FINANCIAL STABILITY REPORT
January 2009 - June 2010
Maiden Edition
CENTRAL BANK OF NIGERIA
To be one of the most efficient and effective of the world's
central banks in promoting and sustaining
economic development
To be proactive in providing a stable framework for the
economic development of Nigeria through the effective, efficient
and transparent implementation of monetary and exchange
rate policy and management of the financial system
CBN's Vision and Mission
Vision
Mission
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010
iii
CBN's Organogram
Deputy Governor
(Operations)
Deputy Governor
(Corporate Service)
Deputy Governor
(Economic Policy)
Deputy Governor
(Fin. System Stability)
The Board
Directorates
Departments
Human
Resources
Procurement &
Support Services
Finance
Medical
Services
Security
Services
Legal
Services
Monetary
Policy
Financial
Markets
Trade &
Exchange
Research
Statistics
Financial Policy
& Regulation
Banking
Supervision
OFI
Supervision
Development
Finance
Banking &
Payment System
Currency
Operations
Branch
Operations
IT
Reserve
Management
Governor
Corporate
Secretariat
Strategy &
Performance Mgt
Governors’
Department
Risk
Management
Internal
Audit
Board of Directors
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010
iv


R e p o r t C o n t e n t s
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010
v
CBN'S VISION AND MISSION
iii
CBN'S ORGANOGRAM
iv
REPORT CONTENTS
v
PREFACE
viii
GOVERNOR'S STATEMENT
ix
EXECUTIVE SUMMARY
xv
The Central Bank of Nigeria

The Nigeria Deposit Insurance Corporation (NDIC)

The Securities and Exchange Commission (SEC)

The Nigeria Stock Exchange (NSE) and the Abuja Commodity
and Securities Exchange (ACSE)

The National Insurance Commission (NAICOM)

The National Pension Commission (PENCOM)

Inter-Agency Cooperation

Other Stakeholders in the Financial System

Self-Regulatory Organizations (SROs)

The Informal Sub-Sector..

Global Macroeconomic and Financial Developments

Output ..

Inflation

Interest Rates

Exchange Rates

Stock Markets

Domestic Macroeconomic and Financial Developments

The Real Sector

The Fiscal Sector

The Financial Sector

The External Sector

Key Risks in the Financial System

Credit Risk

Liquidity and Funding Risks

Market Risk

Operational and Reputational Risks

Laundering and Terrorist Financing Risk

Promoting Financial Stability

Institutional Capacity Building

International Economic Relations and Cooperation

Access to Finance

Direct Real Sector Interventions

Indirect Interventions

Non-Interest Banking


OVERVIEW

2.0
THE STRUCTURE OF THE NIGERIAN FINANCIAL SYSTEM

3.0
THE MACROECONOMIC AND FINANCIAL ENVIRONMENT

4.0 INITIATIVES IN THE FINANCIAL SECTOR

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010
vi
Anti-Money Laundering Measures and Combating the
Financing of Terrorism (AML/CFT)

Major Developments

Other Developments

Other Strategies for Dealing with Risks in the Banking System

Macroeconomic Outlook

Regulatory Reforms

The Establishment of the Macro-Prudential
Analysis Division

Review of Prudential Guidelines and Related Matters

Guidelines on Margin Lending

The Supervisory Framework

Adoption of Risk-based Supervision of Banks and Other
Financial Institutions

Consolidated and Cross-border Supervision

The Financial Services Regulation Coordinating
Committee (FSRCC)

Memoranda of Understanding (MOUs)

Proposed Amendment to the Banks and Other Financial
Institutions Act (BOFIA)

Supervisory Challenges ..

The Impact of Global Financial and Economic Crises

Weak Corporate Governance Culture/Practices

An Inadequate Legal Framework

Data Integrity

Addressing Inadequate Supervisory Capacity/
Arrangements

Consumer Protection

Focus of Surveillance in 2010/2011

The Payments System Vision 2020 (PSV 2020)

Developments in the Payments System

Real-time Gross Settlement (RTGS)

Clearing of Cheques

e-Cards

Automated Teller Machines

Mobile Payments

Challenges of the Payments and Settlements System

Review of the Universal Banking Model

The Establishment of the Asset Management Corporation
of Nigeria (AMCON)

Adoption of the IFRS in the Nigerian Banking System

Promoting Consumer Protection in the Nigerian Banking Industry

Enhancement of the Credit Risk Management System


THE PRUDENTIAL REGULATION AND SUPERVISORY
FRAMEWORK ..

6.0 THE PAYMENTS AND SETTLEMENTS SYSTEM

7.0 PRESERVING THE INTEGRITY OF THE FINANCIAL SYSTEM .

8.0
CONCLUDING REMARKS
..

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010
vii
LIST OF ABBREVIATIONS AND ACRONYMS

LIST OF FIGURES
LIST OF TABLES
LIST OF BOXES

Figure 1
..

Figure 2:


Figure 3:
C


Figure 4:
I


Figure 5:
G
..

Figure 6:
F
..
..

Figure 7:
O
..
..

Figure 8:
T


Figure 9:
T


Figure 10:
..

Figure 11:


Figure 12:
..
..

Figure 13:

Figure 14:


Figure 15:
..
..

Figure 16:
..

Figure 17:
..
..
..

Figure 18:

Figure 19:
..

Figure 20:
..

Figure 21:
..
..

Figure 22:


Figure 23:


Figure 24:


Table 1:
..
..
..

Table 2
..
..

Table 3:
..
..
..

Table 4:


Table 5:


Box 1:


Box 2:


:
Structure of the Nigerian Financial System as at June 2010
Growth in Oil and Non-Oil GD
ontribution to Non-oil GDP
nflation Trend
overnment Expenditure and Revenue (Q1 2009 - Q1 2010)
iscal Balance and Quarterly Budget (Q1 2009 - Q1 2010)
verall Fiscal Balance and Quarterly Budget (N'billion)
rends in Major Monetary Aggregates
rends in Net Domestic Credit

Money Market Rates between December 2008 and March 2010

Lending Rates

Exchange rates From December 2008 to March 2010

Measuring Stock Market Confidence, February 2008 - March 2010

The Total Assets of DMBs

Sectoral Distribution of Credits as at End-March 2010

Trend in the Growth of Gross Loans and Non-performing Loans

The Money Market and Monetary Policy Rates

Timelines for the Implementation of the PSV 2020 User Initiatives

Volume of Inter-bank Funds Transfers Between 2007 and 2009

Value of Inter-bank Funds Transfers Between 2007 and 2009

Volume of Electronic Card Transactions, 2007 - 2009

Value of Electronic Card Transactions

Volume of e-Payment Transactions

Value of e-Payment Transactions

World Economic Outlook for 2010 and 2011
Policy Interest Rates of Selected Countries, 2007 - 2010

