FINANCIAL STABILITY REPORT – JUNE 2016
i


FINANCIAL STABILITY
REPORT


June 2016


FINANCIAL STABILITY REPORT – JUNE 2016

Contents

FINANCIAL STABILITY REPORT – JUNE 2016
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List of Tables

Table 2. 4: Domestic and Foreign Portfolio Participation in Equity Trading in the first half of 2016 . 29


List of Figures

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List of Boxes


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List of Acronyms
AMCON
Asset Management Corporation of Nigeria
AML/CFT
Anti-Money Laundering and Combating the Financing of Terrorism
ASI
All Share Index (Nigerian Stock Exchange Index)
ATMs
Automated Teller Machines
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
CPFA
Closed Pension Fund Administrator
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
EVD
Ebola Virus Disease
FAO
Food and Agriculture Organisation
FATF
Financial Action Task Force
FCs
Finance Companies
FCT
Federal Capital Territory
FGN
Federal Government of Nigeria
FMBN
Federal Mortgage Bank of Nigeria
FMDQ-OTC
Financial Market Dealers Quotation – Over the Counter Plc
FMF
Federal Ministry of Finance
FRACE
Financial Regulation Advisory Council of Experts
FSIs
Financial Soundness Indicators
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
FINANCIAL STABILITY REPORT – JUNE 2016
viii

L/C
Letter of Credit
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
NAICOM
National Insurance Commission
NBS
National Bureau of Statistics
NDC
Net Domestic Credit
NDIC
Nigeria Deposit Insurance Corporation
NIBSS
Nigerian Inter-bank Settlement System
NIRSAL
Nigerian Incentive-based Risk Sharing System for Agricultural Lending
NMRC
Nigeria Mortgage Re-finance Company Plc
NPLs
Non-Performing Loans
NSE 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
RUFIN
The Rural Finance Institution Building Programme
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 – JUNE 2016
ix

Governor’s Statement
The global economy in the first half of 2016 was characterized by, weak and uneven growth,
largely owing to the continued effect of the fall in commodity prices, slow recovery in the
Euro Area and China and the volatile financial markets. The growth in most advanced
economies remained lackluster, with low potential growth and a gradual closing of output
gaps. Emerging and developing economies witnessed low levels of output productivity and
divergent growth rates. While the effect of “Brexit” has not started manifesting on output, the
magnitude of uncertainty thereby complicates macroeconomic forecasts and market
predictions. Inflationary pressure was projected to inch up in many countries while exchange
rate depreciation was common to most emerging and developing economies.

The Nigerian foreign exchange market came under some pressure in recent times owing to a
combination of factors, including: heightened demand; weaker external environment;
normalisation of United States monetary policy; low crude oil prices; and disruptions in oil
production. In response to these developments, the Bank implemented a combination of
policies, which included upward review of the policy rate from 11 to 12 per cent and the CRR
from 20 to 22.5 per cent in March 2016. In addition, the Bank introduced a flexible exchange
rate regime geared towards achieving a more market-driven, transparent and liquid foreign
exchange market. These key policy actions were aimed at ensuring that the Nigerian
economy remained resilient to potential shocks from the global economy.

The Nigerian financial system remains stable and resilient in spite of prevailing
macroeconomic challenges. The Bank will continue to focus on its main objective of
maintaining price and financial system stability to support sustainable economic growth and
development in Nigeria. These efforts will include strengthening its risk-based and macroprudential surveillance approaches to further ensure the soundness and efficiency of the
financial system. Monetary policy will continue to align with fiscal measures to support
diversification of the economy for increased productivity, job creation and broad-based
economic growth.

It is my belief that this Report will provide useful information and guidance to economic
analysts and investors, and is therefore recommended for perusal.


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


FINANCIAL STABILITY REPORT – JUNE 2016
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Foreword
In the first half of 2016, global output growth remained sluggish. In a bid to stimulate growth,
many central banks had relied on unconventional expansionary monetary policy for several
years. However, the US recently commenced a normalisation of monetary policy which had
divergent impacts on the economies of many emerging market economies. Also, the
slowdown in China has impacted the economies of commodity exporting countries
negatively.

The June 2016 Financial Stability Report reviews developments in the global and domestic
economies. In the first half of 2016, the continued slowdown in the domestic economy,
coupled with sluggish recovery in the global economy, portended increased risk to the
stability of the financial system. The trend of low oil and commodity prices which led to
severe fiscal contractions and low accretion to external reserves continued to impinge on the
stability of the exchange rate. Inflationary pressures continued to mount in the first half of
2016, and impacted negatively on the ability of domestic borrowers to meet foreign exchange
denominated obligations. The above combination of factors led to the increase in NPLs
witnessed in the first half of the year. Regulatory actions during the period were taken to
ensure that the financial system remained safe and sound. The CBN will continue to use both
macro- and micro-prudential instruments in its oversight of the banking sector in pursuit of
that goal.

Our goal in regulating the financial system is to ensure the stability of the system and its
resilience to withstand unanticipated adverse shocks, while contributing to the Federal
Government’s efforts to grow the Nigerian economy. Consequently, this edition of the FSR
stressed, among others, the need for banks to further strengthen their risk management and
corporate governance practices, and to ensure compliance with anti-money laundering and
combating the financing of terrorism (AML/CFT) regulations.

The FSR is divided into five sections. Section One reviews the global and domestic economic
and financial developments. Section Two discusses developments in the financial system and
the implications for financial stability, while Section Three covers regulatory and supervisory
activities and highlights key stability issues. Key developments in the payments system are
highlighted in Section Four. Finally, Section Five provides the near-term outlook for financial
stability.

We continue to welcome stakeholder feedback on the Report.

O. J. Nnanna, Ph. D.
Deputy Governor, Financial System Stability

FINANCIAL STABILITY REPORT – JUNE 2016
xi

Executive Summary
Global output growth in the first half of 2016 was sluggish and uneven, mainly because of the
slow recovery of commodity prices and the impact of the British vote to exit the European
Union. In many of the advanced economies, growth has remained depressed, but was
divergent in emerging and developing economies. Furthermore, inflationary pressures
increased in the first half of 2016 around the globe, reflecting increased domestic demand
pressures, owing mainly to the expected consequences of increase in economic uncertainties.
Although commodity prices recovered marginally from the position at end-December 2015,
they remained generally depressed.

The international stock and currency markets recorded mixed performance during the first
half of 2016. Factors that impacted the performance of many stock markets and currencies
included the generally low commodity prices and the normalisation of US monetary policy.
Monetary policy rates of most central banks were fairly stable in the review period.

In Nigeria, macroeconomic concerns increased as the National Bureau of Statistics (NBS)
estimated that output growth contracted in the second quarter of 2016 by 2.06 per cent,
compared with a growth of 2.35 per cent in the corresponding period of 2015, and that
inflation had increased to 16.48 per cent. Average interest rates during the period were lower
than their levels in the second half of 2015. The low average short-term rate was due mainly
to increased liquidity in the system. In a bid to stem inflationary pressure, the Monetary
Policy Committee tightened the stance of monetary policy during the review period.

Key monetary developments during the review period included the increase in broad money
supply (M2) by 8.26 per cent and narrow money supply by 6.47 per cent. Total bank loans
and advances to the private sector of the economy grew by 17.62 per cent at the end of the
first half of 2016, in contrast to the decline of 1.44 per cent at the end of the second half of
2015.

The structure of bank credit and deposits indicated that short-term maturities remained
dominant. Also, the market structure of the banking system remained largely oligopolistic in
the first half of 2016.

Key developments in the other financial institutions sub-sector included: the licensing of new
institutions to deepen financial inclusion; the continuation of the Microfinance Certification
Programme; and the implementation of new capital requirements for finance companies. The
implementation of the various aspects of the National Housing Finance Programme also
continued in the review period.

Monetary policy in the first two months of 2016 was accommodative, consistent with the
goal of stimulating the economy. However, in March 2016, the MPR was increased and the
asymmetric corridor for Standing Deposit and Lending facilities of the CBN was narrowed to
curb the excess liquidity in the banking system and tame inflationary pressures.
FINANCIAL STABILITY REPORT – JUNE 2016
xii


The Bank introduced the Flexible Exchange Rate regime in the review period as part of
efforts to deepen the foreign exchange market and achieve exchange rate stability. External
reserves declined from $28.29 billion at end-December 2015 to $27.22 billion at end-June
2016.

The CBN continued to support the economy through various credit guarantee and
intervention schemes to stimulate the real sector. These had started to yield results noted in
the form of increased productivity and job creation. The National Collateral Registry (NCR),
aimed at improving access to finance for MSMEs, became operational in the review period.

Financial soundness indicators for the banking system reflected a slight decline in capital
adequacy positions of the banks in relation to December 2015. However, the banking
industry capital adequacy ratio at end-June 2016 was above the regulatory minimum. The
increasing quantum of non-performing loans posed a major concern for regulators in the
review period. To address this, the Bank enhanced the supervision of the exposure of banks
to the oil and gas sector and the foreign exchange market. Cross-border supervisory
collaborations were also sustained.

To sustain public confidence, the Bank processed customers’ petitions against banks and
other financial institutions, in addition to the continued implementation of the Bank
Verification Number (BVN) Scheme.

Although the outlook for the rest of the year appears to be challenging, the current measures
put in place and others being considered by the Bank, together with to the efforts of the
Federal Government, are expected to minimize the impact of shocks to the domestic
economy.


FINANCIAL STABILITY REPORT – JUNE 2016

1.0
MACROECONOMIC DEVELOPMENTS AND FINANCIAL SYSTEM
STABILITY
1.1
Global Economic and Financial Developments
1.1.1
Output
Global output growth has remained sluggish and uneven since the beginning of 2016. The
slow recovery of commodity prices and the recent Brexit heightened global economic
uncertainties. Notwithstanding the continued monetary expansion in many of the advanced
economies, growth has remained depressed in advanced and divergent in emerging and
developing economies. Global output was 3.1 per cent in 2015, but the projections of 3.2 and
3.5 per cent for 2016 and 2017 were revised downwards to 3.1 and 3.4 per cent respectively,
representing 0.1 percentage point reduction from the earlier projections1. The downward
revisions of the projections were driven by the expectation that the recovery of global output
growth would be slower.

In advanced economies, output growth was estimated at 1.8 per cent in 2016 and 2017
compared with 1.9 per cent in 2015. In the United States, growth was projected to decline to
2.2 per cent in 2016 from 2.4 per cent in 2015, reflecting the weaker growth recorded in the
first-quarter of 2016. In the United Kingdom, output growth in 2015 was 2.2 per cent but was
projected at 1.7 and 1.3 per cent for 2016 and 2017 respectively. Output growth in Japan was
0.5 per cent in 2015, but projected at 0.3 per cent in 2016 and 0.1 per cent in 2017.

In the Euro area, output growth was 1.7 per cent in 2015 and was projected to reduce to 1.6
per cent in 2016, higher than 1.4 per cent forecasted for 2017. The projection for 2016 was
influenced by better-than-expected output growth of 2.2 per cent recorded in the first
quarter, resulting from strong domestic demand and rebound in investments. The projected
figure for 2017 was revised downwards by 0.2 percentage points, owing to increased
uncertainty in consumer and business confidence.

Growth in emerging market and developing economies in 2015 was 4.0 per cent and
projected at 4.1 per cent in 2016 and 4.6 per cent in 2017. In China, output growth was 6.9
per cent in 2015 but expected to decline to 6.6 per cent in 2016 and 6.2 per cent in 2017,
reflecting low investment growth as the country continues to rebalance its economy. Latin
America and the Caribbean output growth was projected to contract from 0.0 per cent in 2015
to negative 0.4 per cent in 2016, reflecting the economic recession in Brazil and declining
commodity prices and demand. In the Middle East, output growth was projected at 3.4 per
cent in 2016 from 2.3 per cent in 2015, but estimated at 3.3 per cent in 2017. However,
lower oil prices and geopolitical pressures are expected to influence the outlook.


1IMF’s July 2016 World Economic Outlook
FINANCIAL STABILITY REPORT – JUNE 2016

Output growth in sub-Saharan Africa was projected to reduce significantly to 1.6 per cent
in 2016, compared to 3.5 per cent in 2015. The expected decline reflected the low
commodity prices, declining financing inflows and adverse climatic conditions affecting
most countries of the region. In Nigeria, output growth was estimated to decline to negative
1.8 per cent in 2016 from 2.5 per cent in 2015, reflecting low oil receipts, foreign exchange
volatility, inadequate power supply and the Niger Delta crises. However, output growth is
expected to improve to 1.1 per cent in 2017 due to ongoing economic reforms.

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

World

Advanced Economies

United States

Euro Area

Japan

United Kingdom

Canada

Emerging Market and
Developing Economies

China

MENA Region

Sub-Saharan Africa

Nigeria

* Projections
Sources: i. IMF’s July 2016 World Economic Outlook
ii. Global Economic Prospects, January 2016

1.1.2
Global Inflation
Global inflationary pressures increased in the first half of 2016, reflecting increased domestic
demand pressures in most countries. The rise in the rate reflects the expected consequences of
increase in economic uncertainty and reduction in market confidence and investment.

Inflation in advanced economies was projected at 1.0 per cent in 2016 and 1.9 per cent in
2017 from 0.3 per cent recorded in 2015. In the US, inflation rate is estimated to increase to
1.3 per cent in 2016 and 2.2 per cent in 2017 from 0.1 per cent in 2015. Inflation in the Euro
area was 0.2 per cent in 2015, projected at 0.3 per cent in 2016 and 1.4 per cent in 2017.
Japan recorded 0.7 per cent in 2015, but projected to negative 0.1 per cent in 2016 and 0.7 per
cent in 2017. In the United Kingdom, the rate was 0.1 per cent in 2015 less than 0.7 and 2.2
per cent projected for 2016 and 2017, respectively.

In 2015, inflation rate in Emerging and Developing Economies was 5.6 per cent, but
projected to 6.6 per cent in 2016 and 5.4 per cent in 2017. The MENA Region had 6.5 per
cent inflation rate in 2015 which was projected to 3.9 per cent and 4.0 per cent in 2016 and
2017, respectively. In Sub-Saharan Africa, inflation rate was 6.9 per cent in 2015 which was
projected to rise to 11.1 per cent in 2016 and 9.0 per cent in 2017. The projected rates for
FINANCIAL STABILITY REPORT – JUNE 2016

2016 and 2017 for Nigeria were 14.8 and 12.1 per cent, from the 9.1 per cent recorded in
2015, respectively.

Table 1. 2: Global Consumer Prices/Inflation (per cent)
1.1.3
Global Commodity Prices
1.1.3.1 Oil Prices
Crude oil prices remained low in the first half of 2016, reflecting the excess supply2, lower oil
demand3 and the general slowdown in the global economy. However, the crises in the Niger
Delta region of Nigeria and some MENA countries, and the Canadian wild fires disrupted
supply, which accounted for some slight increases in oil price during the review period.

In June 2016, the OPEC Reference Basket4 increased by 36.3 per cent to $45.84/b from
$33.64/b in December 2015, but was lower by 23.5 per cent than the level of $59.91/b as at
June 2015. Intercontinental Commodities Exchange (ICE) Brent increased by 25.5 per cent to
$47.80/b in June 2016 from $38.08/b in December 2015, but was lower by 20.6 per cent than
the $60.21 recorded in June 2015. West Texas Intermediate (WTI) increased by 29.4 per cent
to $48.24/b in June 2016 from the $37.28/b recorded in December 2015, but was lower by
18.9 per cent than the $59.47 recorded in June 2015.

Global oil production was 95.14 mb/d in June 2016, compared to 95.12 mb/d in December
2015 and 94.67 mb/d in June 2015. The OPEC supply increased marginally in June 2016,
driven majorly by supply increases in Iran and Saudi Arabia.

The growth in global crude oil demand in 2016 was projected at 0.31 mb/d above the 93.95
mb/d for December 2015. The global consumption of petroleum and other liquid fuels, which
grew by 1.4 mb/d in 2015, is projected to grow further by 1.4 mb/d in 2016 and 2017, owing

2 Including new entrants
3 Including use of alternative energy sources and production of shale oil
4 Reuters OPEC MOMR.
Region/Country

2016*
2017*
Advanced Economies

United States

Euro Area

Japan

United Kingdom

Emerging and Developing
Economies/

MENA Region

Sub-Saharan Africa

Nigeria

* Projections
Source: Bloomberg
FINANCIAL STABILITY REPORT – JUNE 2016

to expected increases in consumption by non-OECD member countries. The growth in
consumption by non-OECD member countries was 1.0 mb/d in 2015, and is projected at 1.3
mb/d in 2016 and 1.5 mb/d in 2017, with China and India expected to account for the largest
shares.

