdom

Canada

Emerging Market and
Developing Economies

China

MENA Region

Sub-Saharan Africa

Nigeria

* Projections
Source: World Economic Outlook, January 2017 Update
FINANCIAL STABILITY REPORT – DECEMBER 2016

1.1.2
Inflation
Globally, inflationary pressures were witnessed in most economies for 2016 due largely to
domestic demand pressures and supply shocks. In the advanced economies, headline inflation
rose significantly to 1.7 per cent in 2016 from 0.3 per cent in 2015, as oil prices showed signs
of recovery. In the US, inflation rate increased to 2.1 per cent in 2016 from 0.1 per cent in
2015 and projected to 2.2 per cent in 2017. Inflation rate in Euro Area was 1.1 per cent in
2016, compared to 0.2 per cent in 2015 and projected to 1.4 per cent in 2017. In Japan,
inflation declined from 0.7 per cent in 2015 to 0.5 per cent in 2016, but projected to 0.7 per
cent in 2017. In the UK, the rate increased from 0.1 per cent in 2015 to 1.6 per cent in 2016
and projected to 2.2 per cent in 2017. The increase in the UK was associated with the
depreciation of the Pound Sterling during the period.

Inflation rate in Emerging Market and Developing Economies was 5.6 per cent at endDecember 2015, declined to 4.5 per cent at end-December 2016, but projected to 5.4 per cent
in 2017. MENA Region had 5.1 per cent inflation rate in 2016, declining from 6.5 per cent in
2015 and projected to decline further to 4.0 per cent in 2017. In Sub-Saharan Africa, the rate
significantly increased from 6.9 per cent at end-December 2015 to 11.3 per cent at endDecember 2016, but projected to decline to 9.0 per cent in 2017. In Nigeria, the rate jumped
from 9.1 per cent in 2015 to 18.6 per cent in 2016, due largely to exchange rate depreciation,
rising energy prices and declining output. However, inflation in Nigeria was projected to
moderate to 12.1 per cent in 2017 (Table 1.2).

Table 1. 2: Global Consumer Prices/Inflation (Per cent)
Region/Country

2017*
Advanced Economies

United States

Euro Area

Japan

United Kingdom

Emerging and Developing
Economies

MENA Region

Sub-Saharan Africa

Nigeria

Source: Bloomberg
* Projections
FINANCIAL STABILITY REPORT – DECEMBER 2016

1.1.3
Commodity Prices
1.1.3.1 Oil Prices
For the first time in 18 months, crude oil prices closed above $50/b at the end of 2016,
compared with below $40/b at the end of 2015. The moderate uptick in crude oil prices was
traced to increased global demand, the supply-cut agreement by OPEC, supply disruptions
caused by the Canadian wildfires, crises in some MENA countries and the Niger Delta region
of Nigeria.

The OPEC Reference Basket (ORB) price increased by 15.19 per cent to $53.30/b at endDecember 2016, from $46.27/b at end-June 2016 and was higher than the end-December
2015 price of $31.27/b.

The price of Brent Crude oil increased by 15.07 per cent to $54.66/b at end-December 2016
from $47.50/b at end-June 2016, which was higher than the $37.59/b recorded at endDecember 2015.

West Texas Intermediate (WTI) rose to $54.75/b at end-December 2016 from $45.30/b at
end-June 2016, which was 20.86 per cent higher than the $36.77/b recorded at end-December
2015. The significant increase in the price of oil at end-December 2016 was as a result of,
among other things, the unusual oil stock built-up activities by major oil suppliers at the end
of 2016.

OPEC Oil supply fell by 0.221mb/d, while non-OPEC oil supply contracted by 0.71 mb/d in
2016. The decline in supply was largely due to higher-than-expected domestic consumption
in Russia and Norway, as well as reduction in production levels of shale oil in the US. The
non-OPEC supply is projected to rise by 0.12 mb/d in 2017, while OPEC supply is expected
to rise by 0.15 mb/d in 2017.

The growth in global crude oil demand in 2016 was 1.25mb/d above the 93.95 mb/d in 2015,
mostly reflecting the better economic performance in OECD, Asia Pacific and Europe
regions. Global oil demand is expected to rise by 1.16 mb/d in 2017. Demand for OPEC
crude oil was 31.2 mb/d, higher than its level in 2015 by 1.8 mb/d and projected at 32.1 mb/d
in 2017.

Table 1. 3: World Oil Price as at December 2016

Dec. 2015
Jun. 2016
Dec. 2016
OPEC Ref. Basket
31.27
46.27
53.30
Brent
37.59
47.50
54.66
WTI
36.77
45.30
54.75
Source: Reuters

FINANCIAL STABILITY REPORT – DECEMBER 2016

1.1.3.2 Food Prices1
The Food and Agriculture Organisation (FAO) Food Price Index averaged 171.8 points in
December 2016, compared to 163.4 points in June 2016 and 153.4 points in December 2015,
reflecting an increase of 5.1 and 12.0 per cent from the June 2016 and December 2015
positions, respectively. In 2016, the index averaged 161.6 points, down by 1.5 per cent from
2015. Despite the significant increase in the prices of sugar and vegetable oils in 2016, the
decline in prices of cereal, meat and dairy products kept the index below its 2015 average
(Table 1.4).
The Meat Price Index averaged 161.5 points in December 2016, higher than the 159.9 points
recorded in June 2016 by 1.6 points (1.0 per cent). The value was higher than the 150.0
points recorded in December 2015. Total average for 2016 was 156.6 points, lower than
168.1 points for 2015 by 7.0 per cent, influenced by a significant decline recorded for bovine
and poultry meats.
The Dairy Price Index averaged 192.6 points in December 2016, higher than the level of
137.9 points in June 2016. The index was also higher than the 149.5 points recorded in
December 2015 by 43.1 points, or 28.8 per cent. The increase in the second half of the year
was as a result of moderate rise in the prices of butter, cheese and Whole Milk Powder
(WMP), while prices for Skimmed Milk Powder (SMP) remained stable. Reduction in the
production of milk in the EU and Oceania, and increase in demand continued to influence the
market. The Index average for 2016 was 153.8 points marginally lower than 160.3 points for
the preceding year by 4.1 per cent.
The Cereal Price Index averaged 142.1 points in December 2016, reflecting a slight reduction
of 9.4 per cent from the 156.9 points in June 2016. This was 6.3 per cent lower than the 151.6
points at end-December 2015. The decline in the Cereal Price Index was attributed to the
larger-than-expected wheat harvests in Australia and the Russian Federation, good crop
prospects in Argentina and upward adjustments in maize production in South America. In
2016, the annual Cereal Price Index averaged 146.9 points, 9.5 per cent lower than the 162.4
points recorded in 2015.
The Vegetable Oil Price Index averaged 183.0 points in December 2016, higher than 161.9
points in June 2016 and 141.5 points in December 2015. The increase was driven primarily
by palm and soy oils. The low palm oil global inventory levels and low supply continued to
bolster prices, while soy oil was affected by adverse weather in Argentina and the prospect of
rising uptake by the bio-diesel sector in the United States, Brazil and Argentina. Overall, the
index averaged 163.8 points in 2016, compared with 147.0 in 2015, representing an increase
of 11.4 per cent.
Sugar Price Index averaged 262.6 points in December 2016, lower than 276.0 points in June
2016 by 13.4 points (4.9 per cent), but higher than the 207.8 points recorded in December
2015. The fall in world sugar prices in December 2016 was majorly triggered by a continuous
weakening of the Brazilian real against the US dollar and increasing sugar exports from

1 The analysis was based on the FAO index.
FINANCIAL STABILITY REPORT – DECEMBER 2016

Brazil (the world’s largest sugar producer and exporter) in the second half of the
year. Despite the fall in the price at the end of the second half of the year, the price in 2016
averaged 256.0 points, higher than 190.7 in 2015 by 34.2 per cent. The increase in the annual
average price was mainly attributed to tighter supplies in Thailand and India (Table 1.4).
Table 1. 4: World Food Price Index as at December 2016

Dec

Av.

June

Dec

Av.

Food Price Index


161.6
Meat

Dairy

Cereals

Vegetable Oils

Sugar

Sources: WEO January 2017.
1.1.4
International Financial Markets
1.1.4.1 Stock Markets
The international stock markets recorded mixed performance in 2016. In North America, the
Canadian S&P/TSX Composite, Mexican Bolsa and United States S&P 500 indices increased
by 17.5, 6.2 and 9.5 per cent, respectively, between end-December 2015 and end-December
2016. In South America, the Argentine Merval, Brazilian Bovespa and Colombian IGBC
General indices increased by 44.9, 38.9 and 17.2 per cent, respectively. The improved
performance of the markets was due to strong domestic demand and rebound in investments
during the year. In Europe, the FTSE 100, DAX, CAC 40 and MICEX indices increased by
14.4, 6.9, 4.9 and 26.8 per cent, respectively.

In Asia, the weakening economic conditions in China remained a feature in the Asian
markets. As at end-December 2016, China’s Shanghai Stock Exchange-A index decreased by
12.3 per cent, while India’s BSE Sensex and Japan’s Nikkei 225 indices increased by 1.9 and
0.4 per cent, respectively.

Stock market indices in Africa, notably, the Nigerian NSE, South African JSE All-Share,
Ghanaian GSE ASI and Kenyan Nairobi NSE 20 all decreased by 6.2, 0.1, 15.3 and 21.1 per
cent, respectively. The weak economic conditions in most African economies, the
appreciation of the US dollar, and the continued normalization in the US, accounted for the
decline in the markets. However, the Egyptian EGX CASE 30 index increased by 75.4 per
cent following major economic and financial market reforms (Table 1.5).


FINANCIAL STABILITY REPORT – DECEMBER 2016

Table 1. 5: Indices of Selected International Stock Markets: December 2015 and December

Country
Index
31-Dec-15
30-Jun-16
31-Dec-16
%
Change
(Dec 15 –
Dec 16)
%
Change
(Jun 16 –
Dec 16)
AFRICA
Nigeria
NSE All-Share Index

South
Africa
JSE All-Share Index

Kenya
Nairobi NSE 20 Share
Index

Egypt
EGX CASE 30

Ghana
GSE All-Share Index


NORTH AMERICA
US
S&P 500

Canada
S&P/TSX Composite

Mexico
Bolsa


SOUTH AMERICA
Brazil
Bovespa Stock

Argentina
Merval

Columbia
COLCAP


EUROPE
UK
FTSE 100

France
CAC 40

Germany
DAX

Russia
MICEX


ASIA
Japan
NIKKEI 225

China
Shanghai SE A

India
BSE Sensex

Source: Bloomberg
FINANCIAL STABILITY REPORT – DECEMBER 2016

1.1.5
Foreign Exchange Markets
During the second half of 2016, most of the currencies under review experienced mixed
movements against the U.S. dollar. In Africa, the South African rand appreciated against the
U.S. dollar by 5.97 per cent, while the Nigerian naira, Kenyan shilling, Egyptian pound and
Ghanaian cedi depreciated against the U.S. dollar by 7.21, 1.38, 50.99 and 6.84 per cent,
respectively.

Foreign exchange rate movement in North America indicated that the Canadian dollar and
Mexican Peso depreciated against the U.S. dollar by 2.99 and 10.90 per cent, respectively. In
South America, the Brazilian real, Argentine peso and Colombian peso depreciated against
the U.S. dollar by 1.53, 5.23 and 2.72 per cent, respectively. In Europe, the British pound and
euro depreciated against the U.S. dollar by 7.41 and 5.26 per cent, respectively, while the
Russian ruble appreciated against the U.S. dollar by 3.90 per cent.

In the Asian region, the Japanese yen, Chinese yuan and Indian rupee depreciated against the
U.S. dollar by 11.77, 4.32 and 0.57 per cent, respectively. The low global commodity prices
and weak economic conditions accounted for the general depreciation of most currencies
against the dollar (Table 1.6).

Table 1. 6: Exchange Rate of Selected Countries (Value in currency units to US$): Dec.2015
and Dec. 2016

Currency
31-Dec-15
30-Jun-

31-Dec-16
June 16 -
Dec. 2016 %
App/Dep.
Y-on-Y
App/Dep.
AFRICA


Nigeria
Naira

South Africa
Rand

Kenya
Shilling

Egypt
Pound

Ghana
Cedi

NORTH AMERICA
Canada
Dollar

Mexico
Peso

SOUTH AMERICA
Brazil
Real

Argentina
Peso

Colombia
Peso

EUROPE
UK
Pound

Euro Area
Euro

Russia
Ruble

ASIA
Japan
Yen

China
Yuan

India
Rupee

Source: Bloomberg
FINANCIAL STABILITY REPORT – DECEMBER 2016

1.1.6
Monetary Policy Rates
Monetary policy rates of most central banks were fairly stable during the second half of 2016.
The rates remained within the zero bound in advanced economies in a bid to catalyze growth.
The US Federal Reserve kept its rate within the bound of 0.25-0.50 per cent for eleven
months of 2016, but shifted to 0.50 - 0.75 per cent bound in December 2016.

The Bank of Japan, Bank of Canada and Bank Negara Malaysia, as well as the central banks
of Chile and Colombia held their rates constant. However, Bank of England, European
Central Bank, Bank of Korea, Reserve Bank of Australia, Bank of Indonesia, Central Bank of
Russia, Peoples Bank of China (PBOC), and Reserve Bank of New Zealand lowered their
rates during the review period. South Korea maintained 1.50 per cent since July 2015, but
reduced to 1.25 per cent in June 2016. New Zealand maintained 2.75 per cent from
September 2015, but reduced to 2.25 per cent in March 2016 and further to 1.75 in November
2016. The Bank of Indonesia which maintained its rate at 7.50 per cent since July 2015
reduced it to 6.5 per cent in June 2016 and further to 4.75 per cent in November 2016. The
central bank of Mexico increased its rate from 3.75 to 4.25 per cent in May 2016 with an
increase it to 4.75 per cent in October 2016 and then to 5.25 per cent in December 2016.

In the BRICS economies, Brazil maintained 14.25 per cent in the first ten months of 2016 and
reduced to 13.75 per cent in December 2016. Russia reduced from 11.00 per cent to 10.50 per
cent in June 2016 and further to 10.00 per cent in September 2016. India reduced the rate to
6.50 per cent from 6.75 per cent in April 2016 and further to 6.25 per cent in October, while
China’s rate remained at 4.35 per cent from July 2016. South Africa also maintained 7.00 per
cent.

Policy rates in African economies changed slightly, except in Nigeria where 14.00 per cent
was maintained during the review period. Egypt was 11.75 per cent in June 2016, but moved
up to 14.75 per cent in November 2016. Ghana’s rate increased from 25.00 per cent to 26.00
per cent in June 2016 and reduced to 25.5 per cent in November 2016 (Table 1.7).

Table 1.7: Policy Rates Across Selected Countries (January – December 2016)

Country
Jan-16
Feb-

Mar-

Apr-

May-

Jun-

Jul-16
Aug-

Sep-16
Oct-

Nov-

Dec-

Developed Economies
Japan

Europe

UK

US

Canada

South Korea

New Zealand

Australia

ASEAN
Indonesia

FINANCIAL STABILITY REPORT – DECEMBER 2016

Malaysia

BRICS


Brazil

Russia

India

China

South Africa

Other Emerging Economies & South America
Mexico

Chile

Colombia

Africa
Egypt

Ghana

Nigeria

Source: Bloomberg
1.2
Domestic Developments
1.2.1
Output
The negative output performance witnessed in the first half of 2016 moderated in the second
half of the year. This was largely attributed to low oil price and the impact of the insecurity in
some parts of the country. Furthermore, the foreign currency shortages contributed
significantly to naira depreciation in the foreign exchange market, and the pass-through effect
on domestic prices and cost of production. Consequently, data from the National Bureau of
Statistics (NBS) indicated that the contraction in the Gross Domestic Product (GDP) at 2010
constant basic prices continued, to negative 1.76 per cent in the second half of 2016,
compared with the negative 1.22 per cent in the first half of 2016.