Exchange Rates of Some Selected Currencies

International Stock Market Indices

Sectoral Distribution of Credit
The Intervention Measures
Financial Stability Going Forward
P
r
e
f
a
c
e
Financial stability is the resiliency of the financial system to unanticipated adverse
shocks while enabling the continuing smooth functioning of the financial system
intermediation process. A stable financial system contributes to broader economic
growth and rising living standards. The financial system performs one of the most
important functions in the welfare of its citizens by supporting the ability of households
and firms to hold and transfer financial assets with confidence.
The Central Bank of Nigeria (CBN) is committed to promoting the economic and
financial welfare of Nigerians by actively overseeing a stable and efficient financial
system. The CBN promotes this objective by providing central banking services,
including: liquidity and lender-of-last-resort facilities; overseeing key domestic clearing
and settlement systems; conducting and publishing analyses and research; and
collaborating with various domestic and international policy-making bodies to develop
policy. CBN's contribution complements the efforts of other federal, state and local
agencies that bring unique expertise to the management of the economy.
The Financial Stability Report (FSR) is one of several avenues through which the CBN
seeks to contribute to the resiliency of the Nigerian financial system. The Report
combines the Bank's ongoing work in monitoring developments in the system, with a
view to identifying potential risks to the overall soundness, as well as highlighting the
efforts of the Bank and other regulatory authorities, to mitigate those risks. The Report
aims at promoting informed public discussion on some key aspects of the Nigerian
financial system and providing an assessment of the downside risks, rather than the most
likely future path for the financial system. In addition, the FSR summarises recent
financial sector policy actions as well as aspects of the financial system's structure and
functioning of the CBN. It is hoped that the Report would assist financial institutions
and the relevant authorities in mitigating risks to the system.
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010
viii
Governor’s Statement
The world economy was hit by an unprecedented financial and economic meltdown of
2007-2009, tipped into recession by the subprime crisis in the US in August 2007. The
meltdown led to the collapse of many world renowned financial institutions and resulted
in the bankruptcy of a nation. In Nigeria, the economy faltered and the banking system
experienced a crisis in 2009, triggered by global events. The stock market lost
approximately 70 per cent of its value in 2008-2009 and many Nigerian banks had to be
rescued. In order to stabilise the system and return confidence to the markets and
investors, the CBN injected 620 billion of liquidity into the banking industry and
replaced the leadership of eight banks. Since then, the sector has stabilised considerably.
The global financial and economic crises have significantly altered the way financial
markets function and changed the way central banks operate in most economies.
The Nigerian banking sector has witnessed dramatic growth in the post-consolidation
period. However, neither the industry nor its regulators were sufficiently prepared to
monitor and sustain the sector's explosive growth. Prevailing sentiment and economic
orthodoxy encouraged the rapid growth, creating a blind spot to the risks building up in
the system. Prior to the crisis, the sentiment in the industry was that the banking sector
was sound and that its growth should be encouraged.
In my view, eight major interdependent factors led to the creation of an extremely fragile
Nigerian financial system that was tipped into crisis by the global financial crisis and
recession. These factors were:
i.
Macro-economic instability caused by large and sudden capital inflows;
ii.
Major failures in the corporate governance at banks;
iii.
Lack of investor and consumer sophistication;
iv.
Inadequate disclosure and transparency about the financial position of
banks;
v.
Critical gaps in the regulatory framework and regulations;
vi.
Uneven supervision and enforcement;
vii.
Unstructured governance & management processes at the CBN
viii.
Weaknesses in the business environment.
Each of these factors is serious enough in its own right. Acting together, they brought the
entire Nigerian financial system to the brink of collapse.
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010
ix
Economic and Macro Prudential Management
Corporate Governance at Banks
Investor and Consumer Sophistication
Although there is some evidence of economic diversification, oil maintains an overly
dominant position in the Nigerian economy, introducing volatility and posing significant
challenges to macro-economic stability. As oil prices increased steadily between 2004
and 2008, Government spending tracked the price of oil, making fiscal policy highly procyclical adding to the volatility.
The economy was not able to absorb the excess liquidity from oil revenues and foreign
investments into the productive sectors. This resulted in significant flows to non-priority
sectors and to the capital markets, mostly in the form of margin loans and proprietary
trading, camouflaged as loans. As a result, market capitalisation of the Nigerian Stock
Exchange (NSE), which was at its peak in 2007, represented 5.3 times of its position in
2004, with market capitalisation of bank stocks increasing ninefold during the same
period. This set the stage for a financial asset bubble, particularly in bank stocks. The
rapid rise in asset prices and the over-concentration of bank shares in the stock market
index were clear indications of an accident waiting to happen. Surprisingly, these
developments did not raise concern among regulators. For instance, in 2007, the
Nigerian Stock Exchange was believed to be “the best performing” bourse in the world
though there was no evidence to suggest a commensurate improvement in the
fundamentals of real sector corporations.
The huge surge in capital availability occurred at a time when corporate governance
practices in Nigerian banks were extremely weak. In fact, the failure of corporate
governance contributed significantly to the financial crisis. Consolidation created bigger
banks but the process failed to overcome the fundamental weaknesses in corporate
governance in many of the banks. It was well known in the industry that since
consolidation, some banks had been engaging in unethical and potentially fraudulent
business practices; the scope and depth of such activities were documented in recent
CBN examinations.
Bank boards are hardly the only ones to blame for failure to deal with the sudden surplus
in capital. A lack of investor and consumer sophistication also contributed to the crisis by
failing to impose market discipline and allowing banks to take undue advantage of
consumers. Investors, many of whom were new to investing, were unaware of the risks
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010
x
they were taking and consumers were often subjected to poor service and sometimes
hidden fees. Nigeria does not have a tradition of consumer activism or investor
protection, and, as a consequence, many Nigerians made investments without a proper
understanding of the risks. A limited consumer protection framework did exist in
Nigeria. However, the framework was inadequate and as a result consumers' rights were
not sufficiently protected.
Given the low level of sophistication among many consumers and investors, inadequate
disclosure by the banks was another major contributing factor to the crisis. Bank reports
to the CBN and investors were often inaccurate, incomplete and late, depriving the CBN
of the right information to effectively supervise the industry and depriving investors of
information required to make informed investment decisions.
Lack of effective co-ordination among the financial system regulators prevented the
CBN from having a comprehensive, consolidated picture of its regulatory activities. In
addition, the regulations needed to address the major causes of the crisis were often
inadequate. Despite the widespread knowledge of bank malpractices and the propensity
for regulatory arbitrage, the Financial Services Regulation Coordinating Committee
(FSRCC), the coordinating body for financial services regulators, did not meet for two
years during the period. Whilst excess capital gave rise to strong growth in lending,
banks were also allowed to use the capital to engage in many other non-lending
activities, such as stock market investments, most of which were hived off to subsidiaries
outside the supervisory purview of the CBN.
Uneven supervision and inadequate enforcement of relevant regulations also played a
significant role in exacerbating the problems associated with the crisis. Regulators were
lax in anticipating and supervising the massive changes in the industry or in eliminating
the pervasive corporate governance failures.
Governance and internal processes were not properly structured and this constrained the
CBN's ability to supervise the industry. Consequently, issues concerning the stability of
the financial sector and economic development, such as global economic risks,
Disclosure and Transparency
Regulatory Framework and Prudential Regulations
Supervision and Enforcement
Governance and Management Processes
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010
xi
federal/state economic development strategies and fiscal policies, the formation of asset
bubbles, exchange rate risks, capital market depth, and the informal sector economy
were not comprehensively addressed.
An insufficiently developed infrastructure and the difficult business environment had a
negative impact on the banking industry. The tortuous legal process, the absence of
reliable credit rating agencies and poor infrastructure all contributed to poor banking
practices. Thus, only a few banks were able to foreclose on borrowers, and such
constraints led to borrowers abusing the system. Lack of basic credit information on
customers, underscored by the absence of a unique identifier, has held back the
development of credit bureaux and hampered customer credit assessment at banks,
thereby contributing to an increase in the stock of bad debt in the system.
The blueprint for reforming the Nigerian financial system in the next decade is built
around four pillars, as follows:
Pillar 1: Enhancing the quality of banks,
Pillar 2: Establishing financial stability,
Pillar 3: Enabling the evolution of a healthy financial sector, and
Pillar 4: Ensuring that the financial sector contributes to the real economy.
In some areas, the CBN would take the lead in implementing reforms while in others it
would play a key advocacy role, as elaborated in the following paragraphs.
The CBN has initiated a five-part programme to enhance the operations and quality of
banks in Nigeria. The programme would consist of initiatives to fix the key causes of the
crisis. It would also include implementation of risk based supervision, reforms to
regulations and the regulatory framework, enhanced provisions for consumer
protection, and internal transformation of the CBN. Core to transforming the CBN
would be corporate governance within the CBN. The organisation structure of the CBN
has been streamlined to enable the Bank to better supervise and regulate the industry. In
addition, the CBN would deploy a stronger management information framework to
effectively supervise the industry.
The Business Environment
The Reform Programme
Enhancing the Quality of Banks
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010
xii
Establishing Financial Stability
Enabling the Evolution of a Healthy Financial Sector
Ensuring that the Financial Sector Contributes to the Real Economy
The second pillar in the reform programme comprises establishing financial stability.
The key features of this pillar would centre on strengthening the Financial Stability
Committee within the CBN, the establishment of macro-prudential rules, and further
development of the capital market as an alternative to bank funding.
The pillar of this reform programme would address key issues, such as banking industry
structure and banking infrastructure, including credit bureaux and registries, the cost
structure of banks, as well as the role of the informal sector in the economy.
Prior to the ongoing reform, development financial institutions which had been set up for
specific purposes, such as housing finance, industrial finance, and urban development
had not impacted the real economy as envisaged. This situation in Nigeria is unlike in
some emerging markets where proactive government action had contributed
significantly to the real economy. The fourth pillar of the reform is aimed at ensuring that
the financial sector would contribute optimally to the real economy.
The foregoing reform programme represents our vision for the Nigerian banking sector
and the road map for the sector's healthy development. The effort to strengthen the
Nigerian financial system is consistent with the 'Financial System Strategy FSS 2020
programme' which is aimed at fostering a strong and robust domestic financial system
that would serve as a catalyst for the emergence of Nigeria as one of the top 20 economies
in the world by the year 2020.
In order to help achieve such noble objectives, the CBN is launching this maiden edition
of the Financial Stability Report (FSR), covering the period January 2009 to June 2010.
Thereafter, the Report will be published bi-annually.
Governor
Sanusi Lamido Sanusi
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010
xiii
Executive Summary
The global financial crisis of 2007-2009 created a paradigm shift in the manner in which
global economies are run. The experience has revealed that macroeconomic stability is
vulnerable in the face of financial instability. In realisation of this, financial stability is
now accorded prominence in the global arena, giving rise to the establishment of
Financial Stability Boards by the leaders of developing nations (G20) to, among other
things, co-ordinate the work of national financial authorities and international standardsetting bodies in order to develop and promote the implementation of effective
regulatory, supervisory and other sector policies.
Most monetary authorities across the globe are taking bold steps to blend monetary
policy with elements of financial stability, in addition to promoting resilience through
collaboration and advocacy, with periodic reviews of environmental circumstances and
attendant risks. This Financial Stability Report (FSR) is an instrument for stimulating
such review and, hence, an indispensable policy driver.
In Nigeria, the financial system has witnessed rapid growth, occasioned by the bank
consolidation exercise of 2005. However, poor governance and a lax risk management
culture, exacerbated by the adverse impact of the global financial and economic
meltdown, have brought about distress in a number of Nigerian banks. This development
prompted the Central Bank of Nigeria (CBN), in collaboration with the Nigeria Deposit
Insurance Corporation (NDIC), to conduct a special examination of all the banks to
ascertain the health of the banking sector. The examination revealed serious
shortcomings, including poor corporate governance and inadequate risk management
practices, which portended systemic risk, necessitating the intervention of the CBN
since August 2009. Additional measures were subsequently implemented to effectively
contain the distress in the system.
The Financial Stability Report (FSR), which will be issued bi-annually henceforth, is
intended to provide regular updates on developments in the Nigerian financial sector, as
well as analyses of their impact on the economy. This maiden edition of the FSR,
provides an insight into the structure of the Nigerian financial system and domestic and
global macroeconomic developments, and highlights the major prudential,
developmental and payments system initiatives which were undertaken to strengthen the
resilience and integrity of the financial system. The publication is intended to promote a
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010
xv
clearer understanding of the issues impacting on the stability of the Nigerian financial
system and the corresponding policy responses.
The global economy began a gradual recovery in the second half of 2009, after the deep
recession triggered by the subprime mortgage crisis in the United States of America
(USA) and subsequent global financial and economic crises. In response to the various
fiscal and monetary stimulus packages adopted by various countries in 2008 and 2009,
global economic activity further improved in the first quarter of 2010, as evidenced by
growing world trade, and improved industrial production and retail sales which boosted
confidence in markets.
Output growth in emerging and developing economies is expected to rebound to over 6.3
per cent during 2010 and 6.5 per cent in 2011, following a modest 2.4 per cent growth in
2009. Growth in Sub-Saharan Africa is projected to improve from 2.1 per cent in 2009 to
4.7 per cent in 2010 and further to 5.9 per cent in 2011. Similarly, the health of the
international banking system is generally improving alongside global economic
recovery. The IMF estimates of bank write-downs since the start of the crises through
2010 have been reduced to $2.3 trillion from $2.8 trillion in October 2009. The
recoveries in real and financial activities were mutually supportive, but access to credit
remained tight for some sectors. Money markets were stabilizing, while corporate bonds
and equity markets were recovering. In most developed markets, credit to the private
sector had eased, while many emerging and developing economies were showing signs
of gradual improvement. In a few advanced economies, however, rising fiscal deficits
and public debts have contributed to the sharp increase in sovereign risk premium,
thereby posing new risks to the recovery.
Global consumer prices moderated for most of 2009, as inflationary pressures remained
subdued. This was attributed to weak global demand. For example, inflation in
advanced economies is projected to moderate from 1.5 per cent in 2010 to 1.4 per cent in
2011, compared with that of emerging and developing economies where inflation is
expected to decline from 6.2 per cent in 2010 to 4.7 per cent in 2011. Overall, inflation is
likely to fluctuate during the recovery period as consumer prices remain sensitive to
commodity prices. Modest increases are expected in oil prices, which are expected to
GLOBAL MACROECONOMIC AND FINANCIAL DEVELOPMENTS
Output
Inflation
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010
xvi
reach about $78.25 per barrel (pbl) on the average by end 2010, from the $61.78 pbl level
in 2009.
Monetary policy had been largely expansionary for most part of 2009. This was driven
by the use of unconventional liquidity measures (quantitative easing) and low monetary
policy rates (close to zero) adopted in many developed economies. For most of 2009, for
example, the Bank of Japan kept its policy rate at 0.1 per cent; the Federal Reserve
System of the USA at 0.25 per cent; the Bank of England at between 0.5 and 1.5 per cent;
while the Reserve Bank of South Africa and the CBN kept their rates at around 6 per cent.
High capacity utilisation in some sectors, coupled with deteriorating credit quality,
accounted for the credit squeeze in a number of emerging economies thereby driving up
rates.
The global financial crisis and fragile economic recovery continued to dominate the
major international currency markets in the second half of 2009. Following concerns
over the high US budget deficits and the sustainability of its economic recovery, most
international currencies appreciated against the US Dollar during the period. For
example, in the first quarter of 2010, the Canadian Dollar and the Mexican Peso
appreciated against the US Dollar by 3.62 and 5.80 per cent, respectively. In Europe, the
British Pound and the Euro depreciated against the US Dollar by 6.05 and 5.81 per cent,
respectively, while in Africa, the South African Rand and the Egyptian Pound
appreciated against the Dollar by 1.75 and 0.01 per cent, respectively. Both the Nigerian
Naira and the Kenyan Shilling, however, depreciated against the US Dollar by 0.14 and
1.39 per cent, respectively.
The global economic recovery and the associated improvements in financial conditions
engendered confidence in international financial markets. As a result of improved
overall confidence, equity markets recovered faster than expected and the intense
volatility that had characterised major international stock markets until the first half of
2009 abated. Consequently, most global stock indices increased between the fourth
quarter of 2009 and March 2010.
In Africa, the Nigerian NSE ASI, the South African JSE All-Share, the Kenyan Nairobi:
Interest Rates
Exchange Rates
Stock Markets
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010
xvii
NSE 20 and the Egyptian EGX CASE 30 indices increased by 26.8, 3.8, 24.9 and 8.5 per
cent, respectively. In North America, the S&P 500, the Canadian S&P/TSX Composite
and the Mexican Bolsa indices increased by 5.2, 2.5 and 4.0 per cent, respectively. In
South America, the Brazilian Bovespa, Argentine Merval and the Columbian IGBC
General indices increased by 2.0, 3.6 and 3.8 per cent, respectively. In Europe, the FTSE
100, the CAC 40, the DAX and the Russian MICEX indices increased by 4.4, 0.3, 2.6 and
6.7 per cent, respectively. In Asia, Japan's Nikkei 225 increased by 4.1 per cent, while
China's Shanghai Stock Exchange (A) index decreased by 4.2 per cent. India's BSE
Sensex index remained unchanged.
The macroeconomic outcomes in 2009 and the first half of 2010 were influenced by
developments in both the domestic and international economies. Overall, the Nigerian
economy was relatively stable, but developments had mixed outcomes. The major
challenge to economic and monetary policies since 2009 has remained the management
of tight liquidity in the banking system. In particular, the growth in credit to the private
sector slowed significantly. Inflation rate (year-on-year) moderated substantially,
although it remained at double digit all through 2009 to the first half of 2010. The
exchange rate, which was relatively stable during the first and second quarters of 2009,
depreciated during the third and fourth quarters and later appreciated in the first quarter
of 2010. Interest rates rose in the first half of 2009, influenced by the global financial
crisis which precipitated tight liquidity conditions in the banking system, but reversed in
the fourth quarter, induced by improvements in liquidity conditions in the money market
and the CBN guarantee of all inter-bank transactions. Crude oil production improved in
the second half of 2009, following the amnesty programme implemented by the Federal
Government in resolving the Niger Delta crisis. Furthermore, oil prices improved in the
international oil market in response to economic recovery in most advanced and
emerging market economies in the second half of 2009.
Inflationary pressures moderated in 2009 and the first quarter of 2010, as the inflation
rate trended downwards. Headline inflation fell from 14.4 per cent at the end of the first
quarter of 2009 to 11.8 per cent at end-March 2010, and averaged 12.0 per cent between
the first quarters of 2008 and 2010. The relatively high level of inflation reflected the
upward movement in food, fuel and housing prices.
DOMESTIC MACROECONOMIC AND FINANCIAL DEVELOPMENTS
Inflation
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010
xviii
THE FISCAL SECTOR
Fiscal Operations
THE FINANCIAL SECTOR
Monetary and Credit Developments
Interest Rates
The estimated Federal Government-retained revenue and aggregate expenditure stood at
2,646.9 billion and 3,456.9 billion in 2009, respectively. Consequently, the fiscal
operations of the Federal Government resulted in a notional deficit of 810.0 billion,
compared with the budgeted deficit of 836.6 billion for the 2009 fiscal year. The
estimated Federal Government-retained revenue and aggregate expenditure in the first
quarter of 2010 were 468.61 billion and 843.81 billion, indicating a decline of 29.34
and 10.14 per cent, respectively, from the levels in the preceding quarter. The fiscal
operations of the Federal Government during the first quarter of 2010 resulted in an
estimated deficit of 375.20 billion, compared with the budgeted deficit of 387.70
billion, as against a surplus of 32.56 billion in the corresponding period of 2009. The
deficit was predominantly financed by FGN Bonds.
Provisional data showed that the growth in monetary aggregates was modest in the first
four months of 2010. Relative to end-December 2009, the broad measure of money
supply (M2), rose by 1.8 per cent to 10,959.2 billion at end-April 2010, implying an
annualized growth of 5.4 per cent, compared with the respective growth rates of 2.2 per
cent and -1.8 per cent at the end of the preceding month and the corresponding period of
2009 and the indicative benchmark growth rate of 29.3 per cent for fiscal 2010. The
development was accounted for largely by the increase in net domestic credit and other
assets (net) of the banking system.
Aggregate bank credit to the domestic economy (net) rose by 7.7 per cent at the end of
April 2010 over the level at end-December 2009. The increase in aggregate credit (net)
was due mainly to the increase in credit to the Federal Government which rose by 32.6
per cent. However, on an annualized basis, the increase translates to 23.1 per cent, which
is below the indicative target of 55.54 per cent for 2010. Base money, the operating
target of monetary policy, at 1,497.1 billion at end-April, 2010, was lower than the
indicative benchmark of 1,872.8 billion programmed for the second quarter of 2010,
by 20.1 per cent.
The downward trend in interest rates, which began in the second half of 2009, continued
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010
xix
in the first four months of 2010. Following the CBN's decision to guarantee inter-bank
transactions as well as some improvement in liquidity conditions, both of which helped
in the restoration of confidence in the system, interest rates declined. The weighted
average inter-bank rate, which was 2.89 per cent as at end-December 2009, declined to
1.27 per cent at end-April 2010. Similarly, the securitized open buy back (OBB) rate
declined to 2.46 per cent at end-March 2010, from 2.64 per cent at end-December 2009,
and further to 1.11 per cent at end-April, 2010. The average term deposit rate declined by
4.5 percentage points over the level at end-December 2009, to 6.9 per cent at end-March
2010.
The fall in short-term rates impacted marginally on lending rates as prime and maximum
lending rates declined by 0.7 and 0.3 percentage points to 18.4 and 23.2 per cent,
respectively, at end-March 2010 from their end-December 2009 levels.
Monetary policy was largely influenced by tight liquidity in the domestic economy,
induced partly by the distress in some banks and the adverse impact of the global
economic and financial crises of 2007/2008. Liquidity management was, therefore,
anchored on the need to ensure a well functioning financial market that would foster
growth without compromising the objective of monetary and price stability. The CBN
made extensive use of open market operations (OMOs), being its primary tool of
liquidity management. This was complemented by variation of prudential reserve ratios,
tenored repurchase transactions, the sale of treasury instruments at the primary segment
of the market, and the use of CBN's standing facility window.
Consequent upon the tight liquidity conditions experienced in the first half of 2009, a
number of measures were undertaken by the CBN to achieve optimum liquidity, stability
in the foreign exchange markets, and a seamless flow of credit to the real economy. These
included the following measures:
Further liberalisation of the foreign exchange market;
Downward adjustments of monetary policy rates and other prudential ratios;
Injection of a stimulus package of 620.0 billion to recapitalise ailing
banks; and
Guarantee of inter-bank transactions.
Liquidity Management

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010
These measures resulted in a number of positive developments in the second half of the
year, which manifested in the relative stability in the foreign exchange market and
improved liquidity conditions in the inter-bank money market, thus restoring confidence
in the system.
The growth of the banking system in the post-consolidation period and the failure of the
regulators and supervisors to develop commensurate capabilities to supervise the
system, created risks to the system, which posed significant challenges to both
regulators and other stakeholders. Furthermore, a number of interdependent factors such
as macro-economic instability, major failures in corporate governance at banks, and
uneven supervision and enforcement were also identified as being responsible for the
ensuing fragile financial system.
The combined effects of these factors rendered the financial system vulnerable and
unsupportive of the economy, which informed the CBN's intervention in August 2009.
The CBN, thereafter, implemented, among others, the following initiatives to further
enhance stability in the system:
Establishment of the Asset Management Corporation of Nigeria (AMCON);
Establishment of the Financial Stability Committee (FSC) ;
Review of supervisory procedures/methodology;
Adoption of a common year-end for banks;
Restructuring of the Financial Sector Surveillance Directorate;
Renewed collaboration with other regulators;
Review of the Corporate Governance Code for Banks;
Establishment of a 200.0 billion Commercial Agriculture Credit Scheme
(CACS) by the CBN, in collaboration with the Federal Ministry of
Agriculture and Water Resources (FMA&WR);
Establishment of a 300 billion Power Development Fund in support of
Small and Medium Enterprises (SMEs);
Establishment of a 200 billion Small and Medium Enterprises Credit
Guarantee Scheme (SMECGS); and
Establishment of a 200 billion refinancing and restructuring of the
manufacturing sector loan portfolio.
Other initiatives by the Federal Government that were supportive of financial stability
INSTITUTIONAL DEVELOPMENTS IN THE FINANCIAL SECTOR
The Banking System

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010
xxi
included the following:
Federal Government's amnesty programme in the Niger Delta region;
Enactment of Nigerian Oil & Gas Industry Content Development Act 2010
(the “Local Content Act”); and
Creation of a Ministry for the development of the Niger Delta.
The major challenges in Nigeria's financial system include the following:
Volatile and reversible capital inflows that characterised bank consolidation
exercise of 2005;
Major weaknesses in the business environment;
Failures in corporate governance in banks and other financial institutions;
Inadequate disclosure and transparency in financial reporting;
Engagement in multiple financial activities that increased the complexity of
the operations;
Uneven supervision and enforcement; and
Inadequate risk management frameworks for identifying, measuring and
controlling the risks associated with the activities of deposit money banks
(DMBs).
These factors have combined to destabilise the financial system and constrain growth in
2008 and 2009. However, there was slight recovery in the first half of 2010 as
uncertainties about the viability of the world economy, which had been ravaged by the
impact of the global financial crisis, eased. Furthermore, the impact of various policy
measures adopted by government and regulators to stabilise the system began to yield
positive results. The banking system, specifically, has been reasonably stable since the
CBN intervention measures were taken in August 2009. It is also pertinent to note that
the CBN-induced reforms have been greatly complemented by a relatively conducive
macroeconomic environment. Nevertheless, the financial system continues to be
exposed to certain inherent risks which include the following:
Credit risk,
Liquidity and funding risk,
Market risk,
Operational and Reputational risks, and
Money laundering and terrorist financing risks.

Key Challenges and Risks in the Financial System
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010
The CBN has, however, implemented a number of measures, including the
establishment of AMCON to address these risks.
The intervention by the CBN in a number of banks revealed certain inadequacies in
regulatory procedures, methodology and enforcement. Consequently, the CBN, among
other measures, has established a Macro-prudential Division in March 2010 in its
Financial Policy and Regulation Department, with a mandate to maintain a banking
industry database, and to collate, analyse, review and monitor the banking industry's
financial condition. The Bank also reviewed the prudential guidelines for loan
classification and margin lending, in line with best practices.
In addition to the global financial crisis, the period January 2009 to June 2010 was also
characterised by weak governance, inadequate regulation and supervision, data integrity
challenges, ineffective consumer protection measures and a weak legal framework.
Payments system reforms were rigorously pursued based on the belief that there is a
strong link between an efficient payments and settlements system and economic growth
and development. The benefits of an efficient payments system include low transaction
costs and a predictable and efficient market response to monetary policy, which
engender financial system stability. Nigeria's payments and settlements system reforms
are intended to promote the use of non-cash mediums, including a robust electronic
payment regime that is reliable and accepted throughout the country.
The preceding review has highlighted various measures taken by the CBN to enhance the
stability of the financial system. Additional measures are being taken to further
strengthen the system, as the following initiatives suggest:
The universal banking (UB) model adopted in 2001, allowed banks to diversify into nonbank financial businesses. Following the consolidation programme in 2005, banks
became awash with capital funds which were deployed by diversifying into various
financial services and the setting up of subsidiaries without adequate capacity to manage
REGULATORY REFORMS
SUPERVISORY CHALLENGES
THE PAYMENTS SYSTEM
PRESERVING THE INTEGRITY OF THE FINANCIAL SYSTEM
i.
Review of the Universal Banking Model
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010
xxiii
the associated risks. Thus, the flexibility and regulatory forbearances provided under the
UB model were abused by operators. To address this challenge, the CBN is reviewing the
UB model with a view to inducing banks to focus on core banking business. Under the
proposed model, banks would not be allowed to invest in or own non-bank subsidiaries,
while banks with such investments would be required to either divest or spin off the
businesses. The three classes of deposit money banks being proposed would be as
follows: International banks, National banks, and Regional banks.
The high incidence of non-performing loans in the banking industry and consequent
significant erosion of the capital of some banks informed the need to establish AMCON
to free such banks of the burden of toxic assets. AMCON is an interventionist initiative
with a life span of ten years and an authorised capital of 10 billion which would be
subscribed to by the CBN and the Ministry of Finance.
The CBN has taken steps to expose the banking system to global best practices in
financial reporting and disclosure. In this respect, the CBN has been proactive in
promoting initiatives to improve disclosure and reporting practices in banks. The
provision of adequate information by banks would enhance market discipline, promote
transparency and facilitate the management of systemic risks. It would also foster safe
and sound banking practices which would enhance financial stability.
To further engender public confidence in the banking system and enhance consumer
protection, the CBN has established the Consumer and Financial Protection Division to
provide a platform through which consumers can seek redress.
The CBN recognises that financial stability is fostered by public confidence which is
facilitated by an arrangement whereby consumers are educated and enlightened on their
rights and responsibilities. Consequently, the Consumer and Financial Protection
Division would embark on a programme of consumer education and enlightenment for
all categories of bank customers throughout the country. The details are in the process of
being worked out and would be disseminated to the Nigerian banking public in due
course.
ii.
Establishment of the Asset Management Corporation of Nigeria (AMCON)
iii.
Adoption of the International Financial Reporting Standards (IFRS) in the
Nigerian Banking System
iv.
Promoting Consumer Protection in the Nigerian Banking Industry
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010
xxiv
The CBN is also collaborating with the Consumer Protection Council on the review of
the Consumer Protection Council Act No. 66 of 1992 to further empower the regulators
to enforce discipline in the market.
The CBN has expanded the operations of its CRMS by licensing some private credit
bureaux to complement the efforts of the CBN bureau. The private credit bureaux are
mandated to cover all sectors of the economy with a view to providing credit reports on
all individuals and corporate bodies that intend to enjoy, or are enjoying, any type of
financial facility in the country.
v.
Enhancement of the Credit Risk Management System (CRMS)
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010
xxv
OVERVIEW
The global economy experienced gradual recovery beginning in the second half of 2009.
This was driven largely by the unprecedented amount of monetary and fiscal stimulus
packages introduced in both developed and emerging market economies in the wake of
the global financial and economic crises. The recovery was evidenced by growing world
trade, improved industrial production and retail sales. Consumer prices also moderated
for most of 2009, as inflationary pressures remained low.
In Nigeria, the financial system witnessed rapid growth, occasioned by the bank
consolidation exercise of 2005. However, poor governance and lax risk management,
exacerbated by the adverse impact of the global financial and economic meltdown,
brought about distress in a number of Nigerian banks. This prompted the Central Bank of
Nigeria (CBN), in collaboration with the Nigeria Deposit Insurance Corporation, to
conduct a special examination of all the banks to ascertain the health of the banking
sector. The examination revealed some serious shortcomings in corporate governance
and risk management practices, among others. These posed significant regulatory
challenges and a threat to the entire system, necessitating the intervention of the Central
Bank of Nigeria (CBN). In addition, various monetary and fiscal policy measures were
adopted to address these challenges.
The Financial Stability Report (FSR), which shall henceforth be issued bi-annually, is
intended to provide regular update on developments in the Nigerian financial sector and
their impact on the economy. This maiden edition of FSR highlights the major
prudential, developmental and payments system initiatives undertaken to strengthen the
resilience and integrity of the financial system. The publication is intended to enhance
understanding of the issues affecting stability in the Nigerian financial system and the
corresponding policy responses. It provides an assessment of the downside risks to the
Nigerian financial system and would thereby assist the authorities and other market
participants in mitigating those risks.
This Report is structured into seven sections. Section 1 is an overview of the Report
while Section 2 presents the structure of the Nigerian financial system. Section 3 unveils
the global and domestic macroeconomic and financial environment and assesses
inherent risks in the financial system, followed by highlights of developments in the
financial sector in Section 4. In Section 5 the prudential supervisory and regulatory
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