1.1.3.2 Food Prices
The Food and Agriculture Organisation (FAO) Food Price Index averaged 163.4 points as at
June 2016, compared to 153.4 points as at December 2015 and 165.1 points as at June 2015,
reflecting an increase of 6.5 per cent from the December 2015 position but a fall of 1.0 per
cent below the level as June 2015.
The FAO Cereal Price Index averaged 156.9 points as at June 2016, reflecting an increase of
3.5 per cent from the level in December 2015, but 4.0 per cent less than the level as at June
2015. The increase as at June 2016 was triggered by a positive change in the price of maize,
owing to contraction in export supplies from Brazil.
The FAO Dairy Price Index averaged 137.9 points as at June 2016, lower than the level of
149.5 points as at December 2015. The index was also lower than the 160.5 points recorded
as at June 2015 by 22.6 points, or 14.1 per cent. The price as at June 2016 reflected the
cumulative effects of lower prices that prevailed in the preceding three months. The decline
in the dairy index was due to over production in the first half of the year.
The FAO Meat Price Index averaged 157.9 points as at June 2016, higher than the 150.0
recorded in December 2015 by 7.9 points (5.3 per cent). The value was lower than the 169.8
points recorded as at June 2015. The FAO Vegetable Oil Price Index averaged 161.9 points
as at June 2016, higher than the level of 141.5 points as at December 2015 and 156.2 points
as at June 2015. The increase in sunflower and rapeseed oil supplies accounted for the
increase in Vegetable Oil Price index.
FAO Sugar Price Index averaged 276.0 points as at June 2016, higher than the December
2015 figure by 68.2 points (32.8 per cent). The June 2016 level was higher than the 176.8
points recorded as at June 2015. The increase in the price reflected the fall in Brazil’s
production owing to adverse weather conditions, and increased conversion of sugarcane to
ethanol production (Table 1.3).

Table 1. 3: World Food Price Index As At June 2016

June 2015
Dec 2015
June 2016
Food Price Index

Meat

Dairy

Cereals

Vegetable Oils

Sugar

* Projections Sources: WEO June 2016.
FINANCIAL STABILITY REPORT – JUNE 2016

1.1.4
International Financial Markets
1.1.4.1 International Stock Markets
The international stock markets recorded mixed performances during the first half of 2016. In
North America, the Canadian S&P/TSX Composite, Mexican Bolsa and United States S&P
500 indices increased by 8.1, 7.0 and 2.7 per cent respectively between end-December 2015
and end-June 2016.

In Europe, the MICEX and FTSE 100 indices increased by 7.4 and 4.2 per cent, while the
DAX and CAC 40 indices decreased by 9.9 and 8.6 per cent, respectively. In South America,
the Argentine Merval, Brazilian Bovespa and Colombian IGBC General indices increased by
25.8, 18.9 and 13.8 per cent respectively. The increases were due to strong domestic demand
and rebound in investments recorded in the first quarter of the year, while the decreases were
due to the downward trend in global economic growth.

In Asia, the weakening economic conditions in China added to the bearish trend in other
Asian markets. During the period under review, Japan’s Nikkei 225 and China’s Shanghai
Stock Exchange-A indices decreased by 18.2 and 17.2 per cent, respectively, while India’s
BSE Sensex index increased by 3.4 per cent.

In Africa, the Nigerian NSE and South African JSE All-Share indices increased by 3.3 and
3.0 per cent, while the Ghanaian GSE ASI, Kenyan Nairobi NSE 20 and Egyptian EGX
CASE 30 indices decreased by 10.4, 9.9 and 0.9 per cent respectively. Most of these markets
were responding to developments in the international economic arena, especially with the
normalization of the US monetary policy (Table 1.4).

Table 1. 4: Indices of Selected International Stock Markets: December 2015 and June 2016
Region/Country
Index
30-Jun-15
31-Dec-15
30-Jun-16
Y-on-Y
% Change
Dec 31, 2015-June
30, 2016 % Change
(YTD)
AFRICA


Nigeria
ASI

South Africa
JSE African AS

Kenya
Nairobi NSE 20

Egypt
EGX CSE 30

Ghana
GSE All Share


NORTH AMERICA
US
S&P 500

Canada
S&P/TSX Composite

Mexico
Mexico Bolsa (IPC)


SOUTH AMERICA
Brazil
Bovespa Stock

Argentina
Merval

Colombia
IGBC General

FINANCIAL STABILITY REPORT – JUNE 2016

EUROPE
UK
FTSE 100

France
CAC 40

Germany
DAX

Russia
MICEX


ASIA
Japan
NIKKEI 225

China
Shanghai SE A

India
BSE Sensex

Source: Bloomberg


1.1.5
International Foreign Exchange Markets
During the first half of 2016, most of the currencies under review experienced mixed
performance owing to the slowdown in global trade and uncertainties in the international
financial markets. Low commodity prices continued to adversely impact the currencies of
commodity exporting Latin America and African countries during the first half of 2016. In
Asia, the trends in monetary policy stance in China and Japan continued to affect their
currencies.
Trends in Exchange Rates
Africa: The South African rand and the Kenyan shilling appreciated against the U.S. dollar
by 6.32 and 1.19 per cent respectively, while the Nigerian naira, Egyptian pound and
Ghanaian cedi depreciated against the US dollar by 30.39, 11.92 and 3.54 per cent
respectively.
North America: The Canadian dollar appreciated against the US dollar by 6.15 per cent,
while the Mexican peso depreciated against the US dollar by 6.71 per cent.
South America: The Brazilian real and Colombian peso appreciated against the U.S. dollar
by 23.63 and 8.70 per cent, respectively while, the Argentine peso depreciated against the
U.S. dollar by 14.09 per cent.
Europe: The euro and Russian ruble appreciated against the U.S. dollar by 2.22 and 13.93
per cent, respectively while the British pound depreciated against the U.S. dollar by 9.33 per
cent.
Asia: The Japanese yen appreciated against the U.S. dollar by 16.48 per cent, while the
Chinese yuan and Indian rupee depreciated against the U.S. dollar by 2.41 and 2.04 per cent
respectively (Table 1.5).


FINANCIAL STABILITY REPORT – JUNE 2016

Table 1. 5: Exchange Rates of Selected Countries (Value in currency units to US$)

Currency
30-Jun-15
31-Dec-15
30-Jun-16
Y-on-Y %
App/Dep
Dec 15 - June 2016 %
App/Dep. (YTD)
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

Y-on-Y= Year on Year
YTD = Year to Date
Source: Bloomberg Daily Exchange rates
1.1.6
International Monetary Policy Rates
Monetary policy rates in most central banks were fairly stable during the first half of 2016.
The Bank of Japan, Bank of England, US Federal Reserve, Bank of Canada and Bank Negara
Malaysia held their rates constant. Rates was also kept unchanged in Chile, while the
European Central Bank, Bank of Korea, Reserve Bank of Australia, Bank of Indonesia and
Reserve Bank of New Zealand lowered their rates during the review period. The divergent
monetary policy stances reflected the underlying fundamentals in the respective economies
(Table 1.6).

In the BRICS, monetary policy rates varied during the review period. Brazil maintained a rate
of 14.25 per cent through the first six months of 2016, Russia reduced its rate to 10.50 per
cent from 11.00 per cent in June, 2016. India reduced the rate to 6.50 per cent from 6.75 per
FINANCIAL STABILITY REPORT – JUNE 2016

cent in April 2016, while China’s rate fluctuated through the period. South Africa increased
to 7.00 per cent from 6.75 per cent in March 2016.

Table 1. 6: Policy Rates Across Selected Countries (July 2015 – June 2016)

Country
Jul-

Aug-

Sep-

Oct-

Nov-

Dec-

Jan-

Feb-

Mar-

Apr-

May-

Jun-

Developed Economies
Japan

Europe

UK

US

Canada

South Korea

New Zealand

Australia

ASEAN
Indonesia

Malaysia

BRICS


Brazil

Russia

India

PBC Base rate

South Africa

Other Emerging Economies & South America
Mexico

Chile

Colombia

Africa
Egypt

Ghana

Nigeria

Source: Bloomberg Monthly Policy Rates
1.2
Domestic Developments
1.2.1
Output
Provisional data from the National Bureau of Statistics (NBS) indicated that output growth
contracted in the first half of 2016, compared with the level in the second half of 2015. Gross
Domestic Product (GDP), at 2010 constant basic prices, contracted by 2.06 per cent in the
first half, compared to an expansion of 2.47 per cent in the second half of 2015. The decline
recorded in the first half of 2016 was due to the decline in both oil and non-oil GDP.

FINANCIAL STABILITY REPORT – JUNE 2016

Figure 1. 1: Gross Domestic Product by Sectors (N billion)

H1 2015
H2 2015
H1 2016
Nbillion
Agriculture
Crude Petroleum & Natural Gas and Solid Minerals
Manufacturing
Construction
Trade
Services

Growth rate in the non-oil sector contracted by 0.29 per cent in real terms in the first half of
2016, compared with the 3.10 per cent in the second half of the preceding year. The
contribution of the non-oil sector GDP declined by 0.13 percentage point below the 90.86
recorded in the preceding half year but increased by 0.85 percentage point above the 89.88
per cent in the corresponding period of 2015.

Table 1. 7: Changes (per cent) in Real GDP by Sector over Corresponding Half Year

Sector
H1 2015
H2 2015
H1 2016
Manufacturing
-2.25
-0.70
-5.22
Construction
8.67
-0.24
-5.83
Services
5.56
3.50
-1.04
Trade
5.77
4.55
0.99
Agriculture
4.07
3.47
3.84
Crude Petroleum, Natural Resources and Solid
Minerals
-7.49
-3.34
-9.53

The services sector accounted for the largest share of 37.55 per cent, while agricultural
sector, trade, manufacturing and construction contributed 21.52, 17.88, 9.25, and 4.21 per
cent respectively.

Further analysis indicated that the contribution of the oil sector to the real GDP in the first
half of 2016 stood at 9.27 per cent, reflecting an increase of 0.13 percentage point above the
9.14 recorded in the preceding half year but a decline of 0.85 percentage point below the
10.12 per cent in the corresponding period of 2015. Nigeria’s crude oil production, including
condensates and natural gas liquids, was estimated at an average of 1.68 mb/d or 305.76
million barrels (mb), in the first half of 2016. This outcome reflected declines of 0.21 mb/d or
11.1 per cent and 0.24 mb/d or 12.5 per cent from the levels of 1.89 mb/d and 1.92 mb/d
recorded in the first half of 2015 and the preceding half of 2015, respectively. Production
outages arising from pipelines sabotage was responsible for the lower output.

FINANCIAL STABILITY REPORT – JUNE 2016

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

H1 2015
H2 2015
H1 2016
Oil
Non-oil


Figure 1. 3: Sectoral Shares in Total GDP (%)

H1 2015
H2 2015
H1 2016
Agriculture
Manufacturing
Building and Construction
Trade
Services
Percentages

1.2.2
Inflation
National Bureau of Statistics (NBS) data showed that the all-items composite Consumer Price
Index (CPI) stood at 201.70 at end-June 2016 (November 2009 = 100), compared with
180.15 and 173.17 at end-December 2015 and end-June 2015, respectively. The index for the
first half of 2016 was higher than the levels in the second half of 2015 and the corresponding
half of 2015 by 11.96 and 16.48 per cent, respectively. The rise in the price index relative to
the preceding half year was accounted for by increases in energy cost and prices of imported
food items.

Headline inflation, at 16.48 per cent in June 2016, rose by 7.47 and 7.31 percentage points
above its levels in December 2015 and June 2015, respectively. The twelve-month moving
average inflation rate in June 2016 was 11.37 per cent, compared with 9.01 and 8.42 per cent
recorded in December 2015 and the corresponding period of 2015. In June 2016, core
inflation rose by 7.49 and 7.82 percentage points to 16.22 per cent above its respective levels
of 8.73 and 8.40 per cent in December and June 2015. Similarly, food inflation rose to 15.30
FINANCIAL STABILITY REPORT – JUNE 2016

per cent in June 2016, compared with 10.59 and 10.04 per cent in December and June 2015,
respectively. The rise relative to the preceding half year was attributed to increased prices of
both domestic and imported food products (Figure 1.4).

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

FIRST HALF 2015
SECOND HALF 2015
FIRST HALF 2016
Per cent
Headline (Y-o-Y)
Core (Y-o-Y)
Food (Y-o-Y)

1.2.3
Interest Rates
Money market rates moved in line with the level of liquidity in the banking system during the
first half of 2016. Interest rates (with the exception of interbank call rate) were lower than
their levels in the second half and corresponding period of 2015. The low average short-term
rate was due to increased liquidity in the system as a result of the release of Statutory
Revenue Allocation to the three tiers of government and the payment of matured CBN bills,
which buoyed banking system liquidity during the period. In a bid to stem inflationary
pressure, the Monetary Policy Committee (MPC) tightened the stance of monetary policy
during the review period. Consequently, the Monetary Policy Rate (MPR) was increased by
100 basis points to 12.00 per cent. The rate for standing lending facilities was retained at
+200 basis points, while the rate for standing deposit facilities was narrowed from -700 basis
points to -500 basis points. Furthermore, the Cash Reserve Requirement (CRR) was increased
by 250 basis points to 22.50 per cent.

The average open-buy-back (OBB) rate fell by 1.42 percentage points to 7.34 per cent from
10.74 per cent in the second half of 2015. The average inter-bank call rate, on the other hand,
edged up slightly by 0.28 percentage point to 9.28 per cent above the level in the second half
of 2015. The Nigeria Inter-Bank Offered Rate (NIBOR) stood at an average of 6.73 and 9.03
per cent for the call and 30-day segments, reflecting declines of 4.00 and 4.49 percentage
points, which were below their respective levels in the second half of 2015 (Figure 1.5).

FINANCIAL STABILITY REPORT – JUNE 2016

Figure 1. 5: Money Market Interest Rates and MPR

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

Average savings deposit rate fell by 0.15 percentage point to 3.43 per cent in the first half of
2016 from 3.58 per cent in the second half of 2015. Similarly, all other rates on deposits of
various maturities fell from a range of 3.73 - 8.96 per cent in the second half of 2015 to a
range of 2.79 - 6.86 per cent in the first half of 2016. Average deposit rates for 7-day, 3month and 1-year tenors fell from 3.73, 8.96 and 8.54 per cent in the second half of 2015 to
2.79, 6.86 and 5.24 per cent in the first half of 2016, respectively.

The average prime and maximum lending rates declined by 0.44 and 0.15 percentage points
below their levels in the second half of 2015 to 16.63 and 26.83 per cent in the first half of
2016, respectively. The developments in interest rates could be attributed to the tight
monetary policy stance.

The average term deposit rate fell by 0.03 percentage point to 5.40 per cent, indicating
increased liquidity in the banking sector during the review period. The spread between the
average term deposit and the average maximum lending rates widened by 2.12 percentage
points to 21.43 per cent, compared with 19.31 per cent recorded in the second half of 2015.
Interest rates, except lending rates, were generally negative in real terms (Figure 1.6).

Figure 1. 6: Lending and Deposit Rates

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

FINANCIAL STABILITY REPORT – JUNE 2016

1.2.4
Fiscal Operations
The Federal Government retained revenue for the first half of 2016 declined to N1,212.36
billion from N1,853.27 billion and N1,583.19 billion in the second half and corresponding
period of 2015, respectively. This outcome was below the first half of 2016 budget estimate
of N2,024.90 billion by 40.1 per cent. Of this amount, N782.29 billion (64.5%) was received
from the Federation Account; N89.91 billion (7.4%) was Federal Government Independent
Revenue; N56.33 billion (4.7%) VAT Pool Account; and “Others” N283.83 billion (23.4%).
The share from the Federation Account included current federation revenue, N735.40 billion
(94.0%); exchange gain, N8.91 billion (1.1%); and NNPC refunds, N37.98 billion (4.9%).
The low oil prices during the first half of 2016 had a significant negative impact on
Government revenue.

Federal Government expenditure rose by 8.0 per cent to N2,952.44 billion in the first half of
2016, compared with the N2,734.60 billion recorded in the second half of 2015. The
expenditure also grew by 30.7 per cent, relative to the level in the corresponding period of
2015. Recurrent expenditure constituted 73.5 per cent of total expenditure during the first half
of 2016.

