FINANCIAL STABILITY
REPORT


December 2014


CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014
iii

TABLE OF CONTENTS


PAGE

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DECEMBER 2014
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DECEMBER 2014
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LIST OF TABLES


Table 3. 1: Selected Financial Soundness Indicators (FSIs) of the Nigerian Banking Industry* (All


CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014
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LIST OF FIGURES


LIST OF BOXES
Box 3: Framework for the Regulation and Supervision of Domestic Systemically Important Banks .. 74


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DECEMBER 2014
viii

LIST OF ABBREVIATIONS AND ACRONYMS
AIPs
Approvals-in-Principle
AMCON
Asset Management Corporation of Nigeria
AML/CFT
Anti-Money Laundering and Combating the Financing of Terrorism
ASI
All Share Index (Nigerian Stock Exchange Index)
ATMs
Automated Teller Machines
BDCs
Bureaux de Change
BOFIA
Banks and Other Financial Institutions Act 1991 (as amended)
BRICS
Brazil, Russia, India, China, and South Africa
CACS
Commercial Agriculture Credit Scheme
CAR
Capital Adequacy Ratio
CBN
Central Bank of Nigeria
CIBN
Chartered Institute of Bankers of Nigeria
CIFTS
CBN Inter-bank Fund Transfer System
CR6
Concentration Ratio (of the six largest banks)
CRMS
Credit Risk Management System
DFIs
Development Finance Institutions
EBAs
Eligible Bank Assets
EDC
Entrepreneurship Development Centre
FCs
Finance Companies
FGN
Federal Government of Nigeria
FMDQ-OTC
Financial Market Dealers Quotation – Over the Counter Plc
FRACE
Financial Regulation Advisory Council of Experts
FSIs
Financial Soundness Indicators
FSRCC
Financial Services Regulation Co-ordinating Committee
GDP
Gross Domestic Product
HHI
Herfindahl-Hirschman Index
ICFA
Implied Cash Flow Analysis
IFRS
International Financial Reporting Standards
IMF
International Monetary Fund
KYC
Know Your Customer
M1
Narrow Money Supply
M2
Broad Money Supply
MCP
Microfinance Certification Programme
MENA
Middle East and North African Countries
MFBs
Microfinance Banks
MoUs
Memoranda of Understanding
MPR
Monetary Policy Rate
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
Nigerian Stock Exchange
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014
ix

OBB
Open Buy Back
OFIs
Other Financial Institutions
PAIF
Power and Aviation Infrastructure Fund
PCBs
Private Credit Bureaux
PMBs
Primary Mortgage Banks
PoS
Point of Sale
PSV 2020
Payments System Vision 2020
rDAS
Retail Dutch Auction System
ROA
Return on Assets
ROE
Return on Equity
RTGS
Real-Time Gross Settlement System
SEC
Securities and Exchange Commission
SMEs
Small and Medium Enterprises
SMECGS
Small and Medium Enterprises Credit Guarantee Scheme
WAMZ
West African Monetary Zone
wDAS
Wholesale Dutch Auction System
WEO
World Economic Outlook


CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014
x

FOREWORD
The December 2014 edition of the FSR reviewed developments in the global and domestic
economy and appraised the impact of monetary and financial policies towards the
achievement of stability in the Nigerian financial system and the growth of the economy. The
period (June – December 2014) was characterized by macroeconomic shocks in the Nigerian
economy as a result of heightened political activities and dwindling government revenue
occasioned by the rapid decline in the international price of crude oil. The Report highlighted
the challenges to financial system stability in general, as well as, the implications for the
banking sector soundness in particular. In ensuring financial system stability, the CBN
employed not only macro-prudential policy instruments, but also adopted risk based
supervision approach to strengthen banking sector resilience.

The Report focused on the resilience of the financial system to withstand unanticipated
adverse shocks, while ensuring the continued smooth functioning of the system’s financial
intermediation processes. A stable financial system should aim at facilitating sustainable
economic growth and development necessary for improved standard of living and enhanced
economic conditions. The critical role of a stable and sound financial system in the growth
and development of the nation, can therefore, not be over emphasized.

This edition of the FSR has emphasized the need for financial sector regulatory authorities to
identify early warning signals in the sector and recommend appropriate policy tool-kit. This
approach, which is in line with international best practice, has been the CBN strategy towards
ensuring financial system stability.

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

May I also acknowledge the contributions of Financial Policy and regulation Department that
coordinated the production of this Report as well as other stakeholders whose facilitations
were immeasurable.


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


CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014
xi

GOVERNOR’S STATEMENT
During the second half of 2014, which this edition of the Financial Stability Report covers,
there were remarkable developments in both the domestic and global economy. On the
positive side, we have seen strong GDP growth and declining unemployment in the United
States, weakening inflationary pressures in Europe, and rebound of growth in the United
Kingdom. On the negative side, many policymakers and governments around the world have
been grappling with sustained and significant fall in oil prices, the end of the U.S. Federal
Reserve’s Quantitative Easing Programme, and the effects of US-led sanctions on Russia for
its alleged role in the ongoing Ukrainian conflict.

On the domestic side, we have witnessed direct spillovers into our economy from the
negative shocks mentioned above. These spillovers include exchange rate pressures, decline
in government revenue, capital reversals, and dwindling accretion to foreign reserves.

It is in this context that I heartily welcome the review and analysis contained in this edition of
the FSR. The report provides the basis for implementing appropriate countervailing strategies
for stabilizing the financial system. In response to these challenging shocks, we acted calmly
to first understand the underlying causes of the problems, and then we debated their policy options
and finally acted swiftly to implement decisions that were reached.

Going forward, it is imperative to reiterate that the Bank would continue to formulate policies
and implement strategies that will stabilize the financial system and stimulate growth in the
real sector. In addition, the CBN will continue to promote financial inclusion and strengthen
credit administration processes through the establishment of the National Collateral and
Secured Transactions Registry to enhance asset quality. The Bank will also sustain its efforts
at strengthening supervision of the financial institutions to ensure financial stability.

I am confident that in spite of the challenges experienced during 2014 and the uncertainties
about 2015, the Bank will reinforce its lead role in ensuring the continued coordination and
collaboration with stakeholders in the Nigerian financial system to pursue policies that would
sustain market confidence. More importantly, it will intensify efforts at achieving greater
coordination with the fiscal and other regulatory authorities to ensure financial system
stability and effectiveness in macroeconomic management.

It is on this note that I recommend this edition of the FSR to all who have a stake in the
growth and development of the Nigerian financial system and the economy at large.


Godwin I. Emefiele
Governor, Central Bank of Nigeria

CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014
xii

EXECUTIVE SUMMARY

The global economy grew by 3.3 per cent in 2014, the same as in 2013, but growth was
lower than the 3.4 and 4.1 per cent in 2012 and 2011, respectively. The US economy,
helped by a 55.0 per cent decline in oil prices since September 2014, strengthened the
global growth, but was moderated by weaknesses in global investments, inventory
overhangs, unfavorable weather conditions, geopolitical tensions and the sluggish recovery
in other advanced and the emerging market economies. These factors, alongside others,
have resulted in moderate and unbalanced growth in different regions.

Generally, global inflationary pressures eased in 2014, although some advanced economies
experienced increased inflation, owing largely to substantial output gaps. In sub-Saharan
Africa, inflation rate increased slightly to 6.7 per cent in 2014, but this was generally
contained, owing to tightened monetary policies and a decline in oil and food prices.

Developments in both output and inflation in the different regions of the globe produced
mixed results in the capital markets during the second half of 2014. In the foreign exchange
market, the currencies of most emerging market economies depreciated against the U.S.
dollar.

In Nigeria, GDP growth remained robust in the second half of 2014. The tight monetary
policy stance of the CBN, which continued into the second half of the year moderated
inflationary pressures as the year-on-year headline inflation rate declined marginally to 8.0
per cent. In the second half of 2014, average interest rates remained stable but rose in
December in response to further tightening of monetary policy in November. Broad money
supply (M2) grew by 7.29 per cent at the end of the second half of 2014. On the other hand,
narrow money (M1) declined by 10.89 per cent at end-December 2014, compared with the
2.88 per cent decline at the end of the first half of the year.

Credit continued to grow in the second half of 2014, as it recorded 10.97 per cent increase
over the end-June 2014 position of N15,008.27 billion to close at N16,129.49 billion. While
credit to the Federal Government declined, credit to the private sector increased by 12.08 per
cent in the review period. The structure of credits indicated the continued dominance of
short-term maturities. Furthermore, the banking industry remained dominated by a few major
banks in terms of both deposits and assets.

During the review period, the CBN strengthened the regulatory framework for financial
holding companies by issuing relevant guidelines for their operations and regulation. It also
continued to ensure stability of the banking system through effective micro and macro
supervision of the system, as well as the conduct of stress tests to evaluate the resilience of
the system to shocks. Reform efforts were focused on reviving the mortgage sub-sector
through the establishment of the Nigeria Mortgage Refinance Corporation (NMRC).

CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014
xiii

The Bank sustained its tight monetary policy stance by increasing the Monetary Policy Rate
(MPR) from 12.00 to 13.00 per cent and raising the Cash Reserve Requirement (CRR) on
private sector deposits by 500 basis points, from 15.00 to 20.00 per cent in the review period.
Consequently, rates at the inter-bank funds market, which were relatively stable in the first
ten months of 2014, rose in December.During the review period, gross external reserves
declined to US$34.25 billion at end-December 2014,owing largely to the fall in oil prices.

Stress tests conducted on the banking industry at end-December 2014 revealed that banks
were generally resilient to shocks. They were, however, more sensitive to credit
concentration and exchange rate risks than other risks.

Towards enhancing the safety, effectiveness and efficiency of the payments system, the
implementation of the cash-less policy was extended to the remaining 30 states of the
Federation in the second half of 2014. The registration of bank customers under the Bank
Verification Number (BVN) scheme continued. Efforts were also being made to capture
customers of microfinance banks under the scheme.

Key risks in the banking system included: risks associated with credit growth; insecurity in
some parts of the Country; fluctuation in key prices, arising from external shocks and the
uncertainties over the 2015 elections.
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

1.0
MACROECONOMIC DEVELOPMENTS AND FINANCIAL SYSTEM
STABILITY

1.1
Global Economic and Financial Developments

1.1.1 Output
Global output grew by3.3 per cent in 2014 (Table 1.1), the same as in 2013, but was lower than
the 3.7 per cent projected for the year, reflecting the slow recovery in the global economy. An
expected boost in global output from the strengthening of the US economy and the 55.0 per cent
decline in oil prices since September 2014, was offset by weaknesses in global investments and
inventory overhangs, unfavorable weather conditions, geopolitical tensions and the sluggish
recovery in many advanced and emerging market economies. Other factors included the
appreciation of the US dollar, depreciation of the euro and yen, rising interest rates and high risk
premia in many emerging market economies. The euro area and Japan continued to grapple
with structural bottlenecks and lingering effects of the global financial crisis, while China
remained burdened with weak growth. In addition, weak external demand, continued tightening
of domestic policies, political uncertainties and supply-side constraints in other developing
countries adversely affected the growth in global output across countries in various degrees.
Overall, these developments have resulted in moderate and unbalanced growth in global output
across regions in 2014.

In the advanced economies, output growth was 1.8 per cent in 2014, compared with the 1.3 and
1.2 per cent recorded in 2013 and 201, respectively. Growth in the US economy rebounded to
2.4 per cent, after the 2.1 per cent contraction in the first quarter of 2014. The growth in the US
economy was attributed to the decline in oil prices and unemployment, weakening inflationary
pressures, increased household spending and industrial activities, as well as a rise in shale oil
production.

In Japan, output growth was 0.1 per cent in 2014, compared with 1.6 per cent in 2013. This
reflected a less than expected rebound in domestic spending, owing to an increase in
consumption tax during the review period. Canada’s output growth was 2.4 per cent in 2014,
compared with 2.0 per cent in 2013 owing partly to favourable monetary policy conditions.

Output growth in the euro area was 0.8 per cent in 2014, in contrast to the decline of 0.5 per
cent in 2013, reflecting further monetary easing, a more neutral fiscal policy stance, and
depreciation of the euro. The growth was offset by weaker investments and declining inflation
expectations. In the UK, growth remained relatively strong at 2.6 per cent in 2014 owing to
broad-based consumer and business confidence.

In emerging markets and developing economies, output growth declined to 4.4per cent in 2014,
compared with 4.7 per cent in 2013 and 5.1 per cent in 2012. Similarly, output growth in China
declined to 7.4 per cent in 2014, from 7.8 per cent in 2013, reflecting moderation in domestic
demand owing to measures taken to rein in growth in credit and real estate activities. In India,
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

despite the structural challenges and weak demand, output grew by 5.8 per cent in 2014,
compared with 5.0 per cent in 2013. Output growth in Russia was 0.6 per cent in 2014,
compared with 1.3 per cent in 2013. The decline in growth was linked to low investments, low
oil prices, weak demand for exports owing to the economic sanctions and the crisis in Ukraine.

In the Middle East and North Africa (MENA) region, GDP growth was 2.8 per cent in 2014,
compared with 2.2 per cent in 2013, despite the decline in oil prices and output as well as
political uncertainties. The growth was as a result of stable macroeconomic indicators, such as
inflation which declined from 9.0 to 7.6 per cent.

Output growth in sub-Saharan Africa (SSA) was 4.8 per cent in 2014 compared with5.2 per cent
in 2013.The growth was attributed, in part, to the adoption of fiscal consolidation in most
countries and positive domestic supply-side measures within the region. The slower growth in
SSA was attributed to declining oil and commodity prices as well as the outbreak of Ebola Virus
Disease (EVD) in the West African sub-region. In Nigeria, output growth rose to 6.2 per cent in
2014, from 5.5per cent in 2013. The South African economy fell short of expectation as output
declined to 1.4 per cent in 2014, from 2.2 per cent in 2013.

Table 1. 1: Global Economic Outlook (per cent change)
Region/Country
Year-on-Year

Forecast

2013 2014

World

Advanced Economies

United States

Euro Area

Japan

United Kingdom

Canada

Emerging Markets + Developing Economies

China

MENA Region

Sub-Saharan Africa

Nigeria

Sources:
i. WEO, October 2014 and WEO Update, January 20,2015;
ii. Global Economic Prospects, January 2015

1.1.2 Global Inflation
Generally, global inflationary pressures eased in 2014, reflecting contractionary monetary policies
and fiscal consolidation measures adopted by most countries.

In advanced economies, inflation increased from 1.4 per cent in 2013 to 1.6 per cent in 2014,
largely because many of the economies recorded substantial output gaps, though deflation
remained a challenge in some of them. In addition, the low level of inflation, although below most
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

central banks’ targets, reflected continued slack in economic activities, reduction in the labour
force owing to demographic trends as well as dissatisfied workers leaving the labour market.
Inflation in the US, which was 1.5 per cent in 2013, rose to 2.0 per cent in 2014.

In the euro area, inflation moderated to 0.5 per cent in 2014 from 1.3 per cent in 2013 and is
expected to rise to 0.9 per cent in 2015, as the region’s economy recovers. Similarly, inflation in
the United Kingdom moderated to 1.6 per cent in 2014, from 2.6 per cent in 2013 and is projected
to increase slightly to 1.8 per cent in 2015.

In Japan, inflation moved from 0.4 per cent in 2013 to 2.7 per cent in 2014 and is estimated to
decline to 2.0 per cent in 2015. The rise in inflation in 2014 was attributed to the new fiscal stance
and the depreciation of the yen.

Inflation in the emerging and developing economies also moderated to 5.5 per cent in 2014 from
5.9 per cent in 2013. In sub-Saharan Africa, inflation edged slightly up to 6.7 per cent in 2014,
from 6.6 per cent in 2013. However, inflation remained within single digit owing to tightened
monetary policies and falling oil and food prices.

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

Projection
Advanced Economies

United States of America

Euro Area

Japan

United Kingdom

Emerging and Developing Economies

MENA Region

Sub-Saharan Africa

Nigeria

Source: WEO October, 2014

1.1.3
Global Commodity Prices
The prices of key commodities declined in the second half of 2014, with the highest price decline
of 44 per cent in crude oil. The prices of agricultural products, metal and precious metals also
witnessed downward trends. In terms of annual average prices, the decline in commodity prices in
2014 relative to 2013 varied from 2.8 per cent for agricultural products to 7.1 per cent for both
energy and food, 7.7 per cent for crude oil, 10.3 per cent for gold prices and 12.2 per cent for
precious metals (Table 1.3).


CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Table 1. 3: Average Commodity (Nominal) Price Indices (2010 = 100)

Change
% 2014/

June

Dec

Change
% Dec/
June 2014
Energy


Non Energy


Metals


Agriculture


Food


Precious metals


Memorandum items
Crude oil ($/bbl)


Gold ($/toz)

Source: Commodity Markets Outlook, January 2015, World Bank Group.

The factors accounting for the decline in commodity prices in the review period included supply
increases across most commodity sectors, weak global growth and appreciating US dollar. The
fall in oil prices was attributed to an increase in supply combined with a decrease in demand and
OPEC’s policy shift from supporting prices to maintaining market share.

1.1.3.1 Oil Prices
The Organization of Petroleum Exporting Countries (OPEC) Reference Basket (ORB) was down
by 44.0 per cent from the US$108.4pb recorded in June 2014, to US$60.7/bat end-December
2014, the lowest since May 2008, amid imbalances in oil market supply and demand. The oil price
drop was the third largest seven-month decline in three decades.

Global oil production rose more rapidly than refining capacity in 2014. Output was 1.7mb/d
higher than the88.81mb/d recorded in 2013, and was more than enough to meet growth in
demand. In addition, a 0.6mb/d increase in Libya’s production at end-October 2014 left the oil
market with large inventories, the largest reported crude stocks in more than five and a half years.
Also, improvement in shale technology led to higher US production and contributed to the
increase in global crude inventories.

Global oil demand was estimated at 93.5mb/d in December 2014, representing an upward revision
of 0.02mb/d from the level in the previous month. The adjustment from historical trends mainly
reflected better-than-expected oil demand from non-OECD countries. In 2015, world oil demand
is expected to rise by 1.15 mb/d, representing an upward revision of 0.30 mb/d owing to
expectations of higher oil requirements in non-OECD countries.