1.0
framework in Nigeria is discussed. Section 6 reviews developments in the Payments and
Settlements System, Section 7 highlights actions required for preserving the integrity of
the Nigerian financial system, while Section 8 concludes the Report.
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

THE STRUCTURE OF THE NIGERIAN FINANCIAL
SYSTEM
2.0
The Nigerian financial system comprises both formal and informal sub-sectors. The
formal sub-sector is made up of the regulatory authorities, money, capital and foreign
exchange markets, insurance companies, brokerage firms, deposit money banks
(DMBs), development finance and other financial institutions. As at end-March 2010,
there were 24 deposit money banks (DMBs), 5 discount houses (DHs), 941 microfinance
banks (MFBs), 107 finance companies (FCs), 101 primary mortgage institutions
(PMIs), 13 Pension Fund Administrators (PFAs), 5 Pension Fund Custodians (PFCs), 1
Stock Exchange, 1 Commodity Exchange, 1,621 bureaux-de-change operators (BDCs),
690 securities brokerage firms, 5 development finance institutions (DFIs), and 73
insurance companies. See Figure 1.
The informal sub-sector includes community-based organisations such as financial
cooperatives, microfinance institutions, rotatory savings and credit associations
(ROSCAS), self-help groups and similar institutions. A major characteristic of the
financial system is the weak relationship and integration of the informal sub-sector with
the formal sub-sector.
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

ACSE


-

Abuja Commodity and Securities Exchange


DFIs


-

Development Finance Institutions


FMBN
- Federal Mortgage Bank of Nigeria

NACRDB
- Nigeria Agricultural Cooperative and Rural Development Bank

NAICOM
- National Insurance Commission

NASS
- National Assembly

NDIC
- Nigeria Deposit Insurance Corporation

NEXIM
- Nigeria Export-Import Bank

NSE
- Nigerian Stock Exchange

PENCOM
- National Pension Commission

SEC
- Securities and Exchange Commission

UDB
- Urban Development Bank
The Presidency

Federal Ministry
of Finance

Central Bank of
Nigeria

NDIC

SEC

NAICOM
PENCOM
Pension Fund Administrators
Pension Fund Custodians
Insurance Brokers & Adjusters
Reinsurance Companies
Insurance Companies
ACSE

NSE

Registrars
Brokers and Issuing Houses
Specialised
DFIs

Deposit Money Banks
Discount Houses
Microfinance Banks
Finance Companies
Primary Mortgage Institutions
Burean de Change
Bank of Industry
FMBN
UDB
NEXIM
NACRDB
NASS

Figure 1: Structure of the Nigerian Financial System as at June 2010
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

At the apex of the regulatory system are the Presidency and National Assembly which
provide statutory oversight functions on the Federal Ministry of Finance (FMF) and the
CBN.
The CBN's regulatory focus is on deposit money banks (DMBs) and other financial
institutions (OFIs), comprising primary mortgage institutions (PMIs), bureaux-dechange (BDCs), microfinance banks (MFBs), finance companies (FCs), discount houses
(DHs) and development finance institutions (DFIs).
The primary responsibility of the NDIC is the insurance of depositors' funds in DMBs
and other insured financial institutions. The Corporation is also responsible for the
liquidation of distressed banks, and, in conjunction with the CBN, also supervises DMBs
and other insured institutions.
The Securities and Exchange Commission is the regulator of the Nigerian capital
market.
These are the two securities exchanges in the Nigerian capital market. The NSE has
authority over the securities' trading rules and regulations, while the Abuja Commodity
and Securities Exchange superintends commodities trading.
NAICOM is responsible for the regulation and supervision of the insurance sub-sector.
PENCOM is the regulatory agency with oversight responsibility for pension fund
custodians as well as pension funds administrators in Nigeria.
The Financial Services Regulation Coordinating Committee (FSRCC), introduced
under the CBN Act 2007, serves as a forum for the various financial sector regulators to
2.1
The Central Bank of Nigeria
2.2
The Nigeria Deposit Insurance Corporation (NDIC)
2.3
The Securities and Exchange Commission (SEC)
2.4
The Nigeria Stock Exchange (NSE) and the Abuja Commodity and
Securities Exchange (ACSE)
2.5
The National Insurance Commission (NAICOM)
2.6
The National Pension Commission (PENCOM)
2.7
Inter-Agency Cooperation
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

meet to exchange information on surveillance activities and the health of the financial
system. The Governor of the CBN is the Chairman of the FSRCC.
The foregoing agencies, through their activities in the regulation and supervision of
financial institutions, engender financial stability.
The SROs are professional bodies that prescribe codes of ethics and undertake advocacy
for their members. These include: the Chartered Institute of Bankers of Nigeria (CIBN);
the various accountancy bodies; the Chartered Institute of Stockbrokers; the Association
of Stock Broking Houses of Nigeria; the Association of Issuing Houses of Nigeria; the
Association of Capital Market Registrars; the Association of Corporate Trustees; the
Financial Market Dealers Association of Nigeria; the Capital Market Solicitors
Association; the Association of Bureaux de Change Operators of Nigeria; and the
Mortgage Banking Association of Nigeria.
The informal financial sub-sector in Nigeria is characterised by small, unit-size,
unconventional practices, lack of transparency of operations, a low capital base and
limited services. Although their terms of engagement are often more stringent than those
of conventional institutions, they are widely patronised because of nearness and
availability, promptness of service delivery and the existence of social ties between
practitioners and their clients.
Institutions that participate in this sub-sector are the financial cooperatives, self-help
groups, the Rotatory Savings and Credit Associations (ROSCAS), money lenders and
credit unions. They are predominant in rural settings and, in most cases, outside the
formal banking sub-sector. The fact that their activities are not captured in the entire
financial aggregates poses concerns and challenges to monetary policy transmission and
financial stability.
The CBN has over the years, encouraged their integration with the formal financial
system through awareness creation, appropriate policies, capacity building and training.
For example, the microfinance policy regulatory and supervisory framework
particularly specifies that institutions in this category should aspire to be licensed as
2.8
Other Stakeholders in the Financial System
2.8.1
Self-Regulatory Organizations (SROs)
2.8.2
The Informal Sub-Sector
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

microfinance banks where their client base would increase to 2000, or their loan
portfolio to a minimum of 20 million. The Bank is also enhancing their integration into
the formal financial sector through the creation of appropriate linkages, e.g. the self-help
linkage groups for agricultural financing.
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

3.0
THE MACROECONOMIC AND FINANCIAL
ENVIRONMENT
3.1
Global Macroeconomic and Financial Developments
3.1.1
Output
The global economy began a gradual recovery in the second half of 2009, after the deep
recession triggered by the subprime mortgage crisis in the United States of America
(USA) and the subsequent global financial and economic meltdown. In response to the
various fiscal and monetary stimulus programmes introduced by various nations in 2008
and 2009, global economic activity further improved in the first quarter of 2010, as
evidenced by growing world trade, industrial production, and retail sales which boosted
confidence in markets.
World real Gross Domestic Product (GDP) growth reached about 3.3 per cent (on an
annualised basis) during the second quarter of 2009 and grew to over 4.5 per cent in the
second half of 2009, with commodity prices recording a rebound, in response to the
expansion in world economic activity. Output in most regions of the world, however,
remained below their pre-crisis levels.
According to the April 2010 edition of the International Monetary Fund's World
Economic Outlook, global recovery has evolved better than expected, but in many
economies the strength of the rebound has been moderate, given the severity of the
recession. Economic activity remains dependent on highly accommodating
macroeconomic policies and susceptible to downside risks. Therefore, policy makers
would need to ensure a smooth transition of demand from government to the private
sector, and from economies with huge external deficits to those with surpluses. The
IMF's World Economic Outlook envisages further recovery, but at varying speeds across
and within regions. Thus, global growth is projected at about 4.2 and 4.3 per cent in 2010
and 2011, respectively. Although advanced economies recorded a decline of more than
3.0 per cent in output in 2009, it is projected that they would expand by 2.3 per cent in
2010 and 2.4 per cent in 2011.
Output growth in emerging and developing economies is projected to rebound to over
6.3 per cent during 2010 and 6.5 per cent in 2011, following a modest 2.4 per cent
rebound in 2009. Growth in Sub-Saharan Africa is projected to improve from 2.1 per
cent in 2009 to 4.7 per cent in 2010 and further to 5.9 per cent in 2011 (see Table 1).
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

Similarly, the health of the banking system is generally improving alongside global
economic recovery. The IMF's estimates of bank write-downs since the start of the crises
through 2010 have been reduced to $2.3 trillion from $2.8 trillion in October 2009. The
recoveries in real and financial activities were mutually supportive, but access to credit
remained tight for some sectors. Money markets were stabilising, while corporate bonds
and equity markets were recovering. In most developed markets, credit to the private
sector had eased, while many emerging and developing economies were showing signs
of gradual improvement. In a few advanced economies, however, rising fiscal deficits
and public debts have contributed to a sharp increase in sovereign risk premium, thereby
posing new risks to the recovery.
Table 1: World Economic Outlook for 2010 and 2011
Source: IMF's World Economic Outlook, April 2010
3.1.2 Inflation
Global consumer prices moderated for most of 2009 as inflationary pressures remained
subdued. This was attributed to weak global demand. For example, inflation in advanced
economies is projected to moderate from 1.5 per cent in 2010 to 1.4 per cent in 2011,
compared with that of emerging and developing economies, where inflation is expected
to decline from 6.2 per cent in 2010 to 4.7 per cent in 2011. Overall, inflation is likely to
fluctuate during the recovery period as consumer prices remain sensitive to commodity
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

Estimates

World output

Advanced economies


United States


Euro area


Germany


France


Italy


Japan


United Kingdom


Emerging and Developing Economies


Sub-Sahara Africa


0.4
0.4
NA
NA
NA
China


India


Middle East and North Africa


0.3
0.2
NA
NA
NA
Brazil


Mexico


Consumer prices

Advanced economies


Emerging and Developing Economies


Overview of the
World Economic Outlook
Projections for 2010 & 2011
(Per cent change, unless otherwise noted)
Q4 over Q4
Jan-10
WEO
Projections
Difference


Year over Year
Projections
prices. Some increases are expected in oil prices, as they are expected to reach $78.25 per
barrel (pbl), on the average, by end 2010 from the $61.78 pbl level in 2009.
Monetary policy had been largely expansionary for most of 2009. This was driven by the
use of unconventional liquidity measures and low monetary policy rates (close to zero)
adopted in many developed economies. For most of 2009, for example, the Bank of
Japan kept its policy rate at 0.1 per cent; the Federal Reserve System at 0.25 per cent; the
Bank of England at between 0.5 and 1.5 per cent; while the Reserve Bank of South Africa
and the Central Bank of Nigeria kept their rates at around 6 per cent (see Table 2). High
capacity utilisation in some sectors, coupled with deteriorating credit quality, accounted
for the credit squeeze in a number of emerging economies, thereby driving up rates.
3.1.3
Interest Rates
Table 2: Policy Interest Rates of Selected Countries, 2007 - 2010
FED

USA

BOJ
Japan

ECB
EU

BOE

UK

SARB

South Africa

BOG

Ghana

CBN

Nigeria

4.25

0.5

4.0

5.5

11.0

13.5

9.0

1.0

0.1

2.5

2.0

11.5

17.0

9.75

2009 January

0.25

0.1

2.0

1.5

11.5

17.0

9.75

February

0.25

0.1

2.0

1.0

10.5

18.5

9.75

March

0.25

0.1

1.5

0.5

9.5

18.5

9.75

April

0.25

0.1

1.25

0.5

8.5

18.5

8.0

May

0.25

0.1

1.0

0.5

7.5

18.5

8.0

June

0.25

0.1

1.0

0.5

7.5

18.5

8.0

July

0.25

0.1

1.0

0.5

7.5

18.5

6.0

August

0.25

0.1

1.0

0.5

7.0

18.5

6.0

September

0.25

0.1

1.0

0.5

7.0

18.5

6.0

October

0.25

0.1

1.0

0.5

7.0

18.5

6.0

November

0.25

0.1

1.0

0.5

7.0

18.0

6.0

December

0.25

0.1

1.0

0.5

7.0

18.0

6.0

2010 January

0.25

0.1

1.0

0.5

7.0

18.0

6.0

February

0.25

0.1

1.0

0.5

7.0

16.0

6.0

March

0.25

0.1

1.0

0.5

6.5

16.0

6.0

April

0.25

0.1

1.0

0.5

6.5

15.0

6.0


Sources: FED-US Federal Reserve; BOJ-Bank of Japan; ECB-European Central Bank; BOE-Bank of England;

SARB-South African Reserve Bank; BOG-Bank of Ghana; CBN-Central Bank of Nigeria.