The fiscal operations of the Federal Government resulted in an overall deficit of N1,740.08
billion or 4.0 per cent of GDP. This was higher than the proportionate budget deficit of
N1,110.97 billion for the first half of 2016 and the N881.33 billion recorded in the second
half of 2015. The deficit was financed mostly from domestic sources (Figure 1.7).

Figure 1. 7: Federal Government Fiscal Operations


The consolidated domestic debt stock of the Federal Government at end-June 2016 was
N10,606.33 billion. This reflected an increase of 20.02 per cent over the level at endDecember 2015.


-2,000

2,000
4,000
First Half 2015
Second Half 2015
First Half 2016
Revenue
Expenditure
Deficit
FINANCIAL STABILITY REPORT – JUNE 2016

2.0
DEVELOPMENTS IN THE FINANCIAL SYSTEM
2.1
Monetary and Credit Developments5
Provisional data indicated that relative to the preceding December, broad money supply (M2)
grew by 8.26 per cent to N21,684.97 billion at end-June 2016, compared with the 5.90 per
cent increase at end-December 2015, but contrasted with the decline of 0.54 per cent at endJune 2015. The increase in money stock, relative to end-December 2015 was driven largely
by the increases of 25.69 and 12.52 per cent in foreign assets (net) and domestic credit (net)
respectively, which was moderated by the decline of 34.59 per cent in other assets (net) of the
banking system. Correspondingly, the growth in total monetary liabilities, M2, was driven by
the 6.47 and 9.61 per cent increase in narrow money (M1) and quasi-money respectively.

Narrow money supply rose by 6.47 per cent to N9,125.93 billion at end-June 2016, compared
with 24.14 per cent at end-December 2015, reflecting the 8.87 per cent decline in demand
deposits. Currency outside banks, as a ratio of narrow money, supply fell from 17.0 per cent
at end-December 2015 to 14.8 per cent at end-June 2016 (Figure 2.1).

Figure 2. 1: Trend in Monetary Aggregates


2.1.1
Aggregate Credit to the Economy
Net domestic credit (NDC) of the banking system grew by 12.52 per cent to N24,318.14
billion at the end of the first half of 2016, compared with the growth of 12.13 and 11.08 per
cent at the end of the preceding and the corresponding periods of 2015, respectively. This
reflected the increase in net claims on the private sector. In terms of growth in M2, NDC
contributed 13.51 percentage points, compared with 12.27 percentage points at the end of the
preceding half year.


5 The analysis is based on the revised June 2016 CBN Monetary Survey.


First Half 2014
Second Half

First Half 2015
Second Half

First Half 2016
Monetary Aggregates (N'B)
M1
M2
COB
FINANCIAL STABILITY REPORT – JUNE 2016

Figure 2. 2: Credit to the Economy

2.1.1.1 Claims on the Federal Government
Net credit to the Federal Government dropped marginally by N0.96 million to N2,893.19
billion at the end of the first half of 2016, in contrast to the significant growth of 151.56 per
cent recorded at the end of the second half of 2015.

Table 2. 1: Growth in Monetary Aggregates (% Change)
% Change (Over preceding
December)
Dec 13

Jun 14
revised
Dec 14
revised
Jun 15
revised
Dec 15
Provisional
Jun 16
Provisional
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)

2.1.1.2 Claims on the Private Sector
Credit to the private sector at end-June 2016 grew by 14.45 per cent, compared with 3.29 and
4.27 per cent in the preceding and corresponding period of 2015, respectively. This reflects a
12.63 per cent increase in claims on the core private sector6, compared with 3.12 per cent
growth at the end of the second half of 2015. The contribution of claims on the private sector
to the growth of total monetary assets stood at 11.42 percentage points, compared with 2.90
percentage points at the end of the second half of 2015.
2.1.1.3 Consumer Credit
Consumer credit decreased by 0.49 per cent to N781.67 billion at end-June 2016 below the
level at the end of second half of 2015 and in contrast to the growth of 2.32 per cent at endDecember 2015. The decline was attributed to weak consumer demand and increased risk

6Excludes the state and local governments
-500


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

aversion by banks for consumer credit. Consumer credit accounted for 3.8 per cent of the
total credit to the core private sector, compared with 4.3 per cent at the end of the second half
of 2015 (Figure 2.3).

Figure 2. 3: Consumer Credit


2.1.2
Sectoral Credit Utilisation
Total bank loans and advances to the private sector of the economy grew by 17.62 per cent to
N15,677.68 billion at the end of the first half of 2016, in contrast to the decline of 1.44 per
cent at the end of the second half of 2015. Relative to the second half of 2015, the amount of
credit extended to the various sectors by banks during the review period showed an upward
trend.

Credit to the oil and gas sector accounted for the highest share of total credit, as it accounted
for 28.78 per cent of the total, compared with 24.82 per cent in the second half of 2015. The
manufacturing sector accounted for 12.95 per cent of the total credit, compared with 13.91
per cent in the second half of 2015. Agriculture, forestry and fishery accounted for 3.08 per
cent of the total, indicating a 0.69 percentage point decline compared with 3.77 per cent in
the preceding half year (Figure 2.4).


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

Figure 2. 4: Sectoral Allocation of Credit

2.1.3
Reserve Money
Reserve money declined by 7.6 per cent to N5,372.01 billion at end-June 2016, compared
with the level at end-December 2015. This was 2.66 per cent above the 2016 second quarter
indicative benchmark of N5,232.87 billion. The fall in the sources of reserve money reflected
the decrease in net domestic and other assets (net) of the CBN, while the corresponding
decrease in the uses of reserve money was attributed to the decrease in currency in circulation
and bank deposits with the CBN.
2.1.3.1 Currency-in–Circulation and Bank Deposits with the CBN
Currency-in-circulation, which constituted 31.36 per cent of the uses of reserve money at the
end of the first half of 2016, fell by 9.32 per cent to N1,684.73 billion. Similarly, bank
deposit with the CBN fell by 12.50 per cent at end-June 2016, compared with the 3.84 per
cent decline at the end of the second half of 2015.

Figure 2. 5: Reserve Money and its Components - Sources


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


N' Billion
Sectors
Dec-15
Jun-16
FINANCIAL STABILITY REPORT – JUNE 2016

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

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


2.1.4
Maturity Structure of Bank Deposits and Credit
The structure of bank credit in the first half of 2016 indicated that short-term credit remained
dominant. Credit maturing within one year accounted for 46.0 per cent, compared with 47.1
per cent at the end of the second half of 2015. The medium-term7 and long-term8 credit stood
at 18.1 and 35.9 per cent, compared with 16.9 and 36.0 per cent at the end of the second half
of 2015 (Figure 2.7).

Figure 2. 7: Distribution of Bank Loans and Advances by Maturity


Deposits of below one-year maturity constituted 95.32 per cent (of which 75.45 per cent had
maturity of less than 30 days), compared with 95.40 per cent at end-December 2015. The
medium and long-term deposits constituted 1.83 and 2.85 per cent, compared with 1.83 and
2.77 per cent at end-December 2015 respectively (Figure 2.8).

7Medium term implies maturities ≥1yr and < 3yrs.
8 Long term implies maturities of 3yrs and above.

Jun 13
Dec 13
Jun 14
Dec 14
Jun 15
Dec 15
Jun 16
Per cent
Short term
Medium-term
Long-Term
FINANCIAL STABILITY REPORT – JUNE 2016

Figure 2. 8: Maturity Structure of Bank Deposits


The maturity mismatch remained a constraint to the ability of banks to create long-tenored
assets. However, sustained implementation of various policies by the Bank designed to derisk and encourage lending to the real sector is expected to further improve medium to longterm lending.
2.1.5
Market Structure of the Banking Industry
In terms of size of assets and deposit of banks, the market share of the five largest banks in
the first half of 2016 declined to 43.30 and 51.96 per cent, from 60.61 and 52.94 per cent in
the second half of 2015 respectively. The market share of the largest bank’s deposits and
assets stood at 12.84 and 13.52 per cent respectively in the first half of 2016. The remaining
18 banks had market shares ranging from 0.21 to 6.58 per cent in deposits and 0.26 to 6.41
per cent in assets, reflecting low competition in the market. This finding is supported by the
Herfindahl-Hirschman Index (HHI)9 of the industry of 743.37 and 751.17 for deposits and
assets, at end-June 2016, compared with 788.09 and 781.40 at end-December 2015,
respectively (Figure 2.9). Despite the improvement recorded relative to the first half of the
year, the structure of the banking industry in the first half of 2016 remained oligopolistic.


9HHI is based on a scale of 100 to 10,000.


H1, 2013
H2, 2013
H1, 2014
H2, 2014
H1, 2015
H2, 2015
H1, 2016
Per cent
Per cent
Short-term
Medium-term (rhs)
Long-Term (rhs)
FINANCIAL STABILITY REPORT – JUNE 2016

Figure 2. 9: Market Concentration Ratios of Banks (Assets and Deposits)


2.2
New Institutions Licensed
The following category of banks and other financial institutions (OFIs) were granted the
authorizations10 indicated against their classes in the table below, during the period under
review:

Table 2. 2: Update on FI Licences issued
S/N
Type of Institution
Number of New Licenses
Jan. –Jun., 2016

Microfinance Banks

Finance Companies

Commercial Banks

Bureaux de Change

In total, 181 new licences were issued during the review period. In the MFB category,
Yankari Savings and Loans Limited transformed to a state MFB in April, 2016, while in the
commercial banking category, United Mortgages Limited transformed into Providus
Commercial Bank with regional authorization on May 4, 2016.
2.3
Other Financial Institutions
There were 4,084 Other Financial Institutions (OFIs) at end-June 2016, compared with 3,905
institutions at end-December 2015, representing an increase of 179 OFIs or 4.50 per cent.
The increase was attributed to the net effect of 180 new OFIs and the exit of one (1) PMB
which transformed into a regional commercial bank during the review period. The total
number of OFIs comprised six (6) Development Finance Institutions (DFIs), 34 Primary
Mortgage Banks (PMBs), 979 Microfinance Banks (MFBs), 66 Finance Companies (FCs),
2,998 Bureaux de Change (BDCs) and one (1) Mortgage Refinancing Company.

10 Some of the institutions were not entirely new, but transformed from one category into another.

Jun 13
Dec 13
Jun '14
Dec 14
Jun 15
Dec 15
Jun 16
HHI
CR
CR5(Deposits)
CR5( Assets)
CR( Largest-Deposits)
CR (Largest-Assets)
HHI (Deposits) (rhs)
HHI (Assets) (rhs)
FINANCIAL STABILITY REPORT – JUNE 2016

The provisional total assets of the OFIs sub-sector increased by 6.63 per cent to N1,963.68
billion at end-June 2016, from N1,841.64 billion at end-December 2015. Total net
loans/advances decreased by 6.65 per cent to N1,007.12 billion at end-June 2016, from
N1,078.81 billion at end-December 2015. However, total deposits increased by 15.06 per
cent to N620.43 billion at end-June 2016, from N539.22 billion at end-December 2015.
Similarly, the total paid-up capital increased by 4.44 per cent to N463.41 billion at end-June
2016 from N443.71 billion at end-December 2015. The increase was due mainly to the
injection of additional capital by some OFIs in compliance with regulatory requirements.

2.3.1
Development Finance Institutions
Provisional data showed that the total assets of the six (6) Development Finance Institutions
(DFIs) increased by 5.50 per cent to N1,016.0 billion at end-June 2016, compared with
N962.3 billion at end-December 2015. The net loans and advances of the institutions,
however, decreased by 17.49 per cent to N566.84 billion at end-June 2016, from N687.02
billion at end-December 2015, reflecting the economic downturn.

The total asset base of the institutions indicated that the six (6) DFIs, namely, Bank of
Industry (BOI), Federal Mortgage Bank of Nigeria (FMBN), Nigerian Export-Import Bank
(NEXIM), Bank of Agriculture (BOA), National Economic Reconstruction Fund
(NERFUND) and The Infrastructure Bank (TIB) accounted for 69.90, 17.23, 6.90, 3.39, 1.81
and 0.77 per cent respectively. Similarly, the respective institutions accounted for 87.74,
5.24, 5.02, 1.73, 0.19 and 0.08 per cent of the net loans/advances respectively.
2.3.1.1 Development Finance Institutions Stakeholders Forum
The maiden bi-annual consultative forum for the stakeholders of DFIs in Nigeria was held on
February 23, 2016. The forum served as a platform to discuss issues and challenges affecting
the sub-sector and proffer solutions on the way forward. At the forum, it was noted that DFIs
contributed only N0.761 trillion or 5.2 per cent of the N14.7 trillion total credits to the
economy, hence the need for a significant improvement in their contribution. Meanwhile the
revised Regulatory and Supervisory Guidelines for Development Finance Institutions in
Nigeria was formally launched during the review period.
2.3.2
Microfinance Banks
The total assets of microfinance banks (MFBs) increased to N455.96 billion at end-June
2016, from N361.04 billion at end-December 2015, reflecting an increase of 26.30 per cent.
The paid-up capital and shareholders’ funds of MFBs also increased by 34.08 per cent and
41.66 per cent to N112.87 billion from N84.18 billion at end-December 2015, and from
N95.36 billion to N135.09 billion at end-June 2016 respectively. The increases in paid-up
capital and shareholders’ funds were largely attributed to the injection of additional capital by
some MFBs and the accretion to reserves.

Total deposit liabilities and net loans/advances of MFBs also increased by 18.93 and 38.65
per cent to N191.25 billion and N232.73 billion at end-June 2016, compared with N160.81
billion and N167.85 billion, at end-December 2015, respectively. Reserves also increased by
FINANCIAL STABILITY REPORT – JUNE 2016

101.27 per cent to N22.22 billion at end-June 2016, from N11.18 billion at end-December
2015.

2.3.2.1 Microfinance Certification Programme
The third phase of the Microfinance Certification Programme (MCP) which commenced in
January 2014, continued in the review period, in compliance with the Microfinance Policy
Framework and the Revised Regulatory and Supervisory Guidelines for Microfinance Banks
in Nigeria. The Guidelines require all top management staff in microfinance banks to possess
requisite certification in microfinance management from the Chartered Institute of Bankers of
Nigeria (CIBN).

The certification examinations administered by the CIBN showed that additional 380
candidates completed the Level II of the certification examinations during the review period.
As at end-June 2016, a total of 3,850 candidates had been certified by the Institute as having
successfully passed the prescribed examinations for the award of the Certificate in
Microfinance Banking.

Also, a two-day implementation programme on the integration of Rural Business Plan (RBP)
and other products into the curriculum of MCP was held during the review period. The
following issues were agreed upon on that occasion:
1. Modalities for the revision of the MCP curriculum with a view to incorporating
emerging products and microfinance services, particularly the RBP, Agent
Banking, Agricultural Microfinance, and Housing Microfinance for sustainable
delivery.
2. The requirements for operationalizing the capacity enhancement exercise for the
Training Services Providers (TSPs) under the MCP.
3. The budget and implementation framework, including deliverables and timelines.
4. Risk control measures to be adopted before accessing the Micro, Small and
Medium Enterprise Development Fund (MSMEDF).

Peer Review Sessions for MFBs
The joint RUFIN/CBN sponsored peer review forum for microfinance banks held during the
period under review. Feedback from participants at the forum revealed the need to increase
the number of participating institutions and the frequency of meetings. The institutional
synergy developed through shared experiences at the sessions is envisaged to strengthen
regulatory oversight and enhance economic empowerment of micro loan beneficiaries,
reducing loan defaults and contributing immensely to the government’s overall strategy of
poverty reduction.

2.3.3
Finance Companies
The number of licensed finance companies (FCs) stood at 69 at end-June 2016, including the
three (3) newly licensed that were yet to commence operations. Total assets of FCs at endJune 2016 stood at N109.43 billion compared with N128.58 billion at end-December 2015,
reflecting a decrease of 14.89 per cent. Nevertheless, funds available to the sub-sector
FINANCIAL STABILITY REPORT – JUNE 2016

increased significantly to N1.19 billion at end-June 2016 from N0.12 billion at end-December
2015, arising from the injection of new capital. FCs’ balances with banks increased by 24.48
per cent to N3.33 billion from N2.68 billion at end-December 2015, resulting in increased
liquidity in the subsector. Conversely, loans and advances, investments, fixed assets, paid up
capital11 and total borrowing declined by 27.42, 26.64, 21.11, 11.10 and 10.01 per cent to
N39.91 billion, N13.72 billion, N11.29 billion, N15.35 billion and N67.89 billion
respectively.