Figure 1. 1: Real GDP Growth rate (%)
-3
-2
-1

H1 2014
H2 2014
H1 2015
H2 2015
H1 2016
H2 2016
Per cent
REAL GDP


FINANCIAL STABILITY REPORT – DECEMBER 2016

Figure 1. 2: Gross Domestic Product by Sectors (%)

The non-oil GDP fell to 0.16 per cent in the second half of 2016, compared with the decline
of 0.29 per cent in the first half of the year. The significant decline in oil prices led to the
increase in the contribution of the non-oil sector GDP by 1.61 and 1.48 percentage points
above the 90.73 and 90.86 per cent recorded in the preceding half year and the corresponding
period of 2015, respectively. With respect to sectoral contribution in real terms, the services
sector accounted for the largest share (36.28%), followed by the agricultural sector (27.04%),
industry (16.91%), trade (16.52%) and construction (3.25%) (Figure 1.2).

During the second half of 2016 the average daily production of crude oil fell to 1.60 million
barrels per day (mb/d) in the second half from 1.68 mb/d in the first half of 2016.
Consequently, the contribution of the oil sector to the real GDP decreased to 7.66 per cent
from 9.27 and 9.14 per cent recorded in the preceding half year and the corresponding period
of 2015, indicating a decline of 1.61 and 1.43 percentage points, respectively.

Figure 1. 3: Share of Oil and Non-oil Sectors in Real GDP (%)

H2 2015
H1 2016
H2 2016
Per cent
Oil
Non-oil

H2 2015
H1 2016
H2 2016
Agriculture
Manufacturing
Construction
Trade
Services
Percentages
FINANCIAL STABILITY REPORT – DECEMBER 2016

Table 1. 8: Changes (per cent) in Real GDP by Sector over Corresponding Half Year

Sector
H2 2015
H1 2016
H2 2016
Manufacturing
-0.70
-5.22
-3.46
Construction
-0.24
-5.83
-6.07
Services
3.50
-1.04
-1.34
Trade
4.55
0.99
-1.41
Industry
-1.96
-7.62
-10.42
Agriculture
3.47
3.84
4.29
Crude Petroleum, Natural
Resources and Solid Minerals
-3.34
-9.53
-17.71

1.2.2
Inflation
The composite Consumer Price Index (CPI) at November 2009 constant prices was 213.55 in
December 2016, compared with 201.7 and 180.1 at end-June 2016 and the corresponding
period of 2015, respectively. Consequently, year-on-year headline inflation stood at 18.55 per
cent in December 2016, compared with the level of 16.48 per cent in June 2016, representing
an increase of 2.07 percentage points. The inflationary pressure, during the period, was
largely driven by the continued impact of the removal of subsidies in the energy sector and
the depreciation of the naira, which increased domestic cost of production and services.

Food inflation, which comprises farm produce and processed food stood at 17.39 per cent
year-on-year at end-December 2016, from 15.30 and 10.59 per cent at end-June 2016 and
end-December 2015, respectively. This represents increases of 2.09 and 6.80 percentage
points over the preceding and corresponding periods.

The imported food inflation (year-on-year) at end-December 2016, rose by 1.06 percentage
points to 21.09 per cent from its level at end-June 2016, contributing 5.25 percentage points
of the food inflation at end-December 2016 compared to 4.96 percentage points at end-June
2016. Rice accounted for the highest contribution of 11.67 per cent to imported food
inflation, followed by frozen fish with 9.56 per cent.

Similarly, core inflation, which excludes the prices of volatile agricultural produce, rose to
18.1 per cent at end-December 2016, from 16.22 and 8.73 per cent at end-June 2016 and endDecember 2015, respectively (Figure 1.4).

FINANCIAL STABILITY REPORT – DECEMBER 2016

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

SECOND HALF

FIRST HALF

SECOND HALF

Per cent
Headline (Y-o-Y)
Core (Y-o-Y)
Food (Y-o-Y)


1.2.3
External Sector
1.2.3.1 Foreign Exchange Flows
The provisional cumulative inflow of foreign exchange into the economy, at US$33.02
billion, was 13.3 per cent above the level in the first half of 2016. Of this amount, inflow
through autonomous sources accounted for 62.3 per cent, while inflow through the CBN
accounted for 37.7 per cent. Total foreign exchange outflow from the economy rose by 14.8
per cent to US$13.64 billion from the level in the first half of 2016. The rise in outflow was
mainly attributed to the increase in the interbank forwards settled in the second half of 2016.
The economy recorded a net foreign exchange inflow of US$19.38 billion, representing 12.21
per cent rise above the level in the first half of 2016.

The total autonomous inflow rose by 0.7 per cent to US$20.58 billion, compared to the level
in the first half of 2016 due mainly to rise in invisibles by 2.5 per cent, of which 62.3 per cent
was accounted for by ordinary domiciliary accounts. Foreign exchange inflow through the
CBN rose by 42.9 per cent above the level in the first half of 2016 to US$12.45 billion, due to
increases in crude oil and non-oil export earnings. Receipts from crude oil sales rose by 22.7
per cent to US$5.66 billion, in the first half of 2016. This is attributable to the gradual
increase in domestic production and international crude oil prices. The non-oil receipts rose
by 65.5 per cent to US$6.79 billion in the second half of 2016, due mainly to increase in
other official receipts.

Foreign exchange outflow through the CBN rose by 15.5 per cent to US$12.39 billion, above
the level in the first half of 2016. Of this amount, interbank utilization accounted for US$7.99
billion, of which inter-bank forwards, inter-bank sales and others stood at US$4.17 billion
(52.14%), US$0.72 billion (8.92%) and US$3.11 billion (38.9%), respectively.

Overall, the total foreign exchange transactions through the Bank resulted in a net inflow of
US$0.58 billion in the second half of 2016, compared with a net inflow of US$0.96 billion in
the corresponding half of 2015. This is, however, in contrast to a net outflow of US$2.03
billion in the first half of 2016.
FINANCIAL STABILITY REPORT – DECEMBER 2016

Figure 1. 5: Foreign Exchange Transactions through the CBN (Second Half 2016, US$’
Billion)


1.2.4
Fiscal Operations
Federal Government Retained revenue for the second half of 2016 increased to N2,558.0
billion, above the levels of N1,898.21 billion recorded in the first half of 2016 and the halfyear budget estimate of N2,024.90 billion for 2016. The increase in the retained revenue
relative to the first half was mainly attributed to increase in non-oil receipts. The breakdown
of the retained revenue showed that the Federal Government’s share of the Federation
Account was N1,262.4 billion (49.4%); the VAT Pool Account, N90.7 billion (3.5%); the
Federal Government Independent Revenue, N267.8 billion (10.5%); share of excess crude
Account, N141.4 billion (5.5%); Exchange Gain, N316.4 billion (12.4%) while others
(including NNPC Refund) accounted for the balance of N479.3 billion (18.7%).

The fiscal stance of increased spending to address the challenges of the negative growth
(recession) led to higher government expenditure in the second half of 2016. Consequently,
Federal Government expenditure grew by 10.3 per cent to N4,024.8 billion, above N3,650.33
billion in the first half of 2016. It was, also higher than the budgeted expenditure of
N3,127.27 billion for the second half of 2016. Recurrent expenditure component of the total
expenditure accounted for N3,496.5 billion (86.9%) while capital and statutory transfers
components accounted for N264.9 billion (6.6%) and N263.4 billion (6.5%), respectively.

The fiscal operations of the Federal Government in the second half of 2016 resulted in an
overall deficit of N1,466.8 billion, compared with the N1,752.11 billion recorded in the first
half of 2016 and the budgeted deficit of N1,102.37 billion for the second half of 2016. The
deficit was financed through domestic sources including issuance of government securities.

-5

2nd Half 2015
1st Half 2016
2nd Half 2016
$ Billion
Inflow
Outflow
Net flow
FINANCIAL STABILITY REPORT – DECEMBER 2016

Figure 1. 6: Federal Government Fiscal Operations (N Billion)


The consolidated domestic debt stock of the Federal Government at end-December 2016 was
N11,738.62 billion. This represented an increase of 10.8 per cent over N10,606.33 billion at
end-June 2016.


-1,000


Second Half 2015
First Half 2016
Second Half 2016
N Billion
Revenue
Expenditure
Deficit
FINANCIAL STABILITY REPORT – DECEMBER 2016

2.0
DEVELOPMENTS IN THE FINANCIAL SYSTEM
2.1
Monetary and Credit Developments2
Monetary policy management in the second half of 2016 remained a challenge due to slow
recovery of crude oil prices in the international market, shortage of foreign exchange,
inflationary pressures and weak economic conditions. Money supply expanded during the
review period compared to the first half of 2016 and the corresponding period of 2015.
Relative to the level at end-December 2015 broad money supply, M2, rose by 16.93 per cent
to N23,421.82 billion at end-December 2016, compared with the growth of 10.23 per cent at
end-June 2016.
The growth in broad money at end-December 2016 was also higher than the 5.90 per cent
growth recorded at end-December 2015. The growth in M2 at end-December 2016 was
largely due to the 57.27 and 25.64 per cent expansion in net foreign assets and domestic
credit (net) of the banking system. The increases more than offset the effect of the 74.45 per
cent decline in other assets (net) of the banking system. Correspondingly, the growth in total
monetary liabilities, M2, was driven by the significant increase in narrow money (M1).
Provisional data indicated that narrow money (M1) grew by 29.51 per cent to N11,101.59
billion at end-December 2016, compared with the growth of 11.05 per cent at end-June 2016.
The growth in M1 at end-December 2016 was due to the 30.43 per cent and 25.02 per cent
growth in demand deposits (DD) with banks and currency outside banks (COB), respectively.
Figure 2. 1: Trend in Monetary Aggregates

There was a slight weakening in intermediation efficiency of the banking industry at endDecember 2016. The ratio of intermediation efficiency measured by the proportion of
currency outside banks (COB) to total monetary liabilities, stood at 7.8 per cent, representing
an increase of 1.6 and 0.5 percentage points above the level at end-June 2016 and the
corresponding period of 2015, respectively. Negative real rates of interest on deposits and
higher cost of living contributed to the relatively high level of currency outside the banks
during the review period.

Aggregate savings at end-December 2016 declined with the ratio of quasi-money to total

2 The analysis is based on the provisional December 2016 CBN Monetary Survey.


Dec 2014
Jun 2015
Dec 2015
Jun 2016
Dec 2016
Monetary Aggregates (N'B)
M1
M2
COB
FINANCIAL STABILITY REPORT – DECEMBER 2016

monetary assets at 52.6 per cent from 56.9 per cent at end-June 2016. The outcome was
driven, largely, by the decline in savings and time deposits of commercial and merchant
banks, which proportion of M2 fell by 4.3 percentage points below the level at end-June 2016.

2.1.1
Aggregate Credit to the Economy
Despite the continuing contractionary monetary policy stance of the Bank, net aggregate
credit to the domestic economy rose from N24,623.63 billion at end-June 2016 to N27,
153.87 billion at end-December 2016 representing a 10.3 per cent rise. The development
reflected increases in claims on the private sector and net claims on the Federal Government.

In terms of contribution to the growth in M2, the net domestic credit of the banking system
contributed 27.3 percentage points compared with 13.6 percentage points at end-June 2016.
The contribution of credit to the core private sector to the growth in M2 rose from 11.6
percentage points at end-June 2016 to 17.3 percentage points, during the review period.

Figure 2. 2: Credit to the Economy


2.1.1.1 Claims on the Federal Government
Net claims on the Federal Government increased to N4,808.04 billion at end-December 2016
compared with N2,893.19 billion at end-June 2016, representing an increase of 10.6 per cent.
The development reflected significant growth in holding of government securities, especially
Treasury bills and FGN bonds, which grew by 28.9 per cent and 42.7 per cent, respectively.

Net claims on the Federal Government contributed 9.6 percentage points to the growth rate of
total monetary assets, compared with 1.5 percentage points at end-June 2016.

2.1.1.2 Aggregate Claims on the Private Sector
Banking system’s credit to the private sector grew by 19.37 per cent to N22,345.84 billion, at
end-December 2016 compared with the growth of 14.44 and 3.29 per cent recorded at endJune 2016 and the corresponding period of 2015, respectively. The development reflected,
largely, the 19.14 per cent increase in claims on the core private sector3, which continues to
reflect the impact of various policies of the CBN that enhanced the lending capacity of banks.

3Excludes the states and local governments.


Dec 14
Jun 15
Dec 15
Jun 16
Dec 16
N Billion
N Billion
Claims on Private Sector LHS)
Net Domestic Credit (LHS)
Claims on Federal Government (Net) (RHS)
FINANCIAL STABILITY REPORT – DECEMBER 2016

In terms of contribution to the growth rate of total monetary assets, claims on the private
sector stood at 17.3 percentage points, compared with 11.61 percentage points at end-June
2016.

Table 2. 1: Growth in Monetary Aggregates
% Change (Over preceding
December)
Jun 14
revised
Dec 14
revised
Jun 15
revised
Dec 15

Jun 16
revised
Dec 16

Domestic Credit (Net)

Claims on Federal Government
(Net)

Claims on Private Sector

Foreign Assets (Net)

Other Assets (Net)

Total Monetary Assets (M2)

Quasi-Money

Money Supply (M1)

Currency Outside Banks

Demand Deposits

Total Monetary Assets (M2)

2.1.1.3 Foreign Assets (net) of the Banking System
Net foreign assets of the banking system rose by 57.27 per cent to N8,891.06 billion at endDecember 2016, compared with the 25.7 per cent growth at end-June 2016, in contrast to a
decline of 18.7 per cent at the end of the corresponding period of 2015. The development
reflected significant growth in foreign assets of the CBN which grew by 53.9 per cent relative
to its level at end December 2015.
2.1.1.4 Consumer Credit
The volume of consumer credit during the second half of 2016 reduced marginally by 2.51
per cent to N762.07 billion relative to its level at end-June 2016, due largely to build up of
uncertainties and higher cost of funds in the economy. Consumer credit, which constituted
3.53 per cent of the total credit to the core private sector, was 0.3 percentage point lower than
the proportion in the first half of 2016 (Figure 2.3).

Figure 2. 3: Consumer Credit


Dec 14
Jun 15
Dec 15
Jun 16
Dec 16
Ratio (%)
N Billion
Consumer Credit
Ratio of claims on core private sector (rhs)
FINANCIAL STABILITY REPORT – DECEMBER 2016

2.1.2
Sectoral Classification of Private Sector Credit
As at end-December 2016, bank credit to the various sectors showed an upward trend.
Sectoral credit to the private sector rose by 3.9 per cent to N16,293.48 billion at endDecember 2016 from N15,677.71 billion at end-June 2016. The oil and gas sector accounted
for the highest share of total credit with 30.02 per cent, compared with 28.78 per cent in the
first half of 2016. Manufacturing and power & energy sub-sectors accounted for 13.6 per cent
and 4.5 per cent, compared with 12.9 per cent and 4.4 per cent, respectively, in the preceding
half year. Agriculture, forestry, and fishery sub-sector accounted for 3.3 per cent, indicating a
0.2 percentage point increase above the 3.1 per cent in the preceding half year. The
contribution of the construction sector remained the same at 3.89 per cent as in the preceding
half year (Figure 2.4 and Table 2.2).

Figure 2. 4: Sectoral Distribution of Credit


Table 2. 2: Sectoral Distribution of Credit

Sector
June 2016
December 2016
N'
Billion
Share of
Total (%)
N
'Billion
Share of
Total
(%)
Oil and gas

Manufacturing

Governments

General

General commerce

Information and communication

Real estate activities

Finance and insurance

Power and energy

Construction

Agriculture, forestry and fishing

Transportation and storage


N' Billion
Jun-16
Dec-16
FINANCIAL STABILITY REPORT – DECEMBER 2016

Capital market

Public utilities

Professional, scientific and
technical activities

Education

Administrative and support service
activities

Human health and social work
activities

Mining and quarrying

Water supply sewerage, waste
management and remediation
activities

Arts, entertainment and recreation

Activities of extraterritorial
organization and bodies

Total

Reserve Money (RM)
Reserve money (RM) at end-December 2016 rose by 9.61 per cent to N5,888.20 billion from
N5,372.01 billion at end-June 2016. This was, however, lower than its level by 3.01 and
10.52 per cent for the corresponding period of 2015 and the fourth quarter of 2016 indicative
benchmark of N6,580.39 billion, respectively. The upward movement in reserve money
relative to the level at end-June 2016 reflected the 56.94 per cent increase in the net foreign
assets of the CBN, which more than offset the decline in net domestic assets and other assets
net.