3.1.4 Exchange Rates
The global financial crisis and fragile economic recovery continued to dominate the
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

major international currency markets in the second half of 2009. Following concerns
over the high US budget deficit and the sustainability of its economic recovery, most
international currencies appreciated against the US Dollar during the period.
During the first quarter of 2010, the Canadian Dollar and the Mexican Peso appreciated
against the US Dollar by 3.62 and 5.80 per cent, respectively. In South America, the
Brazilian Real and the Argentine Peso depreciated against the US Dollar by 1.67 and
1.22 per cent, respectively, while the Colombian Peso appreciated against the US Dollar
by 6.70 per cent. In Europe, the British Pound and the Euro depreciated against the US
Dollar by 6.05 and 5.81 per cent, respectively, while the Russian Rubble appreciated
against the US Dollar by 3.45 per cent. In the Asian market, the Japanese Yen depreciated
against the US Dollar by 0.51 per cent, whereas the Chinese Yuan and the Indian Rupee
appreciated against the US Dollar by 0.42 and 3.57 per cent, respectively.
In Africa, the Nigerian Naira and the Kenyan Shilling depreciated against the US Dollar
by 0.14 and 1.39 per cent, respectively, while the South African Rand and Egyptian
Pound appreciated against the Dollar by 1.75 and 0.01 per cent, respectively (see Table
3).
Table 3: Exchange Rates of Some Selected Currencies
Source: www.exchange rates.org
YTD = Year to Date
WTW= Week to Week
Exchange Rates of Selected Countries: (Value in currency units to US$)
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

31-Dec-08
30-Jun-09
30-Sep-09
31-Dec-09
31-Mar-10
% Change Dec
08 and Mar 10
% Change Dec
09 and Mar 10

AFRICA
Nigeria
South Africa
Kenya
Egypt
NORTH
AMERICA
Canada
Mexico
SOUTH
AMERICA
Brazil
Argentina
Colombia
EUROPE
UK
Euro Area
Russia
ASIA
Japan
China
India
Currency
Naira
Rand
Shilling
Pound
Dollar
Peso
Real
Peso
Peso
Pound
Euro
Ruble
Yen
Yuan
Rupee

3.1.5 Stock Markets
The global economic recovery and the associated improvements in financial conditions
engendered renewed confidence in international financial markets. As a result of the
increased overall confidence, equity markets recovered faster than expected and the
intense volatility that had characterised major international stock markets, until the first
half of 2009, abated. Consequently, most global stock indices increased between the
fourth quarter of 2009 and March 2010.
In Africa, the Nigerian NSE ASI, the South African JSE All-Share, the Kenyan Nairobi:
NSE 20 and the Egyptian EGX CASE 30 indices increased by 26.8, 3.8, 24.9 and 8.5 per
cent, respectively. In North America, the S&P 500, the Canadian S&P/TSX Composite
and the Mexican Bolsa indices increased by 5.2, 2.5 and 4.0 per cent, respectively. In
South America, the Brazilian Bovespa, the Argentine Merval and the Columbian IGBC
General indices increased by 2.0, 3.6 and 3.8 per cent, respectively. In Europe, the FTSE
100, the CAC 40, the DAX and the Russian MICEX indices increased by 4.4, 0.3, 2.6 and
6.7 per cent, respectively. In Asia, Japan's Nikkei 225 increased by 4.1 per cent, while
China's Shanghai Stock Exchange (A) index decreased by 4.2 per cent. India's BSE
Sensex index remained unchanged (see Table 4).
Table 4: International Stock Market Indices
Country
Index
31-Dec-08
30-Mar-09
30-Jun-09
30-Sep-09
31-Dec-09
31-Mar-10
% Change Dec
08 - Mar 10
% Change Dec
09 - Mar 10
AFRICA
Nigeria
NSE All-Share Index

South Africa
JSE All-Share Index
21,509.19
19929.04
22,049.42


Kenya
Nairobi NSE 20 Share index
3,459.97
2754.54
3,294.56


Egypt
CSE CASE 30
4,596.49
4247.48
5,702.87


US
S&P 500
903.00

784.09

919.32


Canada
S&P/TSX Composite
8,987.70


8,465.35


10,374.91


Mexico
Bolsa
22,392.38


19,564.23


24,368.38


SOUTH AMERICA
Brazil
Bovespa Stock

Argentina
Merval

Columbia
IGBC General

EUROPE
UK
FTSE 100

France
CAC 40

Germany
DAX

Russia
MICEX

ASIA
Japan
NIKKEI 225

China
Shanghai SE A

India
BSE Sensex

NORTH AMERICA
Source: Bloomberg
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

3.2
Domestic Macroeconomic and Financial Developments
3.2.1 The Real Sector
3.2.1.1 Output
The macroeconomic outcomes in 2009 and the first half of 2010 were influenced by
developments in both the domestic and international economies. Overall, the Nigerian
economy was relatively stable with mixed outcomes. The major challenge to economic
and monetary policies, since 2009, has remained the management of tight liquidity in the
banking system. In particular, the growth in credit to the private sector slowed
significantly. Inflation rate (year-on-year) moderated substantially, although it remained
at double digit all through 2009 to the first half of 2010. The exchange rate, which was
relatively stable during the first and second quarters of 2009, depreciated marginally
during the third and fourth quarters and later appreciated marginally in the first quarter of
2010. Interest rates rose in the first half of 2009, influenced by the global financial crisis
which precipitated tight liquidity conditions in the banking system, but reversed in the
last quarter, reflecting improvements in the liquidity conditions in the money market, as
well as the CBN guarantee of all inter-bank transactions. Crude oil production improved
in the second half of 2009 following the amnesty programme implemented by the
Federal Government towards resolving the Niger Delta crisis. In addition, oil prices
improved in the international oil market, in response to reported economic recovery in
most advanced and emerging market economies in the second half of 2009.
Real Gross Domestic Product (GDP) recorded a growth of 7.4 per cent in the fourth
quarter of 2009 and 7.8 per cent in the first quarter of 2010, compared with 7.1 per cent
and 4.5 per cent in the fourth quarter of 2008 and first quarter of 2009, respectively. The
outcome was driven mainly by the non-oil sector, particularly agriculture, which
constituted 35.9 per cent of GDP and grew by 5.5 percentage points in the first quarter of
2010, compared with 5.4 per cent in the corresponding period of 2009. A GDP growth
rate of 7.8 per cent is envisaged for 2010.
Nigeria's crude oil output declined in the first half of 2009, with an estimated total
average production of 1.76 million barrels per day (mbd), but increased to 1.94 and 1.99
mbd in the fourth quarter of 2009 and first quarter of 2010, respectively. The improved
output was attributable to the relative calm in the Niger Delta Region, following the
Federal Government's amnesty programme.
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

As in the preceding years, allocation of crude oil for domestic consumption remained at
0.445 mbd for 2009 and the first half of 2010. The average spot price of Nigeria's

reference crude oil, the Bonny light (37 API), stood at US$62.1 per barrel at endDecember 2009 and rose to US$79.1 per barrel in the first quarter of 2010 (see Figures 2
and 3).
Figure 2: Growth in Oil and Non-Oil GDP
-10
-5

Q1 '09
Q2 '09
Q3 '09
Q4 '09

Q1
per cent
OIL GDP
Non-Oil GDP (lhs)
GDP
Figure 3: Contribution to Non-oil GDP

Q1 '09
Q2 '09
Q3 '09
Q4 '09

Q1
per cent
Agriculture
Industry(lhs)
Services (lhs)
Building &Const(rhs)
per cent
3.2.1.2 Inflation
Inflationary pressures moderated in 2009 and the first quarter of 2010, as the inflation
rate trended downwards. Headline inflation fell from 14.6 per cent at the end of the first
quarter of 2009 to 11.8 per cent at end-March 2010 and averaged 12.0 per cent between
the first quarters of 2008 and 2010. The relatively high level of inflation reflected the
upward movement in food, fuel and housing prices.
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

Figure 4: Inflation Trend

'Dec 08
'Jan 09
Mar' 09
Jun '09
Sep '09
Dec' 09
Mar' 10
per cent
Non-food(Core) (Y on Y)
Food (Y on Y)
Headline (Y on Y)
Headline (12MM)
3.2.2
The Fiscal Sector
3.2.2.1 Fiscal Operations
The estimated Federal Government-retained revenue and aggregate expenditure stood at
2,646.9 billion and 3,456.9 billion in 2009, respectively. Consequently, the fiscal
operations of the Federal Government resulted in an estimated deficit of 810.0 billion,
compared with the budgeted deficit of 836.6 billion for the 2009 fiscal year. The
estimated Federal Government-retained revenue and aggregate expenditure in the first
quarter of 2010 were 468.61 billion and 843.81 billion respectively, indicating a
decline of 29.34 and 10.14 per cent, respectively, from the levels in the preceding quarter.
The fiscal operations of the Federal Government during the first quarter of 2010 resulted
in an estimated deficit of 375.20 billion, compared with the budgeted deficit of
387.70 billion, as against a surplus of 32.56 billion in the corresponding period of
2009. The deficit was predominantly financed by FGN Bonds.
Figure 5: Government Expenditure and Revenue (Q1 2009 - Q1 2010)


Q1'09
Q2'09
Q3'09
Q4'09
Q1' 10
Nbillion
Federally collected revenue
FG Retained Rev
Total Exp
Rec.exp
Capital
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

Figure 6: Fiscal Balance and Quarterly Budget (Q1 2009 - Q1 2010)
-400
-200

Q1'09
Q2'09 Q3'09
Q4'09 Q1' 10
Fiscal Balance
Quarterly Budget
N Billion
Figure 7: Overall Fiscal Balance and Quarterly Budget (N'billion)


Q1'09
Q2'09
Q3'09
Q4'09
Q1'

Overall balance
Quarterly Budget
3.2.3
The Financial Sector
3.2.3.1 Monetary and Credit Developments
Provisional data showed that the growth in monetary aggregates was modest in the first
four months of 2010. Relative to end-December 2009, the broad measure of money
supply (M2), rose by 1.8 per cent to 10,959.2 billion at end-April 2010, implying an
annualised growth of 5.4 per cent, compared with the respective growth rates of 2.2 per
cent and -1.8 per cent at the end of the preceding month and the corresponding period of
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

2009, and the indicative benchmark growth of 29.3 per cent for fiscal year 2010. The
development was accounted for, largely, by the increase in net domestic credit and other
assets (net) of the banking system.
Aggregate bank credit to the domestic economy (net) rose by 7.7 per cent at the end of
April 2010 over the level at end-December 2009. The increase in aggregate credit (net)
was due mainly to the increase in credit to the Federal Government, which rose by 32.6
per cent. However, on an annualised basis, the increase translates to 23.1 per cent, which
was below the indicative target of 55.54 per cent set for 2010.
Base money, the operating target of monetary policy, which stood at 1,497.1 billion at
end-April, 2010, was lower than the indicative benchmark of 1,872.8 billion
programmed for the second quarter of 2010 by 20.1 per cent. See Figures 8 and 9.
Figure 8: Trends in Major Monetary Aggregates
-20

'Dec 08
'Mar 09
'Jun 09
'Sep 09
'Dec 09
Mar 10
Apr' 10
per cent
M2
M1
NDC
Figure 9: Trends in Net Domestic Credit


-20

'Dec 08
'Mar 09
'Jun 09
'Sep 09
'Dec 09
Mar 10
NDC(lhs)
CP(lhs)
CG(rhs)
per cent
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

3.2.3.2 Interest Rates
The downward trend in interest rates, which began in the second half of 2009, continued
in the first four months of 2010. Following CBN's decision to guarantee inter-bank
transactions as well as some improvement in liquidity conditions which helped to restore
confidence in the system, the rates declined. The weighted average inter-bank rate,
which was 2.89 per cent as at end- December 2009, declined to 1.27 per cent at end-April
2010. Similarly, the securitised open buy back (OBB) rate declined to 2.46 per cent at
end-March 2010, from 2.64 per cent at end-December 2009, and further to 1.11 per cent
at end-April 2010. Average term-deposit rate declined by 3.95 percentage points to 5.54
per cent at end-March 2010, from the level at end-December 2009.
The fall in short-term rates impacted marginally on lending rates as prime
and maximum lending rates declined by 0.7 and 0.3 percentage points to
18.4 and 23.2 per cent, respectively, at end-March 2010, from their endDecember 2009 levels. Despite the declining rates, the spread between the
average term-deposit and the maximum lending rates widened to 18.09
percentage points in March 2010, from 11.72 percentage points in
December 2008 (see Figures 10 and 11).
Figure 10: Money Market Rates between December 2008
and March 2010

Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Per cent
Money Market Rates
MPR/MPR
Call Rate
Open-Buy -Back
NIBOR 7 -day
CBNLFR
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

Figure 11: Lending Rates

Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
per cent
Average Term (lhs)
Max. lending (lhs)
Saving (lhs)
Prime lending (lhs)
Spread (rhs)
percentage point
3.2.3.3 Liquidity Management
Monetary policy was largely influenced by tight liquidity conditions in the domestic
economy, induced partly by the distress in some local banks and the global economic and
financial crises of 2007/2008. Liquidity management was, therefore, anchored on the
need to ensure a well functioning financial market that would foster growth without
compromising the objective of monetary and price stability. The CBN made extensive
use of open market operations (OMOs), being its primary tool of liquidity management.
This was complemented by prudential reserve ratios, tenored repurchase transactions,
the sale of treasury instruments at the primary segment of the market, and the used of
CBN's standing facility window.
Consequent upon the tight liquidity conditions experienced in the first half of 2009, a
number of measures were taken by the CBN to achieve optimum liquidity, stability in the
foreign exchange markets, and a seamless flow of credit to the real economy. The
measures included the following:
Further liberalisation of the foreign exchange market;
Downward adjustment of monetary policy rates and other prudential ratios;
Injection of a stimulus package of 620.0 billion to recapitalise some ailing
banks; and
Guarantee of inter-bank transactions.
These measures resulted in a number of positive developments in the second half of the
year as manifested in the relative stability of the foreign exchange market and improved
liquidity conditions in the inter-bank money market.

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

3.2.3.4 Capital Market Developments
The improved performance recorded in the capital market between 2006 and the early
part of 2008 was driven by the recapitalisation and consolidation of the banking industry
and the huge inflows from pension funds. Consequently, the market recorded
phenomenal increases in all the indices, especially the All-Share-Index (ASI) and market
capitalisation. Market capitalisation grew from a very low level of 500 billion in 2000
to 5.1 trillion and 13.3 trillion in 2005 and 2007, respectively.
However, the global financial crisis adversely affected the Nigerian capital market in
2008, as activities were generally bearish. Share prices of quoted companies crashed and
market capitalisation declined to 9.5 trillion. Also, internal market shortcomings,
including poor corporate governance, insider dealings, weak risk management practices
and share price manipulation, contributed to loss of confidence in the market.
In 2009, the major market indicators further trended downwards, as the aggregate
volume and value of traded securities declined substantially by 46.8 and 71.4 per cent,
respectively. Also, aggregate market capitalisation of the 266 listed securities declined
by 26.3 per cent to close at 7.0 trillion, from 9.6 trillion recorded in 2008. The market
capitalisation of the 216 listed equities dropped from 7.0 trillion in 2008 to close at
5.0 trillion. These developments were due largely to the price depreciation recorded by
the equities, the delisting of 11 companies and the maturing of 53 fixed income
securities. Market capitalisation as a percentage of GDP was 28.5 per cent in 2009,
compared with 39.7 per cent in 2008. The ratio of the value of stocks traded to GDP stood
at 10.0 per cent, same as in 2008, while the turnover value as a percentage of market
capitalisation was 9.8 per cent, compared with 25.2 per cent in 2008. The annual
turnover value (measured as the ratio of the total value of stocks traded to the total value
of stocks listed on the domestic market) declined by 71.4 per cent, compared with a
decline of only 14.3 per cent in 2008.
In the first quarter of 2010, developments in the capital market were mixed. The volume
of traded securities declined by 1.4 per cent to 27.2 billion shares, while the value
increased by 9.5 per cent to N193.8 billion in 621,662 deals, compared with 27.6 billion
shares and 177.0 billion in 368,980 deals in the preceding quarter. The market
capitalisation of the 262 listed securities rose by 20.0 per cent to 8.4 trillion over the
preceding quarter's level. The All-Share Index, which opened at 20,827.17 at the
beginning of the quarter, closed at 25,966.25, implying an increase of 24.7 per cent over
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

the level in the preceding quarter. The development was attributed to the price gains
recorded by the highly capitalised stocks and listing of new securities on the Exchange
during the period under review.
Following the consolidation exercise in 2005, the banking sector witnessed dramatic
growth. However, neither the banks nor the regulators were sufficiently prepared to
sustain and monitor the explosive growth. Furthermore, the concomitant build-up of
risks in the system posed serious challenges to the regulators and other stakeholders. The
interdependent factors that were identified as being responsible for the ensuing fragile
financial system included corporate governance failures at banks, inadequate disclosure
and transparency, inadequate legal and regulatory framework, poor risk management
practices, etc.
The combined effects of these factors rendered the financial system vulnerable and
incapable of supporting the economy adequately. Furthermore, there were doubts and
concerns about the true financial conditions of some banks, thereby eroding public
confidence in the system. In the circumstances, the CBN had to conduct a diagnostic
review of the industry to establish its true health and to enable it effectively intervene to
remedy the situation. The result of the exercise revealed that the factors listed above,
which were exacerbated by the adverse impact of the global financial crisis, threatened
the safety and soundness of the financial system.
The exercise also revealed that some banks that were exposed to the capital market, in the
form of margin trading facilities, experienced liquidity problems. Furthermore, the
pressure to earn a high return on the huge capital increased the risk appetite of many
banks, resulting in huge exposures in highly risky areas, such as oil and gas.
Specifically, the diagnostic review revealed the following shortcomings:
A high percentage of non-performing loans in some banks, which exceeded
by far the industry average. The poor asset quality was attributed to poor
corporate governance practices, weak risk management practices, lax credit
administration processes and non-adherence to the banks' credit risk
management policies;
3.2.3.5
Institutional Developments in the Financial Sector
The Banking System

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

The poor asset quality impacted negatively on the earnings and capital of
some banks thereby threatening their going concern status;
Huge exposure to the Capital Market and Oil and the Gas sector.
Consequently, some banks were required to increase their provision for loan
losses, which impacted negatively on their profitability and shareholders'
funds;
Some banks were significantly undercapitalised for their levels of operation
and needed to urgently inject fresh funds, ranging from about 5.8bn to
109.23bn;
The capital adequacy ratios recorded in some banks were below the
prescribed minimum threshold of 10 per cent, which implied that the capital
of such banks was inadequate to support their levels of operation;
The affected banks did not meet the minimum liquidity ratio of 25 per cent
set for banks and could also not meet their maturing obligations without
resorting to the CBN discount window, thereby providing proof of their
illiquid status; and
Pervasive poor corporate governance practices, especially in the areas of
disclosure and financial reporting.
Given the above aggravated state of affairs and other challenges posed to the system, the
CBN implemented a number of initiatives, not only to rescue the ailing banks in the
interest of depositors, but also to safeguard the stability and soundness of the system. The
initiatives are summarised in the following paragraphs.
Intervention and Restructuring: The CBN intervened in eight banks by
removing executive management teams and the board of directors and
appointing new executive management teams to run the affairs of the
affected banks. It also injected 620 billion in the form of Tier 2 Capital
(seven-year convertible bond) into the banks. The capital injection was to be
repaid from the proceeds of re-capitalisation of the banks. Subsequently, the
process of strengthening the banks in which the CBN had intervened was
initiated to make them attractive to both local and foreign investors.