2.3.4
Primary Mortgage Banks
The number of PMBs in operation decreased to 34 at end-June 2016, from 35 at endDecember 2015. The decrease was attributed to the conversion of United Mortgages Limited
to a regional commercial bank during the review period. Consequently, National PMBs
remained nine (9) at end-June 2016, while State PMBs decreased to 25 from 26 at endDecember 2015.

Total assets of PMBs decreased to N382.63 billion at end-June 2016 from N389.73 billion at
end-December 2015, representing a decrease of 1.82 per cent, attributed mainly to the
conversion of United Mortgages Limited to a commercial bank. Similarly, loans and
advances, and paid up capital decreased by 1.84 and 8.11 per cent respectively. The declines
were due to the fall in the number of operating institutions in the period under review.

However, deposit liabilities increased by 1.12 per cent to N123.06 billion at end-June 2016
from N121.69 billion at end-December 2015. Reserves also increased by 14.12 per cent to
N30.25 billion at end-June 2016 from N26.52 billion at end-December 2015, while
investments in quoted shares increased by 43.09 per cent to N18.89 billion at end-June 2016
from N13.20 billion at end-December 2015 (Table 2.3).

Table 2. 3: Key PMB Financial Highlights as at June 30, 2016

June 2016
(N’ billion)
December 2015
(N’ billion)
% Change
Total Assets
382.63
389.73
(1.82)
Loans and Advances
167.63
168.95
(0.78)
Paid up Capital
103.29
112.41
(8.11)
Reserves
30.25
26.51
14.12
Shareholders’ Funds
133.54
138.92
(3.87)
Deposit Liabilities
123.06
121.69
1.12
Liquid Assets
58.66
64.70
(9.33)

2.3.3.1 National Housing Finance Programme
The Bank continued to pursue the four cardinal deliverables of the National Housing Finance
Program (NHFP) during the period under review, namely Nigeria Mortgage Refinance
Company, Housing Microfinance, Mortgage Guarantee and Technical Assistance.

11The decline in paid-up capital arose mainly from the inability of some FCs to render statutory returns as at
the time of the Report.
FINANCIAL STABILITY REPORT – JUNE 2016

Nigeria Mortgage Refinance Company
At end-June 2016, the NMRC had refinanced mortgages amounting to N2.66 billion,
representing 33.25 per cent of its N8 billion raised from the bonds market, compared with
N1.66 billion or 20.76 per cent of its bonds at end-December 2015. The relatively low
volume of mortgages refinanced by the company remained attributable to non-conformity of
most legacy mortgage loans of primary mortgage lenders to the NMRC’s underwriting
standards. The CBN and other stakeholders continued to ensure that the capital raised was
wholly utilized for mortgage refinancing.

Housing Microfinance
The terms of reference had been developed and call for expression of interest made to
qualified firms meant to provide the capacity building to participating MFBs in the pilot
Housing Microfinance (HMF) Scheme. A sum of US$25 Million had been earmarked under
the World Bank approved concessional US$300 Million to support the development and
piloting of Housing Microfinance Products.

Mortgage Guarantee
Under the NHFP, the mortgage guarantee is structured to provide insurance cover through
products designed to create easy accessibility for intending mortgagee(s). By end-June 2016
the CBN had engaged an expert with the mandate to carry out a preliminary study on the
Nigerian market with a view to recommending the best institutional and operational
frameworks.

Technical Assistance
During the period under review, the Technical Assistance/Capacity Building Team, of the
NHFP comprising the CBN, the Federal Ministry of Finance (FMoF), Federal Ministry of
Housing, Lands and Urban Development and the World Bank Group visited seven states in
the country identified as part of mass literacy campaign to broaden awareness on the benefits
of the programme and solicit stakeholder buy-in, as well as adoption of a model Land and
Title law.

During the period under review, the Technical Assistance/Capacity Building Team, of the
NHFP, comprising the CBN, Federal Ministry of Finance (FMoF), Federal Ministry of
Housing, Lands and Urban Development and the World Bank Group, visited seven states in
the Country, as part of the mass literacy campaign to broaden awareness of the benefits of the
program and solicit stakeholder buy-in, as well as adoption of a model Land and Title Law.

2.3.5
Bureaux de Change
The number of licensed BDCs increased to 2,998 at end-June 2016 from 2,839 at endDecember 2015. During the period under review, the Revised Operational Guidelines for
Bureaux de Change became effective. Circulars were also issued to strengthen the operations
of the BDC segment of the foreign exchange market.

FINANCIAL STABILITY REPORT – JUNE 2016

2.4
Financial Markets
2.4.1
The Money Market
The CBN maintained its accommodative monetary policy stance in the first two months of
2016 in a bid to stimulate the economy. Thus, the Monetary Policy Rate (MPR) was
maintained at 11.00 per cent with the asymmetric corridor of +200/-700 basis points around
the MPR for the lending and deposit rates respectively. The CRR on deposits was also
retained at 20.00 per cent. However, in March 2016, the MPR was increased to 12.00 per
cent, with an adjustment of the asymmetric corridor to +200/-500 basis points around the
MPR, while the CRR was increased to 22.50 per cent, from 20.00 per cent. The increase was
made in order to curb the excess liquidity in the banking system and to tame inflationary
pressures.

Money market rates which opened low, remained flat at the beginning of the first half of
2016. The inter-bank call and open buy back (OBB) rates were at 1.50 and 1.00 per cent, on
January 5, 2016 respectively. The rates traded significantly below the MPR corridor through
the first quarter of 2016. However, the monthly weighted average OBB and inter-bank call
rates closed at 21.75 and 29.91 per cent in June 2016, compared with 0.77 and 0.87 per cent
recorded in December 2015, respectively. The monthly average OBB rate ranged from 2.90
to 21.75 per cent, while the inter-bank call rate ranged from 2.75 to 29.91 per cent during the
review period.

Figure 2. 10: Money Market Rate Movements, July 2015 – June 2016

**NB: There was no OBB transaction in April 2016.
July
August
September
October
November
December
January
February
March
April
May
June
Inter-bank

OBB

SDF

MPR

SLF


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

2.4.1.1 Nigerian Treasury Bills
During the review period, the 91-, 182- and 364-day tenored bills totalling N2,457.28 billion
were issued and allotted. This reflected an increase of 52.48 per cent, when compared with
the N1,611.52 billion recorded in the second half of 2015. Similarly, total subscriptions rose
by 23.68 per cent to N5,057.30 billion in the first half of 2016 from N4,089.11 billion in the
second half of 2015. The increase in NTBs issued and allotted was to finance budget deficit.

An analysis of the holding structure of investments in NTBs in the review period showed that
banks took up N1,745.90 billion, representing 71.05 per cent of total NTBs issued, while
non-bank investors took up the balance of N711.38 billion. In terms of total NTBs
outstanding, investment by banks at end-June 2016 accounted for 40.73 per cent; the nonbank investors accounted for 58.20 per cent, while mandate customers held the balance of
1.07 per cent. Average marginal rates ranged from 4.0000 to 9.9948 per cent for the 91-day,
6.9900 to 12.3000 per cent for the 182-day, and 8.0500 to 14.9990 per cent for the 364-day
tenor.
2.4.2
The Foreign Exchange Market
The Bank’s efforts towards maintaining a stable foreign exchange rate were sustained in the
first half of 2016. However, external shocks, speculative demand pressure and low accretion
to external reserves remained the major challenges to the stability of the exchange rate.
Consequently, the CBN introduced the Flexible Exchange Rate regime on June 20, 2016 and
revised guidelines to strengthen the operation of the foreign exchange market were issued.
The objective of the new policy was to enhance efficiency, boost liquidity and promote
stability in the market.

2.4.2.3 Foreign Exchange Market Rates
In the review period, the average exchange rates at the interbank and BDC segments
depreciated by 15.00 and 26.58 per cent from N196.99/US$ and N258.30/US$ as at endDecember 2015 respectively, to close at N231.76/US$ and N351.82/US$ at end-June 2016,
respectively (Figure 2.7).

Figure 2. 11: Inter-bank and BDC Rates, July 2015 - June 2016

Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Inter-Bank

BDC

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

2.4.3
The Capital Market
The Nigerian Stock Exchange (NSE) All Share Index (ASI) and Market Capitalisation (MC)
recorded slight gains during the review period. The increase was due to a combination of
factors, which included the general moderation of volatility in global and domestic stocks and
in commodity prices.

2.4.3.1 The Bond Market
Total bonds outstanding at end-June 2016 stood at N7,542.17 billion, with FGN, agency, subnational and corporate bonds constituting N6,571.96 billion (87.14%), N0.90 billion (0.01%),
N433.24 billion (5.74%) and N536.07 billion (7.11%) respectively. The total bonds
outstanding at end-June 2016 reflected an increase of 9.28 per cent over the end-December
2015 figure of N6,901.94 billion, which comprised FGN, agency, sub-national and corporate
bonds valued at N5,936.44 billion (86.01%), N1.50 billion (0.02%), N456.45 billion (6.61%)
and N507.55 billion (7.36%) respectively (Table 2.5).

Table 2.5: Outstanding Bonds as at 30 June 2016

Dec. 31, 2015
(N’ Billion)
Jun. 30, 2016
(N’ Billion)
% Change
Proportion of
Total (%)
FGN

Agency

Sub-National

Corporate

Total
6,901.94
7,542.17
9.28

FGN Bonds
New issues and re-openings of FGN Bonds series 1, 2 and 3 were auctioned during the
review period. The total value of FGN Bonds offered for sale was N590.00 billion, reflecting
an increase of 53.25 per cent above the N385.00 billion offered in the second half of 2015,
while public subscriptions and sales stood at N1,183.83 billion and N529.50 billion
respectively. The increase in the amount offered was attributed to the need to finance budget
deficit, while the over subscription was attributable to the high level of liquidity in the
banking system and investor appetite for fixed income securities as well as the impressive
yield on FGN bonds.

The price of FGN Bonds at the secondary market declined as a result of decreasing demand,
increased stability in global economic fundamentals and improved corporate performance.
Consequently, yields on FGN Bonds at end-June 2016 increased considerably, compared
with the position as at end-December 2015 (Figure 2.8).

FINANCIAL STABILITY REPORT – JUNE 2016

Figure 2. 12: Yield Curves for Nigeria at end-June 2016

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, same as the amount redeemed in the
second half of 2015. Consequently, total outstanding agency bonds at end-June 2016 was
N0.90 billion.

Sub-National Bonds
There was no new issue of sub-national bonds in the first half of 2016, as against the N61.51
billion issued by six state governments in the preceding period. A total amount of N19.87
billion was amortised by 12 States as against N32.27 billion amortised in the second half of
2015, while N3.35 billion was redeemed by three states. The total outstanding bonds held by
16 State Governments stood at N433.23 billion.

Corporate Bonds
Two corporate bonds, valued N30.63 billion, were issued in the review period compared with
three valued N47.94 billion issued in the preceding period. Bonds valued N1.89 billion were
amortised by 10 companies, while bonds worth N0.22 billion were redeemed by one
company. The outstanding corporate bonds held by 14 companies at end-June 2016, stood at
N536.07 billion.

Table: 2.6: Corporate Bonds issued in the first half of 2016

Company
Description
Value
(N’ Billion)
FCMB
15.00 FCMB 6-Nov-2020
20.87
Transcorp Hotels Plc
15.50 Transcorp 4-Dec-2020
9.76
Total

30.63


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

2.4.3.2 The Equities Market
The NSE ASI closed at 29,597.79 at end-June 2016, reflecting an increase of 3.34 per cent
above the 28,642.25 recorded at end-December 2015. Market capitalization closed higher at
N10,165.34 billion, reflecting an increase of 3.20 per cent over the N9,850.61 billion
recorded at the end of the preceding period. Similarly, foreign portfolio inflows were valued
N78.83 billion, while outflows stood at N110.62 billion, resulting in a net outflow of N31.79
billion at end-June 2016, compared with N65.22 billion recorded at end-December 2015. The
FPI transactions accounted for 40.43 per cent of total equity transactions in the period,
compared with 55.09 per cent recorded in the second half of 2015. The improvement in the
market indicators was attributable to the marginal recovery in some sectors of the global
economy, slowdown in foreign portfolio outflows and improved activities in the domestic
economy.

Table 2. 4: Domestic and Foreign Portfolio Participation in Equity Trading in the first half of

Period
Total
Volume
(Billion)
Foreign
(N’
Billion)
Foreign
(%)
Domestic
(N’
Billion)
Domestic
(%)
Foreign
Inflow (N’
Billion)
Foreign
Outflow
(N’
Billion)
NSE ASI
Market
Cap. (N’
Billion)
May 2016


Dec. 2015


Period %
Change
-40.811
-56.56

-21.50


During the first half of 2016, six new issues, comprising two State Government Bonds, two
FGN Bonds, one corporate bond and one corporate equity were listed, while three companies
were delisted from the Exchange for non-compliance with post-listing requirements. Four
supplementary listings were also recorded on account of additional public offers and special
placement.

In its efforts to deepen the Nigerian capital market, the Securities and Exchange Commission
(SEC), among other initiatives, launched the e-Dividend Mandate Management System (eDMMS) and encouraged investors to register on the platform.

Also to deepen the market, the Nigerian Stock Exchange (NSE) partnered with NASDAQ to
acquire the SMARTS Market Surveillance system to enhance compliance and surveillance,
and introduced the X-Stream trading platform as its trading engine.

2.5
Financial Inclusion
Pursuant to the implementation of the National Financial Inclusion Strategy (NFIS), the
following activities were executed during the review period:
Implementation of the NFIS at the State Level
FINANCIAL STABILITY REPORT – JUNE 2016

CBN branches, in collaboration with financial service providers and relevant government
agencies, set up technical committees to facilitate the implementation of the NFIS at the State
level.
Development of Financial Inclusion Targets for Banks
The Bankers’ Committee assigned four banks to work with the Financial Inclusion Secretariat
towards setting targets for each bank on key products and channels that would drive financial
inclusion efforts. The targets were based on the number of new adult savings account
customers in a year, number of loans granted to adult customers, number of new bank agents
deployed, number of new bank branches established in selected local governments, and
number of new ATMs to be deployed in selected local government areas. The report of the
task force was approved by the Bankers’ Committee in the review period.
Implementation of the Digital Financial Services Project
Two pilot schemes were selected to drive digital financial inclusion in Nigeria:
E-Wallet for Farmers: Targeted at facilitating electronic payments within the
agricultural value chain as well as paying Government subsidies into farmers’ bank
accounts rather than handing them out in cash. The digitization is expected to impact
about 14 million farmers nationwide.
Social Safety Nets: Targeted at 1-3 million poor households across the Country, this
initiative would build on existing conditional cash transfer (CCT) programmes which
have been piloted in the Country, e.g. in Ekiti and Osun States. The focus is to have
government pay social welfare funds electronically to the accounts/wallets of lowincome households subject to pre-determined criteria.

Mobile Money in Nigeria
During the review period, the CBN made important regulatory changes in the mobile
payments market to promote the adoption of mobile money under the National Financial
Inclusion Strategy (NFIS). The notable changes included: the issuance of the Shared Agent
Network regulation; the Super-Agent framework; and the release of new guidelines on
mobile money services, which provide for increased capitalization requirements for mobile
money operators (MMOs) from N0.5 billion to N2 billion.

2.5.1
Financial Inclusion of People with Disabilities
In view of the peculiar nature of People Living with Disabilities (PLWD) and the need for
them to be financially included, the MSMEDF guidelines provide for 2 per cent of its total
resources, i.e. N4.4 billion, to be set aside for economically active PLWD. As at end-June
2016, the sum of N19 million (0.04% of the allocated amount) had been disbursed to PLWD.

A number of participating financial institutions (PFIs) are currently running pilots of the
MSMEDF disbursement to PLWD to support their access to credit financing. In addition to
disbursement by PFIs, some state governments had also disbursed loans through special
FINANCIAL STABILITY REPORT – JUNE 2016

purpose vehicles (SPVs). These states included Benue, Enugu, Gombe, Kaduna, Kwara and
Osun.

2.5.2
Strategic Engagement with Stakeholders
In order to improve the bi-annual financial inclusion data collection process, the Financial
Inclusion Secretariat held review meetings with PenCom, NAICOM, NIMC, NCC and CBN.
The engagement focused on streamlining the key performance indicators per sector,
introducing disaggregated data, such as gender and state as well as addressing challenges of
primary data gathering from operators. The exercise was targeted at facilitating the
performance of more insightful analysis by the Secretariat to support the strategy
implementation process.