Figure 2. 5 Reserve Money and its Components - Sources

Dec-13
Jun - 14
Dec -14
Jun -15
Dec -15
Jun -16
Dec -16
N'Billion
NFA
NDA
Oin
RM

The corresponding increase in the uses of reserve money was due to the 29.35 and 0.59 per
cent rise in currency-in-circulation and bank reserves, respectively.


FINANCIAL STABILITY REPORT – DECEMBER 2016

Figure 2. 6: Reserve Money and its Components – Uses


Dec-13
Jun-14
Dec 14
Jun 15
Dec 15
Jun 16
Dec 16
N' Billion
CIC
Bank reserves
RM

2.1.4
Interest Rate
The Monetary Policy Committee (MPC) at its July 2016 meeting increased the Monetary
Policy Rate (MPR) from 12.00 to 14.00 per cent. This was to complement the adoption of the
flexible foreign exchange policy framework in a bid to moderate inflation and provide for
positive real returns on investment to attract investors. The tight monetary policy stance of
the Bank brought about a reduction in the banking system liquidity, which impacted on
money market rates. In a bid to stem inflationary pressure and curtail liquidity arising from
maturing CBN bills as well as fiscal injections, the CBN intensified its liquidity management
activities through the Open Market Operation (OMO) auctions.

On the average, all the rates in the second half of 2016 were higher than their levels in the
first half. Savings deposit rate rose slightly by 0.70 percentage point from 3.4 per cent in the
first half, to 4.1 per cent in the second half of 2016. Similarly, average deposit rates for 7-day,
3-month and 1-year tenors rose from 2.83, 6.84 and 5.25 per cent in the first half of 2016 to
3.65, 8.13 and 7.20 per cent, respectively in the second half of 2016.

The 6-month average prime and maximum lending rates rose in the second half of 2016 by
0.48 percentage point to 17.11 per cent and by 0.93 percentage point to 27.75 per cent,
compared with their levels in the first half of 2016. Relative to the first half of 2016, the
average term deposit rate rose by 1.58 percentage points to 6.96 per cent in the second half of
2016. Consequently, the spread between the average term deposit and the average maximum
lending rates narrowed by 0.65 percentage point to 20.80 per cent at the end of the second
half of 2016. Real deposit and prime lending rates were negative, while real maximum
lending rate recorded positive trend given the prevailing headline inflation rate of 18.55 per
cent at end-December 2016.

FINANCIAL STABILITY REPORT – DECEMBER 2016

Figure 2. 7: Lending and Deposit Rates

SECOND HALF 2015
FIRST HALF 2016
SECOND HALF 2016
Percentage point
Per cent
Saving
Prime
Maximum
Avterm Dep.
Spread (Max-Avtrm) rhs

The 6-month average open-buy-back (OBB) rate in the second half of 2016 stood at 13.15 per
cent while inter-bank call rate averaged 20.13 per cent, representing 6.14 and 11.63
percentage points increase above their levels in the first half of 2016. The NIBOR averaged
19.24 and 17.36 per cent for the call and 30-day segments in the second half of 2016
compared with 6.73 and 6.75 per cent in the first half of 2016. The corridor around the MPR
for standing lending and deposit facilities was retained at +200 and -500 basis points,
respectively, in the second half of 2016. Similarly, the cash reserve ratio (CRR) and liquidity
ratio (LR) were also retained at 22.50 per cent and 30 per cent, respectively, during the
second half of 2016.

Figure 2. 8: Money Market Interest Rates and MPR

SECOND HALF 2015
FIRST HALF 2016
SECOND HALF 2016
per cent
Call
OBB
MPR

2.1.5
Maturity Structure of Bank Deposits and Credit
The total DMB’s deposit which was N16,673.7 billion in June 2016 rose moderately by 0.75
per cent to N16,798.4 billion in December 2016. The structure of DMBs’ credit in the second
half of 2016 indicated that short-term maturities remained dominant in the market. Loans and
advances maturing in one year and below accounted for 46.4 per cent of the total at endFINANCIAL STABILITY REPORT – DECEMBER 2016

December 2016, compared with 46.0 per cent at end-June 2016. The medium-term4
maturities rose by 2.6 percentage points to 20.7 per cent, from its level at end-June 2016,
while the long-term5 maturities rose to 32.9 per cent, compared with 35.9 per cent at end-June
2016 (Figure 2.9).

Figure 2. 9: Distribution of Bank Loans and Advances by Maturity


DMBs’ deposit liabilities showed an increasing trend with short-term deposits of less than 1year tenor constituting 95.6 per cent of the total, of which 75.9 per cent had a maturity of less
than 30 days. Deposits of more than 1-year but less than 3-year tenor, constituted 1.2 per cent
of total deposits, while deposits of more than 3-year tenor, constituted 3.2 per cent of total
deposits at end-December 2016 compared with 2.9 and 2.8 per cent at end-June 2016 and the
corresponding period of 2015, respectively (Figure 2.10).

Figure 2. 10: Maturity Structure of Bank Deposits


The maturity mismatch in the banking system remained a challenge to the growth of longtenured assets, thereby limiting lending to the real sector. However, increasing fiscal

4Medium term implies maturities ≥1yr and < 3yrs.
5 Long term implies maturities of 3yrs and above.

Dec 14
Jun 15
Dec 15
Jun 16
Dec 16
Per cent
Short term
Medium-term
Long-Term


Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Per cent
Per cent
Short-term
Medium-term (rhs)
Long-Term (rhs)
FINANCIAL STABILITY REPORT – DECEMBER 2016

interventions complemented by enhanced developmental activities of the CBN will help in
attracting long term funds for real sector development and growth.
2.1.6
Market Structure of the Banking Industry
In the second half of 2016, five banks dominated activities in the banking industry. The
average concentration ratio of the five largest banks (CR5) with respect to deposits and assets
stood at 53.70 and 53.68 per cent, respectively, at end-December 2016, compared with 43.3
and 51.9 per cent at end-June 2016. The market shares of the largest bank with respect to
deposits and assets stood at 13.20 and 14.23 per cent, respectively. Nineteen other banks had
market shares ranging from 0.02 per cent to 6.19 per cent, in deposits, and 0.06 per cent to
6.23 per cent in assets.

The concentration ratio of the banking industry was supported by the Herfindahl-Hirschman
Index (HHI)6 for the industry at 773.21 and 774.50 for deposits and assets, at end-December
2016, compared with 764.13 and 757.00 at end-June 2016, respectively (Figure 2.11). This
showed a weakening of the competitiveness of the industry compared to the first half of 2016.

Figure 2. 11: Concentration Ratios of the Banking Industry Assets and Deposits


2.2
New Institutions Licensed
The following category of banks and other financial institutions (OFIs) were granted the
authorizations indicated against their classes during the period under review:

Table 2. 3: Institutions Licensed in the Second Half of 2016
S/N
Type of Institution
Number of
Institutions
Jan 1 – June 30,

Number of
Institutions
July 1 – December
31, 2016
Total Number of Institutions
as at December 31, 2016

Microfinance Bank

Bureau De Change
34 (New)
24(New)
3,147

6HHI is based on a scale of 100 to 10,000.

Jun 15
Dec 15
Jun 16
Dec 16
HHI
CR
CR5(Deposits)
CR5( Assets)
CR( Largest-Deposits)
CR (Largest-Assets)
HHI (Deposits) (rhs)
HHI (Assets) (rhs)
FINANCIAL STABILITY REPORT – DECEMBER 2016

113 (Old)
121(Old)

Finance Company

Commercial Banks

-

Development Finance
Institution (DFI)
-
-

Merchant Banks
-
-

Primary Mortgage
Banks
-
-

Nigeria Mortgage
Refinance Company
-
-

Other developments in the period under review included the licensing of 24 BDCs bringing
the total to 3,147. Also a unit Non-Interest Microfinance Bank was licensed, while 11 unit
MFBs merged into a State MFB bringing the total number of MFBs to 978. Four Finance
Companies were also licensed. A categorization of the authorization of commercial banks at
end-December 2016 showed 10 international, nine national and two regional licenses.
2.3
Other Financial Institutions
Total assets of the sub-sector decreased by 7.18 per cent to N1,812.93 billion at endDecember 2016, from N1,953.20 billion at end-June 2016. Total net loans/advances also
decreased by 17.36 per cent to N951.98 billion at end-December 2016, from N1,151.97
billion at end-June 2016. Similarly, the total paid-up capital decreased by 11.71 per cent to
N413.06 billion at end-December 2016 from N467.85 billion at end-June 2016. Total
deposits also decreased by 15.26 per cent to N535.57 billion at end-December 2016, from
N632.02 billion at end-June 2016.

2.3.1
Development Finance Institutions
The total assets of the five (5) DFIs decreased by 2.63 per cent to N964.24 billion at endDecember 2016, compared with N990.24 billion at end-June 2016. Of this amount, Bank of
Industry (BOI), Federal Mortgage Bank of Nigeria (FMBN), Nigerian Export-Import Bank
(NEXIM), Bank of Agriculture (BOA) and The Infrastructure Bank (TIB) accounted for
69.26, 20.24, 6.57, 3.15, and 0.78 per cent, respectively.

The net loans and advances decreased by 19.49 per cent to N571.85 billion at end-December
2016, from N710.27 billion at end-June 2016 due mainly to increased loan loss provisioning
arising from higher rates of default. Of the net loans and advances of N571.85 billion, BOI
accounted for 4.87 per cent, FMBN 19.85 per cent, NEXIM 4.62 per cent, BOA 0.16 per cent
and TIB 0.50 per cent.

2.3.2
Microfinance Banks
The total assets of microfinance banks (MFBs) decreased to N341.68 billion at endDecember 2016, from N455.96 billion at end-June 2016, reflecting a decrease of 25.06 per
cent. The shareholders’ funds also decreased by 42.91 per cent from N135.09 billion to
N77.12 billion at end-December 2016. The decrease in shareholders’ funds was largely
FINANCIAL STABILITY REPORT – DECEMBER 2016

attributed to losses by the microfinance banks resulting from increased provisioning for non-
performing loans.

Total deposit liabilities and net loans/advances also decreased by 13.05 and 20.96 per cent to
N166.29 billion and N183.96 billion at end-December 2016, compared with N191.25 billion
and N232.73 billion at end-June 2016, respectively. Reserves also decreased by 24.39 per
cent to N16.80 billion at end-December 2016, from N22.22 billion at end-June 2016. The
decrease in reserves was as a result of operational losses.

2.3.2.1 Microfinance Certification Programme
The Microfinance Certification Programme (MCP) continued in the review period. The
number of certified candidates (Level II) increased by 309 to 3,899 in the second half of 2016
from 3,590 at end-June 2016.
2.3.3
Primary Mortgage Banks
The number of licensed primary mortgage banks (PMBs) remained 34 at end-December
2016, comprising 10 National PMBs and 24 State PMBs. Total assets of PMBs increased
marginally to N383.67 billion at end-December 2016 from N382.36 billion at end-June 2016,
representing an increase of 0.34 per cent. Similarly, balances with banks and paid up capital
increased by 78.86 per cent and 0.05 per cent to N24.79 billion and N103.35 billion
respectively, at end-December 2016 from N13.86 billion and N103.29 billion at end-June
2016.

However, loans and advances, deposit liabilities and other liabilities decreased by 6.85 per
cent, 5.25 per cent and 5.89 per cent to N154.46 billion, N115.77 billion and N68.06 billion,
respectively, at end-December 2016 from N165.83 billion, N122.18 billion and N72.32
billion at end-June 2016.

Table 2. 4: Financial Highlights of PMBs as at December 31, 2016

December

(N’ billion)
June

(N’ billion)
% Change
Total Assets
383.67
382.36
0.34
Loans and Advances
154.46
165.83
(6.85)
Balances with Banks
24.79
13.86
78.86
Deposit Liabilities
115.77
122.18
(5.25)
Other Liabilities
68.06
72.32
(5.89)
Paid up Capital
103.35
103.29
0.05

2.3.3.1 National Housing Finance Programme
The implementation of the National Housing Finance Programme achieved new milestones in
the review period as reported below:
Nigeria Mortgage Refinance Company
At end-December 2016 the Nigeria Mortgage Refinance Company (NMRC) had refinanced
mortgages amounting to N8 billion representing an increase of 200.75 per cent compared
FINANCIAL STABILITY REPORT – DECEMBER 2016

with N2.66 billion at end-June 2016. Having exhausted the first N8.0 billion bonds raised
from the market, the company is in the process of raising additional N2.4 billion to refinance
eligible mortgages of its member Participating Lending Institutions (PLIs).

In line with its condition for credit recourse, the NMRC exchanged refinanced nonperforming mortgages of N172.46 million with 3 Primary Lending Institutions for performing
mortgages of N208.96 million within the review period.

The NMRC successfully hosted the African Union Conference for Housing in Abuja in
September 2016. The Conference created awareness on opportunities in the housing finance
sector and proffered solutions to common challenges.

Housing Microfinance
Further to the expression of interest (EOI), and completion of the evaluation process, two
firms were selected to work with the eight MFBs that had been prequalified to participate in
the pilot Housing Microfinance (HMF) Scheme with a budget of USD15 million aimed at
catering for the housing needs of low income earners.

2.3.4
Finance Companies
Following the return of operating licenses by five (5) FCs, the number of finance companies
(FCs) stood at 70 inclusive of four (4) newly licensed institutions that were yet to commence
operations.

Following the implementation of the new capital requirement of N100 million, paid-up
capital increased to N19.19 billion at end-December 2016 from N15.35 billion at end-June
2016. Consequently, total assets of the subsector increased by 12.71 per cent to N123.34
billion at end-December 2016 compared with N109.43 billion at end-June 2016. Also, loans
and advances, investments, and fixed assets increased by 4.51 per cent, 2.69 per cent and
21.15 per cent to N41.71 billion, N14.09 billion and N13.69 billion from N39.91 billion,
N13.72 billion and N11.30 billion at end-December 2016 and at end-June 2016, respectively.
Shareholders’ funds also increased by N2.49 billion to N23.03 billion at end-December 2016,
from N20.54 billion at end-June 2016. Similarly, borrowings increased by 9.98 per cent to
N74.67 billion at end-December 2016, from N67.89 billion at end-June 2016. However,
reserves decreased by 28.01 per cent to N3.83 billion at end-December 2016 from N5.32
billion at end-June 2016 due mainly to operational losses.

Table 2. 5: Key Finance Companies’ Financial Highlights at end-December 2016

December 2016
(N’ billion)
June 2016
(N’ billion)
% Change
Total Assets
123.34
109.43
12.71
Cash in Vault
0.50
1.19
(57.98)
Balances with Banks
3.52
3.33
5.7
Loans and Advances
41.71
39.91
4.51
Investments
14.09
13.72
2.69
Fixed Assets
13.69
11.30
21.15
FINANCIAL STABILITY REPORT – DECEMBER 2016

Borrowings
74.67
67.89
9.98
Paid up capital
19.19
15.35
25.01
Reserves
3.83
5.32
(28.01)
Shareholders Fund
23.03
20.54
12.12

2.3.5
Bureaux de Change
The number of licensed BDCs stood at 3,147 at end-December 2016. During the period under
review, the CBN directed Authorised Foreign Exchange Dealers to commence the sale of
dollars to BDCs from the proceeds of international money transfers with effect from July 22,
2016.

2.4
Financial Markets

2.4.1
The Money Market
The CBN maintained its contractionary monetary policy stance in the second half of 2016 in
order to stimulate capital inflow, reduce demand pressures in the foreign exchange market
and tackle rising inflation. At the Monetary Policy Committee meeting held in July 2016, the
Bank adjusted the Monetary Policy Rate (MPR) upward by 200bps to 14.00 per cent from
12.00 per cent but retained the asymmetric corridor around the MPR at +200/-500 basis
points, while the Cash Reserve Requirement (CRR) on deposits was also retained at 22.50 per
cent.