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

Establishment of the Asset Management Corporation of Nigeria
(AMCON): The need for a special purpose vehicle (SPV) to free banks of
their toxic asset burden led to the promotion of AMCON by the CBN, in
conjunction with the Federal Ministry of Finance. It is believed that the
establishment of AMCON constitutes the first critical step towards the
resolution of the non-performing loan problem in banks a process that
would eventually facilitate further consolidation of Nigerian banks.
Establishment of the Financial Stability Committee (FSC): The
Committee was established to strengthen systemic stability in the financial
system, through the formulation of monetary policy and macro-prudential
rules. The FSC and the Monetary Policy Committee would be at the core of
the new macro-prudential framework, working together to ensure that
monetary policy is shaped by systemic risk trends and consistent with the
expanded goals for asset price stability.
Review of Supervisory Procedures & Methodology: Implementation of
risk-based and consolidated supervision commenced with a pilot run of two
deposit money banks and is being vigorously pursued.
Adoption of a Common Year-End for Banks: A common accounting
year-end for banks in Nigeria with effect from December 31, 2009 was
introduced. Furthermore, a road map was provided for the implementation
of the International Financial Reporting Standards (IFRS) by December
2012.
Restructuring of the Financial Sector Surveillance Directorate: The
CBN streamlined its organisational structure to ensure better supervision
and regulation of the industry. Thus, with effect from March 2010, the CBN
has restructured its Financial Sector Surveillance Directorate by creating
the Financial Policy and Regulation Department to, among other things,
enhance regulatory effectiveness. The Directorate is now named Financial
System Stability Directorate, made up of four departments, namely,
Banking Supervision, Financial Policy and Regulation, Development
Finance, and Other Financial Institutions Supervision Departments. Also,
as part of the restructuring of the CBN, new departments Financial

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

Markets, Banking and Payments System, and Risk Management
Departments have been created to enhance financial stability.
Collaboration with Other Regulators: The CBN has intensified efforts,
through the Financial Services Regulation Coordinating Committee
(FSRCC), to foster closer collaboration and the harmonisation of its policies
with those of other regulatory agencies, such as SEC, NAICOM, PENCOM,
etc, for better supervisory impact.
Corporate Governance: The CBN has strengthened corporate governance
in banks by limiting the tenure of managing directors to a maximum of ten
years. Also, the former top management of the CBN and the NDIC are no
longer eligible to hold offices in Nigerian banks, including their
subsidiaries, for a minimum period of five years after their exit from service.
The other reforms implemented were as follows:
Licensing of private credit bureaux,
Establishment of a Small and Medium Enterprise Credit Guarantee Scheme
(SMECGS),
Establishment of Infrastructure Finance Office,
An Export Financing Initiative,
A Warehouse Receipt Financing Initiative,
Establishment of the Commercial Agriculture Credit Scheme, and
A certification programme for Microfinance Banks.
In an effort to strengthen the Nigerian Stock Exchange (NSE), a new organisational
structure was approved for the Exchange in 2009 to enable it effectively deliver on its
mandate. The Exchange introduced a new NSE-30 and four sectoral indices, covering
Food and Beverage, Banking, Insurance, and Oil and Gas.
Furthermore, the Exchange concluded arrangements with Thomson Reuters and
Bloomberg for the dissemination of real-time market data to the global investment
community. The Exchange also commissioned two (2) new trading floors in Owerri and
Bauchi, bringing the number of trading floors to thirteen (13).

The Capital Market
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

In the first quarter of 2010, a review of capital market rules was undertaken. The key
provisions of the new rules include the following:
Prior approval of the Securities and Exchange Commission (SEC) for
appointments into the top management of market operators must be
obtained;
Listed companies are required to submit their year-end accounts to the SEC,
not later than 9 months after their financial year ends, while government and
supranational bodies must submit not later than 12 months;
The underwriting of issues is no longer mandatory: where an issue is
underwritten, the underwriting commitment by a single underwriter shall
not be more than 3 times its shareholders' fund for equity offering and 4
times for fixed income securities;
Issuers are now required to list their securities not later than 30 days after the
allotment clearance (where the issuer had stated in its prospectus that the
securities would be listed); and
Public companies are now required to make additional financial reporting,
such as quarterly reports, half-yearly reports and to file annual reports with
the Commission, in accordance with the requirements of sections 60 65 of
the Investment and Securities Act (ISA), 2007.
A list of the practices considered by the SEC as substantially preventing or reducing
competition in a company's line of business, was also provided.
For sustainable growth and development in any economy, developments in the real and
financial sectors should move in the same direction. However, in Nigeria, the experience
of the immediate past has shown a marked disconnect between the two sectors. This was
because the phenomenal growth in the financial sector did not translate to enhanced real
sector financing.
To address this challenge and boost economic growth, several measures have been
initiated over the past eighteen (18) months, including the following:
a.
Guaranteed Minimum Price (GMP) Scheme to serve as an incentive for
farmers to expand the cultivated areas in the country;

The Real Sector
i.
Agriculture:
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

b.
Construction of additional 19 silos, with a view to attaining the national
target of 1 million tonnes storage capacity, in line with the Food and
Agriculture Organization (FAO) recommendation;
c.
Establishment of 37 buying points and 36 markets for livestock, fisheries
and fruit and vegetables to improve the market infrastructure and access to
these basic commodities; and
d.
Establishment of a 200.0 billion Commercial Agriculture Credit Scheme
(CACS) by the CBN, in collaboration with the Federal Ministry of
Agriculture and Water Resources (FMA&WR).
Establishment of a 300 billion Power Development Fund in support of
SMEs;
Establishment of a 200 billion Small and Medium Enterprises Credit
Guarantee Scheme (SMECGS); and
Establishment of a 200 billion fund for the refinancing and restructuring
of the manufacturing sector loan portfolio.
The Federal Government's amnesty programme in the Niger Delta region.
The enactment of the Nigerian Oil & Gas Industry Content Development
Act, 2010 (the “Local Content Act”); and
The creation of a separate Ministry for the development of the Niger Delta.
Commencement of the dredging of the River Niger;
Establishment of maritime institutes in five river ports at Warri, Onitsha,
Idah, Lokoja and Baro;
Introduction of various models of Public-Private-Partnership (PPP)
initiatives, such as the Build Operate and Transfer (BOT), the Build Operate
and Own (BOO), etc, in some key areas, such as roads, airports, and rail
transport. Examples in this regard include:
-
The construction of rail lines to seaports at Tin Can, Onne, Calabar,
Koko, Warri and various river ports; and
ii.
Manufacturing and SMEs:
iii.
Oil & Gas:
iv.
Transportation:

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

-
The construction of rail lines to six identified Inland Container
Depots (ICDs), the expansion of some existing ICDs, and the
rehabilitation of Idogo and Baro lines for use as ICDs.
The external sector recorded a modest improvement during the review period. Total
exports, free-on-board (FOB), decreased by 31.7 per cent to 6,771.6 billion (US$20.12
billion) by end-December 2009, compared with the level in the corresponding period of
2008. The development reflected the downward movement in crude oil prices in the
international market, relative to the preceding year. The overall balance of payments
position stood at 1,508.40 billion at end-December 2009, compared with N196.4
billion at the corresponding period of 2008, reflecting the changes in the external
reserves. The overall deficit was equivalent of 63 per cent of GDP and contrasted with
the modest surplus of 0.8 per cent recorded in 2008.
The exchange rate remained relatively stable in the first four months of 2010. The
weighted average exchange rate of the Naira against the US Dollar, under the WDAS,
depreciated by 1.7 per cent to 149.92 per US Dollar, from 147.36 per US Dollar
recorded at the end of the corresponding quarter of 2009. In the bureaux-de-change
(BDCs) segment of the market, the Naira traded at an average rate of 152.45 per US
Dollar, compared with 160.97 per US Dollar in the corresponding quarter of 2009,
reflecting a 5.3 per cent appreciation. The admission of the BDCs to the CBN foreign
exchange window was responsible for the appreciation and the convergence of rates (see
Figure 12).
3.2.4
The External Sector
Figure 12: Exchange rates From December 2008 to March 2010

Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Per cent
N:$
W/R/DAS Rate (N:$)
BDC Rate (N:$)
INTR Bank (N:$)
PREM(WDAS/BDC (%)
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

3.3
Key Risks in the Financial System
After the 2005 bank consolidation programme, some interrelated negative factors,
which have been accentuated by the global financial and economic crises, began to
surface and resulted in a fragile financial system on the verge of collapse. The factors
included volatile capital flows, major weaknesses in the business environment, failures
in corporate governance in banks and other financial institutions, inadequate disclosure
and transparency, engagement in multiple financial activities, and uneven supervision
and enforcement. In addition, DMBs did not have adequate risk management
frameworks for identifying, managing and controlling the risks associated with their
businesses.
In the first half of 2010, the financial sector was reasonably stable. The uncertainty in
some quarters over the viability of the financial system, which had been precipitated by
the adverse impact of the global financial and economic crises on the sector, had eased.
This positive development arose from the impact of various policy measures adopted by
government and the regulatory authorities to stabilise the system. Specifically, the
banking system had been relatively stable since the intervention by the CBN and the
measures taken since August 2009 to safeguard depositors' funds and engender financial
stability. It is also pertinent to note that the reforms have been greatly complemented by a
conducive macroeconomic environment.
Consequently, the CBN, as part of the initiatives taken under the banking reforms
programme, established the Risk Management Department to facilitate the
institutionalisation of a comprehensive risk management framework in the Nigerian
financial system. It is envisaged that this initiative would engender financial stability.
Figure 13: Measuring Stock Market Confidence, February 2008 March 2010
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

The financial system continues to be exposed to certain risks which the CBN is taking
steps to manage (see Figure 13). The key risks include the following:
Credit risk,
Liquidity and funding risk,
Market risk,
Operational and Reputational risks, and
Money laundering and terrorist financing risks.
Credit exposure continues to constitute the main source of risk to the financial system.
The major risks in this area that warrant close attention include the credit exposure of
DMBs to the more volatile sectors of the economy such as general commerce and oil and
gas. The threat to financial stability from the risk perspective is evidenced from:
Rapid growth in total assets;
The lack of diversification in the credit portfolio of DMBs; and
The deteriorating asset quality of banks.
The total assets of the 24 DMBs in the Nigerian banking system stood at 15,056 billion
at end-April 2010. Between 2007 and end-March 2010, total banking system assets grew
by 41.39 per cent, indicating an average annual growth rate of 13.80 per cent. The growth
in banking system assets was boosted by the rise in Government Securities and
Investments which grew by 48.93 and 58.23 per cent, respectively. The financing of the
growth in total assets of DMBs during the period was traced to increased deposit
liabilities and money at call, which grew by 21.24 and 60.04 per cent, respectively (see
Figure 14).

3.3.1
Credit Risk
a.
Total Assets
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

Figure 14: The Total Assets of DMBs
Figure 15: Sectoral Distribution of Credits
as at End-March 2010
The distribution of outstanding bank credit, which is skewed in favour of less-preferred
sectors, has long-term implications for growth and financial stability (see Figure 15 and
Table 5). High levels of credit concentration in the Oil and Gas, Real Estate, and Stock
Market segments, as was the case in 2009, remain a major concern to the authorities in
view of the prevailing volatile nature of developments in these sectors. Inadequate or
absence of basic economic and social infrastructure remains a major factor determining
the sectoral distribution of credit. There is a need to expedite the proposed reforms in
some key sectors of the economy, notably power and oil/gas sectors, to attract the muchneeded investment which should stimulate credit to the more preferred sectors of the
economy. The resumption of credit to the key productive sectors of the economy is
critical because of the obvious medium to long-term benefits for the real economy.
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

b.
Credit Portfolio of DMBs
The gross credits of DMBs grew from 4,607 billion as at end-December 2007 to
8,950 billion as at end-December 2009, and further to 11,071.1 billion as at endMarch 2010. However, the reluctance of DMBs to lend to the real sector of the economy
has persisted as banks have remained averse to extending new loans and advances to the
real sector. The reluctance of DMBs to grant credit to the real sector constitutes a
challenge in fostering economic growth and in generating employment opportunities.
Table 5: Sectoral Distribution of Credit


Dec - 09

Jan - 10
Feb - 10
Mar
- 10
Mar - 10
N'b
N'b
N'b
N'b
%
Agriculture

1.55
Mining & Quarrying

1,191

1,052

1,060
1,217

13.75
Manufacturing

1,030

1,003

10.78
Real Estate and Construction

9.51

Public Utilities

0.96

General Commerce

1,245

1,112

1,116

12.61

Transport and Communication

9.41

Finance and Insurance

1,231

1,132

1,306

1,435

16.21

General

2,172

2,485

2,440

1,882

21.26

Govt

3.98

Total Credit (Gross)

8,950

8,825

8,900

8,853

c.
Asset Quality of Banks
In aggregate terms, Nigerian banks' non-performing assets have increased, reflecting,
largely, the ongoing reclassification of bank assets. As at March 2010, 34.8 per cent of
on-balance sheet assets were classified as non-performing. Of these non-performing
assets, 20.4 per cent were not covered by the value of collateral (see Figure 16). The
remainder of these assets were in arrears, but were well covered by collateral. Most of the
non-performing loans (NPLs) were, as earlier noted, as a result of margin lending and
huge exposures to the oil and gas sector.
Figure 16: Trend in the Growth of Gross Loans and
Non-performing Loans
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

CBN Initiatives to Mitigate Credit Risk
3.3.2
Liquidity and Funding Risks
The credit risk within the Nigerian banking sector between 2008 and 2009 has posed a
major challenge to the continued viability of the financial system. In order to mitigate the
risks, the CBN has taken the following initiatives:
i.
The establishment of private credit bureaux to complement the Credit Risk
Management System (CRMS) of the CBN, in order to improve the credit
appraisal procedures of DMBs, so as to strengthen their credit risk
management processes. Three credit bureaux have been licensed as at June
2010;
ii.
The establishment of the Asset Management Corporation of Nigeria
(AMCON), as a critical part of ongoing initiatives by the CBN of mitigating
credit risks in the banking system by freeing banks of their toxic assets and
injecting liquidity into the system;
iii.
Promoting self-discipline by banks in the management of their risks. In this
regard, the DMBs are being encouraged to implement the Code of
Corporate Governance for Banks in Nigeria, and put in place risk
management frameworks, in line with the existing Guidelines for
Development of Risk Management Framework by Banks, issued by the
CBN;
iv.
The adoption of Basel II in Nigeria by 2012;
v.
The issuance of new Prudential Guidelines, Guidelines on Margin Lending,
circulars on the use of Bankers Acceptances and Commercial Paper, and of
Minimum Information Disclosure Requirements in Financial Statements;
vi.
Continued advocacy for the establishment of special courts for the speedy
resolution of commercial cases; and
vii. The adoption of the IFRS by Nigerian banks by 2012, at the latest.
Nigerian banks experienced severe liquidity challenges from 2007 to July 2009, which
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

were caused mainly by the following factors:
Huge non-performing loans, particularly margin loans and Oil & Gasrelates exposures;
Recall of foreign credit lines by correspondent banks;
Withdrawal of foreign portfolio investments from the system; and
Absence of a robust liquidity risk management framework.
The CBN has taken the following measures to contain the liquidity crisis:
Expansion of the CBN Discount Window in October 2008;
Reduction of the liquidity ratio from 30.0 per cent to 25.0 per cent and the
Cash Reserve Requirement from 2.0 per cent to 1.0 per cent, with effect
from April 2009;
Removal of the executive management of eight (8) banks adjudged to have
engaged in unsafe and unsound banking practices which were the root cause
of their liquidity problems;
Injection of 620 billion into the eight (8) banks as Tier 2 capital;
The CBN guarantee of all foreign credit lines to banks; and
The CBN guarantee of inter-bank market transactions.
It is noteworthy that the various measures taken have significantly restored confidence
in the market and resulted in a more stable financial system.
During the first quarter of 2010, yields on the Federal Government of Nigeria (FGN)
bond market did not reflect economic fundamentals. For instance, yields on 10-20 year
FGN bonds were around 6-8 per cent, whilst the rate of headline inflation was estimated
at 12.5 per cent. Thus, real interest rates on those bonds were negative, a situation which
is not sustainable in the medium or long term. The situation is more likely to be corrected
by an increase in nominal interest rates, rather than a substantial decline in the rate of
inflation. As DMBs hold over 60 per cent of outstanding FGN bonds, such a correction
could result in huge capital losses to the DMBs. This situation would also apply to other
institutional investors, such as pension fund administrators who hold 10 per cent of FGN
bonds. This could lead to erosion of banks' capital, and would have a negative impact on
financial system stability.