During the review period, a financial inclusion portal was created on the CBN website -
www.cbn.gov.ng/fininc/default to highlight the National Financial Inclusion Strategy and
implementation activities.

2.5.3
Financial Literacy
To commemorate the 2016 Global Money Week in Nigeria, the Bank, in collaboration with
stakeholders, carried out the Global Walk for Money, Financial Literacy Fair/Exhibition and
school Outreach/Mentoring Programme.

The Bank also collaborated with the Bankers’ Committee Sub-committee on Financial
Literacy and Enlightenment to implement the school mentoring programme in 23 States.
Through this platform, 3,450 children were sensitized on the benefits of savings.

2.6
The Insurance Sector
The National Insurance Commission (NAICOM) issued a licence to a fully-fledged Takaful
company to offer non-interest (ethical) insurance products during the review period.
In compliance with its corporate governance rules, the Commission enforced the 9-year
tenure limit for non-executive directors in the insurance industry. This led to the mandatory
retirement of over 100 non-executive directors from the insurance sector and has served to
inject new blood and ideas into the boardrooms of the concerned companies.
2.7 The Pension Sector
The National Pension Commission (PenCom) established a Micro-Pension Department to
drive financial inclusion through the provision of pension services to the informal sector of
the economy. The objective was to provide access to pension services to low income
individuals, self-employed and all persons not mandated to participate in the Contributory
Pension Scheme (CPS).

FINANCIAL STABILITY REPORT – JUNE 2016

2.8
Real Sector Intervention Programmes
During the first half of 2016, the CBN reviewed some of the existing programmes and
introduced new initiatives as follows:

2.8.1
Risk Mitigation and Insurance Schemes

2.8.1.1 The Nigeria Incentive-based Risk Sharing System for Agricultural Lending
The NIRSAL commenced operations as a full fledged non-bank financial institution.
2.8.1.2 The Agricultural Credit Guarantee Scheme Fund
The Fund, in the first half of 2016, guaranteed 23,774 loans valued N3.63 billion granted by
three commercial and 72 microfinance banks as against 40,734 loans, valued N5.99 billion,
granted by five commercial and 46 microfinance banks in the second half of 2015. This
outcome reflected decreases of 41.63 and 39.40 per cent in the number and value of loans
guaranteed respectively. In terms of repayments, the sum of N4.03 billion involving 29,519
projects was repaid during the same period compared with N4.36 billion for 25,287 projects
in the corresponding period of 2015. This achievement reflected a decrease of 7.57 and an
increase of 16.74 per cent in the value and number of loans guaranteed respectively.
Cumulatively, 1.025 million loans valued at N99.54 billion had been guaranteed from
inception to June, 2016.

2.8.1.3 National Collateral Registry
The Bank established the National Collateral Registry (NCR) to help improve access to
finance by MSMEs and fast track financial inclusion in Nigeria. It is an online platform that
will allow low-income people and small-scale entrepreneurs to secure loans against movable
assets such as machinery, livestock, and inventory. The National Collateral Registry became
operational on May 25, 2016 and it can be accessed via www.ncr.gov.ng.

Meanwhile, the Bank, in collaboration with International Finance Corporation (IFC) and
other stakeholders, developed an awareness/education programme to enlighten MSMEs and
the financial institutions on the credit reporting system and the benefits of the NCR project in
the Country. A road show was organized in Lagos on 14th June, 2016 to create awareness
among micro entrepreneurs, business associations and financial service providers in the South
West region.
The Bank, in June 2016, issued a circular to all financial institutions on the Secured
Transactions and National Collateral registry to guide banks and other financial institutions
on the use of movable assets to facilitate credit to MSMEs. Financial institutions were
required to designate staff to serve as their administrator on the Registry’s platform.

2.8.2
Credit Support Schemes
2.8.2.1 The Commercial Agriculture Credit Scheme
The sum of N35.99 billion was disbursed to 13 banks for 39 projects during the review
period, compared with N48.91 billion disbursed to eight banks for 49 projects in the second
half of 2015. This outcome reflected a decrease of N12.92 billion (26.42%) and 10 projects
FINANCIAL STABILITY REPORT – JUNE 2016

(20.41%) in value and number respectively. The cumulative amount disbursed under the
scheme from inception to June 30, 2016 stood at N372.39 billion to 459 projects, 46 of which
were state government projects. Seven of the 413 private projects financed under CACS were
owned and managed by women. The total repayments stood at N22.78 billion by 17 banks for
247 projects, bringing the cumulative repayments to N200.69 billion at end-June 2016.

Additional 883 jobs were created (325 skilled and 558 unskilled) owing to CACS
intervention. This brought the cumulative number of jobs created about 1.13 million from
inception to June 2016.

2.8.2.2 SME Restructuring and Refinancing Fund
Cumulative disbursements to the participating banks remained at N381.99 billion for 604
projects. The repayment proceeds at end-June 2016 stood at N152.96 billion out of which
N148.56 billion had been re-disbursed to participating banks under the Real Sector Support
Facility (RSSF). A total of 29,642 jobs were created under the scheme.

2.8.2.3 Real Sector Support Facility
Under the Real Sector Support Facility (RSSF), N1.10 billion was released for one project,
bringing the cumulative number of projects to two, valued N4.60 billion at end-June 2016.

2.8.2.4 Textile Sector Intervention Fund
The CBN created a N50 billion Textiles Industry Intervention Fund for the restructuring of
existing and provision of new facilities in the textile industry. The sum of N7.56 billion had
been released to BOI in favour of 10 projects during the review period.

2.8.2.5 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:

Anchor Borrowers’ Programme (ABP)
(a) The sum of N40 billion had been set aside from the N220 billion MSMEDF for the
Anchor Borrower Programme (ABP) at a single-digit interest rate of 9 per cent; and
(b) A sum of N14.46 billion had been disbursed to 77,990 rice farmers in Benue, Kebbi
and Zamfara States.

Other Disbursements to SME and Micro Credit
The sum of N30.24 billion was disbursed during the first half of 2016 as against N45.42
billion disbursed in the corresponding period of 2015. Total disbursement for SMEs and
Micro Credit stood at ₦73.77 billion bringing, cumulative disbursement to ₦89.60 billion
since inception. Specifically, 86,302 male and 15,345 female micro enterprise owners as well
as 330 SMEs benefited from the Fund since inception.
2.8.2.6 Power and Aviation Intervention Fund
During the review period, the sum of N11.59 billion was disbursed to two (2) power and one
(1) airline projects. Out of the amount, the sum of N9.61 billion was disbursed to two power
FINANCIAL STABILITY REPORT – JUNE 2016

projects, while an airline project received N1.89 billion. Cumulative disbursement from
inception stood at N261.20 billion for 57 projects, comprising 41 power projects and 16
airline projects at end-June 2016. The sum of N11.35 billion was repaid by 27 obligors
during the review period (Table 2.8). The cumulative total repaid thus far was N75.55 billion
in respect of the 57 projects.

Table 2. 8: PAIF Performance as at June 30, 2016
S/N Type
No. of Obligors
No. of
projects
Amount
(N’ Billion)
%
Repayments
(N’ Billion)

Airline

120.76
46.2
39.34

Power

140.44
53.8
36.21

Total

261.20
100.0
75.55

It is expected that the concessionary interest rate of 7 per cent and tenor of 10 – 15 years on
the PAIF interventions would reduce the cost of funds to beneficiaries and facilitate
repayments. Meanwhile, it provided the much needed life-line to the domestic airline
industry.

2.8.2.7 Nigeria Electricity Market Stabilization Facility
During the first half of 2016, the sum of N41.88 billion was released to 15 market
participants that included two (2) electricity distribution companies, seven (7) power
generation companies, five (5) gas suppliers and one (1) service provider. Total disbursement
of funds since inception stood at N106.64 billion to 23 eligible electricity market participants.

Table 2. 5: NESMF Performance as at June 30, 2016
S/N
Market
Participants
Disbursements
(Jan – June
2015)
Disbursements (Jan
– Jun, 2016)
Cumulative as at
June 30, 2016


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

Discos
41.05

8.56

49.62

Gencos
18.46

22.50

32.67

Gascos
5.24

10.36

23.89

Service
Providers
0.00

0.46

0.46

Total
64.75

41.88

106.64

NB: There was no approval for disbursement in the second half of 2015.

2.8.2.8 Entrepreneurship Development Centres
The number of participants trained by the Entrepreneurship Development Centres (EDCs)
during the review period was 5,991 as against the target of 5,000, and the 5,927 participants
trained in the second half of 2015. A total of 2,936 (49.01%) of the participants were female
and 3,055 (50.99%) were male. Cumulatively, the sum of N1.59 billion has been accessed by
the graduates since inception.

FINANCIAL STABILITY REPORT – JUNE 2016

2.8.2.9 Youth Entrepreneurship Development Programme
The Youth Entrepreneurship Development Programme was launched during the review
period. The programme is an initiative of the Bank in collaboration with Heritage Bank and
National Youth Service Corps (NYSC). Under the programme, eligible projects will be
entitled to a credit line of up to N3 million. The CBN set aside N30 billion from the N220
billion MSMEDF for the Programme, at a single-digit interest rate of 9 per cent. The first
phase of the Youth Entrepreneurship Development Programme (YEDP) training was held in
Abuja and Lagos for post-NYSC beneficiaries. A total of 65 participants were trained in
Abuja while 112 were trained in Lagos.
2.8.5.10 CBN/NEXIM Export Stimulation Fund and Rediscounting & Refinancing Facility
In support of Federal Government’s effort to diversify the economy and promote exports, the
Bank established the N50 billion Rediscounting and Refinancing Facility (RRF) and the
N500 billion Export Stimulation Facility. The two facilities were introduced to enhance the
competitiveness of Nigerian exports, value-added of the country’s export commodities and
manufactured goods.
The Guidelines for the N50 billion Rediscounting and Refinancing Facility (RRF) and the
N500 billion Export Stimulation Fund to be managed by NEXIM at an all-in interest charge
of 9 per cent were also approved.

The process for the conduct of an impact assessment of all the Bank’s intervention
programmes has commenced.

2.9
The External Sector
External reserve management was affected primarily by global negative rating, decline in
yields and other developments in international financial markets.

In the review period, there were 72 sovereign rating downgrades compared with 42 upgrades
by the major rating agencies, reflecting the increased level of risk globally. The consequence
of these downgrades was the increased incidence of investors’ flight to quality, which
contributed to the decline in yields in major countries. As part of the expanded Asset
Purchase Programme (APP), the ECB introduced the Corporate Sector Purchase Programme
(CSPP), thus substantiating the ECB’s stance to provide further monetary policy
accommodation12. The APP, coupled with negative deposit facility rate of the ECB, also
contributed to the very low/negative yields on Nigeria’s Euro-denominated investments.

Events leading to, and the outcome of, the Brexit referendum exacerbated market volatility.
Yields on GBP-denominated assets declined from 118bps as at January 4, 2016 to close at
37bps on June 30, 2016. Meanwhile, to stabilize the markets, the BOE announced that it was
ready to increase its funding through existing facilities by over £250bn. Yields on US dollar
and Chinese renminbi-denominated investments also declined (Figure 2.11).

12 www.ecb.europa.eu
FINANCIAL STABILITY REPORT – JUNE 2016

Figure 2. 13: Yields to Maturity on 10-year Government Bonds

Source: Bloomberg

Foreign exchange inflow during the first half of 2016 was $9.83 billion, compared with the
$19.01 billion recorded in the second half of 2015, reflecting a significant decrease of 48.29
per cent. Furthermore, total foreign exchange outflow decreased by 42.4 per cent to $10.84
billion, compared with $18.82 billion at end-December 2015.

The foreign exchange flows during the review period resulted in a net outflow of $1.01
billion. This, coupled with a notional currency translation adjustment of $63.65 million, led
to a $1.07 billion decrease in the level of external reserves from $28.29 billion at endDecember 2015 to $27.22 billion at end-June 2016.


-0.5

0.5

1.5

2.5

Per cent
US
Euro Govt
UK
China
FINANCIAL STABILITY REPORT – JUNE 2016

3.0
REGULATORY AND SUPERVISORY ACTIVITIES
3.1
Macro-Prudential Supervision
3.1.1
Financial Soundness Indicators
3.1.1.1 Assets Based Indicators
Assets quality, measured in terms of the ratio of non-performing loans (NPLs) to gross loans,
weakened in the first half of 2016 deteriorating by 6.4 percentage points to 11.7 per cent at
end-June 2016 (Figure 3.1). The prevailing inflationary trend and the liberalization of the
foreign exchange market, which witnessed significant depreciation of the naira/dollar
exchange rate, during the second quarter of 2016, contributed to the decline in assets quality.
These developments led to increased cost of funds and constrained borrowers’ ability to
service outstanding loans, thereby increasing default risk.
Figure 3. 1: Banking Industry NPLs to Gross Loans at end-June 2016

The ratio of core liquid assets to total assets declined by 4.5 percentage points to 14.0 per
cent at end-June 2016 from 18.5 per cent at end-December 2015. Similarly, the ratio of core
liquid assets to short-term liabilities decreased by 5.5 percentage points to 21.6 per cent at
end-June 2016, compared with 27.1 per cent at end-December 2015 (Figure 3.2).


5.0
5.3
11.7

End Jun 2015
End Dec 2015
End Jun 2016
Percentages
FINANCIAL STABILITY REPORT – JUNE 2016

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


3.1.1.2 Capital Based Indicators
During the period under review, indicators of capital adequacy showed marginal declines in
the Nigerian banking sector, compared with the positions in the preceding and corresponding
periods of 2015. The ratio of regulatory capital to risk weighted assets stood at 15.6 per cent
at end-June 2016, showing a decrease of 0.5 percentage point below the level at endDecember 2015. Similarly, the ratio of tier 1 capital to risk weighted assets which stood at
15.9 per cent at end-June 2016, was 1.2 and 1.5 percentage points below the levels achieved
at end-December 2015 and end-June 2015, respectively (Figure 3.3).
The industry ratio of non-performing loans net of provision to capital increased significantly
to 30.9 per cent at end-June 2016 from 5.9 per cent at end-December 2015, depicting weak
capacity of the sector to withstand the adverse impact of non-performing loans.

End Jun 2015
End Dec 2015
End Jun 2016
Percentages
Liquid assets (core) to total assets
Liquid assets (core) to short-term liabilities
FINANCIAL STABILITY REPORT – JUNE 2016

Figure 3. 3: Banking Industry Adequacy Indicators

3.1.1.3 Income and Expense Based Indicators
As a measure of the relative share of net interest earnings, the ratio of interest margin to gross
income declined to 54.3 per cent in the review period from 63.8 per cent at end-December
2015. Similarly, the ratio of non-interest expenses to gross income decreased by 9.6
percentage points to 54.6 per cent. The decrease in these ratios suggests an improved
efficiency of intermediation activities in the Nigerian banking sector. However, the ratio of
personnel expenses to non-interest expenses increased to 41.2 per cent.

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

2015**
2016*
**
End
Jun
End
Dec
End
Jun
End
Dec
End
Jun
End
Dec
End
Jun
End
Dec
End
Jun
1. Assets Based Indicators
Nonperforming
loans to total gross
loans *

Liquid assets
(core) to total
assets*

Liquid assets
(core) to shortterm liabilities*

2. Capital Based Indicators
Regulatory capital
to risk-weighted
assets*

Regulatory Tier 1
capital to riskweighted assets*

Nonperforming
loans net of
provisions to
capital *

3. Income and Expense Based Indicators
Interest margin to


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

gross income*
Noninterest
expenses to gross
income*

Personnel
expenses to
noninterest
expenses


Note: *FSIs are computed based on IMF guidelines. **The indicators for the period End June 2010 to End December 2015
are revised *** Provisional
3.2
The Banking Industry Stress Test
3.2.1
Solvency Stress Test
The banking industry stress test captured the idiosyncratic nature of individual bank's balance
sheet and macro-prudential concerns, using the bottom-up and top-down approaches.
Assessment of the resilience of the Nigerian banking system was conducted by applying a
series of exceptional but plausible shocks and scenarios, which effectively translate single
and multi-factor shocks into banks’ balance sheet.

The test covered 2313 commercial and merchant banks, using the following risk channels:
credit, liquidity, and interest rate. The resilience of the banking system was assessed against a
benchmark with reference to 10 per cent CAR, 30 per cent liquidity ratio, 5 per cent NPL,
sharp decline in return on asset (ROA) and return on equity (ROE).