Activities in the money market in the second half of 2016 reflected largely the tight liquidity
in the banking system occasioned by dwindling statutory revenue and extensive open market
operations (OMO) auctions. The provisioning of funds for special foreign exchange
interventions also exerted pressure on available liquidity and money markets rates moved in
tandem with the level of banking system liquidity. Consequently, money market rates opened
high and trended largely above the MPR for most of the review period. Overnight call rate
opened on July 8, 2016 at 15.00 per cent, while open buy back (OBB) rate opened on July 20,
2016 at 14.00 per cent. Rates spiked at 160 per cent on October 18, 2016 for inter-bank call,
and at 25.40 per cent on November 15, 2016 for OBB.
However, towards the end of 2016, there was respite in the market as inflows from maturing
CBN bills and the refund of N349.59 billion to state governments from the Paris Club,
buoyed liquidity and neutralised the effect of the various withdrawals through OMO.
Consequently, monthly weighted average OBB and inter-bank call rates closed lower at 7.45
and 11.62 per cent in December 2016, compared with 21.75 and 29.91 per cent recorded in
June 2016, respectively. The monthly average OBB rate ranged from 7.45 to 16.79 per cent,
while the inter-bank call rate ranged from 11.62 to 29.81 per cent.


FINANCIAL STABILITY REPORT – DECEMBER 2016

Figure 2. 12: Money Market Rates Movements, January – December 2016

2.4.1.1 Nigerian Treasury Bills
Nigerian Treasury Bills (NTBs) of 91-, 182- and 364-day tenors totalling N2,098.23 billion
were issued and allotted during the second half of 2016. This represented a decrease of 14.61
per cent, when compared with N2,457.28 billion recorded as at end-June 2016. Similarly,
total subscription was lower at N3,620.30 billion, depicting a decrease of 28.41 per cent,
when compared with N5,057.30 billion recorded in the first half of 2016. The decrease in
NTBs issued, allotted and subscribed was attributed to the tight liquidity in the banking
system precipitated by the sustained mop-up by the CBN, provisioning of funds by banks for
the special foreign exchange interventions for Forwards transactions at the foreign exchange
market.

The holding structure of investments in NTBs in the review period indicated that banks tookup N887.14 billion, representing 42.28 per cent of the total NTBs issued, as against
N1,745.90 billion, representing 71.05 per cent of NTBs issued in the preceding period.
Mandate and internal customers, and CBN take-up accounted for N1,075.50 billion and
N135.59 billion, respectively compared with N683.38 billion, and N28.00 billion in the first
half of 2016. The reduced up-take by banks was attributed to tight liquidity in the banking
system and higher yield in CBN bills, leading to the significant increase in mandate and
internal customers’ participation as well as increase in CBN take-up.
The total stock of NTBs outstanding as at end-December 2016 showed that banks accounted
for 38.61 per cent; the non-bank, and mandate and internal customers accounted for 61.33 per
cent, while CBN held the balance of 0.06 per cent. The range of average marginal rates for
the period were 9.9800 - 15.4400 per cent for the 91-day; 12.2400 - 18.0589 per cent for the
182-day; and 14.9900 - 18.7000 per cent for the 364-day tenors.
January
February
March
April
May
June
July
August
September
October
November
December
Inter-bank

OBB

SDF

MPR

SLF


Inter-bank, OBB, SDF, MPR and SLF Rates (%)
FINANCIAL STABILITY REPORT – DECEMBER 2016

2.4.2
The Foreign Exchange Market
The Bank’s effort at maintaining a stable exchange rate was sustained with the full
implementation of the flexible foreign exchange rate regime. However, low accretion to the
foreign reserves due to low oil price, declining oil production attributable to the restiveness in
the Niger Delta region, foreign portfolio investment reversals and high import bills, continued
to exert pressures on the exchange rate. Consequently, the naira depreciated at both the interbank and BDC segments. The Bank, however, continued to intervene directly in the interbank market in an attempt to stabilise the exchange rate.
2.4.2.1 Foreign Exchange Market Rates
The exchange rate of the naira at the inter-bank segment, opened at N282.25/US$ on July 1,
2016 and closed at N305.00/US$ on December 30, 2016. Similarly, at the BDC segment of
the foreign exchange market, the selling rate opened and closed at N348.00/US$ and
N490.00/US$, respectively. This represented depreciation of 7.46 per cent at the inter-bank
and 28.98 per cent at the BDC segments of the market.
On monthly average basis, the exchange rates at the interbank and BDC segments depreciated
by 24.07 and 22.72 per cent from N231.76/US$ and N351.82/US$ in June 2016, to close at
N305.22/US$ and N455.26/US$ in December 2016, respectively (Figure 2.7). The
depreciation of the naira at the interbank and the BDC segments was due to the scarcity of
foreign exchange and sustained demand pressures.

Figure 2. 13: Inter-bank and BDC Rates, January - December 2016

2.4.2.2 Foreign Exchange Spot, Forwards and OTC FX Futures Transactions
In the review period, total CBN foreign exchange sales was $2,940.05 million. Of this, interbank spot sales amounted to $575.50 million, while forwards through special market
intervention sales (SMIS) was $2,364.55 million. The SMIS were directed to critical
purposes including raw materials and machinery, petroleum products, airlines, and
agriculture.

OTC FX Futures contracts amounted to $5,184.10 million (notional value). The sum of
$1,528.94 million matured, while $3,655.16 million remained open as at December 30, 2016.
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Inter-Bank

BDC

Exchange Rate (NGN/US$)
FINANCIAL STABILITY REPORT – DECEMBER 2016

2.4.2.3 Potential Risks/Challenges in the Foreign Exchange Markets
The implementation of the flexible exchange rate regime faced some challenges including:
Market illiquidity arising from low inflow from autonomous sources;
Perceived devaluation risk from market participants;
Persistent foreign exchange demand pressures;
Arbitrage opportunities following the widening spread between the interbank and
BDC rates; and
Uncertainty in the macroeconomic environment.

2.4.3
The Capital Market
Activities in the Nigerian Stock Exchange (NSE) remained depressed during the review
period as the All Share Index (ASI) and Market Capitalisation (MC) decreased compared
with the preceding period. This was due to the bearish trend in the stock market, arising from
uncertainties in the macroeconomic environment, poor corporate performance due to tougher
operating environment, depressed household demand and rising costs which impacted on
stock performance. In addition, the increasing yield in the fixed income market also
distracted investors from the stock market and contributed towards driving prices down.

During the second half of 2016, eleven (11) new issues comprising two (2) State Government
bonds, three (3) FGN Bonds, two (2) corporate bonds, two (2) corporate equities and two (2)
exchange traded funds (ETF), were listed, while nine (9) companies were delisted from the
exchange for either ceasing to exist or non-compliance with post-listing requirements. Four
(4) supplementary listings were also recorded on account of additional public offers and
special placements.
2.4.3.1 The Bond Market
Total bonds outstanding at end-December 2016 stood at N7,552.32 billion, of which FGN,
agency, sub-national and corporate bonds amounted to N6,663.36 billion (88.23%), N0.30
billion (0.004%), N417.72 billion (5.53%) and N470.94 billion (6.24%), respectively. The
total bonds outstanding at end-December 2016 reflected a 9.28 per cent increase over the
N7,542.17 billion end-June 2016 figure, comprising FGN, agency, sub-national and corporate
bonds valued at N6,571.96 billion (87.14%), N0.90 billion (0.01%), N433.24 billion (5.74%)
and N536.07 billion (7.11%), respectively.
Table 2. 6: Outstanding Bonds

June 2016
(N ’billion)
December 2016
(N ’billion)
% Change
Proportion of
Total
FGN

Agency

Sub-National

Corporate

Total

Source: FMDQ OTC PlC

FINANCIAL STABILITY REPORT – DECEMBER 2016

FGN Bonds
In the review period, FGN Bonds offered for sale (new issues and re-openings) was N645.00
billion, representing an increase of 9.32 per cent above the N590.00 billion offered in the first
half of 2016. Public subscription and sales decreased to N941.90 billion and N499.20 billion,
at end-December 2016, from N1,183.83 billion and N529.50 billion, at end-June 2016,
respectively. The decrease in subscription and sales were attributed to the liquidity
constraints in the banking system which led to reduced patronage of FGN bonds by banks
despite the strong appeal of fixed income assets and the impressive yield on FGN bonds.

The price of FGN Bonds at the secondary market declined as a result of reduced transactions
and demand, as well as increased banking system liquidity constraints and other
macroeconomic uncertainties. Consequently, yields on FGN Bonds at end-December 2016
increased considerably at both the long and short ends of the curve when compared with FGN
bond yields in the preceding period (Figure 2.8). The upward review of the MPR by 200 basis
points in the second half of 2016, and the sustained open market operations activities by the
Bank which further reduced market liquidity, contributed to increased yield on FGN bonds in
the secondary market.
Figure 2. 14: Yield Curves for Nigeria

Source: FMDQ-OTC Plc.

Agency Bonds
During the review period, no agency bond was issued. Federal Mortgage Bank of Nigeria
(FMBN) bonds valued N0.60 billion were redeemed, the same as the amount redeemed in the
first half of 2016. Consequently, total outstanding Agency Bonds as at end-December 2016,
stood at N0.30 billion.
Sub-National Bonds
There was no new issue of sub-national bonds in the second half of 2016, the same as in the
preceding period. A total amount of N15.52 billion was amortised by eleven (11) states as

Yield %
Time to Maturity (Years)
Jun-2015
Dec-2015
Dec-2016
FINANCIAL STABILITY REPORT – DECEMBER 2016

against N19.87 billion amortised by twenty (20) states in the first half of 2016. The total
outstanding bonds held by sixteen (16) state governments stood at N47.72 billion.
Corporate Bonds
Three (3) corporate bonds valued N67.97 billion were issued by two companies in the review
period compared with two (2) bonds worth N30.63 billion issued by two (2) companies in the
preceding period. Bonds valued N2.66 billion were amortised by eight (8) companies, while
bonds worth N132.75 billion were redeemed by three (3) companies. The outstanding
corporate bonds which were held by fourteen (14) companies at end-December 2016, stood at
N470.94 billion.

Table 2. 7: Corporate Bonds issued in the second half of 2016
Company
Description
Value (N’ Billion)
Lafarge Africa Plc
14.25 Lafarge 15-June-2019
26.39
Lafarge Africa Plc
14.75 Lafarge
33.61
Sterling Inv. Mgt. Plc
16.50 Sterling Inv. 3-Aug-2023
7.97
Total

67.97
Source: FMDQ OTC PLC

2.4.3.2 The Equities Market
At end-December 2016, the NSE ASI closed at 26,874.62, reflecting a decrease of 9.20 per
cent below the 29,597.79 recorded at end-June 2016. Market capitalization also closed lower
at N9,246.92 billion, reflecting a decrease of 9.03 per cent below the N10,165.34 billion
recorded at the end of the preceding period. The breakdown of trading by foreign portfolio
investors (FPI) showed that inflows were valued at N135.23 billion, while divestments
(outflows) stood at N113.11 billion, reflecting a net inflow of N22.12 billion at endDecember 2016, in contrast to a net outflow of N26.63 billion recorded at end-June 2016.
Total FPI transactions (inflow and outflow) accounted for 47.12 per cent of total equity
transaction in the period, compared with 43.12 per cent recorded at end-June 2016.
The decrease in the market indicators (NSE ASI and Market capitalization) was attributable
to general contraction in economic activities, reduced corporate activities and increased
investors’ skepticism, coupled with other macroeconomic uncertainties. However the
increase in net FPI inflows was attributable to greater exchange rate liberalisation in the
second half of 2016.

Table 2. 8: Domestic and Foreign Portfolio Participation in Equity Trading in the second Half
of 2016
Period
Total
Volume
(N’
Billion)
Foreign
(N’
Billion)
%
Foreign
Domestic
(N’
Billion)
%
Domestic
Foreign
Inflow
(N’
Billion)
Foreign
Outflow
(N’
Billion
NSE ASI
Market
Capitalization
(N’ Billion)
Nov-16

Jun-16

Period %
Change
-30.9604
-24.10668

-36.1553


FINANCIAL STABILITY REPORT – DECEMBER 2016

2.5
Financial Inclusion
Towards achieving the goals of the National Financial Inclusion Strategy (NFIS), the
following activities were undertaken in the review period.
2.5.1
Access to Financial Services Survey 2016
The report of the 2016 Access to Financial Services (A2F) Survey, which was conducted to
provide data on the status of the 80 per cent inclusion target by 2020 as enunciated in the
NFIS, was being compiled for publication.
2.5.2
NFIS Governing Committee Meetings
During the review period, the NFIS Governing Committee met and took the following
decisions:
Approved the 2015 annual report of the National Financial Inclusion Strategy for
publication;
Directed NAIC to implement the capacity building plan for agricultural insurance as
from 2017;
Requested NIPOST to devise ways that will ensure that the approved stamp duty
would not hinder financial inclusion goals;
Charged the Securities and Exchange Commission (SEC) to expedite action on
finalizing the Capital Market Financial Inclusion Strategy as well as to finalize the
draft guidelines on the expansion of distribution channels for capital market products;
Directed the CBN and the National Insurance Commission (NAICOM) to jointly
review and harmonize the Bancassurance Guidelines; and
Set up a Committee to review the NFIS.

2.6
Real Sector Intervention Programmes
2.6.1
Risk Mitigation and Insurance Schemes
2.6.1.1 The Agricultural Credit Guarantee Scheme Fund
A total of 34,774 loans valued at N4.47 billion were guaranteed in the second half of 2016 for
three commercial and 37 microfinance banks as against 23,774 loans valued at N3.63 billion
for three commercial and 72 microfinance banks in the first half of 2016. This trend indicated
an increase of 46.27 and 23.14 per cent in the number and value of loans guaranteed,
respectively. The sum of N5.55 billion involving 34,083 projects was repaid during the same
period compared with N4.03 billion for 29,519 projects in the corresponding period of 2016.
This performance reflected an increase of 37.72 and 15.46 per cent in the value and number
of loans guaranteed, respectively. Cumulatively, 1.060 million loans valued at N104.01billion
had been guaranteed from inception to December, 2016.
2.6.1.2 National Collateral Registry
The National Collateral Registry (NCR) carried out the following activities during the review
period:
i.
Registry Operations
A total of 72 Financial Institutions registered on the NCR comprising 21 Deposit Money
Banks, three Development Finance Institutions, three Merchant Banks, one Non-interest
Bank and 44 Microfinance Banks.

FINANCIAL STABILITY REPORT – DECEMBER 2016

ii.
Registration of Financing Statements
During the review period, 1,462 financing statements detailing priority interest in movable
assets valued at N24.136 billion, were registered by five financial institutions.

2.6.2 Credit Support Schemes

2.6.2.1 The Commercial Agriculture Credit Scheme
During the period under review, the sum of N40.97 billion was disbursed to 14 banks for 31
projects compared with N35.99 billion disbursed to 13 banks for 39 projects at end-June
2016. This outcome reflected an increase of N4.98 billion (13.83%) and a decrease of eight
projects (20.51%). The total repayments during the second half of 2016 stood at N26.28
billion by 18 banks for 214 projects, bringing the cumulative repayments to N225.01 billion
at end-December 2016.

The cumulative amount disbursed under the scheme from inception to end-December 2016
stood at N407.63 billion to 487 projects, 80 of which were state government projects.
2.6.2.2 SME Restructuring and Refinancing Facility
The repayment proceeds under the Facility in the review period stood at N6.57 billion. The
cumulative disbursements to the participating banks at end-December 2016 remained the
same at N381.99 billion for 604 projects, while the total repayment from BOI from inception
to December 2016 was N159.53 billion.

2.6.2.3 Real Sector Support Facility
During the period under review, the sum of N2.25 billion was released to two (2) projects
under the Real Sector Support Facility (RSSF), bringing the number of projects to four (4)
valued at N6.85 billion from inception in 2014.