3.3.3
Market Risk
Interest and Foreign Exchange Rates
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

The CBN has succeeded in reducing the level of volatility of money market rates in the
past one year. Accordingly, the Monetary Policy Rate (MPR) was reduced from 9.75 per
cent to 8.50 per cent and further to 6.00 per cent in July 2009. The weighted average
inter-bank rate and other key money market rates had fallen below the end-December
2008 level by end-August 2009, after the sharp increase recorded between January and
July 2009. The downward trend is partly attributed to the CBN guarantee on inter-bank
transactions which has increased confidence in the market. Despite the low money
market rates, retail lending rates have not decreased correspondingly (see Figure 17).
Policy would continue to be geared towards reducing the high lending rates in the face of
low money market rates.
Figure 17: The Money Market and Monetary Policy Rates

The foreign exchange market remained fairly stable over the review period, with the
Naira/US Dollar exchange rate at 149/USD1, as at end-April 2010. However, as
inflows into the economy increase, there would be a need to monitor and establish the
nature of the inflows in order to ensure that as events unfold in the international
economic arena, the impact of capital reversals on the domestic economy would be
minimised. FDI inflows were 102.42 billion in 2009 and are likely to improve in 2010,
given the fact that FDI inflows stood at 84.78 billion in Q1 2010. The flows spread
across share equities - banking, telecom, manufacturing and oil and gas sectors. In
addition, Nigerian banks have been receiving increased levels of foreign credit lines into
the economy.
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

3.3.4 Operational and Reputational Risks
Operational Risk
Some of the operational risks faced by Nigerian financial institutions in the past eighteen
months include ATM frauds, armed robberies, identity theft, fraud and break-down of
information technology (IT) systems. These risks arising from failure in the people,
processes and systems of financial institutions or from external events have implications
for confidence in the system as unexpected and uncontrolled operational risk can present
a major threat to a financial institution and by extension to the financial system. The
occurrence of an operational risk event can pose a threat to a financial institution either
directly or by aggravating other risk types. The threat to confidence in the financial
system, in itself portends crisis and instability, if it occurs for a sustained period.
Towards ensuring a safe and sound banking system, therefore the CBN has taken several
steps to encourage effective risk management in banks and discount houses. Some
specific steps taken to ensure that operational risk is effectively managed by financial
institutions include:
The directive by the CBN to DMBs and discount houses to develop
Enterprise Risk Management Frameworks (ERMF), which are expected to
cover operational risk management, among others;
Carrying out regular examination of the financial institutions during which
the adequacy and effectiveness of their internal control processes are
evaluated;
Commencement of RBS with pilot examination of two banks, and later
other DMBs, which involved assessment of the adequacy and effectiveness
of risk management, and covered operational risk, among other risk types;
Training of bank directors on their role in risk management including
operational risk ;
Adoption of Basel II, which prescribes various safety and soundness
standards for operational risk management for banks and other financial
institutions; and

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

Commencement of macro-prudential management by the CBN, which is
expected to help monitor risks trends and the economic big picture and map
interconnections between financial institutions especially with regards to
risks which may pose a threat to the stability of the system.
It is believed that the various initiatives will have the desired effect and reduce the risk to
the system arising from operational risk.
Confidence in a nation's financial system is eroded by money laundering of criminal
proceeds, widespread financial fraud, insider-trading of securities, embezzlement,
breach of laid-down procedures, the threat of instability or failure of financial
institutions, etc. The negative and undesirable reputation from such activities would
undermine the economic growth and development of any country, with far-reaching
implications for the country.
Once a country's financial system's reputation has been damaged, repairing it could be
very difficult as significant government resources may be required to rectify a problem
that could have been prevented by putting in place an adequate legal and regulatory
framework.
In the light of the possibility of such undesirable developments in Nigeria, the CBN has
embarked on a number of initiatives to mitigate the risk to the reputation of Nigeria's
financial system, including the following:
i.
Issued the AML/CFT Regulation 2009 to ensure compliance with FATF
Recommendations;
ii.
Established a 'Chief Risk Officers Forum' to promote strong risk
appreciation among risk managers and encourage them to share information
on areas of common interest;
iii. Collaborated with other regulators, through the institution of the FSRCC for
the purpose improving supervisory impact;
iv. Issued circulars on banks' handling of the receipt of proceeds of
international money transfers;

Reputational Risk
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

v.
Commenced review of the banking model to ring-fence banking operations;
and
vi. Established the Financial Stability Committee (FSC) to strengthen systemic
stability through the formulation of monetary policy and micro-prudential
rules.
These efforts have, so far, shown that public confidence in the system is being restored
and that interest in the financial system is on the upswing.
Money Laundering (ML) and terrorist financing have negative effects on the economy as
they are inextricably linked to the underlying criminal activities. Financial institutions
whose platforms are used for any of these purposes run the risk of being associated with
the underlying crime.
Where funds from a particular criminal activity are processed through a particular
financial institution, the latter could be construed as being in active complicity with
criminals, and may be considered part of the criminal network. Evidence of complicity
could have a damaging effect on the attitude of other financial intermediaries, regulatory
authorities and customers of such institution.
In order to underscore these grave concerns, the CBN has put in place appropriate
measures aimed at controlling the activities of money launderers within the institutions
under its regulatory purview. Some of such measures taken during the review period
include the following:
The AML/CFT Regulation, which was gazetted in December 2009, in line
with the FATF Recommendations;
The establishment of the AML/CFT Office, with responsibility for policy
formulation and ensuring compliance with the AML/CFT best practices;
and
Reform of the Payments System to discourage cash transactions, and
encourage electronic payments which could be more easily traced and
documented.
3.3.5 Money Laundering and Terrorist Financing Risk

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

4.0
INITIATIVES IN THE FINANCIAL SECTOR
The focus of the CBN in 2010 is to enhance the safety and soundness of the financial
system through appropriate banking reforms and achieve improved access to financing,
institutional capacity building, and entrenchment of good corporate governance
practices, thereby stimulating economic development.
One of the core functions of the CBN, as provided for in Section 2 of the CBN Act of
2007, is promoting financial stability. The importance of this function became more
apparent during the global economic crisis of 2008 and its effect on the Nigerian
economy. The global crisis affected the Nigerian economy in two significant ways:
The exit of portfolio investors from the Nigerian stock market; and
A significant reduction in government revenues.
The impact was compounded by a sharp decline in capital inflows, which put
considerable pressure on foreign reserves. The resultant liquidity shock necessitated the
intervention of the CBN to restore financial stability.
4.1
Promoting Financial Stability

• Reduction in the Monetary Policy Rate (MPR) from 10.25 per cent to 9.75 to 8 and further to 6
Box 1: The Intervention Measures
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

Banking Reforms
The 2005 bank consolidation programme significantly transformed the Nigeria banking
system. The number of banks decreased from 89 to 25, and subsequently to 24, following
the post-consolidation merger of two banks. The exercise brought about a substantial
growth in capital and led to the expansion of banks' internal and external operations.
Banks embarked on an aggressive expansion of their branch networks in the West
African sub-region and beyond including the addition of several local subsidiaries.
Thus, the number of bank branches increased from 2,900, at pre-consolidation, to 5,565
by end-2009. Aggressive credit expansion ensued. Consequently, banks were under
pressure to report high returns on their expanded activities without adequate risk
management practices to mitigate the risks inherent in their operations.
Regulatory concerns about poor corporate governance practices, system-wide risk
arising from persistent abuse of the Expanded Discount Window (EDW) and distress
borrowing from the inter-bank market by some banks, etc, informed a special
examination of the banking system by the CBN in 2009. The special examination report
revealed that 10 out of the 24 banks were in weak financial conditions, prompting the
following remedial actions by the CBN:
•
The removal of the executive management of 8 of the 10 banks;
•
The appointment of new management teams for the affected banks; and
•
The injection of 620 billion into the affected banks as tier 2 capital. The
capital is to be repaid from the proceeds of future recapitalisation by the
banks.
The intervention substantially stabilised the Nigerian banking system. The CBN further
introduced a four-pillar reform programme to boost confidence in the financial system,
by;
i.
Enhancing the quality of banks,
ii.
Establishing financial stability,
iii. Enabling the evolution of a healthy financial sector, and
iv.
Ensuring that the financial sector contributes to the real sector of the
economy.
The CBN is committed to conducting regular and effective surveillance of the financial
system to promote safe and sound banking system that supports the economic growth
and development of Nigeria.
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

4.2
Institutional Capacity Building
4.3
International Economic Relations and Cooperation
The rapid expansion of the Nigerian banking industry has presented a serious challenge
of inadequate institutional capacity to manage the growth. The dearth of management
skills in banks, coupled with an inadequate regulatory/supervisory capacity has
exacerbated the negative impact of the global financial crisis on the Nigerian economy.
There are two major institutions responsible for training at all levels for the banking
industry: the Chartered Institute of Bankers of Nigeria (CIBN), which is statutorily
charged with the responsibility for banking education in Nigeria and the Financial
Institutions Training Centre (FITC), which conducts short courses for middle and toplevel bankers to enhance their competence. In addition, the West African Institute for
Economic and Financial Management also engages in the training of regulators in
various areas of public finance and economic management. Capacity building for bank
supervisors received much deserved attention during the review period. Several local
and foreign training programmes were executed, covering a wide area of interest. The
major areas were non-interest banking, risk management, credit bureaux operations,
consolidated supervision, Basel II, corporate governance, anti-money laundering,
financial markets/products and bank examiners' courses.
Also, the CBN took the following steps to build capacity in the industry:
A certification programme for boards and top management staff of
microfinance banks;
Fostering closer collaboration among regulators on new developments in
the industry; and
Training of bank directors, in conjunction with the FITC, on risk
management and corporate governance.
The successful completion of the banking and insurance sector consolidation has
provided an opportunity for the Nigerian financial system to further integrate into the
global economy. The exercise has facilitated the flow of trade and investment, deepened
the financial market, created employment opportunities, and enhanced the development
of new financial products and services.
In the process of banks complying with the minimum capital requirement, the economy
has recorded substantial inflow of Foreign Direct Investment (FDI). The policy on

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

external reserve management has also encouraged collaboration between local banks
and external fund managers. Furthermore, the desire to foster financial integration and
support infrastructure development in Africa has informed the Nigerian initiative for
establishment of the African Finance Corporation (AFC).
In line with Nigeria's goal to become one of the top 20 economies in the world by the year
2020, the CBN has initiated a Financial System Strategy 2020 (FSS 2020) to transform
Nigeria into an international financial centre and provide one of the safest and fastest
growing financial systems amongst emerging economies. The focus of the strategy
includes the strengthening of domestic financial markets, enhancing integration with
external financial markets, and building an international financial centre.
As part of its reform process, the CBN has continued to support monetary and financial
integration within the Economic Community of West African States (ECOWAS) subregion. So far, the West Africa Monetary Agency (WAMA), the West Africa Monetary
Zone (WAMZ), and the West African Monetary Institute (WAMI) have been established
to promote financial integration and stability in the sub-region.
The strengthening of international linkages has exposed the country to a number of
challenges, especially on the supervision of Nigerian banks with offshore operations.
Accordingly, a number of Memoranda of Understanding (MOUs) have been signed with
some countries to facilitate information exchange and supervisory collaboration.
The Nigerian financial system, as a result of its increasing international linkages, is
gradually becoming an active player in the world financial system. It is envisaged that
with sustained efforts, the aggressive implementation of the FSS 2020 Initiative would
improve the international competitiveness of the Nigerian economy.
Access to finance in most developing economies is facilitated essentially through two
channels: direct credit extension and indirect extension, through the provision of
appropriate incentives and fiscal policy.
In order to effectively channel financial resources to the real sector of the economy in the
period under review, assist government in the realisation of its Vision 2020 objectives,
4.4
Access to Finance
4.4.1
Direct Real Sector Interventions
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

provide the required policy support and improve access to financial services by the
otherwise excluded segment of the economy, the CBN has sustained the following
initiatives, schemes and programmes:
The ACGSF was established by the Federal Government and the CBN to induce banks to
channel credit to the agricultural sector, with the CBN exercising oversight
responsibility. During the period under review, the Scheme provided 75 per cent
guarantee in respect of loans granted by banks for agricultural purposes. By end-April
2010, the sum of 35.45 billion had been guaranteed under the Scheme in respect of
652,549 bank loans granted to farmers as individuals, cooperative societies and
corporate bodies.

In furtherance of its developmental role and to reduce the cost of agricultural production,
increase output, generate exportable surplus, and provide inputs for the manufacturing
sector, the ACSS, which had been introduced earlier in 2006 as a Presidential Initiative
by the Federal Government, was deepened by the CBN during the period under review.
Under the Scheme, loans are granted to benefitting farmers at 14 per cent, but the farmers
pay a concessionary rate of 8 per cent while the CBN bears the remaining 6 per cent. By
end-April, 2010 the sum of 17.32 billion had been disbursed by banks to promoters of
101 large scale farm projects. The CBN has, so far, honoured its 6.0 per cent interest
rebate obligation as it paid up the sum 323.18 million to the financing banks with
respect to 34 large scale commercial agricultural projects.
The 200 billion CACS was also introduced in 2009 by the CBN, in collaboration with
the Federal Government, to mitigate the effects of the global food and financial crisis. As
a response mechanism, CACS was established to finance the development of large scale
commercial agriculture, value chain and shore up the level of aggregate food supply.
Other objectives of the Scheme are to increase foreign exchange earnings, generate
employment, diversify the country's revenue base, and provide the raw materials
required by the manufacturing sector of the economy on a sustainable basis. By endApril 2010, a total of 48.24 billion had been released by the CBN to four banks in
respect of 4 state government projects valued 4.0 billion and 45 private projects valued
44.24 billion.
4.4.1.1 The Agricultural Credit Guarantee Scheme Fund (ACGSF)
4.4.1.2 The Agricultural Credit Support Scheme (ACSS)
4.4.1.3 The Commercial Agricultural Credit Scheme (CACS)
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

4.4.1.4 The N300 Billion Power Infrastructure Fund
4.4.1.5 The N200 Billion Refinancing/Restructuring of SME/Manufacturing Fund
4.4.1.6 The SME Credit Guarantee Scheme (SMECGS)
4.4.2
Indirect Interventions
The 300 billion Power Infrastructure Fund was introduced in April 2010 by the CBN to
provide long-term support to finance power-chain projects and SME clusters. The Fund
is a 15-year debenture investment in the Bank of Industry (BOI) for on-lending to all
eligible DMBs and Development Finance Institutions (DFIs) at 1 per cent. The DMBs
and DFIs would, in turn, lend to promoters of appropriate projects at a maximum rate of
7.0 per cent (all in cost).
The CBN introduced the 200 Billion Refinancing/Restructuring of
SME/Manufacturing Fund in April 2010 to enable banks refinance and restructure their
existing loan portfolio to SMEs and manufacturing. The 15-year facility has a 3-year
moratorium, with loan amounts ranging from 5 million (minimum) to 1 billion
(maximum) to a single obligor at an interest rate of 7.0 per cent annually, repayable
quarterly.
The SME Credit Guarantee Scheme (SMECGS) was established during the period under
review by the CBN to provide a credit enhancement window to manufacturing SMEs,
agriculture value chain, and educational facilities. The intervention is targeted at
creating more jobs. The Scheme allows a maximum tenor of 7 years and provides an 80
per cent guarantee. All DMBs and development banks are eligible to participate in the
new Scheme.
In response to the effects of the global financial crisis, additional policy measures were
introduced to further improve access to credit to the real sector. These measures include
the following:
Reduction in the Cash Reserve Requirement and Liquidity Ratio;
Extension of guarantee to all lenders in the inter-bank market;
Further liberalisation of the foreign exchange market by creating a window
for BDCs to enable them service small businesses that require foreign
exchange; and
Enhancing the life-cycle of money market instruments by extending their
tenor to a maximum of 364 days.
It is expected that these measures would further encourage banks to lend to the real sector
of the economy, especially agriculture, SMEs, and infrastructure projects.

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

4.5
Non-Interest Banking
4.6
Anti-Money Laundering Measures and Combating the Financing of
Terrorism (AML/CFT)
4.6.1
Major Developments
i.
The AML/CFT Compliance Examination/Inspection
In recognition of the potential benefits of non-interest banking to the economy, the CBN
is finalising the regulatory and supervisory framework for Islamic banking in Nigeria.
Towards the full implementation of non-interest banking in Nigeria, the following
milestones have been achieved as at end-June 2010:
Admission of the CBN as a full member of the Islamic Financial Services
Board (IFSB) based in Malaysia. IFSB is a standard-setting institution,
made up of regulatory and supervisory bodies;
The formation of an inter-agency committee comprising the CBN, Federal
Inland Revenue Service (FIRS), the Nigeria Accounting Standards Board
(NASB), PENCOM, the SEC and the NDIC to define the role each would
play under the new concept; and
Receipt of a technical grant from the Islamic Development Bank (IDB)
Jeddah through the Federal Ministry of Finance, to support the CBN in
developing the regulatory and supervisory framework, building the capacity
of supervisors, and conducting an international conference to create needed
awareness.
In recognition of the negative effects of economic crimes and money laundering on the
stability of the financial system, the Nigerian Federal Government took a number of
measures to strengthen the hitherto weak institutional framework for AML/CFT. The
efforts have led to increased compliance with the Financial Action Task Force (FATF)
40+9 Recommendations.
The supervision of anti-money laundering activities in the financial system was
conducted by the various regulatory bodies for institutions under their authority. The
CBN and NFIU have carried out joint AML/CFT examinations/inspections of 24 banks
during the period. Several other financial institutions have been slated for inspection in
the remaining part of 2010. Similarly, the SEC and NAICOM have inspected several

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

institutions under their supervision and regulation, while the examination of Designated
Non-Financial Businesses and Professions (DNFBPs) was carried out by the Federal
Ministry of Commerce (FMC). The FMC has also produced guidelines and Know-YourCustomer (KYC) manuals for DNFBPs and ran AML/CFT training programmes for both
the regulators and operators. Also all stakeholders in the project work in collaboration
with the Nigerian Financial Intelligence Unit (NFIU).
The Nigerian Federal Government has made vigorous efforts to collaborate and
cooperate regionally and globally with key AML/CFT stakeholders to strengthen the
fight against terrorism and has ratified all the relevant United Nations universal
instruments against terrorism.
The CBN has circulated to financial institutions under its regulatory purview, for
appropriate action, the United Nations list of persons suspected to be involved in
terrorism financing or terrorist activities. The same list was circulated by the Ministry of
Foreign Affairs to other relevant agencies involved in the fight against terrorism and
terrorist financing.
The UN Security Council Monitoring Team on Terrorism (UNSCMTT), in October
2009, evaluated Nigeria's level of compliance with the extant UN resolutions with
respect to terrorism and terrorism financing. The assessment-visit paid particular
attention to issues pertaining to asset freezing, arms embargo and travel ban. The Team
acknowledged Nigeria's progress and commendable level of compliance in the
implementation of the relevant United Nations Security Council resolutions.
The CBN and other stakeholders have continued to build capacity, through training
programmes that cut across critical areas of AML/CFT awareness, skills and
compliance, with participants being drawn from regulatory/supervisory bodies and
reporting entities. The Inter-Governmental Action Group Against Money Laundering in
West Africa (GIABA) provided and supported capacity building programmes on
AML/CFT in Nigeria and the West African sub-region. Other entities, including the West
African Institute for Financial and Economic Management (WAIFEM) have also been
prominent in the building of capacity in this area.
ii.
Financing of Terrorism and Terrorist Activities
iii.
Capacity Building
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