For systemic and peer assessment, the banks were classified into three groups based on their
asset size as follows: Large banks are banks with assets greater than or equal to N1.0 trillion;
medium banks have assets greater than or equal to N500 billion but less than N1.0 trillion;
and small banks with assets less than N500 billion.

3.2.2.1 Baseline Position
The baseline CAR for the banking industry, large, medium, and small banks stood at 14.74,
15.65, 11.99 and 3.16 per cent respectively. These levels reflected declines of 2.92, 2.83, 3.62
and 14.45 percentage points respectively compared with December 2015 positions (Figure
3.4).


13 This excludes one specialized bank.
FINANCIAL STABILITY REPORT – JUNE 2016

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

The pre-shock ROA of the banking industry, large, medium and small banks were 0.42, 0.50,
0.10 and -0.34 per cent respectively. On the other hand, the ROEs of banking industry, large,
medium and small banks were 4.62, 5.21, 1.33 and -20.73 per cent at end-June 2016
respectively (Figure 3.5).

Figure 3. 5: Baseline (Pre-shock) ROAs and ROEs (%)

3.2.2.1 Analysis of Results

1. Credit Risk
The large banks were resilient to credit risk and would be able to sustain an impact of the
most severe shock of a 200 per cent rise in NPLs as it resulted in 12.60 per cent CAR, which
was above the 10 per cent minimum requirement. However, banking industry, medium and
small bank groups, showed vulnerability to the most severe shock of 200 per cent rise in
NPLs as their CAR fell to 8.01, 2.51 and -83.32 per cent respectively.

Table 3. 2: General Credit Shocks

Jun 2016 CAR
Dec 2015 CAR
Banking Industry
Large Banks
Medium Banks
Small Banks

June-2016 ROA
June-2016 ROE
Banking Industry
Large Banks
Medium Banks
Small Banks
Single Factor Shocks
Solvency Ratios After Shocks
All Banks
Large Banks
Medium
Small
Base line CARs

Shock 1av-50% NPLs increase

Shock 1avi-100% NPLs increase

Shock 1avii-200% NPLs increase

FINANCIAL STABILITY REPORT – JUNE 2016

Similarly, large banks showed significant resilience to credit concentration risk as their CAR
remained above 10 per cent under the respective shocks and scenarios. Under the scenario
(shock) of "five biggest corporate obligor credit facilities shifting from doubtful to lost",
CARs of the banking industry, large, medium and small banks would deteriorate to 9.24,
13.09, 0.90 and -38.52 per cent, from 14.74, 15.65, 11.99 and 3.16 per cent respectively.
Under this scenario, large banks maintained CARs above minimum requirement of 10 per
cent, while all other peered banks recorded less than 10 per cent CARs (Table 3.3 and Figure
3.6).

Table 3. 3: Credit Concentration Risk

Figure 3. 6: Credit Concentration Risk


2. Interest Rate Risk
The results of the stress test on the net position of interest sensitive instruments relative to
“returns on assets”, and “returns on equity” revealed that the banking industry peered banks
maintained a stable position to interest rate risk as their pre-shock positions (in terms of
capital impairment, ROA and ROE) decreased marginally, except the ROE of medium banks
which declined. However, medium and small banks could not withstand the shock when 1000
bps upward parallel shift in yield curve was applied (Figure 3.7).

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
2bi - Five biggest corporate obligors’ credit facilities shifted
from pass-through to sub-standard (20%)

2bii- Five biggest corporate obligor credit facilities shifted
from sub-standard to Doubtful (50%)

2biii - Five biggest corporate obligor credit facilities shifted
from Doubtful to Lost (100%)

FINANCIAL STABILITY REPORT – JUNE 2016

Figure 3. 7: Interest Rate Risk (CARs)


Figure 3. 8: Interest Rate Risk - ROAs and ROEs


Table 3. 4: Impact of Selected Shocks on CARs, ROAs and ROEs
Most Severe Shocks (500bps to 1000bps)
Banking
Industry
Large
Banks
Medium
Banks
Small
Banks
Baseline ROAs

Baseline ROEs

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

Shock 5biv (1000bps 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 – JUNE 2016

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


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

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

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


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

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


3. Exchange Rate Risk
The banking industry and all peered banks showed resilience to foreign exchange rate risk as
their capital only experienced marginal deterioration after the impact of “50% exchange rate
appreciation" shock was induced on their net foreign assets.
Table 3. 5: Exchange Rate Risk Shocks

4. FX Trading Risk
The results of the tests showed that the banking industry was stable to FX trading risk. The
banks’ pre-shock positions, both in terms of impact on ROA and ROE would change
marginally even after an induced 100 per cent decline in FX trading income. This was mainly
due to the high net profit positions of the banks relative to the size of their FX trading
income.

Table 3. 6: Impact of FX Trading Shocks on ROA

All
Banks
Large
Banks
Medium
Banks
Small
Banks
Baseline ROA

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

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

Single Factor Shocks
Solvency Ratio After Shocks
All Banks
Large Banks
Medium
Small
Baseline CAR

Shock 4bi (10% appreciation in favour of
Naira)

Shock 4bii (20% appreciation in favour of
Naira)

Shock 4biii (50% appreciation in favour of
Naira)

FINANCIAL STABILITY REPORT – JUNE 2016

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

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


Table 3. 7: FX Trading Volatility Shock

All
Banks
Large
Banks
Medium
Banks
Small
Banks
Baseline ROE

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

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

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

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


3.2.2
Liquidity Stress Test
The result of the test revealed that after a one-day run, the liquidity ratio for the industry
would decline to 30.1 per cent from the 43.0 per cent pre-shock position, and to 5.3 per cent
after a cumulative 30-day run. A 5-day and cumulative 30-days run on the banking industry
would result in a liquidity shortfall of N2.2 trillion and N2.4 trillion respectively. The test
further revealed that 19 banks would record liquidity ratios below the prudential threshold of
30.0 per cent, following the 5-day and cumulative 30-day runs respectively (Table 3.8).

Figure 3. 9: Banking Sector Liquidity Ratios after Period 1-5 day and cumulative 30-day
shocks


The result revealed that the industry liquidity ratio would decline to 9.14 and 5.33 per cent,
from 43.0 per cent baseline position after the 5-day and cumulative 30-day shocks
respectively (Table 3.8). The result also indicated vulnerability to liquidity risk in the event
that these scenarios crystallized.
-5

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

Table 3. 8: Liquidity Stress Test Results
Scenarios
Number of Banks with < 30%
liquidity ratios
June 2016
Dec 2015
(21 Banks)
June 2016
(23 Banks)
System
LR (%)
Liquidity
Shortfall to
30% LR
(N’ billion)
Test 1.1: Implied Cash Flow Test ( 5 Days)

Day 1

30.09
91.46
Day 2

25.51
646.61
Day 3

20.56
1,173.54
Day 4

15.11
1,685.27
Day 5

9.14
2,171.35
Implied Cash Flow
Test (30 Days)

5.33
2,437.55

Figure 3. 10: Industry Pre-shock Positions and after 5-day Shocks


Figure 3. 11: Individual Bank Pre shock Positions and Cumulative 30-day Shocks


Pre-shock
Day 5
FINANCIAL STABILITY REPORT – JUNE 2016

N.B: Banks 21, 22 and 23 were excluded from Figure 3.10 and 3.11 because of their outlier
effect.
3.2.3
Maturity Mismatch
At end-June 2016, the industry pre-shock position revealed that the shorter end of the market
(less than or equal to 30-day and 31- to 90-day buckets) was adequately funded. In the less
than or equal to 30 day bucket, five banks were not adequately funded, while in the 31- to 90day bucket, nine banks had funding gaps. The cumulative position for the industry showed an
excess of N4.9 trillion assets over liabilities (Table 3.9).

Table 3. 9: Maturity Profile of Assets and Liabilities at end-June 2016

Liabilities
Assets
Mismatch
Cumulative
N Billion
≤30 days

31-90 days

91-180 days

181-365 days

1-3 years

Above 3 years

Total
19,796.47
24,728.03
(4,931.56 )


-40
-20

Per cent
After 30 days
Pre Shock
FINANCIAL STABILITY REPORT – JUNE 2016

There was a slight improvement in the post-shock result for Descriptive Maturity Mismatch
test (Table 3.10, Test 2a) arising from the assumption of availability of funds from the CBN
and intra-group. Although the 91- to 180-day bucket was adequately funded under Test 2a,
the position deteriorated in the Static Rollover Analysis (Table 3.10, Test 2b) and the
Dynamic Risk Rollover Tests (Table 3.10, Test 2c) with a mismatch of over N1,168 billion.

Table 3. 10: Test Results for System-wide Maturity Mismatch
Tenor
Test 2a-Descriptive
Maturity Mismatch
Test 2b- Static Rollover risk
Analysis
Test 2c- Dynamic Rollover risk
test
N’billion
No of
banks with
mismatch
N’billion
No of banks
with mismatch
N’billion
No of banks with
mismatch
≤30 days
7,702.09

4,892.49

23.29

31-90 days
3,267.23

152.92

(80.38)

91-180days
1,491.66

(1,063.02)

(105.50)

181-365days
1,422.82

(1,136.80)

(260.05)

1-3 years
(338.79)

(2,905.20)

(1,303.15)

Above 3
years
(4,118.49)

(6,413.42)

(5,291.84)

Total
9,426.51
(6,473.04)

(7,017.62)


Figure 3. 12: Maturity Mismatch Positions (Pre- & Post-Shocks)

3.2.4
Contagion Risk Analysis through Interbank Exposures
The test conducted on banks with unsecured interbank exposures showed that two banks’
CAR decreased by 1.6 percentage points each. A review of secured interbank exposures
showed that four banks were central in the network. Overall, there was marginal contagion
Less than 30
days
(N'billion)
31-90 days
(N'billion)
91 -180days
(N'billion)
181 360days
(N'billion)
1-3 years
(N'billion)
above 3 years
(N'billion)
Pre-shock
5,312


Test 2a

Test 2b
4,892


Test 2c


FINANCIAL STABILITY REPORT – JUNE 2016

risk through unsecured interbank exposure as one bank’s CAR was below the benchmark
after the shock.
Figure 3. 13: Tiered Structure of Unsecured Placements at end-June 2016


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

The results of the banking industry stress tests suggest, at the general level, that the banking
industry was considerably resilient. Although banks were more sensitive to credit
concentration and exchange risks, these risks posed no significant threat to the health of the
banks.

3.3
Supervision of Banks and Other Financial Institutions
3.3.1
Banks
3.3.1.1 Routine/Target Examinations:
During the review period, the Bank commenced the risk based examination of banks with
composite risk rating of “High” and “Above Average” as at 2015 and the only subsisting
discount house, which had been under the management of AMCON. The examination of
other banks with composite risk rating of “Moderate” and “Low” is scheduled to follow
during the second half of 2016.
The risk-based examination of the three private credit bureaux and AMCON was also
conducted within the period.
Monitoring and follow-up of banks’ implementation of major recommendations in the Risk
Based Examination Reports for “High” and “Above Average” composite risk rated banks as
FINANCIAL STABILITY REPORT – JUNE 2016

well as “Medium” and “Low” composite risk rated banks as at September 30, 2015 was
conducted within the first half of the year. The aim was to ensure safety and soundness of the
Nigerian financial system.
3.3.1.2 Foreign Exchange Examinations
The highlights of some of the infractions from the review of foreign exchange activities of
banks included: incorrect rendition of returns to regulators; failure to repatriate export
proceeds promptly; non-compliance with approved net open positions; and various trade
documentation lapses. Appropriate regulatory sanctions were imposed as applicable on the
contravening banks.

3.3.1.3 Anti- Money Laundering/Combating the Financing of Terrorism
The AML/CFT examination of Domestic Systemically Important Banks’ (D-SIBs) branches
as at December 31, 2015 was conducted in the first half of 2016. Also, selected branches of
banks were examined as at May 31, 2016 to assess the level of compliance with extant
AML/CFT Laws and Regulations.
A number of infractions were discovered during the exercise which bordered on identification
and verification of customers, risk classification of customers, KYC documentation,
identification and on-boarding of Politically Exposed Persons (PEPs), level of sophistication
of AML/CFT software, transaction monitoring, threshold and suspicious transaction
reporting, lack of adequate AML/CFT staff training as well as independent audit testing of
the AML/CFT compliance function. However, the Bank has strengthened its sensitization
schemes on the awareness of AML/CFT requirements and compliance. It is envisaged that
the progress made thus far would help keep Nigeria out of the grey list and boost its chances
of becoming a Financial Action Task Force (FATF) member.
3.3.1.4 Review of Exposures of Banks to Oil and Gas Sector
The huge exposure of banks to the oil and gas sector coupled with the low price of crude oil
in the international market continued to generate concerns especially regarding the capacity
of the obligors to meet their obligations. To proactively address these concerns, a review of
the exposure of banks to the sector was conducted and appropriate actions implemented.
Following the review and in line with the provisions of the Prudential Guidelines of July
2010, a sizable number of the facilities were downgraded and re-classified as non-performing
with additional provisions effected.
3.3.1.5 Enhanced Supervision of Domestic Systemically Important Banks
Following full implementation of the Framework for the Regulation and Supervision of DSIBs and the assessment of banks that was carried out in the second half of 2015, eight
deposit money banks (DMBs) were designated as D-SIBs. As at June 30, 2016, these banks
accounted for 67.95% (N20.42 trillion) of the industry total asset of N30.05 trillion.
Similarly, the D-SIBs also accounted for 71.3 per cent (N12.94 trillion) of total industry
deposit of N18.59 trillion and N11.19 trillion (71.47%) of the aggregate industry loans of
N15.68 trillion.

FINANCIAL STABILITY REPORT – JUNE 2016

In line with the additional reporting requirements, the banks were directed to submit reports
in the following areas: Risk Governance Strategies and Business Model, Capital Adequacy
Ratio and Risk Weighted Assets, Liquidity Position and Funding Plan, Risk Management
Practices encompassing credit risk, market risk, operational risk and other significant risks in
their business models at specified intervals.

The D-SIBs were largely compliant with regulatory requirements during the period under
review, with the exception of one bank that had challenges over liquidity, capital adequacy
ratio and non-performing loans.

In line with the enhanced reporting requirements contained in the Framework for the
Regulation and Supervision of D-SIBs, the eight banks designated as D-SIBs submitted their
maiden Recovery and Resolution Plans (RRP) in the first half of 2016. The plans provided a
menu of options that the D-SIBs would deploy to address severe financial stress. Based on
the weaknesses observed in the RRPs, the Bank is developing guidance notes to provide
clarity on regulatory expectations and ensure standardization across the industry.
3.3.2
Cross Border Supervision
3.3.2.1 Onsite examination of offshore subsidiaries of Nigerian banks
During the half year ended June 30, 2016, the Bank planned onsite examination of six
offshore subsidiaries of four Nigerian banks following the receipt of a no-objection from their
respective host supervisors. However, no onsite examination visit took place during the
period owing to the request from the hosts for a shift in examination dates to the second half
of the year.

3.3.2.2 Offsite Analysis and Supervision
The Bank continued to receive and analyse prudential and other returns from the offshore
banking subsidiaries through the parent banks during the review period. Issues of supervisory
concern were highlighted for resolution by the banks. For instance, there were high nonperforming loan ratios, high operating costs, and a few cases of fraud.
The parent banks were directed to submit actionable plans to the CBN on how to turn around
the affected subsidiaries. Several inward and outward fit and proper persons’ inquiries in
respect of top management and board appointments in some subsidiaries were also processed
during the period.
The Bank approved the request from some Nigerian banks to recapitalize their offshore
subsidiaries. It also approved a request from a bank to divest from its offshore subsidiaries.

A bank was granted a no-objection by the CBN to establish a banking subsidiary in
Mozambique with an initial paid-up capital of $35 million. The total number of cross border
establishments remained at 70, comprising 60 subsidiaries and 10 representative offices,
excluding the proposed bank in Mozambique.
FINANCIAL STABILITY REPORT – JUNE 2016

3.3.2.3 Developments on College of Supervisors
The 20th meeting of the College of Supervisors of the West African Monetary Zone
(CSWAMZ) was held in Ghana, and resolved that the responsibility for finalising the
framework on crisis resolution be transferred from CBN to the West African Monetary
Institute (WAMI). Members were directed to provide input on their experiences on crisis
management and resolution in their respective jurisdictions to the Institute.
It was also resolved that WAMI should liaise with donor agencies and the IMF/WB to build
bank examiners’ capacity in key areas of supervision, particularly the assessment of
compliance with the Basel Core Principles, RBS, AML/CFT and emerging issues on the
IFRS.