2.6.2.4 Textile Sector Intervention Fund
The CBN earmarked the sum of N50 billion for restructuring of existing loans and provision
of new facilities under the Textiles Industry Intervention Fund. The sum of N7.36 billion was
disbursed to eight participating banks for nine projects in the review period. Total amount
disbursed from inception on October 6, 2015 to end-December 2016 was N14.92 billion to 14
participating banks for 20 projects.

2.6.2.5 Micro, Small and Medium Enterprises Development Fund
During the review period, activities carried out by the CBN under the Micro, Small and
Medium Enterprises Development Fund (MSMEDF) included:

MSMEDF Disbursements to SME and Micro Credit
During the review period, the sum of N16.74 billion was disbursed as against N30.24 billion
disbursed in the first half of 2016. The cumulative disbursement from inception to date stood
at ₦97.84 billion. Specifically, 97,519 female and 63,302 male micro-enterprise owners as
well as 408 SMEs benefited from the Fund since inception.

FINANCIAL STABILITY REPORT – DECEMBER 2016

Anchor Borrowers’ Programme (ABP)
The Bank approved the funding of Anchor Borrowers’ Programme (ABP) from the N220
billion MSMEDF at a single-digit interest rate of 9 per cent. From July to December, 2016,
the sum of N12.09 billion had been disbursed to 49,658 farmers in Adamawa, Anambra,
Benue, Cross River, Enugu, Edo, Kwara, Kaduna, Kogi, Oyo, Kano, Nasarawa, Taraba,
Sokoto, Niger, and Zamfara States. This figure represents 49.48 per cent of the total net
disbursement from inception to end-December 2016.
2.6.2.6 Power and Aviation Intervention Fund
During the review period, the sum of N11.41 billion was disbursed to three (3) power
projects. Cumulative disbursement from inception stood at N272.61 billion for 59 projects,
comprising 43 power and 16 airline projects at end-December 2016. The sum of N17.57
billion was repaid by 27 obligors during the review period. The total repayment (cumulative)
stood at N93.12 billion at end-December 2016.

Table 2. 9: PAIF Performance as at December 31, 2016
S/N
Type
No. of
Obligors
No. of
projects
Amount
(N’ Billion)
%
Repayments
(N’ Billion)

Airline

120.76
46.2
50.54

Power

151.85
53.8
42.58

Total

272.61
100.0
93.12

A total of 1,758 MW of electricity generation and the construction of 120-kilometre natural
gas pipeline were financed under the scheme at end-December 2016.

2.6.2.7 Nigeria Electricity Market Stabilization Facility
During the review period, the sum of N8.11 billion was released to 6 Generating Companies
(Gencos). Total disbursement of funds from inception stood at N114.74 billion to 29 eligible
electricity market participants. The sum of ₦4.11 billion was repaid by 8 Distribution
Companies (Discos) bringing the cumulative total repayments to N6.26 billion.

Table 2. 10: NEMSF Disbursements at end-December 2016
S/N
Market
Participants
Disbursements
(January – June
2016)
Disbursements (July
– December, 2016)
Cumulative as at December
31, 2016


Value
(N’ Billion)
No.
Value
(N’ Billion)
No.
Value (N’ Billion)

Discos
49.62
-
-

49.62

Gencos
32.67

8.11

49.06

Gascos
23.89
-
-

15.60

Service
Providers
0.46
-
-

0.46

Total
106.64

8.11

114.74
FINANCIAL STABILITY REPORT – DECEMBER 2016

Table 2. 11: NESMF Repayments as at December 31, 2016
Name of Obligor
under NEMSF
Repayment
Obligation
(N' Billion)
Repayment to Date
(N' Billion)
Amount Outstanding
(N' Billion)
Benin Disco
17.31
0.70
16.61
Eko Disco
5.85
0.39
5.47
Enugu Disco
26.64
1.56
25.08
Ibadan Disco
21.32
1.29
20.02
Ikeja Disco
5.99
0.24
5.75
Jos Disco
11.69
0.49
11.20
Kano Disco
9.67
0.62
9.05
Port Harcourt Disco
16.27
0.96
15.31
Total
114.75
6.26
108.49
Note: Only Discos are required to make repayments for the legacy debts settled under NEMSF

The Bank’s intervention has facilitated the following:
Recovery of 1,193MW of generating capacity through the overhaul of 10 turbines;
Acquisition of 414,000 meters and 70,310 number of 500KVA transformers by the
Discos;
Rehabilitation of 332km of 11KV lines and 130km of 0.45KV lines;
Procurement and construction of 34 new distribution substations; and
Acquisition of one (1) mobile injection sub-station.

In addition, capacity recovery programmes were carried out in three hydro power stations
while 10 gas turbines at major thermal power plants including Geregu, Transcorp Ughelli,
and Ibom Power Plants were rehabilitated.

2.6.2.8 Entrepreneurship Development Centres
The number of participants trained by the Entrepreneurship Development Centres (EDCs)
during the review period was 7,553, surpassing the target of 6,600. A total of 3,196 (42.31%)
of the participants were female and 4,357 (57.69%) were male. Cumulatively, the sum of
N2.31 billion has been accessed through banks and other financial institutions by the
graduates since inception, while a total of 66,854 participants have been trained.

2.6.2.9 Youth Entrepreneurship Development Programme
The second stream of the training of young entrepreneurs under the YEDP was flagged off on
20th October, 2016. Heritage Bank Ltd forwarded 548 business plans for funding, out of
which, the Bank approved 310 amounting to N776,773,885.87. As at December 30, 2016, the
sum of N179,717,629.82 has been disbursed to 67 successful applicants.

2.6.2.10 CBN Non-Oil Export Stimulation Fund and Rediscounting & Refinancing
Facility
FINANCIAL STABILITY REPORT – DECEMBER 2016

During the review period, 13 applications were received under the Export Stimulation Fund
(ESF) valued at N25.48 billion while two (2) applications valued at N3.59 billion were
received for Rediscounting and Refinancing Facility (RRF).

2.7
External Reserve Management
External reserves decreased by $235.96 million to $26.99 billion at end-December 2016 from
$27.22 billion at end-June 2016, comprising $2.67 billion for the Federation, $8.84 billion for
the Federal Government and $15.53 billion for the CBN. A breakdown of the reserves
indicated that 84.35 per cent was held in US Dollars, 7.45 per cent in IMF SDRs, 6.87 per
cent in Renminbi and 1.33 per cent in other currencies.
Key issues that dominated external reserve management in the review period were the
expectations and eventual rate hike by the Federal Reserve in December 2016. This led to
decline in the value of US dollar-denominated assets and strengthening of the US dollar
against other currencies. There are still strong expectations of further increase in the Federal
Reserve rate in the near term.
Figure 2. 15: Probability of Federal Reserve Hike in June 2017

Source: Bloomberg

The policies of the Bank of England (BOE) and European Central Bank (ECB) were
expansionary. During the review period, the BOE policies which included reduction in the
Bank Rate to 0.25 per cent, introduction of Corporate Bond Purchases and Term Funding
Schemes decreased yields on GBP-denominated assets. Similarly, the ECB Targeted Long
Term Refinancing Operations (TLTRO) scheme in the same period contributed to the
decrease in sovereign yields.

Per cent
Rate Range (%)
0.75-1
1-1.25
1.25-1.5
FINANCIAL STABILITY REPORT – DECEMBER 2016

Figure 2. 16: Yield on 10-year Government Bonds

Source: Bloomberg

-1

Per cent
Euro Area
UK
FINANCIAL STABILITY REPORT – DECEMBER 2016

3.0
REGULATORY AND SUPERVISORY ACTIVITIES
3.1
Financial Soundness Indicators
The financial soundness indicators used to appraise and monitor the stability of the financial
system included assets, capital, and income/expense-based indicators.
3.1.1
Assets-Based Indicators
Commercial banks in Nigeria experienced deterioration in assets quality at end-December
2016. The ratio of non-performing loans (NPLs) to gross loans deteriorated in the second half
of 2016 by 2.3 and 8.7 percentage points to 14.0 per cent at end-December 2016 compared
with the levels at end-June 2016 and end-December 2015, respectively. The deterioration in
asset quality was largely attributed to the rising inflationary trend, negative GDP growth, and
the depreciation of the naira.

Figure 3. 1: Banking Industry NPLs to Gross Loans at end-December 2016

3.1.1.1 Core Liquid Assets to Total Assets
The ratio of core liquid assets to total assets increased by 2.3 percentage points to 16.3 per
cent at end-December 2016 from 14.0 per cent recorded at end-June 2016. Also, the ratio of
core liquid assets to short-term liabilities increased by 2.9 percentage points to 24.5 per cent
at end-December 2016, compared with 21.6 per cent at end-June 2016. The increase in the
ratio of core liquid assets to both total assets and short-term liabilities reflects improved
buffers to absorb short term obligations.


End Jun. 2015
End Dec. 2015
End Jun. 2016
End Dec. 2016
Percentages
FINANCIAL STABILITY REPORT – DECEMBER 2016

Figure 3. 2: Banking Industry Liquidity Indicators at end-December 2016

3.1.2
Capital-Based Indicators
The ratio of regulatory capital to risk weighted assets decreased by 0.8 percentage point to
13.9 per cent at end-December 2016, compared to 14.7 per cent at end-June 2016. Similarly,
the ratio of Tier 1 capital to risk weighted assets declined by 0.9 percentage point to 12.9 per
cent at end-December 2016 from 13.8 per cent at end-June 2016. Despite the marginal
decrease, the ratios remained above the Basel minimum threshold.
Figure 3. 3: Banking Industry Capital Adequacy Indicators

The ratio of non-performing loans net of provision to capital for the industry increased to
38.4 per cent at end-December 2016 from 28.4 per cent at end-June 2016.
3.1.3
Income and Expense Based Indicators
The return on assets (ROA) declined by 1.0 percentage point to 1.3 per cent at end-December
2016 from 2.3 per cent recorded at end-June 2016, while the ratio of non-interest expenses to
gross income increased to 63.8 per cent at end-December 2016 from 54.6 per cent recorded in
the preceding half. The ratio of interest margin to gross income deteriorated to 50.0 per cent
during the review period from 61.4 per cent at end-June 2016, while the ratio of personnel
expenses to non-interest expenses declined to 30.5 per cent at end-December 2016 from 41.2
per cent recorded at end-June 2016.

End Jun. 2015
End Dec. 2015
End Jun. 2016
End Dec. 2016
Percentages
Liquid assets (core) to total assets
Liquid assets (core) to short-term liabilities

End Jun. 2015
End Dec. 2015
End Jun. 2016
End Dec. 2016
Percentages
Regulatory capital to risk weighted assets
Regulatory Tier 1 capital to risk weighted assets
FINANCIAL STABILITY REPORT – DECEMBER 2016

Table 3. 1: Selected Financial Soundness Indicators of the Nigerian Banking Industry
Indicators

2015**
2016***
EndJun
End-Dec
End-Jun
End-Dec
End-Jun
End-Dec
EndJun
EndDec
EndJun
End-Dec
1. Asset-Based Indicators
Nonperforming
loans to gross
loans*

Liquid assets
(core) to total
assets*

Liquid assets
(core) to short
term liabilities

2. Capital-Based Indicators
Regulatory
capital to riskweighted
assets*

Regulatory Tier
1 Capital to
risk-weighted
assets*

Nonperforming
loans net of
provisions to
capital*

3.Income and Expense Based Indicators
Return on
assets*

Interest margin
to gross
income*

Noninterest
expenses to
gross

Personnel
expenses to
noninterest
expenses

Note:
*FSIs are computed based on IMF guidelines.
**The indicators for the period End June 2012 to End December 2015 are revised
*** Provisional
3.2
The Banking Industry Stress Test
The banking industry stress test was carried out at end-December 2016, covering 23
commercial and merchant banks, to evaluate the resilience of the banks to credit, liquidity,
interest rate and contagion risks. The banking industry is categorised into large (assets ≥N1
trillion), medium (assets >N500 billion but<N1 trillion) and small banks (assets ≤N500
billion).

Baseline Position
The baseline CAR for the banking industry, large, medium, and small banks stood at 14.78,
15.47, 12.75 and 3.14 per cent, respectively. These represented a 0.04, -0.18, 0.76 and -0.02
FINANCIAL STABILITY REPORT – DECEMBER 2016

percentage points change from June 2016 for the banking industry, large, medium and small
banks, respectively.

Table 3. 2: Baseline Position
Baseline CAR
All Banks
Large Banks
Medium Banks
Small Banks
December 2016

June 2016

% Change


Figure 3. 4: Baseline (Pre-Shock) CAR (%)


Figure 3. 5: CAR Trajectory: June 2015 - December 2016


The economic headwinds have adversely impacted bank borrowers, resulting in rising NPLs
which required additional provisioning by banks, thereby reducing the banks’ CAR. The
decline of the CAR of small and medium banks did not weigh significantly on the industry
CAR because large banks hold a significant proportion (88.02%) of total banking industry
loans.


Jun-2016 CAR
Dec-2016 CAR
Banking Industry
Large Banks
Medium Banks
Small Banks


Jun '15
Dec '15
Jun '16
Dec '16
All Banks
Large Banks
Medium Banks
Small Banks
FINANCIAL STABILITY REPORT – DECEMBER 2016

The pre-shock ROA of the banking industry, large, medium and small banks were 0.16, 0.14,
0.23 and 0.38 per cent, while the ROE of the banking industry, large, medium and small
banks were 1.84, 1.53, 3.14 and 24.91 per cent in December 2016, respectively.

Figure 3. 6: Baseline (Pre-shock) ROA and ROE (%)


3.2.1
Solvency Stress Test

Credit Risk
The post-shock stress test results showed that a 100 per cent increase in NPLs will lead to a
CAR of 10.55, 12.01, 10.34 and -27.03 per cent for the banking industry, large, medium and
small banks, respectively. The results revealed that all the groups except small banks can
withstand a 100 per cent increase in NPLs. However, none of the groups could sustain the
impact of the most severe shock of a 200 per cent increase in NPLs as their post-shock CARs
fell below the 10 per cent minimum prudential requirement. The impact of the severe shock
scenario will result in a decline of CAR to 5.87, 8.25, 7.80 and -84.50 per cent for the
banking industry, large, medium and small banks, respectively.

Table 3. 3: General Credit Shocks

Credit Concentration
The banking industry and the peered-groups showed a high level of credit concentration risk
as their respective CARs fell below 10 per cent under the shocks of deterioration in the
quality of the risk assets. If the five biggest corporate obligor credit facilities shifts from Sub0.16

Dec-2016 ROA
Dec-2016 ROE
Banking Industry
Large Banks
Medium Banks
Small Banks
Single Factor Shocks
Solvency Ratio After Shocks
All Banks
Large Banks
Medium
Small
Base line CAR

50% NPLs increase

100% NPLs increase

200% NPLs increase

FINANCIAL STABILITY REPORT – DECEMBER 2016

standard to Doubtful, the CARs fell to 7.89, 8.84, 5.16 and -8.93 per cent for banking
industry, large, medium and small banks, while if the five biggest corporate obligor credit
facilities shifts from Doubtful to Lost, the CARs fell to -0.21, 1.09, -3.88 and -24.44 per cent,
for the corresponding categories, respectively.

Table 3. 4: Credit Concentration Risk

Figure 3. 7: Credit Concentration Shock (100% Loss)


Sectoral Credit Concentration Risk
Analysis of banking industry total credit by sector showed that, Oil & Gas sector constituted
29.59 per cent of total banking industry credit, while Manufacturing, General, General
Commerce, Government and Others, constituted 13.41, 8.71, 6.25, 8.34 and 33.70 per cent,
respectively, at end-December 2016.