iv.
Co-operation among Stakeholders
4.6.2
Other Developments
4.6.2.1 The Creation of an AML/CFT Office at CBN
4.6.2.2 The Constitution of Presidential Inter-Ministerial Committee on FATF
Cooperation amongst domestic stakeholders has witnessed a significant improvement as
they have exchanged information sharing, conducted joint investigations/operations,
and organized joint training programmes. Similarly, on the international scene, relevant
national agencies have strengthened their relationships and have interfaced with their
overseas counterparts. In order to ensure full cooperation with other countries in the fight
against money laundering and terrorism financing, the NFIU has signed a number of
Memoranda of Understanding (MOUs) with many countries on behalf of Nigeria. Other
agencies, including the Independent Corrupt Practices Commission (ICPC), the EFCC
and the NDLEA have also been working directly with their counterparts in several
countries to investigate cases of corruption, drug trafficking and money laundering. The
Nigerian Customs Service has also collaborated with the United States Customs in the
area of bulk cash smuggling.
As part of ongoing efforts to interface more efficiently with NFIU and other stakeholders
on AML/CFT matters, the CBN, in March 2010, established an AML/CFT office in the
Financial Policy and Regulation Department. The main objective is to ensure that
AML/CFT enforcement efforts in the CBN are properly coordinated, that sound
AML/CFT policies are formulated, and that the financial institutions are compliant with
FATF/GIABA's requirements.
In 2009, the FATF subjected Nigeria to a targeted review on account of the size of her
financial system being in excess of US$ 5 billion, as well as poor ratings on 13 of the 16
key/core Recommendations in the Mutual Evaluation Report (MER) of GIABA. In
response, the Nigerian authorities constituted a high-level Presidential InterMinisterial/Agency Committee on FATF in June 2009 to engage the FATF's
International Cooperation Review Group (ICRG) on Africa/Middle-East and address the
concerns cited in the 2007 MER, as well as ensure full compliance with FATF
Recommendations.
During the period, Nigeria held two face-to-face meetings and provided progress reports
and responses to the Regional Review Group (RRG) and ICRG. Since the
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

commencement of the targeted review of Nigeria in September, 2009, the country has:
i)
Worked closely with the RRG and reported on the progress made since the
Mutual Evaluation of 2007;
ii)
Produced and submitted a comprehensive Action Plan and a Time-table on
Nigeria's Strategic Action Plan to address FATF's concerns;
iii) Re-presented the Anti-Terrorism Bill (ATB) as an Executive Bill to the
National Assembly (NASS). The ATB is set for passage in 2010;
iv) Made a proposal, in the form of an executive bill, to the National Assembly,
for the amendment of the Money Laundering (Prohibition) Act (MLPA); and
v)
Gazetted the AML/CFT Regulation in December 2009, thereby making it a
Statutory Instrument (SI) which has the full effect of a law of parliament.
In September and December 2009, Nigeria participated in the RRG's meetings in
Bahrain which discussed the Report of the Africa/Middle East Countries. She also
participated in GIABA's 13th Technical Commission/Plenary Meeting held in Praia,
Cape Verde between 2nd and 4th, May, 2010.
On the whole, Nigeria has demonstrated a strong commitment to combating money
laundering and terrorism financing.
The CBN, in recognition of the potential role of risk officers in improving risk
management practices in banks, has established a Chief Risk Officers' (CROs) Forum.
The Forum seeks to achieve the following objectives:
Promote strong risk appreciation/expertise and corporate governance across
the sector;
Provide early warning signals on systemic risk issues;
Provide feedback on the impact of CBN's existing (or planned changes to)
policies, directives, circulars, and guidelines;
Serve as the industry's risk management think tank; and
4.7
Other Strategies for Dealing with Risks in the Banking System
i.
Chief Risk Officers (CROs) Forum

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

Enhance collaboration and capacity building, through sharing of best
practices.
The limitations in the existing contingency plan for managing systemic crisis in the
Nigerian financial system have necessitated a review of the framework. The revised
contingency plan would strengthen CBN's early warning system to facilitate effective
action to detect and deal with systemic distress in the industry.
Nigerian banks have shown considerable resilience, despite experiencing huge capital
erosion and risk of insolvency, as a result of huge provisioning and decline in asset
quality. The average capital adequacy ratio (CAR) for DMBs has grown from 18.1 per
cent in 2004 to 21.9 per cent in 2008, but declined to 3.65 per cent in 2009 after some
DMBs made full loan loss provisions for their non-performing loans. By end-December
2009, the average CARs of 14 DMBs controlling 45.2 per cent of total deposits were still
above both the Basel Capital Accord benchmark and the CBN regulatory threshold of 10
per cent, while 10 DMBs controlling 46.5 per cent of total deposits, had their CARs
below the prescribed requirement.
The CAR of the banking system is expected to improve as the new AMCON becomes
operational and buys up the non-performing loans of banks.
In the global economy, more countries have shown signs of rising output, moderating
inflation, rising stock market indices and moderating exchange rate depreciation.
Although the outlook appears bright, the challenges and concerns with regards to
sovereign default risk in Europe and increasing fiscal deficits in most advanced
economies remain and constitute serious potential dangers to full recovery.
At the domestic front, macroeconomic outcomes have been mixed in the first half of
2010. Money supply expanded moderately and inflationary pressure is projected to
increase in the second half of 2010. The gross official reserves declined marginally
during the review period. The exchange rate depreciated at both the official and interbank market, but appreciated slightly at the BDCs segment. If the current policy stance
of liberalising the foreign exchange market subsists, the exchange rate is likely to remain
ii.
Contingency Plan for Systemic Distress
iii.
Capital Adequacy
4.8
Macroeconomic Outlook
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

stable in the near term. In the money market, most deposit and lending rates fell.
There is need for caution as the current price of oil may not be sustained, especially if the
value of the US Dollar appreciates and global recovery is not sustained. The remainder of
2010 may witness relatively substantial growth in money supply, given the anticipated
pre-election spending, the planned deregulation of the downstream petroleum sector,
and possible additional liquidity injection into the troubled banks from the purchase of
toxic assets by AMCON. The likely expansion in money supply would constitute a
potential threat of inflationary pressures. However, monthly forecasts indicate that
reserve money would continue below the provisional indicative benchmarks for the
second half of 2010, indicating that the quantitative easing measures currently being
deployed to boost liquidity in the system should not be quickly withdrawn.
Given the reforms in various sectors of the economy and the sustained implementation of
the Federal Government's amnesty programme in the Niger Delta region, it is expected
that growth in GDP would improve in 2010.
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

THE PRUDENTIAL REGULATION AND
SUPERVISORY FRAMEWORK
5.0
5.1
Regulatory Reforms
5.1.1
The Establishment of the Macro-Prudential Analysis Division
Experience has shown that there are strong linkages between financial institutions and
that the failure of one systemically important institution could affect other institutions.
This experience has been reinforced by the global financial crisis. Consequently, it has
become increasingly imperative to evaluate the soundness and vulnerability of the entire
financial system. Pursuant to this, the CBN has established a Macro-prudential Division
in March 2010 in its Financial Policy and Regulation Department to:
Provide early warning signals that would protect the entire financial system
from distress, rather than focusing only on individual institutions in the
system;
Avoid large and burdensome costs to the economy, by adopting more costeffective distress resolution mechanisms;
Identify the collective risks faced by the banking system rather than those
faced by individual banks; and
Examine risks that may arise from contagion as a result of the interaction of
banks as part of the financial system, rather than only on a bank-by-bank
basis.
Accordingly the Division now performs the following functions:
Maintaining a banking industry database;
Collating, analysing, reviewing and monitoring the banking industry's
financial condition (that is, the preparation of periodic financial soundness
indicators);
Preparing periodic management reports (banking industry updates and
developments); and
Managing the Credit Risk Management System (CRMS).
The Division also provides information, including early warning signals, to CBN's
Management on the condition of the financial system.

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

5.1.2
Review of Prudential Guidelines and Related Matters
This was another key measure initiated by the CBN to strengthen its
regulatory/supervisory framework. The decision of the CBN to review and enhance the
1990 Prudential Guidelines was informed by the need for adequate supervision to
promote the safety and soundness of the banking system, in particular, and the financial
system as a whole. The Revised Prudential Guidelines address some critical aspects of
the operations of banks, such as risk management, corporate governance, single obligor
limits, anti-money laundering compliance, loan loss provisioning, etc. The Guidelines
also address the peculiarities of different loan types and financing to different sectors of
the economy.
The 1990 Prudential Guidelines were deficient in the following areas:
They did not cover certain sector-specific credits, such as project financing,
agricultural financing and SMEs financing, owing to the long gestation
periods of such credits;
They were silent on the need for a moratorium (grace period) associated
with maturities in credits to sectors requiring long gestation periods;
They were pro-cyclical;
They did not address the need to specify a collateral value; and
There was ample room for subjectivity and management intervention that
tended to compromise credibility.
The Revised Prudential Guidelines provide appropriate guidance on the recognition and
measurement of loans, the establishment of loan loss allowances, credit risk disclosure,
sound loan provisioning, and related matters. Some of the key objectives of the Revised
Prudential Guidelines are as follows:
Enhance provisioning policies and practices for Nigerian banks consistent
with sound risk management practices ;
Align provisioning guidelines with the life-cycle and gestation periods of
specific industry loan types;
Provide a framework for ensuring that provisioning guidelines are countercyclical (dynamic); and
Put in place a framework that recognises credit risk mitigation through
“haircuts” adjustment for lost facilities.

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

The key features of the Revised Prudential Guidelines include the following:
Provision of a credit Portfolio Classification system for facilities defined as
“Specific Loan Types” and facilities defined as “Other than Specific Loan
Types”;
Provision of a dynamic provisioning regime intended to overcome the
challenge of pro-cyclicality which is a major drawback of the old Prudential
Guidelines; and
Discontinuation of general provisioning.
Following the recent crash of the Nigerian stock market, arising from the twin-effects of
the global financial crisis and margin loan abuse by some Nigerian banks, the FSRCC in
December 2009, set up a committee to develop appropriate guidelines on margin
lending.
The objectives of the guidelines are as follows:
Serve as a guide to market operators;
Enhance the oversight functions of the regulatory agencies;
Limit the risks inherent in margin lending;
Stem the tide of insider and corporate governance abuses; and
Improve the current level of reporting and disclosure by market operators.
Features of the guidelines include the following:
Provides for the contents of a margin agreement;
Specifies the categories of margin accounts, which are of two types, that is:
Bank Margin account and Brokerage Margin account;
Spells out the rules for establishing/opening and maintaining margin
accounts;
Stipulates the margin maintenance requirements for a broker or dealer, and
the bank requirements for margin accounts;
Specifies marginable Securities.
Makes provision for the certification of capital market operators by the CBN
and the SEC; and
Makes margin transaction reporting to both the CBN and the SEC on a
periodic basis mandatory.

5.1.3
Guidelines on Margin Lending
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

5.2
The Supervisory Framework
5.2.1
Adoption of Risk-based Supervision of Banks and Other Financial
Institutions
5.2.2
Consolidated and Cross-border Supervision
During the period under review, the CBN commenced the implementation of risk-based
supervision (RBS) of banks and discount houses in Nigeria, in the context of the ongoing
reforms in the industry. The implementation of RBS was one of the key supervisory
deliverables of 2009 to enhance financial stability.
The key objectives of RBS are to:
Prioritise supervisory resources;
Enable supervisors to focus on what matters;
Encourage sound risk management practices; and
Focus on the significant activities of banks and the control structures.
A supervisory framework and supporting guidelines for the implementation of RBS
were developed. The supervisory guidelines included the following:
A set of Assessment Criteria for evaluating the effectiveness of an
institution's risk management control functions;
Section Notes, covering the generic activities that banks undertake;
Supervisory Guidelines for the development of the Risk Assessment
Summary (RAS), Knowledge of Business (KOB), Management Reporting,
Supervisory Strategy Formulation and Supervisory Documentation, as well
as the identification and assessment of the Inherent Risks in an institution's
significant activities; and
Frequently Asked Questions (FAQs) issued as part of a discussion series to
facilitate a better understanding of the Supervisory Framework among
examiners.
Implementation of risk-based and consolidated supervision commenced with a pilot run
of two DMBs and is being rigorously pursued.
The banking sector consolidation of 2005 has provided huge capital funds for Nigerian
banks and the funds have enabled them to engage in rapid expansion, domestically and
internationally. The expansion in banks' operations, products and services development,
and the emergence of large complex banking organizations (LCBOs) beyond national

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

borders, have brought about challenges which have rendered the current supervisory
approach inadequate. In response, the CBN has initiated a framework for consolidated
and cross-border supervision of banks.
The key objectives of CBN's consolidated and cross-border supervision include the
following:
Adoption of appropriate risk-weighting in capital adequacy calculations
and the prevention of double-leveraging (multiple gearing of
capital/buffer);
Support for the principle that no banking operations, wherever located,
should escape supervision;
Ensuring that all the risks incurred by a banking group, regardless of where
they are booked, would be evaluated and controlled on a global basis;
Evaluation of the strength of a group to which a licensed bank belongs, in
order to assess the potential impact of other members of the group on the
licensed bank. It may be conducted on either a quantitative or a qualitative
basis, or on the basis of a combination of both;
Consolidation of the financial returns, i.e., consolidation of accounts of the
licensed entity using the quantitative approach, while ensuring that the
qualitative approach evaluates the material risks; and
Elimination of regulatory arbitrage.
The key issues in the adoption of Consolidated and Cross-border Supervision are as
follows:
Containing the financial instability associated with cross-border activities
(risk of contagion);
Harmonisation of accounting standards, regulatory and legal frameworks;
Reduction of information gap between home and host
regulators/supervisors; and
The resolution of cross border crises.
The CBN response to the challenges above is summarised in the following action:
Reaed the Financial Services Regulation Coordinating Committee
(FSRCC) to improve information sharing among regulators; and
Signed “Memoranda of Understanding” with a number of jurisdictions
where Nigerian banctivatks are operating.

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

5.2.3
The Financial Services Regulation Coordinating Committee (FSRCC)
5.2.4
Memoranda of Understanding (MOUs)
The FSRCC is a forum established by the CBN Act of 2007 for the purpose of exchanging
information on surveillance activities on the condition of the financial system among
regulators of the financial sector. It provides a platform for the coordination of
regulatory efforts to minimise regulatory arbitrage. The Governor of the CBN is the
Chairman of the FSRCC, while other members are as follows:
Managing Director, Nigeria Deposit Insurance Corporation,
Director-General, Securities and Exchange Commission,
Commissioner for Insurance,
Registrar-General, Corporate Affairs Commission, and
A representative of the Federal Ministry of Finance, not below the rank of
Director.
The objectives of the Committee are to:
Coordinate the supervision of institutions that provide financial services.
Reduce regulatory arbitrage.
Cooperate and share information/experience among members.
Articulate strategies for the promotion of safe, sound and efficient financial
system.
As at end-June 2010, 12 Nigerian banks were operating offshore, while four (4) foreign
banks were licensed to operate in Nigeria. In the spirit of cross-border supervision and
cooperation with other regulators, a number of MOUs have been signed between Nigeria
and some of these regulators. The MOUs seek to achieve the following objectives:
Enhance the stability of the financial system in each country and prepare the
supervisory authorities for the management of any crisis with cross-border
implications;
Improve the effectiveness and efficiency of supervisory measures;
Facilitate the exchange of information, views and assessments among
banking supervisors and promote a better understanding of each other's
methods and approaches, with the aim of encouraging the convergence of
supervisory practices;
Identify significant differences in national laws and regulations that might
imperil the convergence process and take necessary steps to ensure a clear
understanding of such differences among the parties, as well as, their

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

possible influence on the convergence process, and address issues
concerning the stability of national financial systems that may have
potential contagion and spill-over effects in the collaborating countries; and
Enable supervisors to develop a common understanding of the risk profile of
large cross-border banking groups in the collaborating countries; and
develop a common understanding of the risk profile of a banking group as a
starting point for risk-based supervision, at both group and individual levels.
The impact of the recent global financial and economic crises has varied from country to
country. Furthermore, the rate of recovery of each country from the crises has tended to
depend greatly on the robustness of the enabling laws and the powers of the apex
regulator to take prompt regulatory action.
The adequacy of BOFIA, 1991 (as amended), the principal banking legislation enacted
to provide an effective and efficient legal framework for the supervision of banks and
other financial institutions in Nigeria, has been a matter for concern among bankers over
the years. In recognition of this fact, amendment of BOFIA has become imperative.
Some of the proposed amendments would empower the CBN to:
Prohibit the operation of shell banks;
Restructure, reorganise, merge and dispose of banks without recourse to
the SEC or the provisions of the Investments and Securities Act; and
Inject funds into a failing institution under CBN's jurisdiction by way of
equity participation, up to a level that guarantees control by the CBN.
The period, January 2009 June 2010 has been undoubtedly challenging for financial
institutions' supervisors across the globe. While some of the challenges were similar, the
CBN, in addition, had to contend with issues peculiar to its domestic environment. Some
of the challenges and the remedial action taken by the Bank are highlighted in the
following sub-sections of the Report.
The effects of the recent global financial and economic crises on the Nigerian financial
system were at their peak in 2009. The effects include the following:

5.2.5
Proposed Amendment to the Banks and Other Financial Institutions Act
(BOFIA)
5.3
Supervisory Challenges
5.3.1
The Impact of Global Financial and Economic Crises

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

Recall of foreign credit lines;
A precipitous decline in the price of crude oil, occasioned by weak global
demand;
Huge non-performing loans to the Capital Market and the Oil & Gas
Sectors; and
A sharp decline in portfolio investment and inflows from the Diaspora.
In order to mitigate the effects of these negative developments, supervision of financial
institutions became more intrusive, thereby stretching already thin supervisory
resources.
The predominance and overbearing influence of some members of bank Boards and
their management inhibited the entrenchment and institutionalisation of good corporate
governance practices and a healthy culture in many financial institutions. The
introduction of a tenure limit for members of boards and executive management, as well
as external auditors of banks, was one of the measures taken during the period to tackle
this development.
The changing dynamics of bank supervision require that most of the provisions of the
BOFI Act be amended from time to time. Therefore, the passage of the proposed
amendments to the Act by the National Assembly is essential for laying a robust legal
framework for the supervision of banks and other financial institutions in the country.
The unreliable call reports prepared by banks have remained the bane of appropriate and
timely supervisory intervention by the CBN and other regulatory authorities. This fact
has prompted some supervisory responses, including the following:
Upgrading the Electronic Financial Analysis Surveillance System (e-FASS)
infrastructure for online reporting between banks and the CBN;
Adopting a zero tolerance policy for financial misreporting; and.
The adoption of a common financial year-end of December 31 for all banks
and their subsidiaries, effective December 31, 2009.