1.1.3.2 Food Prices
The Food and Agriculture Organization (FAO)’s Food Price Index (FPI) stood at186.2 points in
December 2014, down by 22.7 points (10.9 per cent) from the 208.9 points recorded in June 2014.
The index had been on a downward trend since March 2014, closed the year with a monthly
average of 186.2 in December 2014, with the sharpest year-on-year decline recorded by cereals
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

(12.5 per cent), dairy products (7.7 per cent), oils (6.2 per cent) and sugar (3.8 per cent). Only the
FAO Meat Price Index recorded an increase (8.1 per cent) compared with 2013.

Table 1. 4: Global Food Price Index

Yearly
Avg.

Yearly
Avg.

June

Dec.

Change
June – Dec

Food price index

Meat

Dairy

Cereals

Vegetable oil

Sugar

Source: Food and Agriculture Organization of the United Nations

The FAO Cereal Price Index averaged 183.9 points in December, down by 12.2 points from the
196.1 in June 2014, but higher than the 183.2 recorded in December 2014. The decline was driven
primarily by a 7.0 per cent fall in the international prices of wheat, owing to abundant supply and
large inventories. In terms of annual averages, the FAO Cereal Price Index averaged 192 in 2014,
which was down by 12.5 per cent from the 219.3 in 2013.

The FAO Vegetable Oil Price Index averaged 160.7 points in December, down by 28.1 points
from 188.8 in June 2014, and 164.9 in December 2014. The December price was its lowest since
October 2009. The drop in the index reflected developments in crude oil prices which depressed
demand for palm oil and eroded the competiveness of vegetable oil as a biodiesel feedstock.

The FAO Dairy Price Index averaged 174.0 points in December, down by 62.5 points (26.4%) in
December 2014.Increased supply and a fall in demand by leading importers, especially China and
the Russian Federation, exerted pressure on international prices in December. In 2014, the prices
of milk products averaged 224.2 points, down by 7.7 per cent in 2013.

The FAO Meat Price Index averaged 197.5 points in December 2014, which was 5.3 points down
from the 202.8 in June 2014 reflecting, mainly, falling currency exchange rates relative to the US
dollar and growth in exports. However, the only commodity group within the FAO FPI that
registered an increase in 2014 was meat products. On a year-on-year basis, the FAO Meat Price
Index increased by 14.2 points, from184.1 in 2013 to 198.3 in 2014.

The FAO Sugar Price Index averaged 217.5 points in December 2014, down by 40.5 points from
the 258.0 in June 2014. On an annual basis, sugar prices experienced downward pressure as the
index averaged 217.5 points in 2014, compared with the 251.0 in 2013. Ample supplies in major
sugar producing countries, especially Brazil, the world’s largest producer and exporter, and falling
crude oil prices, which reduced the volume of sugar crops being converted into ethanol, impacted
on international sugar quotations in December.
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

1.1.3.3 Gold Prices
The price of gold continued its downward trend during the second half of 2014 as its average spot
price settled at US$1,201 per ounce in December 2014, down from the US$1,327.33 per ounce in
June 2014 and the US$1,411 per ounce at end-December 2013. Overall, gold lost about 9.5 per
cent in price during the second half of 2014, compared with a gain of 10.0 per cent during the first
half of the year.
1.1.4
International Financial Markets
1.1.4.1 International Stock Markets
International stock markets recorded mixed developments during the second half of 2014 (Table
1.5). While stock movements in North America and Asia were largely positive, markets in Europe
and Africa were mostly negative. In North America, the S&P 500 and Mexican Bolsa increased
by 5.0 and 1.0 per cent, between end-June and end-December 2014, respectively, while the
Canadian S&P/TSX Composite decreased by 3.4 per cent. In Asia, Japan’s Nikkei 225, China’s
Shanghai Stock Exchange-A and India’s BSE Sensex indices increased by 15.1, 58.0 and 8.2 per
cent, respectively. In South America, the Argentine Merval increased by 19.8 per cent, while the
Brazilian Bovespa decreased by 5.9 per cent. In Europe, FTSE 100, CAC 40, DAX and MICEX
indices decreased by 2.6, 3.4, 0.3 and 5.4 per cent, respectively, in the review period.

In the second half of 2014, the global equities market was adversely affected by concerns about
slow and fragile economic growth and falling oil prices. This prompted the European Central
Bank’s (ECB) announcement of its intention to embark on asset purchases to boost the Euro Zone
economy. The US stock market, had for the most part, been on a positive path as investors largely
ignored the collapse in crude oil prices and focused on strengthening the economy.

In Asia, the Japanese economy went into recession amidst threats of deflation, compelling the
Bank of Japan to step up its stimulus programme. However, towards the year-end, its stock market
stabilized and the yen strengthened amidst weak oil prices and sluggish global growth. China’s
economy witnessed slow growth and a rise in non-performing loans which negatively impacted on
the stock market.

Stock market indices, in Africa, notably the Nairobi NSE 20 and the Egyptian EGX CASE 30
indices, increased by 4.7 and 9.4 per cent, respectively, while the Nigerian NSE ASI, the South
African JSE All-Share and the Ghanaian GSE All Share indices decreased by 18.4, 2.3 and 4.7 per
cent, respectively.


CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Table 1. 5: Selected International Stock Market Indices at end-December 2014
Country
Index
EndDec.13
End-June-

End-Dec-14
YTD %
Change
% Change
June– Dec.2014
AFRICA
Nigeria
NSE All-Share Index

South Africa
JSE All-Share Index

Kenya
Nairobi NSE 20 Share index

Egypt
EGX CASE 30

Ghana
GSE All-Share Index

NORTH AMERICA
US
S&P 500

Canada
S&P/TSX Composite

Mexico
Bolsa

SOUTH AMERICA
Brazil
Bovespa Stock

Argentina
Merval

EUROPE
UK
FTSE 100

France
CAC 40

Germany
DAX

Russia
MICEX

ASIA
Japan
NIKKEI 225

China
Shanghai SE A

India
BSE Sensex

Source: Bloomberg
1.1.4.2 International Foreign Exchange Markets
During the review period, the currencies of major emerging market economies depreciated against
the U.S. dollar, reflecting, largely, the turmoil in many financial markets earlier in the year, the
slow economic recovery in advanced economies and the impact of termination of U.S. monetary
easing programme. The moderating growth in the advanced countries was weakened by the
strengthening U.S. dollar, volatile capital flows and financial system vulnerabilities arising from
currency depreciations. Meanwhile, uncertainties in commodity prices which hit Latin American
and African markets, and the insurgency and the Ebola epidemic in the West African sub-region
exacerbated the pressures on their currencies. The divergent monetary policy stance in China and
Japan worsened the fragility of financial markets and currency risks in developing economies.

In North America, the Canadian dollar and Mexican peso depreciated against the US dollar by
7.06 and 12.07 per cent, respectively. Similarly, in Africa, the Nigerian naira, the South African
rand and the Kenyan shilling, depreciated against the US dollar by 7.30, 8.04 and3.31per cent,
respectively. The Egyptian pound remained unchanged while the Ghanaian cedi appreciated by
3.73 per cent.

In South America, the Brazilian real, the Argentine peso, and the Colombian peso depreciated
against the US dollar by 16.92, 4.01, and 21.00 per cent, respectively. Also in Europe, the British
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

pound, the euro and the Russian ruble depreciated against the US dollar by 9.38, 12.05 and 44.06
per cent, respectively.

In the Asian foreign exchange markets, the Japanese yen, the Chinese yuan and the Indian rupee
also depreciated against the US dollar by 15.40, 0.16, and 4.52 per cent, respectively.


Table 1. 6: Exchange Rates of Selected Countries (Value in currency units to US$)
Economy
Currency
31-Dec-

31-Mar-14
30-Jun-

30-Sep-14
31-Dec-14
Appreciation/Depreciation
B/w c & e
B/w a & e
AFRICA

a
b
c
d
e
F
g
Nigeria
Naira

South
Africa
Rand

Kenya
Shilling

Egypt
Pound

Ghana
Cedi


NORTH
AMERICA


Canada
Dollar

Mexico
Peso


SOUTH
AMERICA


Brazil
Real

Argentina
Peso

Colombia
Peso


EUROPE


UK
Pound

Euro Area
Euro

Russia
Ruble


ASIA


Japan
Yen

China
Yuan

India
Rupee

Source: Bloomberg

1.1.4.3 International Monetary Policy Rates
Monetary policy rates were generally retained in most advanced economies during the second half
of 2014. While the Bank of Japan, the Bank of England, the U.S. Federal Reserve, the Bank of
Canada, the Bank of South Korea and the Reserve Bank of Australia maintained rates between
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

0.25 and 1.00 per cent, the European Central Bank reduced its policy rate, from 0.15 per cent in
June to 0.05 per cent in September 2014. The Reserve Bank of New Zealand maintained its rate of
3.25 per cent approved in June to end-December 2014. The Bank of Indonesia also kept its rate at
7.5 per cent during the second half of2014. However, the Bank Negara Malaysia raised its rate,
from 3 per cent in the first half of 2014 to 3.25 percent in the second half of 2014.

In the BRICS countries, the monetary policy stance was mixed during the second half of 2014.
Russia and India left their rates unchanged; Brazil and South Africa tightened up, and China eased
up rates. Mexico maintained its rate at 3.0 per cent throughout the second half of 2014, while
Chile cut its rate from 4.0 per cent in June 2014 to 3.75 per cent in July, 3.5 per cent in August,
3.25 in September, and 3.0 per cent in October 2014 and kept it till the year-end. However,
Colombia increased its policy rate from 4.25 per cent in June 2014 to 4.5 in July and maintained it
till the year-end. Most upward changes were attributed to capital outflows owing to the
normalization of monetary policy of the US Federal Reserve Bank and tapering.

Table 1. 7: Summary of Policy Rates Across Selected Countries (Jan – Dec 2014)
Country
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Japan

Europe

UK

US

Canada

South Korea

New Zealand

Australia

Indonesia

Malaysia


BRICS
Brazil


11.25
11.25
Russia

India
7.75

HK Base

South Africa


Mexico


Chile
4.25
4.25

3.75
3.5
3.25

Colombia


Egypt

Ghana

Developed Economies
ASEAN
Other Emerging Economies & South America
Africa
Source: Bloomberg

1.2
Domestic Developments

1.2.1
Output
Provisional data from the National Bureau of Statistics (NBS) indicated that the domestic
economy expanded further in the second half of 2014. Gross Domestic Product (GDP) measured
in real terms recorded a growth of 13.03 per cent over the level in the preceding half year, in
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

contrast to the 6.14 per cent decline in the first half against end December 2013 performance. It
was, however, 0.31 percentage point below the 13.34 per cent recorded in the corresponding
period of 2013. Overall, growth in real GDP continued to be buoyed by sustained expansion in the
non-oil sector, though it was moderated by the lull in the oil sector, owing to the drastic fall in the
international oil prices.

The non-oil sector recorded 15.06per cent growth in real terms in the second half of 2014,
compared with the 7.04 per cent decline in the preceding first half. The growth in the non-oil
sector was driven mainly by significant expansion in the agriculture sector, particularly, the crop
production activities. Correspondingly, the contribution of the non-oil sector stood at 90.31 per
cent, indicating an increase of 1.6 and 0.7 percentage points over the 88.71 and 89.57per cent
recorded in the preceding half year and corresponding period of 2014, respectively. In real terms,
the agriculture sector recorded the highest level of growth at 40.5 per cent, followed by the
services sector (10.4%), trade (6.9%), and manufacturing (3.6%). In terms of sectoral
contribution, the services sector accounted for the largest share (35.7%) of real GDP. This was
followed by agriculture (25.2%), trade (16.1%), crude petroleum, natural gas and solid minerals
(10.0%), manufacturing (9.5%),and construction (3.5%).

Activities in the oil sector witnessed challenges, arising from falling oil prices during the second
half of 2014.Although average daily production of crude oil rose to 2.18 million barrels per day
(mb/d) in the fourth quarter, from 2.15 mb/d in the third quarter, oil as a percentage of GDP
declined by 2.9 per cent in contrast to 1.6 per cent growth in the first half. Further analysis also
indicated that the oil sector contributed 9.7 per cent to real GDP in the second half, showing 1.59
and 0.73 percentage points decline below the contributions in the preceding half year and the
corresponding period of 2013, respectively.

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

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


CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

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

Sector
H2 2013
H1 2014
H2 2014
Manufacturing
3.6
10.8
3.6
Construction
-4.2
19.0
-5.8
Services
10.6
-3.0
10.4
Trade
6.6
-.8
6.9
Agriculture
41.2
-26.0
40.5
Crude Petroleum, Natural Resources and Solid Minerals
-2.8
1.6
-2.9

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

H2 2013
HI 2014
H2 2014
Oil
Non-oil


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

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


1.2.2
Inflation
Domestic inflationary pressure was moderated by the tight monetary policy stance of the CBN as
the general price level trended downward during the review period. Data from the National
Bureau of Statistics (NBS) showed that the all-items composite Consumer Price Index (CPI) stood
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

at 164.4 in December 2014 (November 2009=100),compared with 158.6 and 152.3 at end-June
2014 and end-December 2013, respectively. Consequently, year-on-year headline inflation, which
stood at 8.2 per cent at end-June2014, declined to 8.0 per cent at end-December 2014, the same
level as at the end of December 2013. Inflation has, therefore, remained in the single digit range
for twenty four (24) consecutive months, indicating relative stability in the general domestic price
level. Similarly, in spite of the slight increase in food prices, especially during the festive period,
food inflation declined to 9.2 per cent at end-December 2014, compared with 9.8 and 9.3 per cent
at end-June 2014 and end-December 2013, respectively. Also, core inflation fell to 6.2 per cent at
end-December 2014, from 8.1 and 7.9 per cent at end-June 2014 and end-December 2013,
respectively (Figure 1.4).

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

SECOND HALF 2013
FIRST HALF 2014
SECOND HALF 2014
Inflation (%)
Head line (Y-o-Y)
Core (Y-o-Y)
Food (Y-o-Y)


1.2.3
Interest Rates
Towards the end of the year, interest rates generally increased, however, on the average, interest
rates in the second half of 2014were generally lower than their levels in the first half, with the
exception of savings and 1- month deposit rates which rose to 3.40 and 8.43 per cent, from their
respective levels of 3.35 and 8.31 per cent at end-June 2014.These developments were attributed,
largely, to the liquidity surfeit in the system, which had, however, been continually moderated by
the monetary tightening stance of the CBN. The average term deposit rate fell from 8.57 per cent
in the preceding half year to 8.28 per cent in the second half of 2014.Similarly, deposit rates for
other maturities fell from a range of 4.81 –9.98 per cent in the first half of 2014,to 4.43 – 9.78 per
cent in the second half of 2014 (Figure 1.5).

The average inter-bank call and open-buy-back (OBB) rates stood at 12.90 and 12.69 per cent in
the second half of 2014, up from their respective levels of 10.44 and 10.99 per cent in the
preceding half year. The average prime lending rate however, fell by 0.35 percentage point to
16.39 per cent. Average maximum lending rate also fell by 0.04 percentage point to 25.72 per cent
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

in the review period, from 25.76 per cent in the preceding half year. Consequently, the spread
between the average maximum lending and the average term deposit rates stood at 17.44
percentage points, indicating a 0.25 percentage point above the level in the first half of 2014. With
inflation at 8.0 per cent at end-December 2014, most deposit and all lending rates were positive in
real terms, the only exceptions being the average savings and 7- day maturity deposit rates. This
positive development is expected to encourage savings, promote capital accumulation and
enhance the capacity of banks to expand credit to the real sector.

Figure 1. 5: Lending and Deposit Rates


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


Figure 1. 6: Money Market Interest Rates and MPR

SECOND HALF 2013
FIRST HALF 2014
SECOND HALF 2014
Interest rates (%)
Call
OBB
MPR


1.2.4
Fiscal Operations
The Federal Government’s retained revenue for the second half of 2014 increased to N1,951.19
billion, from N1,771.27 billion in the first half, but was lower than the budget estimate of
N2,134.04 billion. Analysis of the retained revenue showed that the Federal Government’s share
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

of the Federation Account was N1,403.94 billion (71.9%); the VAT Pool Account, N55.62 billion
(2.9%); the Federal Government Independent Revenue, N284.14 billion (14.6%); SURE-P,N97.76
billion (5.0%); while others (including excess crude and NNPC additional revenue) accounted for
the balance of N109.73 billion (5.6%).Similarly, Federal Government expenditure grew by 10.5
per cent to N2,316.54 billion, from N2,096.37 billion in the first half, compared with the budgeted
expenditure ofN2,616.14 billion for the second half of 2014. Consequently, the fiscal operations
of the Federal Government resulted in an overall deficit ofN365.35 billion or 0.8 per cent of GDP,
as against the proportionate budget deficit of N482.10 billion for the second half of 2014 and
N325.10 billion recorded in the preceding half year. The deficit was financed mostly from
privatization proceeds (Figure 1.7).

The second half of 2014 also witnessed the commencement of a sustained decline in international
oil prices, a development that signalled a decline in government revenue in 2015, given the
traditional dominance of oil receipts in its revenue profile.

Figure 1. 7: Federal Government Fiscal Operations
-1000
-500

SECOND HALF 2013
FIRST HALF 2014
SECOND HALF 2014
Revenue/Expenditure (N B)
Retained revenue
Total expenditure
Budget balance

CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

2.0
DEVELOPMENTS IN THE FINANCIAL SYSTEM

2.1
Monetary and Credit Developments1
Broad money (M2) grew by 7.29 per cent to N16,833.24 billion at end-December 2014,compared
with the indicative benchmark of 15.02 per cent for fiscal 2014 and the growth of 3.08 per cent at
end-June 2014. The development was driven largely by the respective increases of 11.3 and 10.97
per cent in other assets (net) and domestic credit (net), but was moderated by the significant
decline of 15.02 per cent in foreign assets (net) of the banking system. Correspondingly, the
growth in total monetary liabilities, M2, was driven by the significant increase in quasi-money
which more than offset the decline in narrow money (M1). Further analysis of the composition of
M2 showed that the distribution became more skewed in favour of the less liquid component
(quasi money), as the gap between the two widened, especially in the last quarter of the year.