Baseline
Five biggest corporate obligor credit facilities shifted from
Doubtful to Lost (100%)
All banks (23)
Large banks (8)
Medium-sized banks(5)
Small banks (10)

All Banks
Large Banks Medium
Small
Baseline CAR

Single Factor Credit Concentration Shocks
Solvency Ratio After Shocks
All Banks
Large Banks Medium
Small
Five biggest corporate obligors credit facilities shifted from
pass-through to sub-standard (20%)

Five biggest corporate obligor credit facilities shifted from substandard to Doubtful (50%)

Five biggest corporate obligor credit facilities shifted from
Doubtful to Lost (100%)

FINANCIAL STABILITY REPORT – DECEMBER 2016

Figure 3. 8: Sectoral concentration of Credit


The stress test result of a 20 per cent default in oil and gas exposures will lead to CARs of
13.98, 14.67, 11.87 and 2.63 per cent for the banking industry, large, medium and small
banks, respectively. However, with a more severe shock of 50 per cent default in exposure to
the sector, only the large banks will have CAR of 10.17 per cent which is above the
regulatory threshold. This showed that medium and small banks have more oil and gas credit
concentration risk than the large banks, despite their smaller proportion of exposure to the
sector.

Table 3. 5: Impact of Credit Shocks on Oil & Gas Exposures

All banks
(24)
Large (13)
Medium-sized
Banks (3)
Small Banks
(8)
Baseline CARs

20% Default on total
exposure to Oil &
Gas

50% Default on total
exposure to Oil and
Gas


Interest Rate Risk
The results of the stress tests on interest rate risk showed that the banking industry as well as
peered-groups (except small banks) maintained a stable solvency position to interest rate
shock as their post-shock positions (in terms of CAR) deteriorated marginally. However, the
interest rate shocks have significant adverse impact on the ROA and ROE of both the
industry position and the peered groups of banks due to their low baseline positions.

Oil and Gas
29.59%
Manufacturing
13.41%
General
8.71%
Gen. Commerce
6.25%
Government
8.34%
Others
33.70%
FINANCIAL STABILITY REPORT – DECEMBER 2016

Figure 3. 9: Interest Rate Risk


Figure 3. 10: Impact on Interest Rate Risk ROA and ROE


Table 3. 6: Impact of Selected Shocks on CAR, ROA and ROE (500bps to 1000bps)
Most Severe Shocks (500bps to 1000bps)
Banking
Industry
Large
Banks
Medium
Banks
Small
Banks
Baseline ROA

Baseline ROE

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

1000bps downward parallel shift in yield curve


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


500bps downward parallel shift in yield curve

Baseline CAR
Impact of 1000bps downward parallel shift in yield curve on
CAR
All banks (23)
Large banks (8)
Medium-sized banks(5)
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-sized banks(5)
Small banks (10)
FINANCIAL STABILITY REPORT – DECEMBER 2016

1000bps downward parallel shift in yield curve

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


500bps downward parallel shift in yield curve

1000bps downward parallel shift in yield curve


The banking industry solvency stress tests indicated that the resilience of banks to moderate
and severe shocks deteriorated marginally during the review period. Although the sector is
more exposed to credit concentration and default risks, there were no significant systemic
threats.
3.2.2
Liquidity Stress Test
Liquidity stress tests were conducted using the Implied Cash Flow Analysis (ICFA) and
Maturity Mismatch/Rollover Risk methods, to assess the resilience of individual banks and
the banking industry to both liquidity and funding shocks.

The tests revealed that after a one-day run, the liquidity ratio for the industry would decline to
30.2 per cent from the 44.4 per cent pre-shock position and, to 9.73 per cent and 6.76 per cent
after a five-day and cumulative 30-day run, respectively. Similarly, a 5-day and cumulative
30-day run on the banking industry would result in liquidity shortfalls of N2.1 trillion and
N2.3 trillion, respectively.

Figure 3. 11: Banking Sector Liquidity Ratio after Period 1-5 and cumulative 30-day shocks


-5

Pre-Shock
After Day 1
After Day 2
After Day 3
After Day 4
After Day 5
After cum 30 days
Dec-15
Jun-16
Dec-16
FINANCIAL STABILITY REPORT – DECEMBER 2016

Box. 1: Implied Cash Flow Analysis (ICFA) Assumptions
The ICFA assesses the capacity 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. In this
particular instance, 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 5day 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 the following table would remain
unencumbered after a fire sale.

Percentage of Assets Unencumbered after Fire Sales
Item
No
Assets
% Unencumbered
1.
Cash and cash equivalent

2.
Current account with CBN

3.
Government bonds, treasury bills and other assets with
0% risk-weighting
66.5
4.
Certificates of deposit held
66.5
5.
Other short-term investments

6.
Collateralized placement and money at call

7.
CRR

Table 3. 7: Liquidity Stress Test Results
Scenarios
Number of Banks with < 30%
liquidity ratios
December 2016
June 2016
(23 DMBs)
December

(24 DMBs)
System
LR (%)
Liquidity
Shortfall to
30% LR
(N’ billion)
Test 1.1: Implied Cash Flow Test

Day 1

30.15
20.5
Day 2

25.66
568.04
Day 3

20.82
1,088.73
Day 4

15.51
1,592.92
Day 5

9.73
2,072.55
Test 1.2: Implied Cash Flow Test
(30 Days)

6.76
2,308.03

3.2.3
Maturity Mismatch
At end-December 2016, the industry baseline position revealed that, on the average, the
shorter end of the market (≤30 day and 31-90 day buckets) were adequately funded.
However, on individual analysis, four (4) banks were not adequately funded in the ≤30 day
bucket, while ten (10) banks had funding gaps in the 31-90 day bucket.

The cumulative position for the industry showed an excess of N5.5 trillion assets over
liabilities.
FINANCIAL STABILITY REPORT – DECEMBER 2016

Table 3. 8: Maturity Profile of Assets and Liabilities at end-December 2016

Liabilities
Assets
Mismatch
Cumulative
N Billion
≤30 days
14,294.84 8,837.33 5,457.51 5,457.51
31-90 days
2,394.96 1,560.05 834.92 6,292.42
91-180 days
991.47 1,923.07 (931.60) 5,360.82
181-365 days
773.20 2,424.95 (1,651.75) 3,709.07
1-3 years
628.80 3,789.38 (3,160.58) 548.49
Above 3 years
822.54 6,885.98 (6,063.44)
(5,514.95)
Total
19,905.81
25,420.76
(5,514.95)


The Test 2A was cumulatively adequately funded, but Test 2B and 2C had a mismatch of
N7.1 trillion and N7.5 trillion respectively (Table 3.11).

Box. 2: The Maturity Mismatch/Rollover Risk Assumptions
This 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 030 and 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.


FINANCIAL STABILITY REPORT – DECEMBER 2016

Table 3. 9: Test Results for System-wide Maturity Mismatch

Test 2A
Descriptive Maturity
Mismatch
(no consideration of
rollover)
Test 2B
Static Rollover risk Analysis.
(No possibility to close liquidity
gaps in other buckets)
Test 2C
Dynamic Rollover risk test.
(No possibility to close liquidity gaps
in other buckets and free assets is
used to close liquidity gaps in other
buckets)
N’ billion
No of
banks
with
mismatch
N’ billion
No of
banks with
mismatch
N’ billion
No of banks with
mismatch
≤30 days
7,917.67

5,061.12

61.72

31-90 days
3,257.61

155.52

(31.92)

91-180days
1,522.34

(1,112.07)

(81.15)

181-365days
827.52

(1,842.07)

(394.51)

1-3 years
(712.14)

(3,340.51)

(2,052.14)

Above 3
years
(3,629.03)

(6,068.76)

(5,094.86)

Total
9,183.98

(7,146.75)

(7,592.85)


3.2.4
Contagion Risk Analysis through Interbank Exposures
The analysis of banks based on unsecured interbank exposures revealed that one (1) bank was
central in the network, as it was exposed to more than two counterparties in the system, while
a review of secured transactions showed that five (5) banks were central in the network as
they had three or more bilateral exposures. Overall, the result indicated the potential for high
contagion risk through unsecured interbank exposure as three banks (including two
Systemically Important Banks) failed CAR after a 100 per cent default shock (Table 3.12).

Table 3. 10: Result of Net Interbank Unsecured Exposures on Capital Adequacy Ratio.
Lending Banks
Bank 4
Bank 5
Bank 8
Bank 10
Bank 16
Bank 18
Bank 23
Industry
Pre-Test CAR

Post-Test CAR

Net Placement
(N’ Billion)


FINANCIAL STABILITY REPORT – DECEMBER 2016

Figure 3. 12: Tiered Structure of Unsecured Placements at end-December 2016

Note: Node colour representation (Blue= Lenders; Red= Borrowers; Purple= Borrowers
and Lenders); the sizes of the nodes represent the quantum of transactions.

3.3
Supervision of Banks
3.3.1
Routine/Target Examinations
The CBN in conjunction with the NDIC conducted the routine examination of 10 banks in the
“Low” and “Medium” Composite Risk Rating (CRR) categories during the second half of
2016. The examination of banks in the “High” and “Above Average” categories were earlier
conducted in the first half of the year. The non-interest bank and the two non-interest
windows were examined during the second half of the year. The CBN also monitored
compliance of banks to the recommendations of the Money Laundering, and Foreign
Exchange examination reports of 2015.
The outcome of the examinations revealed, among others, a decline in capital adequacy ratios
(CAR) and asset quality which was attributable to weak domestic macroeconomic conditions
and the slow recovery of the global economy. The decline in CAR was due to a slight decline
in total qualifying capital from increased provisions for loan losses and a corresponding
increase in risk weighted assets. The decline in the asset quality was driven by a decline in oil
prices which impacted on the obligors in the oil and gas sector and by extension the banking
industry in view of its large exposures to the sector. The monitoring exercise revealed an
acceptable level of compliance to the recommendations.
The routine examination of the Asset Management Corporation of Nigeria (AMCON) was
conducted during the second half of 2016. The examination focused on the management of
the acquired and restructured Eligible Bank Assets (EBAs), the recoveries made, assets
disposed and strategies for redemption of liabilities.
FINANCIAL STABILITY REPORT – DECEMBER 2016

As at the examination review date of September 30, 2016, the corporation had made total
recovery of N78.76 billion for 2016, which was made up of cash recoveries, asset forfeiture
and securities forfeiture. This represented a 90.2 per cent increase in the recoveries of N41.42
billion recorded in the corresponding period to September 30, 2015.
From its inception to September 30, 2015, the corporation has made total recoveries of
N681.541 billion, representing 38.95 per cent of the corporation’s total Eligible Bank Asset
purchase price of N1.75 trillion.
During the period under review, the corporation maintained its strategy of increased recovery
momentum, complemented with the balances accrued in the Banking Sector Resolution Trust
Funds to enable it redeem its obligations.
3.3.1.1 Foreign Exchange Examinations
The CBN conducted routine and special examinations of foreign exchange activities of banks
during the review period. The examinations revealed a number of infractions which included:
breaches in Net Open Position (NOP) and Foreign Currency Trading Position (FCTP) limits,
failure to repatriate export proceeds timeously and inappropriate involvement of banks in
international money transfer. Other breaches observed were non-compliance with forward
trading rules, late/non-submission of foreign exchange transaction documents by importers,
and non-compliance of Authorised Dealers (ADs) with CBN directives on the specified
sectoral disbursements. Appropriate regulatory measures including sanctions were taken.
Furthermore, the Bank conducted spot checks on International Money Transfer Operators
(IMTO) activities, which revealed several cases of irregularities in IMTO transactions by
unregistered firms.
3.3.1.2 Anti- Money Laundering/Combating the Financing of Terrorism
The Bank, in compliance with Financial Action Task Force (FATF) and Anti-Money
Laundering/Combating the Financing of Terrorism (AML/CFT) requirements, directed banks
to appoint Executive Compliance Officers, not below the rank of Executive Director, who
will be responsible for compliance with regulations. This is in addition to the existing Chief
Compliance Officers. Other activities include the following:
As part of the process towards developing an AML/CFT Strategy Document, the
Bank participated in the maiden Money Laundering/Financing of Terrorism National
Risk Assessment (NRA) exercise which was coordinated by the Nigerian Financial
Intelligence Unit.
The Bank also participated in the AML/CFT Expert Review Forum for the
implementation of the recommendations of the United Nation Convention Against
Corruption (UNCAC).
The CBN coordinated the preparedness exercise of banks for the forthcoming Mutual
Evaluation while it continued to work with GIABA to address issues identified in its
previous Mutual Evaluation Report.
FINANCIAL STABILITY REPORT – DECEMBER 2016

The Bank reviewed the daily deposit limits of the Tier I and II accounts in the Tiered
KYC Policy to N50,000 and N100,000, respectively. Cumulative balances were also
revised to N300,000 and N500,000 for Tier I and II accounts, respectively.
The Bank commissioned a study on Virtual Currency to appraise its implications for
the Nigerian Payments System. Following an interim report of the study, a cautionary
notice was issued drawing the attention of the public to the inherent risks in virtual
currencies pending the conclusion of the study.

Nigeria is no longer subject to FATF’s monitoring process under its on-going global
AML/CFT compliance process. It has also applied for membership of the FATF with a high
level mission of the FATF scheduled to visit Nigeria in the first quarter of 2017.

Box. 3: The Implementation of the Nigeria Sustainable Banking Principles
The Bank conducted an onsite assessment of 18 banks on the adoption and implementation of the Nigerian
Sustainable Banking Principles. The highlights of the assessment, which involved the review of internal
records and engagement with relevant desk officers, were:

Principle 1: E&S Management System for Business Activities
All 18 banks assessed had in place environmental and social (E&S) policies approved by their Boards of
Directors. The policy documents indicated that E&S considerations had been integrated into the enterprise
risk management systems and corporate governance structures of the banks. However, some banks were
yet to develop E&S procedure manuals while others had manuals that were not comprehensive.

Principle 2: Footprint Management for Business Operations
Most of the banks had documented E&S footprint management procedures in place.

Principle 3: Human rights
All the banks had human right policies, recorded either in their E&S or human resource policy documents.
Although staff unions were non-existent in some of the banks, the banks indicated that staff had freedom of
association.

Principle 4: Women Economic Empowerment
Several banks had developed and launched women-friendly products and services, most of which were tied
to the CBN N200 billion Micro Small and Medium Enterprises Development Fund scheme. On the
average, female staff constituted 42 per cent of the total staff and 26 per cent of both top management and
the Board.

Principle 5: Financial Inclusion
All the banks had implemented the tiered KYC initiative, leading to an increase in the number of
previously unbanked individuals drawn to the banking sector. It was also observed that 11 banks designed
innovative financial products and services for underprivileged groups.

Principle 6: E&S Governance
All the banks had E&S risk management governance structures in place. Common to all banks were the
following features -
(a) The Board was responsible for all social, ethical and environmental policies and also had
oversight responsibility on the implementation.
(b) Management was responsible for the development and implementation of E&S risk management
strategies, policies and procedures to facilitate the integration of sustainability into the business
decision models as well as report periodically to the Boards on implementation of the E&S risk
FINANCIAL STABILITY REPORT – DECEMBER 2016

management policies and procedures.

Principle 7: Capacity Building
While many banks adopted various platforms for capacity building on sustainability, it was observed that
the trainings were inadequate to embed strong sustainability culture in business activities.

Principle 8: Collaborative Partnership
All the banks provided evidence of regular attendance of NSBP champion meetings. Some banks had
obtained membership of international bodies such as Global Reporting Initiative (GRI) and United
Nations Environmental Programme – Financial Sector Initiative (UNEP-FI) to assist in their
sustainability initiatives.

Principle 9: Reporting
All the banks had been submitting their E&S reports as and when due.
3.3.1.3 National Road Map on Sustainable Finance
Following the approval of the FSRCC for the implementation of the roadmap for the Nigerian
Sustainable Finance Principle (NSFP), each member agency was required to set up a steering
committee to coordinate the development of sector-specific Sustainability Principles and
Guidelines. The steering committees would interface with the Harmonisation and
Coordination Sub-Committee (HCSC) of the FSRCC to ensure that each sector regulators
meet the agreed 30-month implementation period.

The FSRCC also agreed to collaborate with the International Finance Corporation (IFC) to
build capacity in sustainability and green finance in the review period.