3.3.2.4 Other Supervisory Collaborations
The CBN completed and submitted to the FSB Secretariat the questionnaire on the study
commissioned by the Regional Consultative Group for Sub-Sahara Africa (RCG-SSA) on
Home-Host Cooperation and Information Sharing among Bank Supervisors in the sub-region.
The 9th meeting of the Financial Stability Board Regional Consultative Group for SubSaharan Africa (FSB RCG-SSA) was held in Abuja. Members resolved to continue with the
implementation of post financial crisis reforms, particularly those relating to the enhancement
of corporate governance and risk management practices by banks and the strengthening of the
AML/CFT regulations through the implementation of the legal entity identifier, the Bank
Verification Number and other KYC initiatives.
3.3.2.5 Update on Memoranda of Understanding
No new or subsisting MOU was entered into or renewed during the period, although the CBN
initiated two additional MOUs with Banque des Etats de l’Afrique Centrale (BEAC) and
Reserve Bank of India. The bilateral MOUs would help to strengthen the subsisting
multilateral MOU involving BEAC and facilitate information sharing through joint onsite
examination visits.
3.4
Non-Interest (Islamic) Banking
The Bank continued to participate in the activities of the Islamic Financial Services Board
(IFSB) and the International Islamic Liquidity Management Corporation (IILM) Malaysia.
The CBN in conjunction with the Islamic Financial Services Board, held a workshop on
facilitating the implementation of IFSB Standards 15 and 16. The training was held for
regulators and operators in the non-interest finance industry.

Special training sessions on Stress Testing of Non-Interest (Islamic) Banks (NIBs) and the
determination of Alpha in the computation of capital adequacy ratio (CAR) for NIBs was
organized by the IFSB for the Bank.

The only full fledged non-interest (Islamic) bank was granted a national banking license in
May 2016.

FINANCIAL STABILITY REPORT – JUNE 2016

3.5
Other Financial Institutions
3.5.1
Routine Examination of Development Finance Institutions
A routine risk-based examination of the six Development Finance Institutions (DFIs) was
conducted during the period under review. The examination reports revealed that the
composite risk rating of two of the institutions was “High”, three “Above Average”, and one
“Moderate”. Earnings of the institutions were rated as follows: one “Acceptable”, one “Needs
Improvement” and four “Weak”, arising mainly from significant deterioration in asset quality
and high provisions for loan losses.

Similarly, the capital ratings for the six DFIs were “Strong” for two and “Weak” for the other
four. The prudential and soundness analysis of the DFIs also revealed that two of the
institutions met regulatory Capital adequacy ratios (CAR) while the others had negative
adjusted capital and CAR. All the DFIs maintained NPL ratios above the stipulated
regulatory maximum of 5 per cent.

Other observed regulatory challenges confronting the DFIs included the divergence between
state and private sector enterprise models; weak capital bases and constrained access to stable
long-term funds; and corporate governance issues.

Regulatory letters have been issued to the respective DFIs specifying time lines for remedial
actions for loan recoveries, composition of functional Board committees and instituting
relevant management control functions.

3.5.2
Examination of Microfinance Banks
A total of 95 MFBs were examined during the period under review. These comprised 84 riskbased and 11 special examinations. Reports of the RBS examinations of 84 banks revealed
that one MFB had “Low”, 14 “Moderate”, 19 “Above Average” and 50 “High” composite
risk rating.

Supervisory letters have been issued to the respective institutions, specifying required
regulatory actions within defined time lines including injection of additional capital, recovery
of non-performing loan facilities and adoption of sound risk management controls among
others.
3.5.3
Examination of Finance Companies
Target Examinations of 66 Finance Companies (FCs) were carried out following the
expiration of the extended deadline of December 31, 2015 for compliance with the new
capital requirement of N100 million.

Highlights of the examinations showed that 39 FCs had fully met the capitalization
requirement, while six (6) were below the threshold. The reports further showed that three
companies, which originally met the capital requirement, had recorded capital erosion
through losses. Fourteen FCs did not meet the requirement, while three (3) others voluntarily
FINANCIAL STABILITY REPORT – JUNE 2016

returned their licences, raising the number of FCs that had returned their operating licenses to
eight (8), including five (5) others that had surrendered their licenses before the transition
period. In addition, one FC was exempted from the examination owing to a pending
litigation.

3.5.4 Examination of Nigeria Mortgage Refinance Company
The report of the maiden examination of the Nigeria Mortgage Refinance Company (NMRC)
conducted as at September 30, 2015 was issued during the period under review. The
company’s composite risk rating was “Moderate”, while Capital and Earnings were both
rated “Acceptable”.

3.6
Developments in Basel II/III and IFRS 9 Implementation
As part of the measures to further embed the requirements of Basel II/III into supervisory
policies and practices, the CBN revised the template for the submission of Capital Adequacy
Returns by banks, aimed at ensuring thorough eligibility assessment of the Credit Risk
Mitigation (CRM) techniques prior to recognition and application of risk weights appropriate
to all the exposure classes, among others. Accordingly, all banks submitted their capital
adequacy returns in line with the revised template during the review period. The banks that
failed to meet the minimum capital regulatory requirement submitted capital-raising plans
which are being closely monitored.

In view of the current slowdown in economic activities, the implementation of Higher Loss
Absorbency (HLA) requirement for D-SIBs was shifted to July 1, 2017. Furthermore, in
compliance with Pillar II requirements, all banks submitted Internal Capital Adequacy
Assessment Process (ICAAP) reports for the year ended December 31, 2015, while
supervisory engagements on the reports are ongoing.

In addition, banks, in compliance with regulatory requirements, commenced publication of
both qualitative and quantitative disclosures of their core activities, risk profiles and
methodology to stakeholders.

The CBN during the first half of the year continued its engagement with deposit money banks
and their external auditors to ensure consistent application of IFRS 9 (Financial Instruments).
The CBN also established a Project Team that was tasked with developing guidance to
support IFRS 9 implementation in the Nigerian banking sector.

3.7
The Asset Management Corporation of Nigeria
Net eligible bank assets (EBAs) being managed by AMCON increased to N1.74 trillion at
end-June 2016 from N1.53 trillion at end-December 2015, mainly as a result of interest
accumulation on the Corporation’s loan portfolio.

FINANCIAL STABILITY REPORT – JUNE 2016

The Corporation increased its pace of foreclosures and recoveries during the first half of 2016
with total recoveries of N46.28 billion, reflecting an increase of 178 per cent of the total
recovered during the second half of 2015. A breakdown of the recoveries showed that cash
recoveries, share forfeitures, property forfeitures and claw-backs amounted to N24.5 billion,
N1.3 billion, N20.25 billion and N190 million respectively.
The sum of N120.08 billion was contributed to the Banking Sector Resolution Cost Trust
Fund (BSRCTF) during the first half of 2016 from participating institutions based on their
assets as at 31st December, 2015. The internal recoveries generated by AMCON as well as
the contributions to the BSRCTF would be used to repay the Corporation’s debt obligations
which fall due for payment in December 2016.

3.8
Key Risks to the Financial System

3.8.1 Credit Risk

Risk Rating


Non-performing loans in the period under review grew by 158 per cent from N649.63 billion
at end-December 2015, to N1,678.59 billion at end-June 2016. The industry wide NPL ratio
rose to 11.7 per cent from 5.3 per cent, thus exceeding the prudential limit of 5.0 per cent.

At end-June 2016, loans to the oil and gas sector constituted 28.77 per cent of the gross loan
portfolio of the banking system as credit to that sector grew to N4,511.34 billion, compared
with N3,307.87 billion at end-December 2015. Loans to State Governments rose to
N1,386.61 billion from N1,053.97 billion at end-December 2015, as declining revenues
continued to constrain payment of salary by some States, funding of key services and
execution of developmental projects. This was despite CBN’s N338 billion special
intervention scheme designed to refinance States’ debts, as well as a debt restructuring
programme introduced by the Debt Management Office (DMO), which enabled States
restructure their commercial loans in the preceding period. However, to prevent further
financial crisis, a fresh facility of N90 billion with a 9 per cent interest rate was made
available to the States.

The total exposure to the top 50 obligors stood at N5.23 trillion (33.4%) of total industry
credit exposure of N15.68 trillion. Credit exposure to the dominant sectors as follows: 28.77
per cent to oil and gas sector; 12.95 per cent to manufacturing; 8.84 per cent to governments;
and 8.69 per cent to general commerce.
Credit risk is expected to trend higher into the second half of 2016 owing to increased loan
impairments resulting from the depreciation of the Naira, inability of obligors to service
foreign currency-denominated loans, as well as bank exposures to the oil and gas sector.
FINANCIAL STABILITY REPORT – JUNE 2016

Figure 3. 1: Non-Performing Loans


3.8.2 Liquidity Risk

Risk Rating


The liquidity ratio for the industry decreased by 6.02 percentage points to 42.61 at end-June
2016, from 48.63 per cent at end-December 2015, but remained above the prudential
minimum limit of 30 per cent by 12.61 percentage points. However, market liquidity
decreased at the end of the first half of 2016 owing largely to the increase in CRR to 22.50
per cent from 20.00 per cent and MPR from 11.00 per cent to 12.00 per cent.

3.8.3 Market Risk
Risk Rating


During the period under review, savings rate rose marginally by 0.28 percentage points from
3.33 per cent in January 2016 to 3.61 per cent in June 2016, while the maximum lending rate
grew by 0.09 percentage point to 26.93 per cent in the same period. The decreasing gap
between the savings and maximum lending rates between the second half of 2015 and endJune 2016, from 23.51 to 23.32 reflected increased financial intermediation efficiency.

The 91-day NTB rates closed at 8.32 per cent at end June, 2016 from 4.57 per cent as at
January 2016. The increase in rate is expected to attract higher capital inflows to the market.
Interbank and Open Buy Back rates closed at 35.26 and 21.75 per cent as at end-June 2016
from 0.77 and 0.98 respectively at end-December 2015. The increased rates at the end of the
review period reflected developments in the money and foreign exchange markets.

The rates at the interbank segment of the foreign exchange market at N196.99/US$, for the
most part of the review period, but closed at N283.00/US$ at end-June 2016. Conversely, the

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

rate in the BDC segment fluctuated significantly during the period, rising from N258.30/US$
at end-December 2015 to N351.82/US$ at end-June 2016. The end-June exchange rates
reflected the massive depreciation of the Naira following the adoption of a flexible, marketbased foreign exchange regime towards the end of the half-year.

In the second half of 2016, foreign currency liquidity is expected to remain a challenge owing
to low prices in global commodity markets and declining oil revenues. In addition, the recent
downgrade of Nigeria to BB- from B+ is likely to increase borrowing costs.

3.8.4 Operational Risk
Risk Rating


Operational risk events reported during the period included the incidence of frauds and
forgeries, increased retrenchment from banks and insecurity in some parts of the Country.
Cases of fraud and forgeries increased to 9,164 at end-June 2016 from 7,183 reported at endDecember, 2015. The total amount involved in the cases, however, decreased to N4.36 billion
at end-June 2016 from N5.76 billion at end-December 2015. Similarly, actual losses declined
to N1.38 billion at end-June 2016 from N1.89 billion at end-December 2015. Returns from
banks showed that majority of frauds and forgeries were perpetrated by outsiders while some
bank employees were also involved in fraudulent acts. The frauds were committed mainly
through suppression and conversion of customers’ deposits, illegal fund transfers, pilfering
and fraudulent ATM withdrawals.

In order to check the incidence of frauds and other criminal activities, banks were directed to
sensitize customers on the various types and channels of fraud using established fraud desks;
resolve all intra-bank frauds via the Enterprise Fraud Management system, as well as submit
reports to the Nigeria Inter-Bank Settlement System Plc on fraud information for further
action.

Operational costs increased significantly owing to increases in electricity tariffs and increased
petroleum product prices occasioned by the deregulation of the downstream sector.
Consequently, there were an increased number of layoffs across the banking industry.
Meanwhile the CBN through its Bankers’ Committee declared that it would ensure that the
spate of mass-sacking in the industry was minimized through moral suasion with banks.

3.8.5
Macroeconomic Uncertainties
Risk Rating


The slow growth in the domestic economy, rising inflation and increasing unemployment
combined to create further uncertainties for operators in the financial system. The concern is
FINANCIAL STABILITY REPORT – JUNE 2016

that the shocks may be transmitted in the form of increased delinquency of loans, collapse in
asset prices, instability in the foreign market and increasing inflation. However, it is expected
that current Government efforts to close the fiscal gap and diversify the economy will help
address the concerns.

3.9
CBN Credit Information System
The Bank continued work on the redesign of the CRMS to address the issue of lack of a
unique identifier for prospective borrowers by adopting the Bank Verification Number
(BVN) and Taxpayer Identification Number (TIN) as the sole individual and corporate
borrowers’ identifiers respectively.

The redesigned system will also eliminate some manual processes involved in the current
CRMS, expand the current scope of the system to include borrowers from all lending
institutions and ultimately enhance its overall efficiency and effectiveness in ensuring credit
risk management.

The number of borrowers registered in the CRMS database stood at 195,159 at end-June
2016, indicating an increase of 23.91 per cent over the number recorded in the preceding year
at end-June 2016. Similarly, the number of borrowers with outstanding facilities rose
significantly by 51.30 per cent to 93,168 at end-June 2016 from 61,580 at end-December
2015, and the number of captured credit facilities in the database also increased significantly
by 43.31 per cent to 173,050 at end-June 2016 from 120,750 at end-December 2015, owing
to increased compliance by banks.

Table 3. 11: Borrowers from the Banking Sector14
Description
December

June

Absolute
Change
Change
(%)
Total No. of Borrowers on the CRMS

No. of Borrowers with outstanding credits

No. of Credit/facilities


3.10 The Financial Services Regulation Coordinating Committee


3.10.1 Consolidated Examination of Financial Holding Companies
The FSRCC held Knowledge of Business (KOB) and Risk Assessment Summary (RAS)
working sessions in preparation for consolidated examination. Examiners of member
agencies are currently conducting onsite solo examination of financial holding companies.


14 These figures are based on submission by Commercial and Merchant Banks only and for amounts of N1m
and above.
FINANCIAL STABILITY REPORT – JUNE 2016

3.10.2 National Road Map on Sustainable Finance
The National Sustainable Finance Principles (NSFPs) and the Implementation Roadmap had
been developed by the Harmonisation and Coordination Sub-Committee (HCSC), and
approved by the FSRCC. Implementation of the Roadmap has commenced.


3.10.3 Framework for Domestic Systemically Important Financial Institutions
The FSRCC, through its Financial Sector Soundness Sub-Committee, embarked on
developing a framework for designating Domestic Systemically Important Financial
Institutions (D-SIFIs). The purpose is to encourage regulatory agencies to evolve a peerreview mechanism, particularly in their supervisory processes to upscale their standards.

3.11 Consumer Protection
The Bank received 1,473 complaints from consumers of financial services relating to excess
charges, fraud, dishonoured guarantees, unauthorized deductions/transfers against DMBs and
other financial institutions. A total of 1,157 complaints were resolved/closed in the period
including some that were received prior to the review period. Total claims during the period
amounted to N6.75 billion, $81,023.00 and €19,414.62 while the sums of N4.63 billion,
$80,415.46 and €19,263.62, were refunded by financial institutions to their customers.

Compliance examination was conducted on 17 banks with respect to the Revised Guide to
Bank Charges. The examination established a low level of compliance and defaulting banks
were directed to implement specific remedial actions, including making refunds where
applicable.


FINANCIAL STABILITY REPORT – JUNE 2016

4.0
PAYMENTS SYSTEM
4.1 Developments in the Payments System

The Bank in pursuit of its effort towards continuous improvement of the safety and efficiency
of payments system in Nigeria, recorded significant achievements under the following
initiatives:
4.1.1
Implementation of the Bank Verification Number Scheme
The implementation of the Scheme has resulted in the registration of 25,176,419 individuals,
while 35,508,282 out of 57,899,771 accounts had been linked to BVN. The following
achievements of BVN were recorded:
a. Customers with multiple identities in different banks have largely complied with the
requirements on the harmonization of their account details;
b. “Post No Debit” restrictions were placed on accounts that had not been linked to
BVN;
c. Fraud and forgeries had reduced, owing to the inability to open multiple accounts for
criminal purposes;
d. The Scheme has strengthened the ability of law enforcement agencies in the
investigation of financial crimes;
e. It has enabled MDAs and State Governments to authenticate staff against payrolls,
thereby exposing ghost workers, with consequential savings in staff costs;
f. It has aided the implementation of the Anchor Borrower Programme.