Available data indicated that M1 declined by 10.89 per cent at end-December 2014 to N6,266.68
billion, compared with the 2.88 and 5.23 per cent decline at end-June 2014 and end-December
2013, respectively. The decline at the end of the second half of 2014 was attributed to the
respective 12.28 and 5.53 per cent fall in demand deposit (DD) and currency outside banks
(COB). As a ratio of total monetary assets, COB stood at 8.1 per cent, compared with the 7.18 and
9.22 per cent at the end of the first half of 2014 and the corresponding half of 2013, respectively,
indicating a marginal improvement over the level in the preceding half year.

Figure 2. 1: Trend in Monetary Aggregates


SECOND HALF 2013
FIRST HALF 2014
SECOND HALF 2014
M2
M1
COB
Monetary Aggregates ( N B)


1 The analysis is based on the revised CBN Monetary Survey as at December 31, 2014.
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

2.1.1
Aggregate Credit to the Economy
Net domestic credit (NDC) grew by 10.97 per cent to N16,129.49 billion at end-December
2014,compared withN15,008.27 billion at the end of the preceding half year. This reflected a
12.08 per cent growth in claims on the private sector (CP), which more than offset the 21.81 per
cent fall in claims on the Federal Government (CG) (Figure 2.2).

Figure 2. 2: Credit to the Economy
-5,000


H2, 2013
H1, 2014
H2, 2014
NDC
CP
CG
Credits (N B)


2.1.1.1 Claims on the Federal Government

Net claims on the Federal Government declined significantly by 21.81 per cent to negative
N2,017.53 billion at end-December 2014, compared with the negative N1,973.60 billion and a
decline of 19.16 per cent at the end of the first half of 2014. The development, relative to the first
half, was mainly attributed to the decline in the banking system’s holdings of government
securities, reflecting the flow of bank credit away from the government sector to the private
sector. This movement might be related to the increase in CRR on public sector deposits.

2.1.1.2 Claims on the Private Sector
At N18,147.03 billion, credit to the private sector(including states, local governments and nonfinancial public enterprises) increased by 12.08 per cent, compared with the growth of 4.88 per
cent recorded at the end of the first half of 2014. The growth in private sector credit reflected,
largely, the 13.00 per cent rise in claims on the core private sector2. The impressive growth in
credit to the private sector (especially the core private sector) reflected the impact of various
policies of the Bank to enhance the lending capacity of banks and encourage increased lending to
the productive sector vis-à-vis the government sector.

2Excludes the states and local governments.
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

2.1.1.3 Consumer Credit
The volume of consumer credit by the banks improved during the second half of 2014. Available
data indicated that aggregate outstanding consumer credit stood at N848.77 billion at the end of
the review period, compared with N809.8 billion at end-June 2014. This reflected an increase of
4.81 per cent, compared with 3.49 per cent at the end of the first half of 2014. As a ratio of total
credit to the core private sector, consumer credit constituted 4.88 per cent, compared with 4.49 per
cent in the first half of 2014 (Figure 2.3). The development could be attributed, largely, to the
impact of the recent decision not to remunerate standing deposits facility (SDF) in excess of N7.5
billion. The rising consumer credit could enhance the effectiveness of monetary policy
transmission.

Figure 2. 3: Consumer Credit


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

2.1.2
Sectoral Classification of Private Sector Credit
The upward trend in the amount of credit extended to the private sector continued during the
second half of 2014. Available data indicated that total credit to the various sectors of the
economy grew significantly by 16.62 per cent to N12,629.99 billion, compared with 7.86 and
13.88 per cent growth recorded in the preceding half year and the corresponding period of 2013,
respectively. The oil and gas sector continued to attract the highest share of total credit as it
accounted for 25.70 per cent, compared with 24.33 per cent in the first half of 2014, while the
manufacturing sector accounted for 13.15 per cent of the total credit, the same level as in the
preceding half year. Agriculture, forestry and fishing category accounted for 3.96 per cent of the
total credit, indicating a 0.12 percentage point increase over the 3.84 per cent recorded in the
preceding half year (Figure 2.4 and Table 2.1).

CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Figure 2. 4: Sectoral Distribution of Credit


Table 2. 1: Sectoral Distribution of Credit

June 2014
December 2014
Sector
N'Billion
Per cent
N 'Billion
Per cent
Oil and gas

Manufacturing

General: Household Consumer
Goods/Hospitality/Religious

Information and communication

General commerce

Governments

Real estate

Construction

Agriculture, forestry and fishing

Finance and insurance

Transportation and storage

Capital market

Power and energy

Professional, scientific and technical activities

Education

Administrative and support service activities

Human health and social work activities


Sectoral Distribution (%)
Jun-14
Dec-14
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Activities of extra-territorial organizations and
bodies

Mining and quarrying

Water supply, sewerage, waste mgt. &
remediation activities

Arts, entertainment and recreation

Public utilities

Total


2.1.3
Reserve Money
Reserve money (RM) stood at N5,964.75 billion at end-December 2014, indicating an increase of
17.18 per cent, in contrast to a decline of 5.97 per cent at the end of the preceding half year. This
was higher than the indicative benchmark of N5,106.90 billion. The development reflected the
increase in net domestic assets and other assets (net) of the CBN. The corresponding increase in
the uses of reserve money was attributed to the rise in both currency-in-circulation and bank
deposits with the CBN.

2.1.4
Maturity Structure of Bank Deposits and Credits
The structure of bank credits in the second half of 2014 indicated the continued dominance of
loans and advances of short-term maturities, although with a slight improvement over the position
in the preceding half year. Credits maturing within one year accounted for 49.59 per cent,
compared with 56.6 per cent at the end of the first half of 2014. The medium-term (≥1yr and <
3yrs) and long-term (3yrs and above) maturities stood at 19.50 and 30.91 per cent, compared with
16.80 and 26.60 per cent, respectively, at the end of the first half of 2013 (Figure 2.5). The
increase in the proportion of credits with both medium- and long-term maturities may be
attributed to the effects of various policies of the Bank to de-risk the real sector and encourage
banks to grant loans of medium to long-term maturities.

Similarly, deposits of less than one-year maturity constituted 96.31 per cent (of which 73.69 per
cent had maturity of less than 30 days), compared with 95.60 per cent at end-June 2014. Further
analysis showed that the medium and long-term deposits constituted 2.69 and 1.00 per cent,
compared with 3.40 and 1.00 per cent at end-June 2014, respectively (Figure 2.6).

Notwithstanding the slight improvement in the proportion of credits with medium- and long-term
maturities during the second half of 2014, the dominance of short-term maturities in deposits of
banks continued to be a major constraint to their capacity to grant long-term credit. There is also
the challenge that this development might result in liquidity and re-pricing risks. However,
continuous implementation of the various policies by the Bank to de-risk and encourage lending
to the real sector, as well as the curtailment of inflationary pressures to ensure sustained general
price stability is expected to further improve medium to long-term lending.

CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Figure 2. 5: Distribution of Bank Loans and Advances by Maturity

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


Figure 2. 6: Maturity Structure of Bank Deposits

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


2.1.5
Market Structure of the Banking Industry
During the review period, the average market share of deposits and assets of the five largest banks
(concentration ratio–CR5) decreased to 52.42 and 50.88 per cent, respectively, from 52.85 and
51.48 in the first half of 2014.Similarly, the average market share of the largest bank, in terms of
deposits and assets, decreased to 14.61 and 13.68 per cent, respectively, from 14.80 and 13.69 per
cent in the first half of 2014.Notwithstanding the marginal improvement recorded relative to the
first half of the year, the structure of the banking industry, in the second half of 2014, remained
dominated by a few banks.

In terms of competitiveness, the industry remained competitive in both deposits and assets, as
indicated by the average Herfindahl-Hirschman Index (HHI) of the industry for deposits and
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

assets which stood at 786.66 and 750.91 (on a scale of 10,000), respectively, for the review
period, compared with 789.21 and 752.06 in the first half of 2014 (Figure 2.7).

Figure 2. 7: Market Concentration Ratios of the Banking Industry (Assets and Deposits)

49.5

50.5

51.5

52.5

53.5
SECOND HALF 2013
FIRST HALF 2014
SECOND HALF 2014
HHI
CR
CR( Assets)
CR(Deposits)
HHI (Deposits) rhs
HHI (Assets)rhs


2.2
Banks and Other Financial Institutions

2.2.1
Banking Industry Reforms
The Bank continued to implement its reform initiatives under the 2010 Banking Model. The
following milestones achieved at end-December 2014:

i.
Eleven (11) banks out of the erstwhile 24 universal banks had fully complied with the
CBN Regulation on the Scope of Banking Activities and Ancillary Matters, No 3, 2010,
while nine (9), including the three (3) bridge banks, were working towards compliance.
Four (4) banks had earlier merged with other banks;

ii.
The Asset Management Corporation of Nigeria (AMCON) had sold two (2) out of the
three (3) bridge banks - Mainstreet and Enterprise Banks - to Skye Bank Plc and Heritage
Banking Company Limited, respectively, while Keystone Bank is expected to be sold in
2015; and

iii.
Associated and Kakawa Discount Houses that were granted Approvals-In-Principle (AIPs)
to convert to merchant banks in the first half of 2014 were in the process of obtaining their
final licences.

2.2.2
Regulation of Financial Holding Companies
In order to guide the industry on the implementation of the 2010 Banking Model, the CBN, in
August 2014, issued the Guidelines for Licensing and Regulation of Financial Holding
Companies in Nigeria to complement the CBN Regulation on the Scope of Banking Activities and
Ancillary Matters, No 3, 2010. The Guideline cover, among others things, the definition and
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

structure of financial holding companies (FHCs), licensing requirements, ownership and corporate
governance.

2.2.3
Non-Interest Banks
During the review period, Tijarah Microfinance Bank (MFB) was licensed as a Non-Interest
(Islamic) MFB with State Authorization to operate in Bauchi State. The CBN, in conjunction with
Islamic Finance Council (IFC), the UK and Enhancing Financial Innovation & Access (EFlnA)
organized an interactive session for the Financial Regulation Advisory Council of Experts
(FRACE) members and members of the Non-Interest Financial Institutions’ (NIFIs’) Advisory
Committee of Experts (ACE). The session was aimed at building organizational capacity and
enhancing financial inclusion.

2.3
Other Financial Institutions
There were 3,538 Other Financial Institutions (OFIs) in Nigeria at end-December 2014, compared
with the 4,220 licensed institutions at end-June 2014, representing a decrease of 682 institutions
(16.0%). The change was attributed to the net effect of the exit of 733 BDCs owing to their
inability to meet the recapitalization requirements, the licensing of 54 new OFIs (51 MFBs and 3
FCs); and the rev0cation of two (2) MFBs licenses during the review period. The total number
comprised six (6) Development Finance Institutions (DFIs), 42 Primary Mortgage Banks (PMBs),
903 Microfinance Banks (MFBs), 64 Finance Companies (FCs) and 2,523 Bureaux de Change
(BDCs) (Table 2.2).

Table 2. 2: Institutions in the OFI Sub-sector
Institution-Type
Number
June 2014 Dec 2014
Development Finance Institutions

Primary Mortgage Banks

Microfinance Banks

Finance Companies

Bureaux de Change
3,256
2,523
Total
4,220
3,538

The total assets of the sub-sector increased by 23.2 per cent to N1,690.8 billion at end-December
2014, from N1,372.2 billion at end-June 2014. The total paid-up capital, however, decreased by
0.36 per cent to N444.8 billion at end-December 2014, from N446.4 billion at end-June 2014,
while the total net loans/advances increased by 58.03 per cent to N1,048.5 billion at endDecember 2014, from N663.5 billion at end-June 2014. Total deposits decreased by 22.81 per
cent to N357.0 billion at end-December 2014, from N462.5 billion at end-June 2014.


3Revised from 925 to reflect 71 MFB revocations not captured in the June 2014 FSR.

CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

The key developments that occurred in the sub-sector in the second-half of 2014 are outlined
below:
2.3.1
Microfinance Banks
The total assets of microfinance banks (MFBs) increased to N300.73 billion at end-December
2014, from N280.76 billion at end-June 2014, reflecting an increase of 7.11 per cent. Similarly,
the paid-up capital and shareholders’ funds of MFBs increased by 13.48 and 7.37 per cent to
N82.44 billion and N91.01 billion at end-December 2014, from N72.65 billion and N84.76
billion, at end-June 2014, respectively. The increase in capital was due largely to the
recapitalization of MFBs that upgraded from Unit to State MFBs and State to National MFBs.

Table 2. 3: Key MFB Financial Highlights

June 2014
(N’ billion)
Dec. 2014
(N’ billion)
% Change
Total Assets
280.76
300.73
7.11
Paid up Capital
72.65
82.44
13.48
Shareholders Funds
84.76
91.01
7.37
Deposit Liabilities
144.4
145.83
0.99
Loans and Advances
129.5
162.91
25.8


Total deposit liabilities and net loans/advances also increased by 0.99 and 25.80 per cent to
N145.83 billion and N162.91 billion at end-December 2014, compared with N144.4 billion and
N129.5 billion, at end-June 2014, respectively. The relative improvement in the operations of
MFBS was attributed to the impact of the CBN initiated Microfinance Certification Programme
(MCP) for the boards and management of MFBs and the growing acceptance of the microfinance
banking model. Reserves, however, decreased by N3.5 billion to N8.6 billion at end-December
2014, from N12.1 billion at end-June 2014, owing to increased loan provisioning.

2.3.1.1 Unified Application (Core Banking System) for MFBs
The Bank collaborated with development partners and other stakeholders to establish a unified
application (Core Banking System) for the MFB sub-sector. The proposed unified platform,
together with the Rural Financial Institutions (RUFIN) project for online rendition of electronic
returns by MFBs, is expected to facilitate accurate and prompt rendition of statutory returns.

2.3.1.2 Microfinance Certification Programme
In the review period, 289 candidates completed the Microfinance Certification Programme
(MCP), bringing the total certified operators to 2,882 at end-December 2014. The certified
operators were spread over 632microfinance banks, representing 71.5 per cent of the sub-sector.
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Efforts are ongoing to ensure that all the management staff of microfinance banks undergo the
certification programme.

2.3.2
Primary Mortgage Banks
The number of primary mortgage banks (PMBs) in operation increased to 42 at end-December
2014, from 40 at end-June 2014, as two (2) dormant PMBs were reactivated following their
recapitalization. National PMBs remained at 10 at end-December 2014, while State PMBs
increased to 32 from 30 at end-June 2014.

During the review period, the CBN extended the deadline, from June 30, 2014 to December 31,
2014, for some PMBs that had made progress towards recapitalization to conclude the process.

The total assets of PMBs decreased by 5.97 per cent to N389.0 billion at end-December 2014,
compared with N413.7 billion at end-June 2014. However, their paid-up capital, deposit liabilities
and loans/advances increased by 51.78, 35.33, and 22.18 per cent to N121.69 billion, N703.74
billion and N133.02 billion, respectively, at end-December 2014. Aggregate reserves declined by
74.53 per cent, from N94.61 billion to N24.10 billion, while shareholders’ funds increased by
35.95 per cent, from N107.24 billion to N145.79 billion at end-June 2014.

2.3.2.1 Cash Reserve Requirement for PMBs
In September 2014, the CBN extended the cash reserve requirement facility to PMBs. To this end,
relevant operating accounts were opened for each PMB by the Bank to ensure effective monetary
policy management.

2.3.2.2 The Nigeria Mortgage Re-finance Company Plc
During the second half of 2014, the sum of N2.88 billion was called up as the second tranche of
investment from both domestic and multilateral investors. This was in addition to the N7.05
billion earlier invested in the Nigeria Mortgage Re-finance Company (NMRC) Plc, which
translated to 1.76 billion units of shares for allotment awaiting approval by SEC, bringing the
equity capital contribution to N9.93 billion.

2.3.2.3 Uniform Underwriting Standards
In the review period, the CBN issued Uniform Underwriting Standards (UUSs) for
implementation by PMBs. The standards, which were adapted from the IFC Mortgage Toolkits,
are expected to promote uniform underwriting for the mortgage banking industry.

2.3.3
Finance Companies
The number of Finance Companies (FCs) in operation remained at 64 at end-December 2014. The
total assets/liabilities of FCs increased to N119.60 billion at end-December 2014, from N106.61
billion at end-June 2014, reflecting an increase of 12.18 per cent. Similarly, paid-up capital
increased by 3.07 per cent to N16.12 billion from N15.64 billion at end-June, 2014 and reserves
increased by 513 per cent to N2.34 billion from negative N830.03 million at end-June 2014,
owing, largely, to the operations of leasing companies which had come under the purview of the
Bank. Borrowings also increased by 6.26 per cent to N68.42 billion from N64.39 billion at endCENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

June 2014. However, loans/advances decreased by 6.60 per cent to N48.81billion at endDecember 2014, from N52.26 billion at end-June 2014.

During the review period, the Bank issued the Revised Guidelines for Finance Companies in
Nigeria with an implementation deadline of September 30, 2015. Under the Guidelines:
Leasing companies outside CBN regulatory purview that engage in finance lease business
are required to apply for a finance company licence and be subjected to CBN’s
prudential/regulatory requirements for finance companies. However, the Bank will not
regulate the operations of financial or corporate companies which render only operating
lease services.
Self-regulatory Organisations, such as the Financial Houses Association of Nigeria
(FHAN) and the Equipment Leasing Association of Nigeria (ELAN) are expected to
collaborate with the CBN in ensuring that all existing leasing companies engaged in
finance lease business are brought under the supervisory purview of the CBN.

2.3.4
Bureaux de Change
During the review period, BDCs were required to comply with the new licensing requirements
(Table 2.4) by July 31, 2014. As a result, the number of BDCs at end-December 2014 decreased
to 2,523, from 3,256 at end-June 2014, reflecting a decrease of 733 or 29.05 per cent.

Table 2. 4: Highlights of the New Licensing Requirements

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

2.3.5
The Development Finance Institutions
The total assets of the six (6) reporting development finance institutions (DFIs) increased by 53.3
per cent to N881.5 billion at end-December 2014, compared with N575.1 billion at end-June
2014. The increase was due, largely, to improved operational performance arising from their
participation in various intervention funds channelled by the CBN to stimulate economic growth.
Furthermore, the net loans/advances of the institutions increased by 103.62 per cent to N703.7
billion at end-December 2014, from N345.6 billion at end-June 2014.

CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

2.3.5.1 Development Bank of Nigeria
The Development Bank of Nigeria (DBN) established by the Federal Government of Nigeria
(FGN) was granted an Approval-in-Principle (AIP) by the CBN in September 2014. DBN is
expected to have a paid-up capital of N100 billion to be taken up by the FGN in partnership with
other potential equity investors and development partners including the World Bank and African
Development Bank. A wholesale DFI (WDFI) is envisioned to complement the efforts of other
existing development finance institutions towards real sector development and to leverage current
players on the SME and agriculture finance value chain, through participating financial
institutions.
2.3.5.2 Guidelines for Development Finance Institutions
During the review period, the CBN issued guidelines for the operations of both retail and
wholesale DFIs for private investors to operate DFIs. The guidelines provided for the licensing,
regulation, supervision, and operations of both WDFIs and Retail DFIs (RDFIs). In particular, the
minimum capital requirements for WDFI and RDFI are N100.0 billion and N10.0 billion,
respectively.

2.4
Financial Inclusion
In furtherance of its effort to implement measures aimed at enhancing access to basic
banking facilities and financial services, the Bank, in the review period, conducted
another on-site verification of the status of compliance of banks and other financial
institutions (OFIs) with the provisions of the Tiered KYC Circular and financial
inclusion measures in the CBN AML/CFT Regulations.

The verification exercise, which was conducted in 22 commercial banks and 2 microfinance
banks revealed that as at end-September 2014, 18 banks and 2 MFBs had commenced the
implementation of the Tiered KYC requirements, while 4 banks were yet to commence.
Furthermore, only ten (10) banks were fully compliant, eight (8) partially compliant while four (4)
banks and two (2) MFBs were non-compliant.

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

2.4.1
Financial Literacy
The Bank continued to undertake a series of activities during the review period in pursuit of the
implementation of financial literacy framework. The activities conducted were as follows:

Financial Literacy and Consumer Protection Sensitization and Mass Awareness
Programme in five (5) states across the Federation during the period under review, in
addition to seven (7) states covered in the first half of 2014;
Financial Literacy Advocacy/School Mentoring Programme in 14 secondary schools
across the six (6) geo-political zones and a financial literacy interactive/advocacy session
for junior secondary school students;
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Collaboration with relevant stakeholders 4 to develop an MoU that would support the
deployment of an end-to-end digital financial services infrastructure for the realization of
the financial inclusion target; and
National Baseline Survey on Financial Literacy in Nigeria, which involved:
Development of the segmentation model that would be used during data analysis,
Analysis of the data collected from the field during the administration of the survey,
and
Commencement of the production of a final report highlighting the findings of the
Financial Literacy Survey.

2.5
Financial Markets

2.5.1
The Money Market
At its November 2014 MPC meeting, the Bank further tightened its monetary policy stance by
increasing the Monetary Policy Rate (MPR) from 12.00 to 13.00 per cent and the cash reserve
ratio (CRR) on private sector deposits from 15.00 to 20.00 per cent. In addition, it retained the
CRR on public sector deposits at 75.00 per cent. The net foreign currency trading position limit
was reviewed downward from 1.0 to zero per cent on December 17, 2014.

Money market rates moved in response to these developmentsand peaked at 23.46 and 26.15 per
cent for OBB and inter-bank, respectively, in December 2014. The monthly weighted average
inter-bank call rate ranged from 10.89 to 26.15 per cent, while OBB rates ranged from 10.48 to
23.46 per cent during the review period. The weighted average monthly OBB and inter-bank call
rates closed at 23.46 and 26.15 per cent, respectively, at end-December 2014, from 10.57 and
10.50 per cent at end-June 2014.

2.5.1.1 Nigerian Treasury Bills
Nigerian Treasury Bills (NTBs) for 91-, 182- and 364-day tenors worth N1,649.75 billion were
offered and allotted in the review period. This indicated a decrease of 26.01 per cent compared
with N2,229.72 billion in the first half of 2014. The total public subscription stood at N2,434.19
billion in the second half of 2014, compared with N5,609.37 billion in the preceding period. This
development could be attributable to investors’ response to CBN policies of raising its MPR from
12 to 13 per cent and the consequent higher NTB rates.

The holding structure of investments in NTBs indicated that banks and discount houses took up
N660.38 billion (40.03%), non-bank investors N901.13 billion (54.62%), while the CBN took up
the balance of N88.24 billion (5.35%). The average marginal rates ranged from 9.58 to 11.25 per
cent for the 91-day, 10.10 to 14.48 per cent for the 182-day, and 10.14 to 13.58 per cent for the
364-day tenors.


4 Key stakeholders included the FMF, DFID, Bill & Melinda Gates Foundation, and EFinA.
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

At end-December 2014, investment in NTBs by banks and discount houses accounted for 69.94
per cent of the NTBs outstanding, the non-bank investors accounted for 30.00 per cent, while the
Bank accounted for the balance of 0.06 per cent.

Figure 2. 8: Money Market Rates Movements, 2014

2.5.2
The Foreign Exchange Market
During the review period, the CBN sustained its efforts in maintaining the stability of the foreign
exchange rate. However, exchange rates weakened at both the inter-bank and bureaux de change
(BDC) market segments. The weakening was due, largely, to the falling oil prices resulting in
dwindling external reserves as well as sustained demand pressure.
The CBN continued to conduct the bi-weekly auctions and also intervened regularly in the interbank segment of the market. Consequently, exchange rate at the official window remained
relatively stable for most part of 2014, thereby sustaining investor confidence. However, the
exchange rate rose in November and December 2014, following the adjustment of the midpoint of
the official rate from N155/US$ to N168/US$ and the widening of the band from ±3 to ±5 per
cent.
The average foreign exchange rate at the rDAS, inter-bank and BDCs segments depreciated by
7.30, 9.71 and 11.30 per cent to N169.6800/US$, N180.3286/US$ and N188.4524/US$,
respectively at end-December 2014.
January
February
March
April
May
June
July
August
September
October
November December
Inter-bank

OBB

SDF

MPR

SLF


Inter-bank; OBB, SDF, MPR and SLF Rates (%)
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Figure 2. 9: rDAS, Inter-bank and BDC Rates, 2014

2.5.3
The Capital Market
Activities on the floor of the Nigerian Stock Exchange (NSE) were bearish during the review
period as both the All Share Index (ASI) and Market Capitalization (MC) generally trended
downwards. The decline was due largely to the profit taking activities of investors and increased
net capital outflows, as some foreign investors sold off because of concerns over currency
depreciation in the face of the steady decline in external reserves and international crude oil
prices.
2.5.3.1 The Bond Market
Total bonds outstanding at end-December 2014 stood at N5,695.37 billion, of which FGN,
agency, sub-national and corporate bonds constituted N4,783.63 billion (83.99%), N325.97 billion
(5.72%), N461.14 billion (8.10%) and N124.63 billion (2.19%), respectively. The end –December
2014 figure reflected7.42 per cent increase over the end-June 2014 figures of N6,314.33 billion,
composed of FGN, agency, sub-national and corporate bonds valued N4,370.14 billion (69.21%),
N1,179.51 (18.68%), N572.71 billion (9.07%) and N191.96 billion (3.04%), respectively.


Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
W/DAS-SPT (incl. 1% comm.)

Inter-Bank

BDC


Exchange Rate
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Table 2. 5: Outstanding Bonds

June 2014
(N’ billion)
December 2014
(N’ billion)
% Change
FGN
4,370.14
4,783.63
9.46
Agency
1,179.51
325.97
-72.36
Sub-National
572.71
461.14
-19.48
Corporate
191.96
124.63
-35.08
Total
6,314.33
5,695.37
-9.80

FGN Bonds
New issues and re-openings of FGN Bonds series 1, 2, and 3 were auctioned in the second half of
2014. The total value of FGN Bonds offered for sale were valued N503.61 billion, while public
subscriptions and sales stood at N1,027.40 billion and N493.31 billion, respectively. The oversubscription was attributed to the high level of liquidity in the banking system, investors’
preference for long-term instruments and the attractive rates.

Demand for FGN Bonds at the secondary market declined as a result of the Bank’s decision to
further tighten its monetary policy stance. There were increased yields on the Bonds at endDecember 2014, compared with the position at end-June 2014 (Figure 2.10). With headline
inflation at 8.00 per cent at end-December 2014, FGN bonds remained attractive to investors.

Figure 2. 10: Yield Curves for Nigeria

Source: Financial Markets Dealers Quotations


Yield %
Time to Maturity (Years)
Dec-2014
Jun-2014
Dec-2013
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Agency Bonds
During the review period, no bond was issued by FGN agencies, while bonds valued at N853.44
billion were redeemed by AMCON. Consequently, total outstanding bonds by FGN agencies
stood at N325.97 billion, comprising FMBN N30.56 billion and Local Contractors Receivables
Management (LCRM) Limited N295.41 billion.

Sub-National Bonds
In the second half of 2014, there was no new issue, compared with the first half of the year when
three (3) state governments issued bonds valued N15.00 billion. However, two (2) state
governments redeemed their bonds valued N23.00 billion. The total outstanding bonds held by 15
state governments stood at N461.14 billion.

Corporate Bonds
Two (2) corporate bonds valued N15.50 billion were issued in the review period, compared with a
nil position in the first half of 2014.

Table 2. 6: Corporate Bonds Issued in the second half of 2014
Company
Description
Value
(N Billion)
Issue Date
Stanbic IBTC
182D T.bills+1.20 Stanbic IA 30-Sep-2024
0.1
Sept. 14
Stanbic IBTC
13.25 Stanbic IB 30-Sep-2024
15.4
Sept. 14
Total

15.5

2.5.3.2 The Equities Market
The NSE ASI closed at 34,657.15 at end-December 2014, from 42,482.49 at end-June 2014.
Foreign portfolio investments in the market were valuedN692.39 billion, while divestments
amounted to N846.53 billion, reflecting a net outflow of N154.14 billion at end-December 2014.
Although the market witnessed relative stability at the beginning of the year up to the third
quarter, there was some volatility in the fourth quarter as a result of declining crude oil prices and
foreign exchange reserves.

The market for new equity listings remained relatively flat during the second half of 2014, as only
three (3) new equities (one on Alternative Securities Market and two [2] Exchange Trust Fund)
were listed. Four companies were delisted as a result of non-compliance with the post-listing rules
of the NSE thereby bringing the number of listed companies and equities to 189 and 197,
respectively.

In efforts to deepen the capital market, the appropriate authorities took the following initiatives:
The Securities and Exchange Commission (SEC) conducted a study on the feasibility of
derivatives in the capital market and to assess market readiness, the infrastructure
requirements, and the sequencing for the launch of risk management products in the
Nigerian capital market;
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

The NSE signed a capital market agreement with the London Stock Exchange Group
(LSEG) to strengthen cooperation and promote mutual development between the two
exchanges;
The NSE, the SEC and the Central Securities Clearing System Plc completed a
Transaction Cost Analysis (TCA) of the implicit and explicit costs of trading on the
Nigerian Stock Exchange, compared with other regional and global exchanges, with a
view to implementing a new pricing structure in 2015;
The NSE launched direct market access (DMA) facility as a first step to the
implementation of the sponsored access facility under the West African Capital Markets
Integration (WACMI) programme, thereby giving global investors more control over the
final execution of their orders, as well as their ability to exploit price and liquidity
opportunities;
The NSE launched a new, user-friendly website (X-Web) to improve accessibility, for
both listed company information and other key data points relating to the business of the
Exchange; and
The NSE, in partnership with the Convention on Business Integrity (CBI), launched the
Corporate Governance Rating System (CGRS) designed to rate listed companies, based on
their corporate governance practices, thereby enhancing market confidence. Participation
by listed companies will become mandatory in 2015.
2.6
Real Sector Interventions

2.6.1
Risk Mitigation and Insurance Schemes
The various risk mitigation and insurance schemes initiated by the Bank are aimed at reducing the
risk faced by the banks in providing increased access to financial services to the real sector. In this
regard, various risk sharing and guarantee schemes were initiated over the years to encourage
increased lending to the sector, while minimizing the risk inherent in the lending. Updates on the
activities under the various initiatives are highlighted below:

2.6.1.1 The Nigeria Incentive-based Risk Sharing System for Agricultural Lending Plc
Nigeria Incentive-based Risk Sharing System for Agricultural Lending (NIRSAL) Plc was
established in 2010, to de-risk agricultural lending and unlock financial resources for agricultural
value chain development. During the review period, NIRSAL issued 14 Credit Risk Guarantees
(CRGs) valued atN4.35 billion, compared with four (4) valued atN2.06 billion at end-June 2014.
The total number and value of CRGs under the scheme at end-December 2014 were 60 and
N20.627 billion, respectively.

The Growth Enhancement Scheme
Under the Growth Enhancement Scheme (GES), NIRSAL guaranteed N7.434 billion accessed by
40 agro-dealers during the period under review, compared with the N5.66 billion accessed by 24
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

agro-dealers in the first half of the year. It also paid N149.92 million as interest drawback to
borrowers, compared with N163.83 million paid in the first half. The aggregate for the guarantee
and interest drawback at end-December 2014 stood at N32.99 billion and N348.82 million,
respectively.

Insurance Facility
During the review period, three (3) private insurance companies expanded their insurance
portfolio to cover agricultural insurance. NIRSAL Plc is expected to collaborate with them to
facilitate the development of innovative customer-friendly agricultural insurance products.

Technical Assistance Facility
On capacity building, a total of 27,142 farmers were trained nationwide. Out of this, 15,000 cocoa
farmers were trained in eight (8) states, 1,822 cotton farmers were trained in two (2) states, while
500 rice farmers were trained in one (1) other state.

Bank Rating and Incentive Mechanisms
During the period, the sums of N1.5 billion and N15 billion were set aside for the Bank Rating
and Bank Incentive Mechanisms respectively. Under these mechanisms, banks/counterparties will
be rated by reputable, independent organizations on the basis of the projects they finance in the
agricultural value chains and the impact of their lending on food security, social life, rural
employment, and incomes. Subsequently, banks with higher ratings will be further incentivized to
lend more to projects in the agricultural value chains.

2.6.1.2 The Agricultural Credit Guarantee Scheme
A total of 36,909 loans, valued N7.068 billion, granted by 8 commercial and 42 microfinance
banks were guaranteed during the review period, compared with the 35,413 loans, valued N5.93
billion, guaranteed in the first half of 2014. These outcomes reflected increases of 4.22 and 19.19
per cent in the number and value of loans guaranteed, respectively. The enhanced performance
was attributed to the increase in the number of participating MFBs and prompt payment of interest
drawback claims which encouraged more farmers to patronize the Scheme.

2.6.1.3 The Small and Medium Enterprises Credit Guarantee Scheme
Activities under the Scheme in the second half of 2014 increased as the number of facilities
guaranteed increased from four (4) to five (5) and the value from N153.23 million to N400.00
million, reflecting a 161.05 per cent increase in value, compared with the first half of 2014.

Analysis of the distribution of guaranteed projects showed that the services sector accounted for
62 projects (74.73%), followed by manufacturing with 15 projects (23.37%), agro-allied with3
projects (1.33%) and the health sector with1 project (0.57%).

The total number of fully-repaid project loans during the period under review stood at eleven (11)
valued at N750.60 million, bringing the cumulative number to thirty four (34) valued N2.295
billion, since the inception of the Scheme in 2010.
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

2.6.1.4 The Movable Collateral Registry (MCR)
The Bank continued to collaborate with the International Finance Corporation/World Bank Group
(IFC/WBG) and other key stakeholders to develop a legal and institutional regime to promote the
use of movable properties as collateral for loans in Nigeria, known as the Secured Transaction and
National Collateral Registry (ST & NCR).

Activities under the MCR during the review period included the following:
Execution of a two-year cooperative agreement with the IFC;
Issuance of the Regulation on the National Collateral Registry;
Advertisement of expression of interest (EOI) by the IFC/WBG for the development of
the Collateral Registry IT Software; and
Commencement of the development of the ST & NCR draft Bill.

2.6.2
Credit Support Schemes
2.6.2.1 The Commercial Agriculture Credit Scheme
During the review period, under the Commercial Agriculture Credit Scheme (CACS), a total of
N28.74 billion was disbursed to 52 projects through 12 banks, compared with N8.18 billion
disbursed to 17 projects through 8 banks in the first half of 2014. This indicated increases of
205.88 per cent in number and 251.3 per cent in value, respectively, of the projects financed. An
analysis of the total number of projects also showed that production, processing, marketing and
input supplies accounted for 59.61, 26.92, 7.69 and 5.78 per cent, respectively. Recoveries on the
projects amounted to N61.85 billion, compared with N6.92 billion in the first half of 2014,
reflecting an increase of 793.79 per cent.

The cumulative amount disbursed under the Scheme at end-December 2014 stood at N263.025
billion to346 projects, while N72.399 billion was repaid by 185 projects.
2.6.2.2 The Power and Airline Intervention Fund
During the review period, N3.19 billion was released to the Bank of Industry (BOI) in respect of
two (2) power projects, compared with N508 million disbursed to one (1) project in the first half
of 2014. A total of N9.02 billion was also paid back by borrowers under the Scheme, compared
with N19.77 billion in the first half. The cumulative amount released to BOI from the inception of
the Scheme in 2010, stood at N236.36 billion disbursed through 14 commercial banks in respect
of fifty three (53) projects. These comprised thirty eight (38) power projects valued at N118.93
billion and fifteen (15) airline projects valued at N117.43 billion.

2.6.2.3 The Nigeria Electricity Market Stabilization Facility
The Nigeria Electricity Market Stabilization Facility (NEMSF) is a collaborative initiative
between the Bank and the Ministries of Petroleum Resources and Power, the Nigerian Electricity
Regulatory Commission (NERC), the Nigerian National Petroleum Corporation (NNPC) and
Electricity Transmission Company of Nigeria. The objective is to address the challenges of power
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

and gas sectors in order to fast-track the development of a viable and sustainable energy market in
Nigeria.

During the review period, the Bank engaged relevant transaction and legal advisers as well as
fund managers towards setting up a special purpose vehicle for the management of the Facility.
The Bank also provided the N220 billion fund needed to establish the Energy Intervention Facility
(EIF) and signed definitive implementation agreements with other key stakeholders, including
relevant government ministries, departments and agencies.