3.3.2
Enhanced Supervision of Domestic Systemically Important Banks
In line with the Framework for the Regulation and Supervision of Domestic Systemically
Important Banks (D-SIBs), eight (8) banks earlier designated as D-SIBs retained their status
during the period under review. These banks were required to meet more stringent prudential
regulations to reflect their systemic importance.

At end-December 2016, the D-SIBs accounted for N20.87 trillion (69.06%) of industry total
assets of N30.22 trillion. Similarly, the D-SIBs accounted for N13.04 trillion (70.25%) of
total industry deposits of N18.56 trillion and N11.76 trillion (72.2%) of the aggregate
industry loans of N16.29 trillion.
During the review period, the banking sector witnessed a rise in non-performing loans due to
weakening economic conditions with four (4) D-SIBs recording NPL ratios above the
regulatory limit of 5.0 per cent. The CBN directed the D-SIBs to take appropriate actions to
address the breach.
3.3.2.1 Recovery and Resolution Plan
During the review period, the Bank, in collaboration with the NDIC, issued a guideline on the
Minimum Content for Recovery Plans and Requirements for Resolution Planning to all DSIBs. The Guideline covers the minimum contents for recovery planning and the
FINANCIAL STABILITY REPORT – DECEMBER 2016

documentary requirements for resolution planning to aid D-SIBs in the preparation of their
submissions.

The Guideline was to assist D-SIBs in:
Identifying critical functions and services rendered;
Designing stress scenarios for evaluating their capacity to provide identified critical
services and assess the impact of these scenarios on capital, liquidity, profitability, and
asset quality;
Preparing comprehensive range of actionable recovery options to be taken to remedy
financial weaknesses and maintain market confidence;
Providing documentary evidence that the responsibility for review and approval of the
plan is vested in the Board of Directors and/or other appropriate senior management; and
Preparing resolution pack with detailed information to assist the resolution authorities in
designing relevant resolution strategy for the bank in the event of failure.
The second submissions of RRPs are scheduled to be reviewed in the first half of 2017.

3.3.3 Cross Border Supervision

3.3.3.1 Cross Border Institutions
The total number of cross border institutions decreased from 70 at end-June 2016 to 68 at
end-December 2016 following the closure of two representative offices in South Africa. The
68 entities comprised 59 subsidiaries, one affiliate, one branch and seven representative
offices located in 28 countries.

3.3.3.2 Onsite examination of offshore subsidiaries of Nigerian banks
During the second half of 2016, the CBN participated in the onsite examination of nine (9)
offshore subsidiaries of five Nigerian banks. Seven of the examinations were jointly carried
out with host supervisors in the West African zone, while two were solo.

The report of the joint examinations revealed that five (5) subsidiaries maintained their
“Moderate” risk profile while two (2) subsidiaries whose visits were maiden had risk profile
of “Above Average”. The solo examinations revealed a “High” risk profile for one bank. The
“Above Average” and “High” risk subsidiaries are being subjected to intensive surveillance
in line with the cross border supervisory framework.

In line with FATF recommendations, two (2) joint AML/CFT examinations were carried out
in collaboration with host supervisors in the second half of 2016. The examinations revealed
that the subsidiaries were exposed to significant AML/CFT risk regarding inadequate
customer due diligence. The parent banks have been directed to remediate the observed
lapses.

FINANCIAL STABILITY REPORT – DECEMBER 2016

3.3.4
Offsite Analysis and Supervision
The CBN continued to analyze prudential and other returns from the offshore banking
subsidiaries received through the parent banks during the period. The analysis highlighted
areas requiring improvement in risk management and corporate governance in some
subsidiaries. The parent banks were directed to submit actionable plans to improve the nonperforming loans ratio, reduce operating costs and address lapses in risk management in the
affected subsidiaries.

3.3.5 College of Supervisors

3.3.5.1 College of Supervisors of the West African Monetary Zone
The 23rd meeting of the College of Supervisors of the West African Monetary Zone
(CSWAMZ) was held in Ghana from October 24th to 28th, 2016. The meeting deliberated on
the macroeconomic and financial sector developments in the zone and their impact on the
safety and soundness of individual banks and the financial system. The meeting was held
alongside a high level seminar for college members on Financial Instruments (IFRS 9) and
Micro Prudential Analysis. The seminar was part of the college activities to build examiners’
capacity in key areas of supervision, particularly Basel Core Principles, Risk Based
Supervision, AML/CFT and contemporary supervision matters.

3.3.5.2 United Bank for Africa College of Supervisors
The Bank hosted the third forum of United Bank for Africa (UBA) College of Supervisors in
the second half of 2016. The forum, which had in attendance supervisors from 11 African
countries, concluded that the overall risk profile of UBA was satisfactory.

3.3.5.3 Eco Transnational Incorporated College of Supervisors
The Bank participated in the second Meeting of Eco Transnational Incorporated (ETI)
Supervisory College in Lome, Togo during the second half of 2016. The Meeting was to
assess the risk profile of ETI and its capacity to support Ecobank Nigeria Ltd.
3.3.5.4 Other Supervisory Collaborations
The CBN hosted the annual general meeting of the Association of African Central Banks
(AACB) in August 2016. During the meeting, the CBN signed two Memoranda of
Understanding (MoUs) with the Bank of Central African States and the Banking Commission
of Central African States. The MoUs were executed to facilitate supervisory cooperation and
information sharing.

The Bank also participated in the 17th meeting of the Legal and Institutional Issues
Committee of the West African Monetary Zone in Accra, Ghana, from October 11 - 14, 2016
to consider a Model Banking Act for countries in the zone. The Committee discussed the
draft and agreed on enhancements in the areas of consolidated supervision, large exposures,
corporate governance, risk management and related parties transactions.
FINANCIAL STABILITY REPORT – DECEMBER 2016

3.3.6 Mandatory Registration of Commercial Paper Issued by Commercial
Banks in Nigeria
Nigerian banks were hitherto allowed to participate in any commercial paper (CP) issuance
(including unquoted CP). In line with global reforms which requires more stringent
regulation of OTC markets, the CBN directed banks to deal in only CP that are registered on
Authorized Securities Exchanges with effect from July 11, 2016.

The registration and quotation of CP is expected to bring significant benefits, which include:
1. Providing CBN with price/volume data that would aid oversight and valuation of
CP;
2. Offering comfort to other financial market regulators such as the National Pension
Commission and the National Insurance Commission (NAICOM) to permit their
regulated entities to invest in CP, thus providing additional funding for the real
sector;
3. Reducing the CBN’s need for interventions, thereby, freeing up resources which
could be devoted to other activities of the Bank; and
4. Enhancing transparency in the market to support sound investment decisions.

3.3.7 Watch-list
An exposure draft of the Framework on Watch-list for the Nigerian Banking System was
issued in the second half of 2016. The Framework is a collaborative effort of CBN and
Nigeria Inter-Bank Settlement System (NIBSS) to address the increasing incidence of fraud,
forgeries and other unethical practices in the financial system.
3.4
Supervision of Other Financial Institutions
3.4.1
Routine Examination of Development Finance Institutions
At end-December 2016, the number of DFIs reduced to five (5) in comparison with the six
(6) institutions in operation at end-June 2016, as liquidation of the Nigerian Economic
Recovery Fund (NERFUND) commenced in the period under review. The remaining five
institutions as at December 31, 2015, had composite risk ratings as follows: one, “High”;
three, “Above Average”, and one, “Moderate” compared with June 2016 position of: two,
“High”; three, “Above Average”; and one, “Moderate”.

The capital ratings for the other five DFIs were “Strong” for two and “Weak” for the other
three in comparison with the capital ratings for the six DFIs which were “Strong” for two and
“Weak” for the other four. The prudential and soundness analysis of the DFIs further
revealed that three of the institutions met the minimum capital adequacy ratio (CAR)
requirement of 10 per cent, while the other two had negative CAR. All the DFIs maintained
non-performing loan (NPL) ratios above the stipulated regulatory maximum of 5 per cent.

3.4.2
Examination of Microfinance Banks
A total of 743 MFBs were examined during the period under review. This comprised 585
risk-based and 158 special examinations. Reports of the RBS examinations were being
FINANCIAL STABILITY REPORT – DECEMBER 2016

finalized, while regulatory letters have been issued to various institutions on which the
special examinations were conducted, specifying regulatory actions and defined time lines for
injection of additional capital and recovery of non-performing loan facilities.

3.4.3 Examination of Finance Companies
The examination of nine (9) FCs granted 90-day extension for recapitalization was carried
out in December 2016. The reports of the examination were being compiled.

The Bank approved 40 Finance companies that fully met the new capital requirement of
N100 million, while the licenses of 13 finance companies that did not meet the new capital
requirement were approved for revocation. Also, the licenses of eight other FCs were
approved for revocation for voluntary surrendering of licenses, insolvency and
discontinuation of finance company business.

The appointment of liquidators to wind up the activities and the publication of the names of
all the institutions approved for revocation in the Federal Gazette in line with Section 60 of
BOFIA was also approved by the Bank.
3.4.4
Examination of Primary Mortgage Banks
The 34 primary mortgage banks in operation were examined in the review period. Routine
examination was conducted on 24 PMBs using the risk based methodology, while target
examination was conducted on the others.

The Nigeria Mortgage Refinance Company (NMRC) was also examined in the last quarter of
2016 and retained its “Moderate” composite risk rating (CRR).

3.5
Non-Interest (Islamic) Banking
During the review period, one (1) Micro-Finance (Islamic) bank was granted a license,
bringing to two (2) the number of non-interest microfinance banks.

The Governing Board of the International Islamic Liquidity Management Corporation
(IILM), Malaysia, at its meeting on December 16, 2016 in Jakarta Indonesia appointed the
Governor of the CBN as Chairman, effective January 1 to December 31, 2017.

The Bank also participated in the Council meeting of the IFSB, Governing Board of the IILM
and the Working Group Meetings of the two (2) multilateral institutions.

3.6
Developments in Basel II/III and IFRS 9 Implementation

3.6.1
Developments in the Implementation of Basel II/III
During the review period, the CBN issued Guidance Notes for the Implementation of IFRS 9
(Financial Instruments) which would become effective on January 1, 2018. The Guidance
Notes communicate supervisory expectations for the implementation of the new Expected
Credit Loss (ECL) model, especially in areas where banks are expected to exercise
FINANCIAL STABILITY REPORT – DECEMBER 2016

considerable judgment and/or elect to use simplifications and other practical expedients
permitted under the Standards.
The Guidance Notes further require banks to:
1.
Commence parallel run of the new ECL model alongside the current Incurred Loss
Model as from July 1, 2017;
2.
Obtain External Auditors’/Independent Consultants’ certification of their IFRS 9
accounting policies and impairment models by the third quarter of 2017;
3.
Submit information to the CBN on their Project Governance Structures, IFRS 9 Gap
Analysis and Impact Assessment Reports, and existing or proposed models for ECL
calculation, not later than April 30, 2017; and
4.
Submit periodic status reports to the CBN starting from May 2017.
3.6.2
Implementation of Basel II/III
During the second half of 2016, the CBN engaged banks as part of the Supervisory Review
and Evaluation Process of Basel II requirements. The engagement involved an initial review
of banks’ Internal Capital Adequacy Assessment Process (ICAAP) reports submitted in 2016,
onsite validations and supervisory dialogue.
Improvements were observed in the quality and presentation of the 2016 ICAAP reports,
being the third sets of submissions since the adoption of Basel II requirements in 2014. Most
of the banks adopted specified regulatory approaches for economic capital estimation for
credit (standardized approach), market (standardized approach) and operational risks (basic
indicator approach) and other approaches for other material risks. Other banks used internal
models to estimate the required capital charges for all the material risks identified. The
engagement provided a platform for supervisors to understand banks’ risk and capital
management systems.
3.7
The Asset Management Corporation of Nigeria
The net carrying value of AMCON’s outstanding liabilities remained unchanged at N4.5
trillion at end-December 2016. However, the carrying value of its assets net of impairment
was N624 billion7 at end-December 2016, down from N846.41 billion at end-June 2016
following recoveries realized and additional impairments booked by the Corporation.
The gap between AMCON’s assets and its liabilities would potentially be covered through
the Banking Sector Resolution Cost Trust Fund (BSRCTF) as well as credit recoveries and
assets sales by AMCON.
The BSRCTF realized total collections of N175.97 billion during the 2016 financial year
while AMCON realized total recoveries of N139.04 billion during the year.

7 This figure reflects IFRS reporting as opposed to NGAAP reporting in prior periods.
FINANCIAL STABILITY REPORT – DECEMBER 2016

3.8
Key Risks to the Financial System

3.8.1
Credit Risk
Risk Rating
(High Risk, Trending Up)


During the period under review, credit risk trended higher as the industry wide NPL ratio
moved from 11.7 per cent to 12.8 per cent at the end of 2016 and non-performing loans grew
to N2,084.92 billion at end-December 2016 from N1,678.59 billion at end-June 2016. Total
exposure of the top 50 obligors stood at N5.59 trillion (34%) of total industry credit exposure
of N16.29 trillion.

At end-December 2016, loans to the oil and gas sector constituted 30.02 per cent of the gross
loan portfolio of the banking system as credit to that sector grew from N4,511.34 billion, to
N4,890.91 billion. Loans to State Governments declined marginally to N1,376.89 billion
from N1,386.61 billion at end-June 2016. The period witnessed increased funding to the
states via a Federal Government refund totalling N522 billion in excess debt service
deductions (Paris Club Debt Refund). In addition, N90 billion bail-out facility at 9.0 per cent
interest rate, was provided to enable States reduce backlog of salaries.

Overall, credit risk remains tangible in 2017 as obligors remain constrained in servicing both
Naira and FCY denominated loans owing to the low level of economic activities, low
international oil prices and the depreciation of the naira.
Figure 3. 13: Non-Performing Loans Ratio

3.8.2
Liquidity Risk

Risk Rating
(Medium Risk, Stable)


The liquidity ratio for the banking industry increased by 1.35 percentage points to 43.96 per
cent at end-December 2016 from 42.61 per cent at end-June 2016, above the prudential

Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Per cent
FINANCIAL STABILITY REPORT – DECEMBER 2016

minimum limit of 30 per cent by 13.96 percentage points. Market liquidity decreased to
N159.29 billion at the end of 2016 from N175.15 billion at end-June 2016, owing largely to
the increase in Monetary Policy Rates from 12.00 to 14.00 per cent.

3.8.3 Market Risk
Risk Rating
(Medium Risk, Trending Up)


Savings rate rose marginally by 0.57 percentage point from 3.61 per cent at end-June 2016 to
4.18 per cent at end-December 2016, while the maximum lending rate grew by 1.62 per cent
to 28.55 per cent in the same period. The movement in rates reflected the contractionary
monetary stance of the Bank.

The 91-day NTB rates closed at 13.96 per cent at end-December, 2016 from 8.32 per cent as
at June 2016. The increased rate is expected to attract higher capital inflows to the market.
Interbank and Open Buy Back rates declined significantly to 10.39 and 7.35 at end-December
2016, from 35.26 and 21.75 per cent as at end-June 2016. The downward trending rates
reflected the normalization of the market following the newly introduced flexible foreign
exchange policy.

During the period, management of exchange rates remained constrained as foreign exchange
scarcity prevailed. The scarcity was mainly as a result of reduced capital inflows, slow
recovery in oil prices and general macroeconomic uncertainties. The divergence between the
supply and demand sides brought about disparity in exchange rates as reflected by the steep
depreciation of the naira. However, the newly introduced regime provided respite in
accessing foreign currency as FX forward contracts assisted in reducing overdue trade
finance obligations.