The Bank extended the deadline for BVN enrolment for Nigerian bank customers in diaspora
and security personnel on special assignments to December 31, 2016.

4.1.2
Nigeria electronic Fraud Forum
The Nigeria electronic Fraud Forum (NeFF) partnered with the Nigeria Police to establish a
dedicated e-Payment and Card Crime Unit. The forum is in collaboration with the judiciary to
fast-track the judgement of electronic fraud cases.

4.1.3
Super-Agent Network
Following the issuance of the Guidelines for the Regulation of Agent Banking and Agent
Banking Relationships in Nigeria, the CBN granted an approval-in-principle to Interswitch
Financial Inclusion Services (IFIS) and Innovectives Nigeria Ltd to operate as Super Agents.
This would enable the two companies to grow an active agent network for delivering
financial services to banked and unbanked customers in Nigeria.

4.1.4
Treasury Single Account
In response to the need for States to implement the TSA Scheme, the Bank issued Guidelines
for the Operations of TSA by State Governments in Nigeria designed to standardize operation
of the Scheme across states. The Guidelines allow state governments to maintain TSAs with
the CBN or any bank of their choice. Furthermore the Guidelines stipulate that each State
FINANCIAL STABILITY REPORT – JUNE 2016

Government shall adopt a CBN licensed electronic payment platform for the operation of its
TSA scheme on a full end-to-end basis, for all payments and collections.

As at end-June 2016, two State Governments15 had commenced operation of the TSA with
the CBN and three States16 maintain TSA with commercial banks. The initiative is expected
to facilitate better management of cash resources and harmonize fragmented government
receipts and payments.

4.1.5
Cheque Standards and Cheque Printers Accreditation Scheme
At end-June 2016, the number of accredited cheque printers in Nigeria, remained five. The
cheque printers accreditation scheme is designed to ensure that the printers comply with the
Nigerian Cheque Standards, that risks associated with paper-based payment instruments are
reduced and that MICR reject rates are reduced; thus, enhancing public confidence in the
system.
4.1.6
Licensing of Payment System Participants
During the review period, two (2) Payment Terminal Service Providers (PTSPs) were
licensed, bringing the total licensed PTSPs to 16. In addition, there were 21 mobile money
operators, three (3) Card Schemes, three (3) Payment Solution Service Providers, six (6)
Electronic Financial Transaction Switches and two (2) Third-Party Processors in Nigeria
(Table 4.1).

Table 4. 1: Licensed Payment System Participants
License Type
Dec. 2015
June 2016
Card Schemes

Mobile Money Operators

Payment Solution Service Providers

Payment Terminal Service Providers

Electronic Financial Transaction Switches

Third Party Processors

Total

4.2
Payments System Vision 2020
In pursuit of the attainment of the Payment System Vision 2020 (PSV 2020) objectives, the
CBN issued the following guidelines towards improving the efficiency and safety of the
payments system:

Guidelines on Transaction Switching in Nigeria: The Guidelines set out the
procedures for the operation of switching services in Nigeria, including the rights and
obligations of the parties to the switching contract. It also required the switching
companies to meet with minimum standards for switching, as approved by the CBN.

15 Kaduna and Zamfara
16 Lagos, Plateau and Kwara
FINANCIAL STABILITY REPORT – JUNE 2016

Guidelines on Operations of Electronic Payment Channels in Nigeria: The extant
standards and guidelines on ATM Operations, PoS Card Acceptance Services, Mobile
PoS (MPoS) Acceptance Services, and Web Acceptance Services were consolidated
into the Guidelines on Operations of Electronic Payment Channels in Nigeria. It sets
out operational procedures, settlement framework, minimum standards and
requirements for the different payment channels.

Guidelines for Banking Operations in the Free Trade Zones (FTZ) in Nigeria:
The purpose of the Guidelines is to provide details of regulatory and supervisory
requirements necessary to promote efficient and sustainable banking services, details
of permissible and prohibited activities, and incentives in Nigeria’s FTZs.

In addition, the Bank, in line with principle 8 of BIS Principles for Financial Market
Infrastructure, defined the point of settlement finality for payments via Cheque, RTGS
System, Cards, Mobile and Instant Payment platform in Nigeria. The memorandum for the
submission of the draft Payments System Management Bill earlier submitted to the Federal
Executive Council was approved during the review period.

4.3
Large Value Payments
The volume and value of inter-bank fund transfers through the CBN RTGS System decreased
to 546,283 and N183,365 billion at end June 2016 from 566,852 and N185,868 billion
respectively, at end December 2015, reflecting decreases of 3.63 and 1.35 per cent,
respectively. The marginal decline was attributable to the lower volume and value of
government payments through the System.
4.4
Retail Payments
4.4.1
Cheque Clearing
The volume and value of cheques decreased to 5,731,805 and N2,894.79 billion at end-June
2016 from 7,058,954 and N3,000.72 billion at end-December 2015, reflecting decreases of
18.80 per cent and 3.53 per cent, respectively. The decreases were attributable to the growing
awareness and convenience of alternative payment modes.
4.4.2
Instant Payment
Instant payment volume and value increased to 56,318,341 and N16,365.26 billion
respectively, in the first half of 2016 from 41,678,698 and N13,593.72 billion in the second
half of 2015 respectively. The increases were due to customers’ preference for instant
settlement.

4.4.3
NIBSS Electronic Fund Transfer Transactions
The volume and value of NEFT transactions decreased to 13,009,783 and N5,799.39 billion
respectively, at end-June 2016 from 14,933,051 and N6,315.51 billion at end-December
FINANCIAL STABILITY REPORT – JUNE 2016

2015, respectively. The decreases were due to customers’ preference for the instant payment
platform.

4.4.4
Electronic Card Transactions
Electronic card (e-card) transaction volume rose to 314,640,432 in the first half of 2016 from
275,592,061 in the second half of 2015, while the value increased to N2,871.46 billion in the
first half of 2016 from N2,619.57 billion in the preceding period. The increases reflected the
growing public awareness of the card payment system.

Table 4. 2: Electronic Card Transactions


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

June

Dec 2015
June 2016
Dec 2015
June

ATMs

POS

Mobile

Internet
(Web)

Total


FINANCIAL STABILITY REPORT – JUNE 2016

5.0
OUTLOOK
In the near term, the impact of low commodity prices, expected impact of Brexit, prospect of
rising interest rates in the US and an economic slowdown in China could increase uncertainty
in global financial markets and heighten vulnerabilities in the global economy. The continued
slowdown in global output observed in the first half of 2016 may worsen, as commodity
exporting countries face increasing difficulties in financing fiscal deficits.

On the domestic front, the current efforts of the government are expected to minimize the
impact of the slowdown in the economy. The expected gradual recovery of oil prices in the
international market, as well as increased productivity in the domestic economy, arising from
the diversification efforts, should boost output growth. Although inflationary pressures
remain a challenge in 2016, it is expected that the current measures being taken by the
monetary and fiscal authorities would likely address the underlying drivers of the upward
price movements, thereby enhancing the prospects for macro-economic stability.

Furthermore, the adoption of the flexible exchange rate system is expected to boost liquidity,
improve price discovery and enhance transparency in the foreign exchange market all of
which would moderate exchange rate volatility and enhance financial system stability.

Cross-border banking regulation and supervision is expected to be enhanced with the
establishment of additional bank specific-supervisory colleges and the implementation of the
MOU with Banque des Etats de l’Afrique Centrale (BEAC).

The implementation of the revised PSV2020 document is expected to improve payment
system safety, reliability and efficiency. Similarly, the completion of the BVN Scheme is
expected to improve credit risk management and KYC compliance and reduce incidence of
frauds in the banking system.

Given the persistent weakness and volatility in the price of crude oil, the CBN will continue
to closely monitor the exposure of banks to the oil and gas sector and take appropriate actions
to curtail systemic risks in the industry.

All things considered, the financial system is expected to remain resilient and adaptive to
macroeconomic shocks. While challenges remain in both the global and domestic financial
systems, the Bank is confident that its current proactive surveillance measures would ensure
the stability and safety of the system in the near term.


FINANCIAL STABILITY REPORT – JUNE 2016

Box 1: A Brief on Nigeria’s Flexible Foreign Exchange System

In June 2016, the CBN introduced a Flexible Exchange Rate System. The system operates a
single market structure based on two-way quotes. In the market, the CBN-appointed Foreign
Exchange Primary Dealers (FXPDs), can either trade directly with the CBN, among
themselves, or with Non-FXPDs. The Authorised Dealers have maximum limits of +0.5%/-
10.0% of their shareholders’ funds unimpaired by losses as Foreign Currency Trading
Position Limits to support their obligations.

To reduce volatility and ensure stability of rates, the CBN intervenes through the following
market mechanisms:
The inter-bank market, by trading with the FXPDs who in turn trade among themselves, and
also, trade with Non-FXPDs; and
The Secondary Market Intervention Sales (SMIS), by dealing directly with end-users through
their banks.

CBN intervention in the market is either by buying or selling foreign exchange, spot or
forwards, upon receipt of valid two-way quotes on the standard amount as defined by it. On
June 20, 2016, the single flexible market structure opened with the CBN requesting
Authorised Dealers to submit all their outstanding foreign exchange obligations to their
customers. At the end of the first trading day under the regime, the market was cleared at a
marginal rate of N280.00/US$.

The new flexible exchange rate regime also brought about the introduction of a Naira-settled
non-deliverable over-the-counter foreign exchange futures. The OTC FX futures are nonstandardised and have fixed tenors and bespoke maturity dates. The FX futures are nondeliverable forwards (NDF) where counterparties settle the difference between spot rate and
forward rate at maturity. Other features of the NDF include:

Settlement in Naira rather than in foreign currency;
Trading on the FMDQ OTC platform;
Posting of the various NDF tenors and their rates on the platform; and
Banks are expected to buy any tenor but only on their customers’ requests backed by
adequate documentation.


FINANCIAL STABILITY REPORT – JUNE 2016

Box 2: Highlights of the Pensions Sector
Key highlights of the Pension Sector are provided in the following tables:

Total Pension Fund Assets at end-June 2016
Fund Type
Amount (N’ Billion)
RSA Fund
4,253.82
Closed Pension Fund Administrators
(CPFA)
812.92
Approved Existing Schemes (AES)
662.58
Total Pension Fund Assets
5,729.32

PFA Ranking by Asset Size at end-June 2016

Rank
Market Share (%)
Top 3
54.40
Top 5
66.76
Top 10
88.32
Bottom 3
0.41
Bottom 5
1.62
Bottom 10
8.68

Portfolio Structure of RSA Funds at end-June 2016
Asset Classes
Distribution (%)
Domestic Ordinary Shares
9.97
FGN Securities
74.19
State Government Securities
2.30
Corporate Debt Securities
3.44
Supra National Bonds
0.18
Money Market Securities
9.02
Open / Close-end Funds
0.37
Private Equities
0.17
Infrastructure Fund
0.02
Cash and other assets
0.34
Total

Portfolio Structure of RSA Retiree Fund at end-June 2016
Asset
Proportional Contribution
(%)
Domestic Ordinary Shares
0.63
FGN Securities
74.91
State Government Securities
4.26
Corporate Debt Securities
8.36
Supra National Bonds
0.82
Money Market Securities
9.42
Cash and other assets
1.61
Total

The average return on pension fund investment for the second quarter 2016 was 17.84 per
cent for RSA and 12.13 per cent for retiree funds.
FINANCIAL STABILITY REPORT – JUNE 2016

Box 3: Assumptions for Maturity Mismatch Stress Tests 2a, 2b and 2c
1. The assumptions used for the test are considered ‘extreme but plausible’. The
assumptions are system-wide (uniform) rather than bank-specific.

2. The assumptions are as follows:
An average outflow of 3.8, 5.0 and 1.5 per cent of Total Deposit, Short-term
funding and Long term funding respectively over 5 days period (i.e. the
percentage is reduced for subsequent days after day one to reflect the outflow
in the previous days).
A cumulative average outflow of 22.0, 11.0 and 1.5 per cent of Total Deposit,
Short-term funding and Long term funding for a 30 days test respectively.
The composition of total deposits, short-term funding and long-term funding
in the template are as in the table below:

5 Days Test
30 Days Test
Percent
outflow per
day
Cumulative
outflow
during

days
(Percent)
Total deposits
3.8%
22.0%
Demand deposits
5.0%
30.0%
Demand deposits
5%
30%
Electronic purse
5%
30%
Term Deposits
3.0%
16.8%
Term Deposits
2%
10%
Savings accounts
2%
10%
Other deposit certificates and notes
2%
10%
Domiciliary accounts
5%
30%
Short-term Funding
5.0%
11.0%
Government deposits*


Federal government
5%
10%
State government
5%
10%
Local government deposits
5%
10%
Money at call (Schedule, MRB345)
5%
20%
Inter-bank takings (Schedule MRB341)
5%
20%
Bank deposits domestic(due to)
5%
20%
Bank deposits foreign (due to)
5%
20%
other funding liabilities
5%
20%
Long-term funding
1.5%
1.5%
Borrowing from other banks in Nigeria
2%
2%
Borrowing from other banks outside
Nigeria
2%
2%
Other
2%
2%
Debentures/loan stock (under 3 years)
0%
0%
Debentures/loan stock (over 3 years)
0%
0%
*Government deposits is included in the total deposits making the total outflow on
government deposits higher than 5 per cent.
The following assets are assumed to remain liquid (but adjusted for haircut
and encumbrance) with the calculated percentage unencumbered as follows:

Assets*
% unencumbered
Cash and cash equivalent

Current account with CBN

CRR

Government Bonds & Treasury Bills and other
assets with 0% risk- weighting exposure
66.5
Other Short-term investments

Certificates of deposits held
66.5
FINANCIAL STABILITY REPORT – JUNE 2016

*Compared with the assets classified as ‘liquid’ for the purpose of the computation of
liquidity ratio, all interbank placements, money at call and placements with discount houses
are excluded from identified liquid assets. This is because, at a time of stress there is high
probability that these assets will not be readily available for banks to realise, therefore,
making it illiquid for the purpose of the test.

Details on unencumbered liquid assets

Remains
liquid?
Haircut (in
case of fire
sale)
Value
after
haircut
Per cent
Encumbered –
PreTest
Per cent
Unencumbered
- Post Test
Per cent
Unencumbered
liquid Assets
Assets


33.9%

23.9%
21.6%
Cash and cash equivalent
Yes

Government Bonds &
Treasury Bills and other
exposure with 0% riskweighting
Yes

Other Short-term investment
Yes

Certificates of deposits held
Yes

Asset backed assets
No

0.0%

n.a.
n.a.
Equities
No

0.0%

n.a.
n.a.
Derivatives
No

0.0%

n.a.
n.a.
Bills discounted
No

0.0%

n.a.
n.a.
Other financial instruments
held
No

0.0%

n.a.
n.a.
Loans and advances/leases
No

0.0%

n.a.
n.a.
Investments
No

0.0%

n.a.
n.a.
Other assets
No

0.0%

n.a.
n.a.
Fixed assets
No

0.0%

n.a.
n.a.
Due from
No

0.0%

n.a.
n.a.
Current Account with CBN
Yes

CRR
Yes

Secured Interbank
Placement
Yes


FINANCIAL STABILITY REPORT – JUNE 2016

ACKNOWLEDGEMENTS

List of Major Contributors
S/N
Name
Department

F. E. Ahonkhai
Financial Policy and Regulation Department

H. Mahmud (Dr.)
Ditto

M. W. Muazu-Lere
Ditto

M. C. Akuka
Ditto

P. N. Wondi
Ditto

M. Ekugo
Ditto

H. J. Audu
Ditto

C. O. Ugwueze
Ditto

C. P. Onyekwe
Ditto

A.B. Isah
Ditto

V. K. C. Johnson
Ditto

Y. Izzatu (Mrs.)
Ditto

J. O. Tawose
Ditto

C. P. Nwosu (Mrs.)
Research Department

A. Shebe
Banking Supervision Department

Michael Mbah
Statistics Department

E. O. Shonibare
Risk Management Department

C. Osagie
Financial Markets Department

Uche Uko
Other Financial Institutions Supervision
Department

A.Abdulrahman
Reserve Management Department

P. Oluikpe (Dr.)
Strategy Management Department

M. O. Nwedi
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