2.6.2.4 The SME Restructuring and Refinancing Facility
The SME Restructuring and Refinancing Facility (RRF) was established to fast-track the
development of the manufacturing sector of the Nigerian economy by facilitating access to credit
by manufacturers, improving the financial position of banks, generating employment and
increasing foreign exchange earnings, among others.

The total amount disbursed under the SME Restructuring and Refinancing Facility (RRF)in the
second half of 2014 stood at N33 billion, as against the N17.8 billion disbursed in the first half of
2014.The cumulative disbursements to 601 projects, from the inception of the Scheme to endDecember 2014, stood at N339.73 billion.

2.6.2.5 The Real Sector Support Facility
In November 2014, the Bank established a N300 billion Real Sector Support Facility (RSSF) to
replace the RRF, in order to address the funding needs of large ticket SMEs. The RSSF is to be
disbursed at 9 per cent with a tenor of 15 years. Having largely achieved the objective for which
the RRF was established, the Bank decided to refocus its intervention on new/start-up projects in
the real sector (manufacturing and agricultural value chain SMEs) of the economy.

2.6.2.6 The Micro, Small and Medium Enterprises Development Fund (MSMEDF)
In order to improve access to finance by the micro, small and medium enterprises (MSME) subsector of the economy, the N220 billion MSMEDF was inaugurated at the 8th Annual MSME
Finance Conference/Entrepreneurship Awards in August 2014.

Other activities carried out under the auspices of the Fund during the review period included:

Disbursement of N4.629 billion to thirteen (13) Participating Financial Institutions (PFIs)
and five (5) state governments for on-lending to eligible beneficiaries;

Capacity building and sensitization programmes in 33 states; and

Development and signing of memoranda of understanding with 22 state governments and
the FCT.
2.6.2.7 Entrepreneurship Development Centres
A total of 3,260 participants were trained by the new Entrepreneurship Development Centres
(EDCs) located in three (3) states, compared with 3,101 in the first half of 2014. This resulted in
the creation of 3,659 jobs, compared with 2,703 in the first half of 2014. In addition, 1,170 of the
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

trainees accessed credits from banks for start-ups and expansion of existing businesses compared
with 904 in the first half of 2014.

2.7
The External Sector
At end-December 2014, gross external reserves declined to US$34.24 billion (equivalent of 7
months of imports cover)from US$37.33 billion at end-June 2014 (equivalent of 8.7 months of
imports cover) due, largely, to the fall in oil prices and demand for Nigerian crude. This created
pressure on the external reserves which was exacerbated by high demand for foreign exchange in
the rDAS and the inter-bank segments of the foreign exchange market. The high demand was
driven mostly by the excess liquidity in the banking system and speculative activities.

Total inflow of foreign exchange was US$23.66 billion, compared with US$22.89 billion
recorded in the first half of 2014. This represented an increase of US$0.77 billion or 3.4 per cent
which was due, largely, to the proceeds received through inter-bank swaps. Total outflow
decreased by US$2.23 billion or 7.8 per cent to US$26.27 billion when compared with US$28.50
billion in the first half of 2014. This development reflected the decline in foreign exchange sales
by the Bank in the rDAS and the BDC segments of the market.

The net outflow from the external reserves was US$2.61 billion, compared with US$5.61 billion
recorded in the first half of 2014. The net outflow of US$2.61 billion, coupled with the unrealized
exchange rate loss of US$0.48 billion, accounted for the US$3.09 billion difference between the
level of reserves at end-June 2014 (US$37.33 billion) and at end-December 2014 (US$34.24
billion).

As part of measures to effectively manage the external reserves, the Bank took the following
initiatives during the review period:
Directed banks to utilize, within two (2) working days of delivery, all funds purchased
through the CBN interventions in the inter-bank market, failing which such funds would
be returned at the original purchase rates;
Required that funding of the importation of electronics, finished products, information
technology, generators, telecommunication equipment and invisible transactions shall be
from the inter-bank foreign exchange market only;
Increased the MPR to 13 from 12 per cent and the CRR on private sector deposits to 20
from 15 per cent; and
Adjusted the midpoint of the official rate to N168/US$ from N155/US$, and widened the
corridor from ±3 to ±5 per cent.


CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

3.0
REGULATORY AND SUPERVISORY ACTIVITIES

3.1
Macro-Prudential Supervision
3.1.1
Financial Soundness Indicators
3.1.1.1 Asset-based Indicators
Most asset-based indicators revealed improvements in asset quality in the banking sector in the
second half of 2014. The ratio of non-performing loans (NPLs) to gross loans declined by 0.62
percentage point to 2.88 per cent at end-December 2014. The improvement in asset quality could
be attributable to improved risk management and corporate governance practices as well as the
write-off of non-performing loans during the preparation of the end-of-year accounts. The ratio of
core liquid assets to short-term liabilities increased marginally by 0.1 percentage point to 16.7 per
cent at end-December 2014, compared with 16.6 per cent at end-June 2014. However, the ratio of
core liquid assets to total assets decreased by 0.3 percentage point to 11.4 per cent at endDecember 2014, from 11.7 per cent at end-June 2014 (Figure 3.1).

Figure 3. 1: Banking Industry NPLs to Gross Loans


End-December 2013
End-June 2014
End-December 2014
NPLs to Gross Loans (%)
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Figure 3. 2: Banking Industry Liquidity Indicators


3.1.1.2 Capital-based Indicators
The ratio of regulatory capital to risk weighted assets stood at 17.2 per cent at end-December 2014
showing an increase of 0.8 and 0.1 percentage points above the levels at end-June 2014, and endDecember 2013, respectively. However, the ratio of tier 1 capital to risk weighted assets, which
stood at 15.5 per cent at end-December 2014, was 0.7 and 1.7 percentage points below the levels
at end-June 2014 and end-December 2013, respectively (Figure 3.3).

The industry ratio of non-performing loans (net of provisions) to capital declined from 5.6 per
cent at end-June 2014 to 4.1 per cent at end-December 2014, showing an improvement in the
banking sector’s capacity to absorb losses.

End December 2013
End June 2014
End December 2014
Per cent
Liquid assets (core) to total assets
Liquid assets (core) to short-term liabilities
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Figure 3. 3: Banking Industry Capital Adequacy Indicators


3.1.1.3 Income and Expense-based Indicators
The ratio of interest margin to gross income declined to 51.2 per cent in the review period, from
62.7 per cent at end-June 2014. The decrease reflected the efforts of the authorities to reduce the
high lending rates in the industry. Similarly, the ratio of non-interest expenses to gross income
decreased by 8.6 percentage points to 56.9 per cent at end-December 2014, from 65.5 percent at
end-June 2014, while personnel expenses as a ratio of non-interest expenses declined by 1.6
percentage points to 36.6 per cent at end-December 2014, from 38.2 per cent at end-June 2014.

Table 3. 1: Selected Financial Soundness Indicators (FSIs) of the Nigerian Banking Industry* (All
figures are in percentages, except otherwise indicated)
Indicators


End-
Jun
EndDec
EndJun
EndDec
EndJun
EndDec
EndJun
EndDec
EndJun
EndDec
EndJun
End-
Dec
1. Assets-based Indicators
Non-performing loans
to gross loans *

Liquid assets (core) to
total assets*

Liquid assets (core) to


End December 2013
End June 2014
End December 2014
Capital Adequacy (%)
Regulatory capital to risk-weighted assets
Regulatory Tier 1 capital to risk-weighted assets
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

short-term liabilities*
2. Capital-based Indicators
Regulatory capital to
risk-weighted assets*

Regulatory Tier 1
capital to riskweighted assets*

Non-performing loans
net of provisions to
capital *

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

Non-interest expenses
to gross income*

Personnel expenses to
non-interest expenses

Note: *FSIs are computed based on IMF guidelines. The indicators for the period End-June 2009 to End-December
2013 are revised.
** Provisional

3.2
Banking Industry Stress Tests
Stress tests were conducted at end-December 2014 with the overall objective of identifying
vulnerabilities in the banking industry that could lead to an adverse systemic impact, and taking
appropriate policy measures.

The tests captured the idiosyncratic nature of individual bank's balance sheet and macroprudential concerns, using both the bottom-up and top-down approaches specified in the modified
IMF's stress test framework. Assessments of the resilience of the Nigerian banking system were
done by applying a series of exceptional but plausible shocks and scenarios, which effectively
translated single factor and multifactor shocks into banks’ balance sheets.

The exercise covered the 23 banks in the system, using the following risk channels: credit,
liquidity, interest rates, foreign exchange rates, and foreign exchange trading risks. The resilience
of the banking system was assessed against a defined benchmark of 10 per cent CAR, 30 per cent
liquidity ratio, and 5 per cent NPL. They were also assessed on the basis of return on asset (ROA)
and return on equity (ROE).For systemic and peer assessments, banks were classified into three
groups, based on asset size as follows: Large banks (assets >N1 trillion); medium (assets ≥N500
billion<N1 trillion); and small (assets <N500 billion).
3.2.1
The Baseline Position
The baseline (pre-shock) capital adequacy ratios (CARs) for the banking industry as well as for
large, medium and small banks stood at 17.16, 17.54, 14.55 and 13.77 per cent, respectively at
end-December 2014. These reflected 0.73, 0.64, 0.12 and negative 2.29 percentage point change,
respectively, from their end-June 2014 positions. Similarly, the pre-shock liquidity ratios for the
banking industry and for large, medium and small banks were 45.77, 43.44, 52.86 and 50.51 per
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

cent, respectively. These reflected decreases of 4.14, 3.73, 6.17, and 4.31 percentage points,
respectively, from their levels at end-June 2014 (Tables 3.2 and 3.3).

Table 3. 2: Baseline CARs

Banks

Banking
Industry
Large
Medium
Small
December 2014 (%)

June 2014(%)

Percentage Point
Change


Table 3. 3: Baseline Liquidity Ratios

Banks

Banking
Industry
Large
Medium
Small
December 2014 (%)

June 2014 (%)

Percentage Point
Change


Figure 3. 4: Number of Banks with CARs in Each Bucket

Banks with CAR
≥15%
Banks with CAR
≥10% but < 15%
Banks with CAR <
10% but> 5%
Banks with CAR ≤
5% but> 0%
Banks with CAR
≤0%
Banks with CAR ≥15%
Banks with CAR ≥10% but < 15%
Banks with CAR < 10% but> 5%
Banks with CAR ≤ 5% but> 0%
Banks with CAR ≤0%
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Figure 3. 5: Number of Banks with LRs in Each Bucket

Figure 3. 6: Baseline (Pre-shock) CARs (%)

The pre-shock ROA of the banking industry, large, medium and small banks were 3.13, 3.39, 3.28
and 2.08 per cent, respectively. These reflected increases of 1.78, 1.86, 1.94 and 1.50 percentage
points, respectively, over June 2014 positions. On the other hand, the ROE of the banking
industry, large, medium and small banks increased to 21.23, 21.12, 25.18 and 16.22 per cent in
December 2014, from 9.50, 10.56, 9.63 and 4.29 per cent in June2014, respectively. These
indicated increases of 11.73, 10.56, 15.55 and 11.93 percentage points for the banking industry,
large, medium and small banks, respectively (Figure 3.7).

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

June -2014 CAR
Dec -2014 CAR
June -2014 Liquidty Ratio
Dec-2014 Liquidty Ratio
Banking Industry
Large Banks
Medium Banks
Small Banks
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Figure 3. 7: Baseline (Pre-shock) ROA and ROE (%)

3.2.2
Solvency Stress Test

Credit Risk
The banking industry, as well as large and medium banks were resilient to credit risk, as the
impact of the most severe shock of a 200 per cent NPL increase resulted in their CARs remaining
above the 10 per cent required minimum (13.72%, 14.94% and 11.19% for the banking industry,
large and medium banks respectively) (Table 3.4). The small banks, however, showed significant
vulnerability to the shock of a 200 per cent NPL increase as their CAR fell to 8.85 per cent. Under
this scenario, 16 banks maintained CARs above 10%, while 5 had CARs ≤10% but ≥5%.
Furthermore, one (1) bank had CAR <5% but ≥0% and one other bank had CAR<0% (Table 3.5).

Table 3. 4 General Credit Shocks

Solvency Ratios After Shocks
All Banks
Large Banks
Medium
Small
Shock 1av-50% NPLs increase

Shock 1avi-100% NPLs increase

Shock 1avii-200% NPLs increase 13.72
14.94
11.19
8.85

Table 3. 5: Number of Banks with CARs under Respective General Credit Shocks
<0%
≥0 &<5
≥5 &
≤10
>10
&<15
≥15
Total
Shock 1av-50% NPLs increase

Shock 1avi-100% NPLs increase

Shock 1avii-200% NPLs increase

Credit Concentration Risk
Under the scenario of “Five biggest corporate obligors” credit facilities shifting from performing
to sub-standard (10% provision)” and “from sub-standard to doubtful (50% provision)”, the

June -2014 ROA
Dec-2014 ROA
June-2014 ROE
Dec-2014 ROE
Banking Industry
Large Banks
Medium Banks
Small Banks
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

banking industry and all peered banks showed significant resilience to credit concentration risk as
their CARs remained above 10 per cent, except the small banks, whose CAR fell to 8.33 per cent
(Table 3.6). However, when their facilities shifted to lost (100% provision), the CARs of the
banking industry, large, medium and small banks fell below the regulatory threshold of 10 per
cent to 6.72, 7.20, 6.92 and 2.15 per cent, respectively (Table 3.6 and Figure 3.8).

Table 3. 6: Effect of Credit Concentration Risk on CARs

All Banks Large Banks Medium Small
Baseline CAR

Credit Concentration Shock on 5 Biggest
Corporate Obligors Credit Facilities
Solvency Ratio After Shocks
All Banks
Large Banks
Medium
Small
Shift from Performing to Sub-standard (10%)

Shift to Doubtful (50%)

Shift to Lost (100%)


Figure 3. 8: Credit Concentration Risk

Liquidity Risk
Liquidity risk in the banking industry was adjudged mild as the impact of the most severe shock, a
15 per cent withdrawal of 20 largest deposits, resulted in the liquidity ratio falling by 2.29
percentage points, from 45.77 to 43.48 per cent. Similarly, under the same shock scenario, large,
medium and small banks exhibited the same trajectory as their liquidity ratio dropped to 41.35,
49.53 and 47.10 from 43.44, 52.86 and 50.51 per cent respectively. The banking industry and the
peered banks were, therefore, resilient to liquidity risk, indicating relatively diverse sources of
funding (Table 3.7).


Baseline (December 2014)
Credit facilities shifting from doubtful to lost (100%)
All banks (23)
Large banks (8)
Medium-sized banks(5)
Small banks (10)
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Table 3. 7: Impact of Runs on Liquidity Ratios
Liquidity Shocks
Banking
Industry
(%)
Large
Banks
(%)
Medium
Banks
(%)
Small
Banks
(%)
Baseline

Shock 6gi ( 5% Run on 10 largest Deposits)

Shock 6gii ( 10% Run on 10 largest Deposits)

Shock 6giii ( 15% Run on 10 largest Deposits)

Shock 6hi ( 5% Run on 20 largest Deposits)

Shock 6hii ( 10% Run on 20 largest Deposits)

Shock 6hiii ( 15% Run on 20 largest Deposits)


Interest Rate Risk
Under the most severe shock of a 1,000bps downward shift in the yield curve, the CARs of the
banking industry, medium and small banks slightly deteriorated from the baseline position to
17.02, 13.88 and 13.55 per cent respectively. However, the CAR for large banks marginally
increased to 17.55 per cent (Figure 3.9).

Figure 3. 9: Impact of Interest Rate Shock on CARs


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)
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Figure 3. 10: Interest Rate Risk


Under the same shock scenario, the ROA for the banking industry, medium and small banks
deteriorated marginally to 3.01, 2.57 and 1.87 per cent respectively, and their respective ROE
deteriorated marginally to 20.38, 19.73 and 14.58 per cent. However, the ROA and ROE of the
large banks increased marginally to 3.4 and 21.21 per cent, respectively (Figure 3.10).

The industry was adjudged resilient to interest rate risk, given the relative stability of its CAR,
ROA and ROE after a severe shock of 1,000 bps parallel downward shift in the yield curve was
induced.

Table 3. 8: Impact of Selected Shocks on CARs, ROA AND ROE

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

Baseline ROA

Baseline ROE

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

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

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

CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Exchange Rate Risk
In line with the appreciating trend of the US$ against the naira, the impact of exchange rate on the
banks’ balance sheet was assessed via default on loans granted in foreign currency in respect of
whose repayment would be in the same currency. The naira exchange rate depreciation was
calibrated to assume a one-to-one percentage default on the exposures.

The banks showed great resilience to foreign exchange risk as their capital only experienced
significant deterioration after the impact of “a 50 per cent exchange rate depreciation" shock was
induced on their net foreign credit exposure. At this point, four (4) banks with baseline CAR
above 10 per cent, slipped below the minimum regulatory threshold (Table 3.9).

Table 3. 9: Number of Banks with CARs Outcomes under Various Shock Scenarios
CAR (%)
<0
≥0 &<5
≥5 &<10
≥10 &<15
≥15
Baseline

Shock 4bi (10% depreciation in naira exchange rate)

Shock 4bii (20% depreciation in naira exchange rate)

Shock 4biii (50% depreciation in naira exchange rate)

Table 3. 10: CARs of Banks under Various Shock Scenarios

Similarly, under the same shock scenarios, the CARs of the industry, large, medium and small
banks were above the minimum threshold of 10 per cent, indicating their resilience to foreign
exchange risk (Table 3.10).

Foreign Exchange Trading Risk
The results of the stress tests showed that the banking industry was resilient to foreign exchange
trading risk. The banks’ pre-shock positions, both in terms of the impact on ROA and ROE,
changed only marginally, even after an induced 100 per cent decline in foreign exchange trading
Shock 5biv (1000bps downward parallel shift in yield curve)

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

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

Single Factor Shocks
CARs After Shocks
Banks

All
Large
Medium
Small
Shock 4bi (10% depreciation in naira
exchange rate)

Shock 4bii (20% depreciation in naira
exchange rate)

Shock 4biii (50% depreciation in naira
exchange rate)

CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

income. This was mainly due to the high net profit positions of the banks relative to the size of
their FX trading income (Table 3.11).