In 2017, based on forecasts of improved performance in the global oil market, foreign
currency liquidity is expected to increase while the further downgrade of Nigeria by S&P
from B+ to B in 2016 is anticipated to increase borrowing costs as Nigerian bonds had been
classified speculative.
3.8.4
Operational Risk
Risk Rating
(High risk, trending up)

Operational risk events reported during the period included the incidence of frauds and
forgeries, increased cybercrime attempts and rising insecurity in some parts of the country.
Cases of fraud and forgeries increased to 9,929 at end-December 2016 from 9,164 reported at
end-June 2016. The total amount involved in the cases, however, reduced from N4.36 billion
at end-June 2016 to N4.12 billion at end-December 2016. Similarly, actual losses reduced to
N1.003 billion at end-December 2016 from N1.38 billion at end-June 2016. Returns from
banks showed that majority of frauds and forgeries were perpetrated by outsiders. The frauds
FINANCIAL STABILITY REPORT – DECEMBER 2016

were committed mainly through suppression and conversion of customers’ deposits, illegal
fund transfers, pilfering and ATM withdrawals.

Cybercrime was identified as a key operational risk due to increased reliance on technology
by banks, ease of access to the internet and other electronic platforms by customers. In order
to mitigate this class of operational risk, bank customers were continually sensitized on safe
banking practices.

Operational costs increased significantly due to increments in electricity tariffs as well as
increased petroleum product prices occasioned by the deregulation of the downstream sector.
Consequently, rising costs would translate to further layoffs in the banking industry.

3.8.5
Macroeconomic Risk
Risk Rating
(High Risk, Stable)

During the review period, macroeconomic risks heightened, largely due to the slow pace of
global economic recovery, dwindling oil prices which impacted adversely on Government
revenue, depreciation of the naira, rising inflation and negative growth. However, current
efforts by the Government to stimulate domestic demand through investment in
infrastructure, the Conditional Cash Transfer Programme and implementation of the National
Recovery Strategy are expected to improve overall economic conditions.

3.9
CBN Credit Risk Management System
At end-December 2016, the number of borrowers registered in the CRMS database stood at
221,822, indicating an increase of 13.66 per cent over 195,159 recorded at end-June 2016.
Similarly, the number of registered borrowers with outstanding facilities rose by 11.76 per
cent to 104,126 at end-December 2016 from 93,168 at end-June 2016 and the number of
running credit facilities in the database also increased by 5.16 per cent to 181,987 at endDecember 2016 from 173,050 at end-June 2016, due to increased compliance by banks.
Table 3. 11: Borrowers from the Banking Sector
Description
June 2016
December 2016
Absolute
Change
% Change
Total No. of Borrowers on the CRMS

No. of Borrowers with outstanding
credit

No. of Credit/facilities


Note: These figures are based on submission by Commercial and Merchant Banks only and for amount of N1m
and above.

The redesigned CBN Credit Risk Management System (CRMS) which is currently on a pilotrun is scheduled for roll out in the first quarter of 2017.
3.10 The Financial Services Regulation Coordinating Committee

FINANCIAL STABILITY REPORT – DECEMBER 2016

3.10.1 Consolidated Examination of Financial Holding Companies

The FSRCC conducted the consolidated examinations of FBN and FCMB Holdings in the
review period. The Reports of the examinations were distributed in December 2016 to the
HoldCos and participating agencies.

3.10.2 Illegal Fund Managers
The FSRCC had disbursed all monies escrowed in the CBN in respect of the Illegal Funds
Managers (IFMs)/‘Wonder Banks’ to the court-appointed liquidators, except for the two with
subsisting court cases. During the review period, the FSRCC in conjunction with the Nigeria
Police closed a “wonder bank”, named “AMF Bank Limited”.

The FSRCC Secretariat also inaugurated an ad-hoc committee on the activities of a suspected
fraudulent financial service outfit Mavrodi Mondial Moneybox (MMM). The committee is
charged with the responsibility of recommending ways to curb the spread of MMM in
Nigeria. The MMM and other ponzi schemes operate over the internet with no physical
location. The FSRCC and law enforcement agencies are ensuring the deactivation of the
websites and prosecution of the promoters.

Stakeholders have intensified campaigns and sensitization against the patronage of IFMs.


3.10.3 Capacity Building

During the review period, the FSRCC conducted training for staff of member agencies on the
new Auditor’s Reporting Standard issued by the International Auditing and Assurance
Standards Board (IAASB) and IFRS 9 (Financial Instruments Recognition and
Measurement).

3.11 Consumer Protection

3.11.1 Complaints Management and Resolution
The Bank received 1,183 complaints from consumers during the review period, a decrease of
19.69 per cent compared with 1,473 received in the first half of the year. The number of
complaints against commercial and merchant banks was 1,145 or 96.79 per cent, while those
against other financial institutions (OFIs) and miscellaneous complaints totaled 38 or 3.21 per
cent. The complaints were on ATM and e-payment-related issues, excess charges,
dishonoured guarantees, dishonoured cheques, fraudulent withdrawals and deposit
irregularities.

A total of 928 complaints were resolved in the period under review compared with 1,157
resolved in the first half of the year, this represented a decrease of 229 or 19.79 per cent. The
total refunds to customers in the second half of 2016 was N16.64 billion and $3.35 million
compared with N4.63 billion, $80,415.46 and €19,263.62 refunded at end-June 2016.

FINANCIAL STABILITY REPORT – DECEMBER 2016

3.11.2 Compliance Examination
The Bank conducted compliance examination of banks and other financial institutions during
the review period to ascertain their level of compliance with policies, guidelines and
directives. The examination revealed substantial compliance with regulations. However,
some observations were made and had been communicated to the affected banks for
corrective actions.

3.11.3 Consumer Protection Framework
The Bank in collaboration with Consumer Protection Council, NDIC, the SEC and relevant
stakeholders has developed and issued the Consumer Protection Framework (CPF) to the
industry. The objective of the Framework is to provide context and direction for financial
consumer protection in Nigeria.


3.11.4 Financial Literacy Activities
Highlights of the activities carried out within the review period are:

a) Curriculum Development Project
The CBN in collaboration with the Nigerian Educational Research and Development
Council (NERDC) and some development partners carried out the following activities in
line with the implementation priorities of the National Financial Literacy Framework:
i.
Developed a stand-alone curriculum for Basic Education and Senior Secondary
Schools;
ii.
Conducted a Workshop for the infusion of the stand-alone Financial Education
Curriculum for Basic Education and Senior Secondary Schools in Nigeria into
existing career subjects;
iii.
Conducted the Critique and Editorial Workshops for the infused Financial Education
curriculum into the Basic and Senior Secondary Schools Curricula.

b)
Reach-out and Mentoring Programme
The Bank, in collaboration with the Bankers Committee and other stakeholders celebrated the
World Savings Day on October 31, 2016. In the review period, 26,294 students from 235
secondary schools across the six geopolitical zones of the country were involved in the
Financial Education Programme organised by the CBN, banks and NGOs.

c)
Financial Literacy and Consumer Protection Sensitization and Mass Awareness
Programme
The Bank carried out a sensitization campaign on financial literacy, tagged CBN Fair, in 8
state capitals namely, Birnin-Kebbi, Sokoto, Uyo, Enugu, Yenagoa, Benin City, Makurdi and
Lafia.

d)
Targeted Financial Education Programme for MSMEs and Farmers
Under its Financial Education Programme, the Bank in collaboration with GIZ8 conducted a
train-the-trainers programme for MSMEs and farmers. The modules covered in the training

8 Deutsche Gesellschaft fur Internationale Zusammenarbeit (German Society for International Cooperation)
FINANCIAL STABILITY REPORT – DECEMBER 2016

included: Needs and Wants; Record keeping and Cash flow management; Savings & Savings
group formation; and Borrowing (Loans).


FINANCIAL STABILITY REPORT – DECEMBER 2016

4.0
PAYMENTS SYSTEM
4.1 Developments in the Payments System

In order to ensure a safer and more efficient payments system in Nigeria, the Bank recorded
significant improvements in the following areas:
4.1.1
Update on the Bank Verification Number (BVN) Scheme
At end-December 2016, 27,689,678 individuals had been registered in the BVN database and
39,312,797 accounts linked with BVN out of 60,878,449 active customer bank accounts.

The Bank undertook the following during the review period:

i.
BVN enrolment for Nigerian bank customers in diaspora and security personnel on
special assignment was extended till end-December 2016. This was to enable them
participate in the registration exercise bearing in mind the peculiar nature of their
challenges.

ii.
Savings Account Customers with BVN were allowed to deposit cheques not more
than N2 million in value into their accounts, per customer, per day.

iii.
The Bank exposed a draft Framework to stakeholders for watch-listing any fraudulent
customer in the banking industry using the BVN database.

The implementation of BVN has impacted positively in ensuring the safety of the Nigerian
Payments System. Law Enforcement Agencies continued to leverage on BVN to fast-track
investigation of financial and other related crimes while other stakeholders used it as credible
means of customer identification and authentication.
4.1.2
Nigeria electronic Fraud Forum
The Nigeria electronic Fraud Forum (NeFF) developed a framework for the operation of a
dedicated e-Payment and Card Crime Unit of the Nigerian Police. The Forum collaborated
with the Nigeria Communications Commission to address cases of call diversion due to SIM
swap, fraudulent SMS alert and SIM registration loopholes to minimise electronic fraud.
4.1.3
Migration from Merchant Service Charge to Interchange Fee Regime
To enhance card issuance and utilization, through increased investment in network
infrastructure, a guideline to migrate the payment card operators from Merchant Service
Charge to Interchange Fee Pricing regime, effective May 2017, was issued in December
2016. Under the new arrangement, merchants and acquirers will henceforth negotiate the
merchant service charge, while the CBN will control the interchange fees paid by the acquirer
to the card issuer and other regulated service providers.
4.1.4
Nigeria Automated Clearing System
In its effort to increase the efficiency of cheque clearing, the Bank in collaboration with
NIBSS and other stakeholders upgraded the Nigeria Automated Clearing System (NACS) to
FINANCIAL STABILITY REPORT – DECEMBER 2016

support near real-time online processing of clearing instruments and enhance central image
archiving. The upgrade would facilitate reduction in cheque clearing cycle from the current
T+1 to T+0, and express clearing.
4.1.5
Licensing of Payment System Participants
Two (2) Payment Terminal Service Providers (PTSP), one (1) mobile money operator and
two (2) Payment Solution Service Providers (PSSP) were licensed, bringing the total of
PTSPs, mobile money operators and PSSPs to 18, 22 and six (6), respectively. As at endDecember 2016, there were also three (3) Card Schemes, seven (7) transaction switching
companies and three (3) third party processors in operation.

Table 4. 1: Licensed Payment System Participants
License -Type
Number
June 2016 Dec 2016
Card Schemes

Mobile Money Operators

Payment Solution Service Providers

Payment Terminal Service Providers

Transaction Switching Companies

Third Party Processors

Total
54 59

4.2
Payments System Vision 2020
Under this initiative, the CBN, in collaboration with the SEC, issued Guidelines on Securities
Settlement in Nigeria. The main aim of the guidelines was to ensure competitive, efficient,
safe and sound post trading arrangements which will lead to greater confidence in securities
market and enhance investor protection.
4.3
Large Value Payments
The volume and value of inter-bank fund transfers through the CBN RTGS System increased
to 612,843 and N188,273 billion at end-December 2016 from 546,283 and N183,365 billion
at end-June 2016, representing an increase of 12.18 and 2.68 per cent, respectively. The
increase was largely attributable to bulk upload of government payments through the System.
4.4
Retail Payments
4.4.1
Electronic Transactions
The volume of electronic transactions rose to 538,080,841 at end-December 2016 from
403,648,266 at end-June 2016, while the value increased to N40,457.79 billion at endDecember 2016 from N30,618.06 billion at end-June 2016. The increase of 33.30 per cent
and 32.14 per cent in volume and value, respectively, reflected the growing public confidence
in the system as a result of the convenience of electronic transactions and CBN sensitization.

FINANCIAL STABILITY REPORT – DECEMBER 2016

Table 4. 2: Electronic Transactions

Payment
Channel
Number of
Terminals
Number of Transactions
%
Change
(Volume)
Value N’ Billion
%
Change
(Value)
June
Dec
Jun-16
Dec-16
Jun-16
Dec-16

ATMs

POS

Mobile

Internet
(Web)

NEFT


NIP


e-Bills Pay


REMITA


NAPS


Total


4.4.1.1 Instant Payments
The growth of instant payments continued during the review period as volume and value
increased to 97,298,109 and N21,743.80 billion in the second half of 2016 from 56,318,341
and N16,365.26 billion, in the first half of 2016, respectively. The increase was due to
customers’ preference for instant settlement.

4.4.1.2 Point of Sale Transactions
During the review period, the volume and value of Point of Sale (PoS) transactions increased
to 38,377,598 and N450.52 billion at end-December 2016 from 25,337,605 and N308.47
billion at end-June 2016, representing an increase of 51.46 and 46.05 per cent, respectively.
The increase was attributed to the growing number of merchants that accept POS payments,
incentives programmes and better network availability.
4.4.1.3 Mobile Payments
The volume and value of mobile payments increased from 22,735,523 and N303.53 billion at
end-June 2016 to 24,317,729 and N453.37 billion at end-December 2016, representing an
increase of 6.96 and 49.37 per cent, respectively. The improvement was due to the growing
public awareness of the system.
4.4.2
Cheque Clearing
The volume and value of cheques increased to 5,988,042 and N2,934.76 billion at endDecember 2016 from 5,731,805 and N2,894.79 billion at end-June 2016, reflecting an
increase of 4.47 per cent and 1.38 per cent, respectively.


FINANCIAL STABILITY REPORT – DECEMBER 2016

5.0
OUTLOOK
Global economic recovery is expected to be moderate in the near to medium term as the
impact of risks associated with declining commodity prices, uncertainties concerning the
policies of the incoming US administration, the Brexit vote, negative interest rates in the Euro
Area and Japan and the rebalancing in China tapers off. World output growth is expected to
pick up in 2017 at 3.4 per cent and to 3.6 per cent in 2018. Financial markets may however,
continue to be sensitive to disruptions in prices.

In Nigeria, notwithstanding the US rate hikes which might lead to outflow of some
investments and further depreciation of the naira with pass-through to domestic prices, the
projected gradual recovery in global oil prices, increased crude oil production, passage of the
2017 budget as well as the implementation of the National Economic Reconstruction and
Growth Plan, are expected to spur economic activities and reverse the current recession in the
domestic economy. Consequently, Nigeria’s economy is expected to move out of recession to
an output growth9of 0.8 per cent in 2017 and 2.3 per cent in 2018.
The resilience of the financial system is expected to be enhanced with the continued
application of sound macro and micro prudential policies. Specifically, the Bank will
strengthen macroprudential stress testing and supervisory colleges to enhance the regulation
and supervision of cross-border banking entities. The revised D-SIBs Guidelines will further
improve the surveillance and prudential regulation of systemic institutions. Also, the WatchList Framework for fraudulent customers, review of the Cybercrime Prohibition Act 2015
and the collateral management framework are expected to reduce settlement risk and improve
the efficiency of the payments system.
In general, proactive monetary and financial policies that will ensure macroeconomic stability
will constitute the Bank’s main focus.


9 World Economic Outlook, October 2016
FINANCIAL STABILITY REPORT – DECEMBER 2016

ACKNOWLEDGEMENTS

List of Major Contributors

I. R. Yusuf
Financial Policy and Regulation Department

F. E. Ahonkhai
Ditto

H. Mahmud (Dr.)
Ditto

M. W. Muazu-Lere
Ditto

J. M. Gana
Ditto

H. J. Audu
Ditto

P. N. Wondi
Ditto

C. O. Ugwueze
Ditto

V. K. C. Johnson
Ditto

Umar Babale
Ditto

L. Juma (Mrs.)
Development Finance Department

J. O. Tawose
Monetary Policy Department

O. A. Ben-Obi (Mrs)
Research Department

A. Shebe
Banking Supervision Department

M. K. Mbah
Statistics Department

E. O. Shonibare
Risk Management Department

C. Osagie
Financial Markets Department

U. U. Uche
Other Financial Institutions Supervision Department

M. M. Farouk
Reserve Management Department

P. I. Oluikpe (Dr.)
Strategy Management Department

B. D. Fada
Consumer Protection Department

H. Abdullahi
Banking and Payments System Department

The Report is produced and supervised by the Financial Policy and Regulation Department.


KEVIN N. AMUGO
Director,
Financial Policy and Regulation Department