Table 3. 11: CAR of Banks Given Foreign Exchange Trading Shocks on ROA
Banking
Industry
Large
Medium
Small
Impact of FX Trading Shocks on ROA


Baseline ROA

FX Trading Income Volatility


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

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

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

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


Table 3. 12: Number of Banks Given Foreign Exchange Trading Shocks on ROE

Banking
Industry
Large
Medium
Small
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)


Overall, although the stress tests result showed that the banking industry is generally resilient to
the most severe shocks, there were concerns over credit concentration risk and exchange rate risk.
3.2.3
Liquidity Stress Test
A liquidity stress test was conducted using the Implied Cash Flow Analysis (ICFA) and the
Maturity Mismatch/Rollover Risk approaches to assess the resilience of the banking industry and
individual banks to liquidity and funding shocks.

The ICFA test assessed the ability of the banking system to withstand unanticipated substantial
withdrawal of deposits, as well as short-term wholesale and long-term funding over a 5-day and a
cumulative 30-day periods, with specific assumptions on the fire sale of assets.
The test assumed a gradual average outflow of 3.8, 5.0 and 1.5 per cent of total deposits, shortterm funding and long-term funding, respectively over a 5-day period (Test 1.1) and a cumulative
average outflow of 22.0, 11.0 and 1.5 per cent of total deposits, short-term funding and long term
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

funding, respectively, on a 30-day balance (Test 1.2). It also assumed that the assets listed in
Table 3.13 would remain unencumbered after the fire sale:
Table 3. 13: Assets Unencumbered after Fire Sale
S/N
Assets
% Unencumbered

Cash and cash equivalent

Current account with CBN

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

Certificates of deposit held
66.5

Other Short-term investments

Collateralized placement and money at call

7.
CRR

The Maturity Mismatch/Rollover Risk approach assessed the funding maturity mismatch and the
rollover risk for assets and liabilities in the 0-30 and 31-90 day buckets, with the assumption on
the availability of funding from the CBN and intra-group sources, as described below:
i. Test 2a: Descriptive Maturity Mismatch: assumed that the baseline mismatch remained, but 5
per cent of total deposit would be made available from the CBN and intra-group funding;

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

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

Analysis of Liquidity Stress Test Results
The test results revealed that the industry liquidity ratio declined to 10.40 and 7.80 per cent, from
45.77 per cent after the 5-day and cumulative 30-day shocks, respectively (Table 3.14). Most
banks’ LRs were below the 30.0 per cent threshold under the two scenarios.


CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Table 3. 14: Implied Cash Flow Analysis
Total Number of
Banks tested
Number of Banks with < 30% liquidity ratio
System
LR (%)
Liquidity Shortfall to
make 30% LR
(N’ billion)

Dec 2014
Sep 2014
June 2014
Mar 2014
Dec 2014
Test 1.1: Implied
Cash Flow Test ( 5
Days)


Day 1

33.20

Day 2

28.30
285.15
Day 3

23.00
867.47
Day 4

17.00
1,423.46
Day 5

10.40
1,955.90
Test 1.2: Implied
Cash Flow Test
(30 Days)

7.80
2,137.16

Figure 3. 11: Industry and Individual Bank Pre-shock Liquidity Ratio Positions

Bank 1
Bank 2
Bank 3
Bank 4
Bank 5
Bank 6
Bank 7
Bank 8
Bank 9
Bank 10
Bank 11
Bank 12
Bank 13
Bank 14
Bank 15
Bank 16
Bank 17
Bank 18
Bank 19
Bank 20
Bank 21
Bank 22
Industry
Liquidity Ratio (%)
Mar-14
Jun-14
Sep-14
Dec-14
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Figure 3. 12: Industry Position after 1-5 day and Cumulative 30-day Shocks


Figure 3. 13: Individual Bank Positions after 5-day and Cumulative 30-day Shocks

N.B: Bank 23 was excluded from Figure 3.13 because of its outlier effect.

Assets in the 0-30 days bucket were adequately funded in the three scenarios used in the maturity
mismatch/rollover tests (2a, 2b and 2c). There was deterioration in the 31-90 day bucket in tests
2b and 2c (Figure 3.14).

-5

Pre-Shock
After Day 1
After Day 2
After Day 3
After Day 4
After Day 5
After cum 30
days
Liquidity Ratio (%)
Mar-14
Jun-14
Sep-14
Dec-14
-5

Liquidity Ratio (%)
Day 5
Day 30
Pre-shock
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Figure 3. 14: Rollover Risk, Pre- and Post-shock


Overall, the banking industry was resilient, manifesting a low likelihood of deposit runs. The test
results indicated a deterioration in the banks’ resilience, compared with the position in the first
half of 2014. However, compared with the position as at June 2014, the industry was more
resilient to liquidity risk arising from deposit runs.

3.2.4
Contagion Risk Analysis through Interbank Exposures
The contagion risk analysis assessed the outcome of the financial interconnectedness of
institutions in transmitting shocks to the banking system. An analysis of bilateral links among
different banks was conducted using interbank placements, takings, and money-at-call, with
emphasis on unsecured exposures. It was assumed that unsecured interbank exposures were lost.

An analysis of banks with unsecured interbank exposures revealed that two (2) banks were central
in the network, as they were exposed to three or more counterparties in the system. When secured
transactions were considered, seven (7) banks were central in the network as they had three or
more bilateral exposures. Also, the contagion risk through unsecured interbank exposure was
minimal as only one bank was undercapitalized with a CAR of 8.27per cent. At baseline position,
this bank was already undercapitalized (Table 3.15).


0 - 30
days
(N'billion
)
31-90
days
(N'billion
)
91 -
180days
(N'billion
)
181360days
(N'billion
)
1-3 years
(N'billion
)
above 3
years
(N'billion
)
Pre-shock

Test 2a

Test 2b

Test 2c


CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Table 3. 15: Result of Net Interbank Uncollateralized Exposure Linkages
Lending Banks
Bank 2
Bank 4
Bank 7
Bank 12
Bank 19
Bank 21
Industry
Pre-Test CAR

Post-Test
CAR(%)

Net
Placement
(N’ Billion)


19.7
Nil

Figure 3. 15: Tiered Structure of Unsecured Placements at end-December, 2014

Note: Node colour representation (Blue= Lenders; Red= Borrowers; Purple= Borrowers and
Lenders)
3.3
Supervision of the Banking Sector

3.3.1
Routine/Target Examinations
Joint CBN/NDIC examinations were conducted on all the banks in the review period. The
examinations, which covered risk assets, corporate governance, among others, provided the
opportunity to test their compliance with prudential ratios and the effectiveness of their risk
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

management control functions. At the end of the exercise, some banks with previous Composite
Risk Rating of “Above Average” were upgraded to “Low” and “Moderate” composite risk rating.

Risk-based examinations were conducted on two (2) of the three (3) discount houses. The two (2)
were rated “Moderate risk”, while a compliance examination was conducted on the third in order
to review recoveries and evaluate its financial condition.

Maiden examinations of the three (3) licensed financial holding companies were conducted during
the review period. The three (3) private credit bureaux were also examined to ascertain their
financial conditions and adherence to their operational guidelines.

3.3.2
Examination of Foreign Subsidiaries
Examinations of nine (9) foreign subsidiaries of Nigerian banks were conducted during the review
period. The outcomes revealed that one bank was rated “High Risk”, two “Above Average Risk”
and six “Moderate Risk”. The host supervisors of the subsidiaries were duly informed of the
outcomes, in line with the MoUs executed with them. Subsidiaries in the West Africa Region
were not examined because of the outbreak of the Ebola Virus Disease (EVD), during the review
period.

The College of Supervisors
The Committee of Central Bank Governors of the West African Monetary Zone (WAMZ) met in
Abuja in July 2014 and agreed, among others, that Nigeria should lead the development of a
cross-border crisis resolution framework for the Zone.

Memorandum of Understanding
In the review period, one (1) Memorandum of Understanding (MoU) on information sharing was
executed with the Central Bank of Mauritius, bringing the total number of MoUs to 19.

3.3.3
Supervision of Domestic Systemically Important Banks (D-SIBs)
In line with international best practice and the desire to foster financial stability, the Bank, in
collaboration with the NDIC, issued the Framework for Regulation and Supervision of Domestic
Systemically Important Banks in Nigeria. The Framework specifies, among others, the assessment
methodology for identifying D-SIBs, higher loss absorbency and additional regulatory
requirements such as liquidity, stress testing, disclosure and reporting. The implementation of the
Framework is expected to take effect from March 1, 2015.

3.3.4
Combating Money Laundering and Terrorist Financing in Nigeria
In the period under review, the CBN continued to collaborate with both domestic 5 and
international 6stakeholders in fighting the menace of money laundering and the financing of

5The Securities & Exchange Commission (SEC), the National Insurance Commission (NAICOM), the Special Control Unit against
Money Laundering (SCUML), as well as law enforcement agencies, and Self Regulatory Organizations (SROs).
6The Financial Action Task Force (FATF), the Inter-Governmental Action Group Against Money Laundering in West Africa
(GIABA), the US Department of State and the US Embassy, and the United Nations Organization
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

terrorism. In this regard, Government sustained its support in providing political the backing
required to enforce AML/CFT regulations.

In the area of combating terrorist financing, the CBN regularly circulated to financial institutions
under its regulatory purview the United Nations Consolidated Lists of persons/entities involved
with terrorism financing or terrorist activities for appropriate action. The Bank also issued other
relevant circulars and notifications in respect of terrorist financing for compliance by financial
institutions.

In general, the CBN continued to issue regulations intended to safeguard the Nigerian financial
system from the abuses of financial crime, including money laundering, terrorist financing and
other illicit financial transactions. These efforts led to the removal of Nigeria from the FATF Grey
List in October, 2013 and the FATF’s approval for the country to commence FATF membership
process in June 2014.

3.3.5
Supervisory Policies for the Stability of the Nigerian Banking System
In the light of the growing foreign currency borrowings by banks and the issuance of Eurobonds,
the CBN, issued during the review period, a circular on Prudential Regulation for the
Management of Foreign Exchange Risk of Banks which required banks to take appropriate
measures to hedge their foreign exchange exposures. The circular further adjusted downwards
aggregate foreign currency borrowing of banks to 75 per cent, from the previous 200 per cent of
shareholders’ funds unimpaired by losses. It further pegged banks’ Net Open Position at 20 per
cent of shareholders’ funds unimpaired by losses.

In view of emerging risks in banks and discount houses, another circular on Internal Capital
Generation and Dividend Payout Ratio was issued in October 2014 to facilitate adequate capital
build-up. It required banks and discount houses to adopt more prudent dividend payout policies.
Banks and discount houses with a Composite Risk Rating (CRR) of “High”, or a non-performing
loans (NPLs) ratio higher than 10 per cent, were precluded from paying dividends. Those with
ratings of “Above Average” or an NPL ratio of between 5 and 10 per cent were limited to
amounts not exceeding 30 per cent of the profit after tax.

Furthermore, a circular on the Exclusion of Non-distributable Regulatory Reserve and Other
Reserves in the Computation of Regulatory Capital of Banks and Discount Houses was issued to
derecognize “Regulatory Risk Reserve” as part of Tier I capital, and “Collective Impairment” as
part of Tier II capital. Conversely, it recognized “Other Comprehensive Income Reserve” as Tier
II capital, subject to a limit of 33.33 per cent of Tier I capital.

3.4
Supervision of Other Financial Institutions

3.4.1
Microfinance Banks
During the review period, 467 MFBs were examined bringing the total examined in 2014 to 834.
This number represented 94 per cent of the existing 884 MFBs. The remaining 50 comprised 30
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

licensed during the year, which were yet to qualify for maiden examination, and 20 others, which
had either closed shop or were undergoing restructuring.

The post-examination monitoring of 340 MFBs was conducted during the second half of the year.
The exercise revealed that 71 (20.88%) of the MFBs had implemented at least60 percent of the
examiners’ recommendations, 92 (27.06%) had implemented between 40 and 59 per cent of the
recommendations, while 162 (47.65%) had implemented less than 40 per cent of the
recommendations. Thirteen (3.82%) of the remaining MFBs were found to have closed shop,
while the reports on two (2) were yet to be finalized. To improve the level of compliance with the
examiners’ recommendations, appropriate penalties were imposed on the erring institutions.
3.4.2
Finance Companies
An analysis of the call reports of the 64 operating finance companies (FCs) as at end-December
2014, showed that 24 were sound, six (6) marginal,24 technically insolvent, and six (6) unsound.
Four (4) were, however, undergoing restructuring. The on-site routine examination of the FCs was
on-going at end-December 2014.

3.4.3
Bureaux de Change
During the review period, 322 high end user bureaux de change (BDCs)7 were examined to assess
their compliance with the documentation requirements for foreign exchange utilisation. The
reports revealed that most of the BDCs were involved in infractions such as inadequate/improper
documents, non-utilisation of funds for eligible transactions and relocation of offices without prior
approval, among others. The erring BDCs were appropriately penalised.

3.5
Compliance with International Standards
3.5.1
Basel II Implementation
The implementation of Basel II Capital Adequacy requirements commenced on October 1, 2014,
following the completion of the 9-month parallel run of minimum capital adequacy computation,
using Basel I and II rules. The analysis of the first call reports submitted by banks and discount
houses in October 2014 showed that three (3) out of the ten (10) commercial banks with
international authorization and three (3) out of the nine (9) commercial banks with national
authorization failed to meet the minimum CAR of 15and 10 per cent, respectively. The affected
banks were required to implement capital restoration plans.

All banks and discount houses submitted their first set of Internal Capital Adequacy Assessment
Process (ICAAP) reports in the second half of 2014, covering their current and prospective capital
requirements as at December 31, 2013. The review of the ICAAPs was done in two phases. Phase
1 covered 12 banks comprising mainly domestic systemically important banks (D-SIBs), the
foreign-owned banks and two of the bridge banks, while Phase 2 covered the remaining 14 banks
and discount houses.


7High-end user BDCs refer to operators that bought a minimum of $250,000 during a specified two-week period.
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

The reports revealed that thirty (30) risks were identified by the banks as being material to their
operations. Of this number, six (6) risk types, the Pillar 1 risks (credit, market, operational) as well
as liquidity, reputational and strategic risks, were common to all the banks. However, banks
differed in their assessment of the extent to which each of the risks was significant to their
operations.
Whereas some banks failed to set aside additional capital for their Pillar 2 risks, resulting in their
regulatory capital being the same as the economic capital, others failed to provide sufficient
information regarding the data used for the assessment process, the assumptions made and the
stress tests carried out.
It was also observed that most banks neither submitted evidence of board approval of their
ICAAP, training for board members on ICAAP, risk monitoring reports, nor provided evidence of
a review by auditors. It is expected that sustained regulatory dialogue with the banks will improve
the implementation of Basel II/III, going forward.

3.6
Competency Framework for the Banking Industry
The CBN commenced the full implementation of the Competency Framework for the Banking
Industry in November 2014. Sequel to the gaps observed in the baseline assessment earlier
conducted, financial institutions submitted their remedial plans to the CBN. Bank directors and
employees with deficiencies in the qualifications required for manning key control functions had
been enlisted or required to acquire appropriate certification in accordance with the relevant plans.
The implementation of the plans is being monitored.

3.7
The Framework for Managing Stability in the Nigerian Financial System
Following the lessons learned from the 2008 global financial crisis and its impact on the Nigerian
financial system, the CBN commissioned the SPP8& Oliver Wyman9 (Consultants) in 2010 to
strengthen institutional and legal frameworks to enhance stability in the Nigerian financial system.

The programme has the following main objectives:
i.
Macro-prudential policy: Provide an early warning system to identify, monitor and
analyse risks and vulnerabilities in the financial system as a whole;
ii.
Micro-prudential policy: Strengthen the supervision of individual entities and
contribute to the processes of macro-prudential and crisis management policies;
iii.
Crisis management continuum: Develop a framework for handling financial crises
in a cost-effective manner.

The SPP/OW report recommended the following:
Establishment of a Financial System Stability Committee (FSSC);
Organisational restructuring of stakeholders involved in macro-prudential regulation;

8SPP – Systemic Policy Partnership
9Oliver Wyman is a financial stability consulting firm
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Development of a macro-prudential analytical framework and capabilities;
Enhancement of the micro-prudential function for structural resilience;
Preparation for early intervention measures, crisis triggers, management and
resolution;
Human capital development;
Enhancement of the external engagement model;
Legal preparation and redraft of CBN, BOFIA and other relevant laws/bills; and
Enhancement of data gathering and storage capabilities.

The Financial Services Regulation Coordinating Committee (FSRCC) approved the
recommendations in the review period and also the release of staff from member-agencies for the
nine work streams of the project.
3.8
The Asset Management Corporation of Nigeria
The Asset Management Corporation of Nigeria (AMCON), on October 31, 2014, completed the
scheduled redemption of its Series 5Bonds with a face value of N866.74 billion, including
N13.295 billion repurchased by the Corporation. This brings the total amount thus far redeemed
since its inception to N1.8 trillion. With this redemption, the CBN is the only holder of the 6 per
cent 2023 AMCON Note with face a value of N3.80 trillion. The Notes are expected to be
progressively redeemed over its remaining life from contributions to the Banking Sector
Resolution Cost Trust Fund10 and recoveries from AMCON’s operations.

Total recoveries stood at N506.50 billion or 28.94 per cent of the total Eligible Banking Assets of
N1.75 trillion. This comprised cash recoveries of N201.37 billion (39.76%) and assets forfeiture
worth N305.13 billion (60.24%). The assets forfeited comprised real estate and other properties
valued N191.82 billion, as well as securities of N113.31 billion.

During the review, the Corporation divested its equity interest in Enterprise and Mainstreet Banks
to Heritage Banking Company Ltd and Skye Bank Plc, respectively. The Corporation is expected
to divest from Keystone Bank, the last of the three bridge banks, in 2015.

3.9
Key Risks in the Financial System

3.9.1
Credit Risk
There was a slight improvement in the quality of bank assets as NPLs declined by 4.14 per cent to
N363.31 billion at end-December 2014, from N379.01 billion at end-June 2014. At 2.88 per cent,
the NPL ratio remained within the prudential limit of 5.0 per cent (Figure 3.16).

Sustained low oil prices may, however, result in an increase in NPLs, given that the exposure to
the oil and gas sector accounted for 25.70 per cent or N3.24 trillion of the total credits of N12.63
trillion at end-December 2014.

10The CBN and banks reached an agreement in 2011 to make yearly contributions to the Banking Sector Resolution
Cost Trust Fund (BSRCTF), towards meeting the costs of resolving the 2009 banking crisis in Nigeria.
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

The Bank will continue to monitor the development while requiring banks to strengthen their
contingency plans and to conduct regular stress tests to mitigate the impact of the crash in oil
prices on their balance sheets.

Figure 3. 16: Non-Performing Loans


3.9.2
Liquidity Risk
The liquidity ratio for the industry increased by 3.11 percentage points to 45.77 per cent at endDecember 2014 from 42.66 per cent at end-June 2014, thus contributing to the high cost of
managing liquidity. All banks met the minimum prudential liquidity ratio of 30 per cent during the
review period.

3.9.3
Market Risk
There was a mixed trend in the movement of interest rates during the second half of the year.
Whilst savings, one month deposit and interbank rates increased, other rates decreased from their
levels in the first half of the year. The spread of 22.32 percentage points between the average
savings deposit rate of 3.40 per cent and the maximum lending rate of 25.72 per cent was high and
indicated persistent inefficiencies in the market, although the spread narrowed marginally from
22.65 per cent at end-June 2014.

Owing to pressures from the fall in oil prices and the consequent low accretion to external
reserves, the exchange rates depreciated persistently and became volatile in the interbank and
BDC segments of the market during the period under review. Thus, the Bank adjusted the
midpoint of its official exchange rate and implemented tighter measures to preserve the value of
the naira. Meanwhile, the external reserves declined by US$3.09 billion to US$34.24 billion at
end-December 2014, from US$37.33 billion at end-June 2014. Also, a high premium of N18.77


Nov '10 Mar '11 Jun '11 Dec '11 Jun '12 Dec '12 Jun '13 Dec '13 Jun '14 Dec '14
NPLs (%)
NPLs%
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

(11.06%) and N9.88 (6.28%) remained between the rDAS & BDC and rDAS & Interbank
segments, respectively, at end-December 2014.

The Bank will continue to monitor market risk and take appropriate actions.

3.9.4
Operational Risk
Some of the key operational risks reported were a high incidence of fraud and forgeries, absence
of unique identifiers, and insecurity in some parts of the country. The cases of fraud and forgeries
increased to 6,250 at end-December 2014, from 5,197 reported in the first half of the year. The
total amount involved in these cases, however, dropped to N9.0 billion at end-December 2014
from N16.82 billion recorded in the first half of 2014. However, actual losses from these incidents
increased to N3.04 billion at end-December 2014, from N1.72 billion in the first half of 2014. It
was observed that some of the reported cases of card fraud were perpetrated in jurisdictions with
less secure payment platforms. Banks have been encouraged to adopt global best practices, such
as the latest version of the payment card industry data security standard (PCIDSS) certification to
mitigate the cyber-threat to their systems.

The CBN in collaboration with the Bankers’ Committee introduced the Bank Verification Number
(BVN) in February 2014 to improve customer identification with a view to mitigating the risk of
money laundering and predatory borrowing in the banking system. All credit customers were
required to enroll on the BVN by end-December 2014, while all other customers are expected to
obtain their BVN not later than June 2015.

Insecurity in the North-East of the country persisted during the period under review and this
affected the operations of some banks in the region.

3.10 Credit Bureaux

3.10.1 CBN’s Credit Risk Management System
The Credit Risk Management System (CRMS) continued to complement the process of credit risk
management in the banking industry. At end-December 2014, the number of borrowers registered
by banks in the CRMS database stood at 125,371. Of this, the total number of credit borrowers
was 48,837, while the number of outstanding credits was 78,341.

During the review period, 105 requests/enquiries on customers’ credit records in the CRMS were
processed as against 84 in the first half of 2014. Most of these were on companies/projects
applying for funding under the Commercial Agriculture Credit Scheme (CACS).

3.10.2 Private Credit Bureaux
The number of credit records in the database of the three private credit bureaux declined by 2.67
per cent to 97.69 million at end-December 2014, from 100.37 million in the first half of the year.
The decline was attributed to data cleansing carried out by one of the credit bureaux. Similarly,
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

the number of requests for credit information declined by 34.0 per cent, from 238,254 at end-June
2014 to 157,273 at end-December 2014.

3.11 Consumer Protection
During the review period, 782 complaints were received, compared with the 438 received in the
first half of 2014. Of this, 504 (64.45%) were resolved or closed compared with 497 in the first
half, an increase of 1.41 per cent. The increase in the number of complaints was due to, among
others, increased public awareness of the consumer complaints resolution channels available in
the CBN. The value of claims by complainants against banks and other financial institutions
(OFIs) in the second half of 2014, amounted to N15.67 billion and US$1.51 million, while refunds
totalled N2.38 billion and US$901,864.19 (Table 3.16).

Table 3. 16: Complaints Management Activities from July to December 2014
S/No
Description
July
August
September
Oct
Nov
Dec
Total

Number of Complaints
received

Number of Complaints
resolved/closed

Amount claimed (N
Billion)


Amount refunded
(NBillion)


Amount claimed
(US$)


Amount refunded
(US$)


Mediation meetings
held

3.11.1 Consumer Complaints Management System
In the second half of 2014, the Consumer Complaints Management System (CCMS) was
deployed to improve complaints management in banks, after a user awareness session for their
relationship officers. The system is, however, grappling with some IT challenges, resulting in
delays by banks in uploading complaints. The Bank will continue to provide technical support for
the system and monitor its performance to improve efficiency.

3.11.2 Market Conduct

3.11.2.1 Compliance Checks
During the review period, the Bank conducted compliance checks on 20 banks to confirm the
accuracy of their monthly returns, ascertain their level of compliance with the Revised Guide to
Bank Charges (RGBC), and assess their level of implementation of the regulatory directives.

CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Erring banks were directed to implement remedial actions, including making refunds amounting
to N73.02 million to customers who had been over-charged, in violation of the provisions of
CBN’s Revised Guide to Bank Charges.

The maiden compliance check of OFIs was conducted on five (5) PMBs and one (1) MFB. The
spot-check was to ascertain the existence and operation of Consumer Complaints Help Desks
across the OFIs.

The major findings of the compliance check included the following:

Two (2) of the OFIs partially complied with the requirement to establish Help Desks at
their head offices and branches;

Only one (1) OFI rendered Monthly Returns on consumer complaints; and

Only one (1) OFI complied with the requirement to disclose consumer complaints
information in its 2013 annual report.

3.11.2.2 Policy on Time Bar on Complaints Management
The Bank exposed a draft policy instrument on time limit for managing complaints against
financial institutions to industry stakeholders for their inputs/comments. The proposed policy,
which would ensure the availability of supporting documents, is aimed at enhancing timely
resolution of complaints as well as promoting efficiency in the complaints management functions
of the CBN and the financial institutions. The policy proposed that complaints would be lodged
by customers against their financial institutions within a 6-year period from the date of the
transaction after which no complaint would be entertained by the CBN. The proposed time limit
would not preclude the right of a complainant from seeking redress in the court of law.

It is expected that full implementation of the consumer protection initiatives would go a long way
in enhancing public confidence in the banking system.


CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

4.0
THE PAYMENTS SYSTEM

4.1 Developments in the Payments System
In furtherance of its efforts in the development of a safe, reliable and efficient payments system,
the Bank undertook some major initiatives and implemented new policies during the review
period, as highlighted below.
4.1.1
Implementation of the Bank Verification Number Scheme

The implementation of the Bank Verification Number (BVN) scheme, designed to address the
absence of a unique identifier across the banking industry was in full swing. The Bank issued
circulars guiding the implementation of the BVN scheme by all banks, which stipulated the
following:

All banks are required to enroll at least 40 per cent of their customers by December 31,
2014;
All customers with new loans must have the BVN as a condition precedent to drawdown,
with effect from November 3, 2014;
All credit customers must have BVNs by December 31, 2014;
By March 2015, transactions valued N100 million or more should only be allowed for
customers with BVN; and
By June 2015, all banks’ customers should have their BVNs. Any bank customer without
his/her BVN would be deemed not to have met a key component of the KYC
requirements.

In addition, the Bank, the Nigeria Inter-bank Settlement System (NIBSS) and other stakeholders
collaborated with the National Association of Microfinance Banks (NAMBs) to extend the BVN
registration to customers of OFIs, especially the MFBs, with a view to strengthening risk
management and KYC processes in the sub-sector.
The collaborative efforts in the implementation of the Scheme have resulted in the enrollment of
2,583,815 customers being enrolled in the BVN central database. The full implementation of the
Scheme is expected to increase the effectiveness of the KYC standard as well as the safety and
reliability of the payments system.

4.1.2
Review of the Instant and “Next Day Value” Payment Operations
The Bank stipulated minimum required controls for different categories of online funds transfer to
strengthen the security of instant payments and next-day-value-funds transfer operations. In
addition, banks were directed to comply with the following risk control measures:
For individual customers, apply daily limits of N1million (instant value) and N10 million
(next day value) to NIBSS Instant Payment (NIP) and NIBSS Electronic Funds
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Transfer(NEFT) respectively, and to other electronic payments options with similar
features, effective September 1, 2014;
For corporate customers, apply daily limits of N10 million (instant value) and N100
million (next day value) to NIP and NEFT respectively, and to other electronic payments
options with similar features, with effect from September 1, 2014; and
Obtain a written indemnity from customers who choose to initiate transactions above the
limits specified, subject to a maximum of N5 million and N100 million for individual and
corporate customers, respectively. Transfers above N100 million shall be effected through
the Real Time Gross Settlement System (RTGS).

4.1.3
The Payment Card Industry Data and Security Standard
All the switches, processors and banks complied with CBN’s directive to be Payment Card
Industry Data and Security Standard (PCIDSS)-certified latest by November 30, 2014. Operators
are required to sustain compliance with the PCIDSS to prevent security breaches, thus increasing
public confidence in the system.

4.1.4
The Cashless Policy and e-Payment Incentive Scheme
The implementation of the cashless policy was extended to the remaining 30 states of the
Federation in the second half of 2014. However, charging processing fees on withdrawals above
the set threshold was deferred till July 1, 2015. To boost the adoption of the cashless initiative, the
Bank, in collaboration with the Bankers Committee, introduced incentives to reward usage of
electronic payment medium. Notable among the incentives were the following:

The reduction of a merchant service charge rate from 1.25 per cent or a maximum of
N2,000, to 0.75 per cent or a maximum of N1,200 per transaction;
Free commission on turnover for all electronic inflows into merchants’ account;
Rewards to merchants through the mystery shopper and recognition campaign;
A cash refund to customers, based on payment card usage;
A points-based reward system;
The offer of promotional gift items to customers, based on their usage of e-payment
channels; and
A tipping point scheme through which sales persons would earn points redeemable
through gift items or cash.

4.1.5
Re-introduction of Remote-on-us ATM Fee
As part of the strategy to improve the efficiency of ATM operations in the country, the Bank
approved the re-introduction of remote-on-us cash withdrawal transaction fee of N65 per
transaction, effective September 1, 2014. The fee was to cover the remuneration of the switches,
ATM monitoring and fit-notes processing costs by acquiring banks. The fee was applicable as
from the 4thremote-on-us withdrawal in a month by a cardholder, thereby making the first three
(3) free for the cardholder.

CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

4.1.6
Accreditation of Cheque Printers for 2014
In line with the provisions of the Nigeria Cheque Printers’ Accreditation Scheme (NICPAS), the
CBN, in collaboration with MICR Technical Implementation Committee, conducted the
accreditation of cheque printers in Nigeria for 2014. At the end of the exercise, four (4) cheque
printers were accredited to print cheques and other debit paper instruments for the Nigerian
financial market.

4.2
The Payments System Vision 2020
In furtherance of the implementation of the Payments System Vision (PSV) 2020, the CBN,
during the review period, revised and exposed the draft guidelines and framework on mobile
payment services in Nigeria to industry stakeholders for their comments. The objective of the
revised Guidelines was to prescribe detailed regulatory and supervisory requirements in line with
the current realities in the industry. Furthermore, the CBN approved the adoption of SWIFT
sanction screening services by all banks, in line with international best practice.

4.3
Large Value Payments
Significant growth in activity was observed in the inter-bank market as reflected by the quantum
leap recorded in the value of inter-bank transfers. The value of inter-bank transfers, through the
new Real-Time Gross Settlement (RTGS) system, increased from N78,011.68 billion at end-June
2014 to N137,498.46 billion at end-December 2014. On the other hand, the volume of inter-bank
funds transfer decreased from 323,414 to 251,004 during the same period. This reflected an
increase of 76.25 per cent and a decrease of 22.39 per cent in value and volume, respectively. The
increase in value was due, largely, to the migration of standing deposit facility operations to the
new RTGS system.
4.4
Retail Payments
4.4.1 Cheques Clearing
Activities on the cheque truncation system revealed an increase in the volume of cheques cleared
from 7,144,340 at end-June 2014 to 8,221,225 at end-December 2014. On the other hand, the
value of cheques cleared decreased to N3,558.41 billion in the second half of 2014,from
N3,710.67 billion in the first half of 2014, a decrease of 4.10 per cent. The decrease in value was
attributable to customer preference for electronic channels for high value transactions.

4.4.2
Instant Payments
Instant payments remained attractive to users during the review period. The volume of
transactions on NIBSS Instant Payment (NIP) increased to 23,990,206 valued N10,783.74 billion
in the second half of 2014, from 16,839,648 valued N9,137.76 billion in the first half of 2014,
indicating an increase of 42.46 and 18.01 per cent, respectively. The increases were due to the a
wider adoption of the instant settlement option.
4.4.3
NIBSS Electronic Fund Transfer
The volume of NIBSS Electronic Fund Transfer (NEFT) transactions increased from 14,260,732
at end-June 2014 to 15,556,085 at end-December 2014, while the value decreased by 1.32 per cent
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

to close at N7,259.68 billion, at end-December 2014. The decline was due to preference for the
NIP platform, being an instant payment channel.
4.4.4
Electronic Card Payments
The volume of electronic card (e-card) transactions rose to 255,820,046 valued at N2,446.00
billion in the second half of 2014, from 199,284,309 valued at N1,944.56 billion in the first half of
2014, representing an increase of 28.37 and 25.79 per cent, respectively (Table 4.1). This
development indicated increased patronage of e-cards by the public.

Table 4. 1: Electronic Card Transactions

Table 4. 2: Proportion of e-Payment Channels Usage in the Second Half of 2014
Payment Channels
Volume
Volume (%)

Value (N Billion)
Value (%)
ATMs

PoS

Mobile

Internet (Web)

Total


Payment
Channels
Number of
Terminals
Volume of Transactions
%
Change
(Volume)
Value of Transactions
%
Change
(Value)
June

Dec

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

PoS

Mobile

Internet
(Web)

Total


CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

5.0
OUTLOOK

The global economic activity for 2015 is projected to grow at 3.5 per cent, reflecting a
downward revision of 0.3 per cent from the October 2014 WEO forecast. The revised forecast
is due to the observed downside risks with the growth prospects in China, Russia, the euro area
and Japan, as well as the implications of a weaker activity in major oil exporting countries
owing to the sustained decline in oil prices. The United States is the only advanced economy
whose growth forecast was raised.

The downside risks include concerns about stagnation and low inflation in the euro area and
Japan, as well as shifts and volatility in the financial markets of emerging economies where
lower oil prices might lead to external sector and balance sheet vulnerabilities in oil exporting
countries. The main upside risk is that of a greater economic boost from lower oil prices.

Output in advanced economies is projected to grow at 2.4 per cent in 2015 up from 1.8 per cent
in 2014. In this group, the US, the euro area, Japan and the UK are projected to accelerate while
Canada is projected to decelerate in 2015.

China’s output growth is projected at 6.8 per cent for 2015, while the emerging and developing
economies’ growth is forecast at 4.3 per cent. Growth in the MENA countries is estimated at 3.3
per cent, while growth in SSA is projected at 4.9 per cent and that of Nigeria at 4.8 per cent for
2015.

With the exception of Japan, inflationary pressure is expected to persist in 2015 in most advanced
economies, as well as in emerging market and developing economies, MENA region and SSA in
2015.

The Nigerian economy is projected to continue to grow, although at a slower rate of 4.811 per cent
in 2015. Growth is expected to be driven largely by developments in the non-oil sector.
Developments in global oil prices are projected to impact negatively on Nigeria’s growth.

In terms of price developments, the devaluation of the naira, together with increased
electioneering spending would exert inflationary pressures in the first half of 2015. Thus, inflation
is projected to rise to 8.78 per cent in 2015. Prices are, however, likely to stabilize in the second
half of the year, as the CBN continues to deploy measures to contain inflationary pressure.

Money market rates are expected to remain stable in the first half of 2015. Expectations of
increased liquidity surfeit in the system would likely be offset by a tight monetary policy in order
to maintain price stability.


11 The National Bureau of Statistics projects a higher growth rate of 5.54% in its Economic Review and 2015 – 2017
Outlook.
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Anticipated sources of risk in the financial system in the first half of 2015 would include declining
crude oil prices, due to US shale oil and gas production and the resultant pressure on the naira
exchange rate. Others include a reversal of capital flows, owing to improvements in the US
economy and the adverse implications for the capital market; a possible increase in nonperforming loans; security challenges in parts of the country; equity market losses that might
linger as a result of low investor confidence; uncertainties associated with the 2015 general
elections; and an upward inflationary pressures from election spending and an expected increase
in electricity tariffs in the first half of 2015.

In light of the above, the CBN, in collaboration with relevant stakeholders, will continue to take
appropriate measures designed to ensure sustained financial system stability.

CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Box 1: Proposed Secured Transaction and National Collateral Registry for MSMES in Nigeria
Background
Lack of suitably acceptable collateral has been among the top reasons for difficulty in
accessing finance by SMEs in Nigeria. A common trend among firms indicates that credit
applications are mostly rejected on grounds of collateral, i.e, unacceptable or unsuitable
collateral. It is in recognition of this challenge that the CBN started the Secured Transaction
and National Collateral Registry (NCR) project in 2013. The Collateral Registry is a central
database that records registration charges and collaterals created by borrowers on both
movable and immovable properties to secure credit facilities provided by lenders.

Rationale for Secured Transaction and National Collateral Registry Reform in Nigeria
According to National Bureau of Statistics (NBS), the SME sector in Nigeria accounts for
close to 50% of GDP. A joint CGAP and the World Bank diagnostic study conducted in
January 2009 to assess the Current State of Access to Finance in Nigeria established that
only 5% of SMEs had access to a loan (despite the fact that 80% of SMEs seek financing).
The World Bank’s Investment Climate Assessment (ICA) estimated that only about 10% of
Nigerian SMEs applied for loans or lines of credit, and about 70% of those who applied were
denied financing. An overwhelming 80% of SMEs that do not apply for financing at all
would like to have loans/lines of credit. Hence, SMEs would seem to demand credit, but do
not apply owing to:
(i)
Cumbersome application procedures and high interest rates;
(ii)
Inaccessible collateral requirements (in Nigeria a loan requires on average
140% of the value in collateral);
(iii)
Loan terms (maturities) that are much shorter than what SMEs require;
(iv)
Lack of an adequate framework for the operation of an efficient registry for
secured interest on movables assets; and
(v)
The absence of an all-inclusive Stakeholders Framework (which would
include as donors, DFID, IFC and WBG and other participants such as
Corporate Affairs Commission (CAC), Ministry of Finance, MFI, NBFIs and
Federal Ministry of Justice, amongst others).

In view of the above, the CBN, set out through the Secured Transaction and National
Collateral Registry project, to address the challenge of insufficient access to suitable
collateral by SMEs in Nigeria, thereby deepening financial resource flow to the sector.

CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Steps taken so far by the Bank
(a)
Setting up of an Inter-agency Stakeholder Working Committee
The development of a robust collateral registry requires inter-agency collaboration and
sustained engagement with key stakeholders. Primary stakeholders in both the public and
private sectors were identified and their buy-in solicited. The Stakeholder Working Group
(SWG) was inaugurated on September 5, 2013.
The following institutions are represented on the SWG:
Public Sector
Central Bank of Nigeria (CBN)
International Finance Corporation (IFC)
Corporate Affairs Commission (CAC)
Nigeria Investment Promotion Commission ( NIPC)
Small and Medium Enterprises Development Agency
(SMEDAN)
Federal Ministry of Trade and Investments
Federal Ministry of Justice
Federal Ministry of Finance
Securities and Exchange Commission
Abuja Commodities and Securities Exchange
Bank of Industry
Private Sector National Association of Small and Medium Enterprises
(NASME)
National Association of Small Scale Industrialists (NASSI)
Equipment Leasing Association of Nigeria (ELAN)
Stanbic IBTC
Diamond Bank
Fidelity Bank
Access Bank

b) The NCR Project Implementation: Where We Are
Project Consultant:

International Finance Corporation
Inter-Agency Committee:
16 stakeholder ministries, agencies, institutions and


companies
The efforts made or planned by the Bank, between June 2014 and February 2015
towards the completion and commissioning of the Registry in June, 2015 include as
follows:
i. Preparation and gazetting of the Regulations for the operations of the Registry -
October, 2014;
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

ii. Draft National Collateral Bill - December, 2014;
iii. Engagement of a software development Vendor – January 2015;
iv. Acquisition of hardware/provision of office space- on-going;
v. Soft launch of the Registry - 31st March, 2015; and
vi. Full commissioning of the Registry - 17th June, 2015.


CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Box 2: International Money Transfer Services (Out Bound)
In exercise of its powers as conferred by the Banks and Other Financial Institutions Act
(BOFIA), Cap. B3 Laws of the Federation of Nigeria 2004 and the Central Bank of Nigeria
Act, 2007, the CBN issued on October 3, 2014revised guidelines for the regulation of
international money transfer services in Nigeria. The review was carried out to accommodate
the recently introduced out-bound money transfer services as an alternative channel of
international remittances to serve the needs of small foreign exchange end-users.
The new arrangement provides Nigerians the opportunity of transferring funds for
disbursement in foreign currency to beneficiaries and recipients abroad. By the terms of the
guidelines, a prospective customer, who wishes to use the service, would pay the naira
equivalent to the money transfer operators (MTOs) for the foreign currency payable to the
specified beneficiary abroad. The service reduces reliance by small foreign exchange users on
bureaux-de-change or banks to source foreign currency before transferring money abroad.
To simplify the process of out-bound remittances and encourage financial inclusion, bank
accounts are not required for funds transfer. Also, the service is only applicable to “person-toperson” transfers hence corporate entities are not allowed to use this product.
Other objectives of the revised guidelines include the following:
Provision of minimum standards and requirements for the operations of international
money transfer services in Nigeria;
Specification of delivery channels for offering international money transfer services (inbound and out-bound) in a cost-effective manner;
Provision of an enabling environment for international money transfer services in the
Nigerian economy;
Specification of minimum technical and business requirements for various participants in
the international money transfer services industry in Nigeria; and
Provision of broad guidelines for the implementation of processes and flows of
international money transfer services, from initiation to completion.
The allowable limit for the out-bound money transfer per transaction, which was initially
pegged at US$2,000 or its equivalent, was revised upward to US$5,000 or its equivalent to
promote more transparency and disclosure.
In addition, out-bound transfer services would only be provided by international money
transfer service operators, while banks and BDCs that meet the new CBN requirements would
serve as agents for money transfer services. MTOs are, however, prohibited from acting as
authorized dealers in gold or other precious metals; engaging in deposit taking and/or lending
money; maintaining current accounts on behalf of customers; establishing letters of credit; and
acting as custodians of funds on behalf of customers.
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Other notable highlights in the revised guidelines include the following:
The allowable cash withdrawal for in-bound transfers shall not be more than US$500, and
any amount in excess of $500 shall be disbursed to beneficiaries through bank accounts or
mobile money wallets;
Where the beneficiary does not have a bank account or mobile money wallet, payments
shall only be made upon the provision of a satisfactory reference from a current account
holder in a bank, confirming that the beneficiary is the bona fide owner of the funds;
The currency to be given to a transfer agent for out-bound money transfers, shall be in
naira;
All outward payment transactions shall be executed in a convertible currency agreed by the
parties;
Where a currency conversion service is offered before initiation of a payment transaction
or at the point of payment, the money transfer services operator must disclose all charges,
as well as the exchange rate to be used for converting the payment transaction; and
A money transfer service operator shall not allow or process a transaction that appears to
have been deliberately split into small amounts to avoid the reporting requirements under
the provisions of the AML/CFT Act.
In order to allow for enhanced access by prospective customers, and in line with the objectives
of the cashless policy, the CBN plans to engage mobile telephone operators so that customers
on the mobile payment platform can transfer money from their accounts via the international
money transfer service providers to anybody abroad.
The out-bound money transfer service is expected to simplify the money transfer process in
Nigeria, increase convenience and access to money transfer outlets, and reduce reliance on
bureaux de change or banks in order to buy foreign currency before transferring money
abroad.


CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

Box 3: Framework for the Regulation and Supervision of Domestic Systemically Important Banks
The global financial meltdown, which started in 2007, led to the need for strengthening of
regulation of Systemically Important Financial Institutions (SIFIs). The Financial Stability
Board described G-SIFIs as "financial institutions whose distress or disorderly failure, because
of their size, complexity and systemic interconnectedness, would cause significant disruption
to the wider financial system and economic activity"12. A SIFI can be a bank, an insurance
company, or any other financial institution whose failure might trigger a financial crisis. The
BCBS has identified factors for assessing a financial institution as systemically important
based on size, interconnectedness, substitutability, cross-jurisdictional activity and
complexity.

The failure of such large and complex financial institutions generates severe undesirable
externalities that include disruption of the financial system and the real economy. One of the
fall-outs of the meltdown is the call for measures to deal with this class of institutions.
Consequently, the G20 leaders, at their meeting of November 2011, requested the Basel
Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB) to
develop a framework for Domestic Systemically Important Banks (D-SIBs)13 in addition to
the Global Systemically Important Financial Institutions (G-SIFIs).

Thus, regulators in each country have the responsibility for adopting whatever portions of the
recommendations they deem appropriate and to set the parameters for defining what a
Systemically Important Financial Institution is.

When Systemically Important Banks (SIBs) were in danger of failure in the past, the only one
model of rescue adopted was the one which allowed governments to inject capital, provide
bailouts and guarantees to keep the financial system stable, while shareholders lost out, as a
result of dilution in shareholding. This warranted the need for enhanced supervisory measures
for D-SIBs, which the current regulatory policies do not adequately address.

As a result of the financial crises, SIBs have become the target for legislation and regulatory
reforms, which have led to an increase in bank capital requirements and the introduction of
higher capital surcharges. In response to the challenges posed by such banks, the Central Bank
of Nigeria (CBN) and the Nigeria Deposit Insurance Corporation (NDIC), developed a
supervisory framework for D-SIBs in Nigeria. This initiative is in tandem with the BCBS and
other global initiatives each jurisdiction or country designs a policy framework for the
identification and regulation of their D-SIBs so as to limit the economic impact of bank
distress and promote financial system stability.


13Neither the Basel Committee nor the Financial Stability Board establishes laws, regulations or rules for any
financial institution directly; they are only policy research and development entities. Therefore, they act only in an
advisory capacity.
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

In Nigeria, owing to the dominance of banks in the financial system, this framework shall
focus on the enhanced supervision of SIBs.

This framework has adopted similar indicators used in determining G-SIFIs by the BCBS in
the identification and supervision of SIBs in Nigeria.

OBJECTIVE
The objective of this framework is to ensure that all SIBs are subjected to an appropriate
degree of oversight and regulation. This entails defining the regulatory parameters and
calibrating the intensity of oversight by the regulators. The overall goal of this framework is
to:

Comply with the BCBS Requirements on Supervision of D-SIBs;
Ensure a transparent assessment of the basis for their regulation;
Create incentives for stronger risk management practices that would reduce the
systemic risk which SIBs pose to the system; and
Limit the impact of negative externalities on the financial system.

ASSESSMENT METHODOLOGY
The BCBS suggested several methodologies for identifying SIBs, including the indicatorbased measurement approach, the bucketing approach, supervisory judgment, periodic review
and refinement. However, in this framework, the indicator-based measurement approach, as
well as supervisory judgment, were used to determine SIBs in Nigeria.

The Indicator-based measurement approach
The indicator-based measurement approach considers the following factors in the
classification of SIBs:

Size,
Interconnectedness,
Substitutability, and
Complexity.

Size
The size of a bank is of critical importance to the stability of the financial system and the
economy. Since there is no uniform global standard for the assessment of the size of a bank,
this framework adopted ‘total assets’ as the principal determinant in the assessment of size.
In Nigeria, when this approach was adopted, the data showed that the eight (8) largest banks
accounted for more than 70% of the total industry assets.

Interconnectedness
The more interconnected a bank is to other financial institutions, the greater the potential for
the failure of that bank to transmit distress through the financial system and the broader
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

economy. The systemic impact of a bank greatly depends on its degree of interconnectedness
with other financial institutions and can be measured by the volume of its intra-financial
system assets and liabilities14 short-term financing by interbank and money market operations.
In this framework, the determinant of interconnectedness is net-interbank transactions.

Substitutability
The systemic impact of a bank’s distress is greater when it cannot easily be replaced in the
short-term period, either as a market participant or financial service provider. Typical
determinants of substitutability are: the value of assets under custody, payments cleared and
settled through payment systems, values of underwritten transactions in debt and equity
markets, and the quantum of lending and deposits of a particular bank. This framework
identified total net credits and total deposits of a bank as the determinants of its
substitutability.

Complexity
The systemic impact of a bank would be higher if its business model, structure and operations
make it difficult or very costly to liquidate by the regulatory authorities. Complexity can be
viewed from the bank’s network of both domestic and foreign subsidiaries, as well as its
affiliation with institutions in other sectors of the financial system, which can complicate the
process of liquidating the bank. In tandem with Nigeria’s current banking model, the major
determinants considered were a bank’s branch network and its number of foreign subsidiaries.

Weights
In adopting the indicator-based measurement approach, the weight of 30% each was assigned
to size and substitutability, while complexity and interconnectedness were weighted 25% and
15%, respectively. The two determinants within the complexity measure were assigned 12.5%
each, whereas determinants under substitutability were each assigned 15% weight.

Supervisory Judgment
The Central Bank of Nigeria applied supervisory judgment in arriving at the results that were
derived from the indicator-based measurement approach of the assessment methodology.
While the BCBS Indicator-based Measurement Approach assigned equal weights to all
factors, this framework has taken cognizance of the domestic environment in assigning
different weights to the factors.

IDENTIFIED SIBs
For a bank to be continually classified as being an SIB, the assessment criteria must be met for
six (6) consecutive months. Any bank classified as being an SIB would remain as such for a
period of 6 months, after which a re-assessment would be carried out by the CBN.

14Intra-financial system assets/liabilities is calculated as the sum of lending/deposits to/by financial institutions,
holdings of securities issued by the bank or other financial institutions, net mark to market reverse repurchase
agreements with other financial institutions, net mark to market securities lending/borrowings to/from financial
institutions and net mark to market OTC derivatives with financial institutions.
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

For a bank to be considered as an SIB, its “cumulative score”15 should be at least 5%, using
the indicator-based measurement approach, subject to review by the Central Bank of Nigeria
from time to time. A bank that had total assets of at least 5%, as well as minimum total credits
and deposit liabilities of 6% respectively of the industry in the previous six (6) months can be
considered as being an SIB.

HIGHER LOSS ABSORBENCY
The capital adequacy ratio (CAR) for banks in Nigeria currently stands at 10% and 15% for
national/regional banks and for banks with an international banking licence, respectively. In
the computation of CAR recommended by the BCBS, Tier 2 capital should not constitute
more than 50% of the qualifying capital, that is, 100% of Tier 1. However, banks designated
as being SIBs would be required to maintain a minimum CAR of 15% out of which Tier 2
capital should not constitute more than 25% of the qualifying capital. In other words, Tier 1
capital should be at least 75% of the bank’s qualifying capital. In addition, SIBs in Nigeria
will be required to set aside a Higher Loss Absorbency16 (HLA) target or an additional capital
surcharge of 1% to their respective minimum required CAR. This should be met with
Common Equity Tier 1 (CET1) capital 17 . The aim of the additional loss absorbency
requirement is to ensure that an SIB would have a higher share of its balance sheet funded by
instruments that reinforce the resilience of the institution as a going concern.

In a situation where the foreign subsidiary of a Nigerian bank is considered systemically
important by the host authority, the Central Bank of Nigeria and the host authorities would
make arrangements to coordinate and cooperate on the appropriate HLA requirement, within
the constraints imposed by the relevant laws in the host jurisdiction.

ADDITIONAL REQUIREMENTS
In addition to the HLA requirement for systemically important banks in Nigeria, the following
requirements and policy measures are considered appropriate to address the risks posed by
SIBs.

Liquidity Standards
The current liquidity ratio requirement for banks shall be imposed on the SIBs; however, this

15Cumulative score represents the aggregate score of the four (4) factors used in identifying an SIB under the
indicator- based measurement approach.

16The Higher Loss Absorbency (HLA) policy measure is to deal with the cross-border negative externalities created
by systemically important banks, which current regulatory policies do not fully address. It will enhance the going
concern loss absorbency of SIBs and reduce the probability of their failure.

17Common Equity Tier I capital is the highest quality component of a bank’s capital as it is capable of fully absorbing
losses whilst the bank remains a going concern.

CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

would be subject to change from time to time.

Stress Testing
Stress testing requirements are designed to work in tandem with the capital plan. The results
of such tests would be used to make appropriate changes to the bank’s capital structure. The
CBN and NDIC shall conduct periodic analysis of the capital of each SIB to evaluate its
ability to absorb losses in situations of adverse economic and financial conditions.

The SIBs would be required to carry out stress tests of their capital and liquidity on a quarterly
basis and the results of the stress test would be reviewed by the Central Bank of Nigeria.

Recovery and Resolution Planning
The SIBs shall be required to develop specific recovery plans which shall be submitted to the
Central Bank of Nigeria and the Nigeria Deposit Insurance Corporation by 1st January of
every year.

Enhanced Supervision
There shall be greater frequency and intensity of on-site and off-site supervision of SIBs.
Monthly monitoring of the key performance indicators of the SIBs shall be carried out by the
CBN in order to ensure their safety and soundness, as well as the going concern status of the
banks. The SIBs shall be expected to provide high quality data to the regulatory authorities for
the purpose of enhanced supervision. In the event that an SIB has a High Composite Risk
rating, half-yearly meetings shall be held with the board and management to address issues of
supervisory concern.

Disclosure Requirements
The SIBs are to make quarterly disclosures of their financial condition and risk management
activities to the regulators as prescribed by the Central Bank of Nigeria. These include, but are
not limited to, the following areas:

Risk governance and risk strategies/business model,
Capital adequacy and risk weighted assets,
ICAAP Policy and Computation,
Liquidity/Funding,
Market risk,
Credit risk,
Operational risk, and
Other identified risks.
SIBs are expected to adopt international bank risk disclosure best practices.

SANCTIONS
Appropriate sanctions shall be imposed for non-compliance with the requirements of this
Framework.
CENTRAL BANK OF NIGERIA FINANCIAL STABILITY REPORT
DECEMBER 2014

ACKNOWLEDGEMENT

List of Major Contributors
S/N
Name
Department

V. E. Inim (Ph. D.)
Financial Policy and Regulation Department

F. E. Ahonkhai
Ditto

I. R. Yusuf
Ditto

M. W. Muazu-Lere
Ditto

M. C. Akuka
Ditto

P. N. Wondi
Ditto

C. O. Ugwueze
Ditto

J. A. Mohammed
Ditto

B. Isah
Ditto

C.P. Onyekwe
Ditto

Y. A. Babade
Ditto

V. K. C. Johnson
Ditto

I.S. Udom
Statistics Department

M. Y. Dogo
Monetary Policy Department

O. S. Ogundele
Ditto

U. Kama
Research Department

M. A. Adigun
Ditto

U. F. N. Onuoha
Development Finance Department

Y. Izzatu (Mrs.)
Ditto

O. C. Nwanisiobi
Ditto

B. Hassan
Banking Supervision Department

M. O. Okafor
Ditto

A. Shebe
Ditto

C. D. Nwaegerue
Ditto

J. A. Angaye
Risk Management Department

G. Adegbite
Financial Markets Department

O. Ezewu
Other Financial Institutions Supervision
Department

A.Ologunde
Ditto

M. Farouk
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