5.3.2
Weak Corporate Governance Culture/Practices
5.3.3
An Inadequate Legal Framework
5.3.4
Data Integrity
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

5.3.5
Addressing Inadequate Supervisory Capacity/Arrangements
5.3.6
Consumer Protection
5.4
Focus of Surveillance in 2010/2011
Skills gaps have hampered the successful implementation of a number of
supervisory/regulatory initiatives, such as the IFRS, risk-based supervision and the
effective supervision of complex e-products. The challenge is being addressed through
structured training for supervisors, and stronger collaboration with the relevant
institutions.
There have been increasing complaints by bank customers. The complaints relate to
excessive charges, breach of contract, and e-products fraud. In response to the
complaints, the CBN has established a Consumer Protection Office, which collaborates
with the Nigerian Consumer Protection Council, to ensure that consumers would always
be adequately protected. The Nigerian banking public would be given details of CBN's
specific guidelines in this regard, as soon as they have been finalised.
Building on the remedial measures already taken to address the weaknesses revealed by
the Special Examination of Banks in 2009 in order to ensure a stable financial system, the
CBN has initiated a Four-pillar Reform Programme with the following features:
Enhancing the quality of banks;
Establishing financial stability;
Enabling the evolution of a healthy financial sector; and
Ensuring that the financial sector contributes to the real sector of the
economy.
Towards this end, CBN's surveillance activities in 2010/11 would focus on strengthening
supervisory standards at both the micro and macro levels. Specifically, supervision
would be proactive by focusing on the full implementation of risk-based and
consolidated supervision.
Furthermore, the implementation of the New Prudential Guidelines and the Revised
Banking Model would come into effect before year end-2010.
The CBN is committed, through the FSRCC, to championing the harmonisation of
regulatory standards, as well as collaborating and sharing information among financial
system regulators.

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

As Nigerian banks move towards the adoption of IFRS by 2012 in order to enhance
transparency, surveillance activities would focus on capacity building for supervisory
staff to ensure a seamless transition from the Nigerian Generally Accepted Accounting
Principles (NGAAP) to the IFRS.
Supervision would also focus on the activities of the recently licensed private credit
bureaux to enhance access to credit in Nigeria. The establishment of a FSC would further
enhance the stability of the financial system.
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

THE PAYMENTS AND SETTLEMENTS
SYSTEM
6.0
Empirical evidence suggests a positive correlation between an efficient payments and
settlements system on one hand, and economic growth and development on the other.
The benefits of an efficient payments system include low transaction costs and a
predictable and efficient market response to monetary policy, both of which engender
financial system stability. In realisation of these benefits and in line with the Financial
System Strategy (FSS 2020) target on payments system, the CBN has initiated the
Payments System Vision 2020 (PSV 2020).
The thrust of PSV 2020 is to develop a payments system that would be nationally utilised
and internationally recognised.
Specifically, the PSV 2020 initiative was designed to achieve the following objectives:
Migrate from a cash-based to an e-payment system for transactions
settlement;
Develop national mobile and electronic cards payments infrastructure;
Replace the current RTGS with a modern, world class system;
Ensure the interoperability and interconnectivity of e-payment service
providers;
Develop an effective framework for consumer protection and dispute
resolution;
Develop a policy and oversight mechanism for the payments system;
Ensure that the Nigerian Payments System complies with the West African
Monetary Zone (WAMZ) standards; and
Ensure appropriate legal backing for the National Payments System.
The Nigerian payments system has witnessed significant improvements over the years,
moving from a rudimentary level during its early years of banking business to the current
level of sophistication. The high dependence on cash for settlements has, however,
resulted in the inefficient allocation of resources and a low depth of financial
intermediation, with adverse repercussions on monetary policy implementation. In
addition, it has discouraged the use of specific banking services, resulting in the high
operational costs for the CBN and DMBs.
6.1
The Payments System Vision 2020 (PSV 2020)

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

In order to reverse this trend, the CBN has initiated the PSV 2020 project, which is aimed
at improving the efficiency of the payments system, through the adoption of electronic
payments. The e-payments initiative provides a road map for the required infrastructure
in the context of the expectations of end-users, service providers, the CBN, other
regulators and the international community.
The seven key features of the PSV 2020 initiative are as follows:
Government Supplier Payment,
Person-to-person payment,
Salary Payment,
Bill Payment,
Tax Payment (Business),
Tax Payment (Individuals), and
Securities Settlement.
Figure 18 presents the timelines for initial use and full volume operation.

Figure 18: Timelines for the Implementation of the PSV 2020 User Initiatives

Seven User Initiatives

Government Supplier Payments
Person to Person Trade
Salary Payments
Bill Payment
Taxes (Business)
Taxes (Individual)
Securities Settlement
Initial use
Full volume
KEY
6.2
Developments in the Payments System
The Bank sustained the implementation of the Payments System Vision 2020 initiative
during the last eighteen months. The Nigeria Automated Clearing System (NACS) has
been deployed in Kano, Ibadan and Benin Clearing Zones, thereby, bringing the total
number of automated clearing houses to five (5). Further measures taken to facilitate the
efficiency of the payments system included the following:
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

Issuance of operational rules and guidelines for the Nigeria Central Switch
to connect all existing switches for the inter-operability and interconnectivity of the different card schemes;
Restriction on the deployment of Automated Teller Machines (ATMs) by
banks to their premises only, while three ATM Consortia have been licensed
to undertake off-site installations of ATMs;
Application of e-payment by Federal Government Ministries, Departments
and Agencies (MDAs), in line with the Presidential directive prohibiting the
use of cheques for transactions by the Federal Government;
Appointment of payments system Project Management Team to fast track
the implementation of the PSV 2020 initiative;
Reviews of the following guidelines, which have reached various stages of
completion: Nigeria Bankers Clearing House Rules, Nigeria Uniform Bank
Account Number, and the e-payment of taxes/salary/pension;
The creation of a Payments System Policy and Oversight Office in the CBN
to:
o
Ensure compliance, monitoring, and enforcement of PSV 2020
policies and guidelines; and
o
Enlighten and sensitise the public on PSV 2020 activities;
Issuance of operational rules and guidelines for ATMs;
Migration from magnetic stripe cards to chip and pin cards;
Introduction of two clearing sessions per day to improve efficiency;
Issuance of a regulatory framework for mobile payment services; and
A cap of N10 million for cheque payments to encourage e-payment.
The volume of inter-bank transfers increased from 220,586 in 2008 to 289,535 in 2009,
implying a growth of 31.3 per cent, while the value decreased by 12.1 per cent, from
73,227 billion to 64,351 billion in the same period (see Figures 19 and 20).

6.2.1
Real-time Gross Settlement (RTGS)
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

Figure 19: Volume of Inter-bank Funds Transfers Between 2007 and 2009


Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Volume of Inter-bank Funds Transfers, 2007 - 2009

Figure 20: Value of Inter-bank Funds Transfers Between 2007 and 2009


Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Value of Inter-bank Funds Transfers, 2007 - 2009

6.2.2
Clearing of Cheques
During the period covered by the Report, the clearing days for up-country cheques (T+5)
and local cheques (T+3) were unified to T+3. This was subsequently reduced to T+2.
Other developments in the period include the following:
Review of the Clearing House Rules,
Implementation of a Cheques Standard, and
Issuance of Cheques and Automated Clearing House (ACH) regulatory
guidelines.
The volume of cheques cleared decreased from 30,172,925 in 2008 to 29,159,780 in
2009, a decline of 3.5 per cent. The gradual adoption of the e-payment system accounted
for the decline in the volume of cheques cleared, an indication that the objectives of the
adoption of e-payment were being achieved.

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

N Billion
6.2.3
e-Cards
The volume and value of e-card transactions increased from 66,108,388 and 441.6
billion in 2008 to 114,592,669 and 645.0 billion in 2009, reflecting increases of 73.34
and 46.1 per cent, respectively (see figures 21 and 22).
Figure 21: Volume of Electronic Card Transactions, 2007 - 2009


Volume of Electronic Card Transactions, 2007 - 2009

Figure 22: Value of Electronic Card Transactions, 2007 - 2009


Jan Feb Mar Apr May Jun
Jul
Aug
Sep
Oct
Nov
Dec
Value of Electronic Card Transactions, 2007 - 2009

6.2.4
Automated Teller Machines
Given the high dependency on cash in Nigeria, it is no surprise that Automated Teller
Machine (ATM) transactions are widely used by individuals, particularly in the urban
areas. Lack of relevant ATM infrastructure in rural areas is a key challenge to the wider
usage of bank accounts since it is the primary method of accessing accounts for many
individuals. Available data on various e-payment channels for the period under review
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

N Billion
indicated that ATMs remained the most patronised channel, accounting for over 80 per
cent of the total e-payment transactions, while the Point-of-Sale (POS) terminal was the
least, with less than 1.0 per cent usage. The details are as follows:
Volume terms


%
ATMs


95.26
POS


0.80
Mobile Phone


1.58
Web (Internet)


2.36
Figure 23: Volume of e-Payment Transactions

ATMs
POS
Mobile Phone
Web (Internet)
Value terms


%
ATMs


85.05
POS


1.71

Mobile Phone


0.19

Web (Internet)


13.05

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

Figure 24: Value of e-Payment Transactions

Volume of e-Payments Transactions
ATMs
POS
Mobile Phone
Web (Internet)
The upsurge in the use of ATMs continued during the review period, with the volume and
value standing at 109,592,646 and 548.60 billion, respectively, as at end-December,
2009. This reflected increases of 81.5 per cent and 37.3 per cent in the volume and value
of over 60,133,610 and 399.71 billion, respectively, recorded in the corresponding
period of 2008. The increase in the use of ATMs was attributable to a number of factors,
such as the increased number of ATMs in the country and convenience of usage.
The use of mobile payments is still at its infancy as the regulatory framework was only
recently approved, while the process of licensing the payment service providers is still in
progress.
Notwithstanding the progress made so far, the Nigerian payments and settlements
system is faced with the following constraints:
A weak infrastructure,
High transaction costs,
High dependence on cash transactions,
A high incidence of poverty and ignorance,
A high level of illiteracy,
A low level of Internet access,
Inadequate inter-operability and inter-connectivity,
The high cost of deploying and maintaining of the payments infrastructure,
6.2.5
Mobile Payments
6.3
Challenges of the Payments and Settlements System

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

A low level of public awareness of the existence of some non-cash payment
products, resulting in under utilisation of e-payments solutions, and
The concentration of e-payment facilities in urban centres.
It is, however, expected that full implementation of the PSV 2020 project would address
these challenges.
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

7.0
PRESERVING THE INTEGRITY OF THE
FINANCIAL SYSTEM
The preceding review has highlighted various measures taken by the CBN to enhance the
stability of the financial system. Additional efforts, as discussed below, are being made
to further strengthen the system.
The universal banking (UB) model adopted in 2001 has allowed banks to diversify into
non-bank financial businesses. Following the bank consolidation programme in 2005,
banks became awash with capital, which was deployed in a variety of financial services
and the setting up of subsidiaries. Soon, a number of weaknesses began to surface, such
as the following:
Inadequate skills and poor risk management practices;
Poor corporate governance practices;
The structural operations of the subsidiaries allowed banks to play multiple
roles, as operating entities, holding companies to their subsidiaries, and also
holding direct and indirect investments in non-financial services entities
such as real estate firms, security outfits, and facilities management
undertakings, thereby increasing contagion risks;
Minimal distinction between the banks and their subsidiaries in the areas of
management and operations. Consequently, instances of improper
allocation of depositors' funds to high risk businesses were rampant;
The inability of regulators of the financial sector to keep pace with the
developments and growth in the sector facilitated a high incidence of
regulatory arbitrage; and
The underlying short-term profit objectives negated the developmental role
of the banking system. Consequently, the real economy suffered from
neglect and also bore the excruciating burden of high interest rates on loans
and advances.
In effect, the laudable objectives of the UB model were vitiated by operators, with banks
operating as financial supermarkets, to the detriment of core banking practices. In order
to address this challenge, the CBN is reviewing the UB model with a view to inducing
banks to focus on core banking business. Under the new model, banks would not be
allowed to invest in non-bank subsidiaries. Banks which currently hold such investments
7.1
Review of the Universal Banking Model

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

would be required to either divest or spin off the businesses The three classes of deposit
money banks being proposed are International banks, National banks, and Regional
banks.
The high incidence of non-performing loans in the banking industry and the consequent
erosion of the capital of many banks informed the need to establish AMCON designed to
free the banks of the burden of toxic assets.
AMCON is an interventionist initiative with an authorised capital to be subscribed by the
CBN and the Ministry of Finance.
The objectives of the Corporation include the following:
Assist eligible financial institutions to efficiently dispose of eligible bank
assets;
Efficiently manage and dispose of the eligible bank assets acquired by the
Corporation; and
Obtain the best achievable financial returns on eligible bank assets, or other
assets, acquired by it having regard to:
o
the need to protect or otherwise enhance the long-term economic
value of those assets; and
o
any other factor which the Corporation considers relevant to the
achievement of its objectives.
The use of asset management companies in the management of NPLs has proved to be a
potent tool in a number of jurisdictions. However, its effectiveness would depend on
such variables as type, legal framework, ownership structure, level of economic
development of the country, and political independence of the agencies, among other
variables.
In order to achieve financial stability, the CBN has taken steps to expose the banking
system to the global best practices in financial reporting and disclosure. The provision
of adequate information by banks would enhance market discipline and reduce
uncertainties, thereby reducing the risk of contagion. Besides promoting the adoption of
7.2
The Establishment of the Asset Management Corporation of Nigeria
(AMCON)
7.3
Adoption of the IFRS in the Nigerian Banking System

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

IFRS in the Nigerian banking industry by end-2012, the Bank has:
Issued a refined reporting templates that would allow for the capture of
standardized sectoral and/or other information;
Introduced a common accounting year-end for all banks, with effect from
end-December 2009, aimed at improving data integrity and comparability;
and
Issued a comprehensive minimum disclosure guideline for banks and
discount houses with effect from December 2009 accounts.
The CBN is also closely collaborating with other stakeholders, such as the NASB, the
FMF, the NDIC, the SEC, NAICOM, PENCOM, the FIRS, and ICAN amongst others, to
ensure a seamless adoption of IFRS in the Nigerian banking sector by 2012. These
efforts are being pursued under the aegis of the Roadmap Committee of Stakeholders on
the Adoption of IFRS in Nigeria, which was inaugurated in 2009 by the NASB and
facilitated by the World Bank.
The adoption of IFRS would bring about significant benefits, but not without its
potential challenges as well.
In order to further engender public confidence in the banking system and enhance
customer protection, the CBN has established a Consumer and Financial Protection
Division to provide a platform through which consumers can seek redress.
In the first three months of the Division's operation, about 600 consumer complaints
were received a clear manifestation of the absence of an effective complaints resolution
mechanism in banks. In order to further address this challenge, the CBN has issued a
directive to banks to establish Customer Help Desks at their head offices and branches.
Also, the CBN has commenced a comprehensive review of the Guide to Bank Charges,
with a view to making the charges realistic and consumer-friendly.
Furthermore, it is important that bank consumers are properly educated and enlightened
on their rights and responsibilities. Consequently, the Consumer and Financial
Protection Division would commence a programme of consumer education and
enlightenment very shortly. The details are being worked out and would be made public
as soon as they are ready.

7.4
Promoting Consumer Protection in the Nigerian Banking Industry
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

The CBN is also collaborating with the Consumer Protection Council on the review of
the Consumer Protection Council Act No. 66 of 1992 to further empower the regulators
to enforce discipline in the market.
The concern of the CBN over bank failures resulting from bad loans, coupled with the
need to strengthen the risk management processes in the financial system, has become
paramount leading to the establishment, in 1990, of a public credit bureau, known as the
Credit Risk Management System (CRMS) and the licensing of private credit bureaux in
2009.
The CRMS was given legal backing by the CBN Act No. 24 of 1991 [sections 28 and 52]
as amended. The Act empowers the CBN to obtain from all banks, returns on all credits
with a minimum outstanding balance of 100,000.00; now 1million and above
(principal and interest), for compilation and dissemination by way of status reports to
authorized institutions which are mainly financial institutions and regulators. However,
it was not until 1997 that the CBN, by its circular No. BSD/PA/7/97, dated 31/12/97,
formally informed the banks of the commencement of operations of the CRMS, with
effect from 1st January, 1998. The circular compulsorily requires all banks to:
[a]
Obtain, from the Credit Bureau, a CRMS borrower's code number in respect of
all customers enjoying any form of credit facilities of 1 million and above;
[b]
Render monthly Credit Returns to the Credit Bureau on all customers with
facilities of 1 million and above;
[c]
Ensure that before a credit of 1 million or above is granted to any customer, or
an additional credit that would increase the outstanding exposure to 1 million or
above, the lending bank should obtain a credit report from the Credit Bureau on
such customer; and
[d]
Ensure that credits are only granted to borrowers on whom favourable credit
reports have been obtained from the CRMS.
The circular also specifies the penalties to be imposed on banks that violate the
provisions of the enabling Act or circular.
7.5
Enhancement of the Credit Risk Management System
i.
CBN CRMS
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

The CRMS was initially designed to capture credits of 100,000 and above, but was
later reviewed upwards to 1 million and above to enable it focus on large credits. The
CBN Credit Bureau operations are limited to banks which are mandatorily required to
render monthly returns on the details of all credits of 1 million and above. Other
financial institutions are expected to be incorporated at a later date. Also, it is mandatory
for all banks to request from the CBN Credit Bureau a credit report in respect of any
customer to whom a credit facility of 1 million and above is being contemplated. The
aim of the CRMS is to strengthen the appraisal procedures of banks, through the
identification of delinquent borrowers, checking of over-lending, and ensuring the
consistent classification of credits.
As at end December 2009, the CBN CRMS had in its database records of 63,451
borrowers with an outstanding indebtedness of 4.0 trillion from 36,768 different credit
facilities, including fixed term loans, overdrafts, leases, CP/BAs, etc.
The CBN CRMS would continue to play its regulatory role, by operating as a public
credit registry and sharing information with the private credit bureaux. In this regard,
banks and other financial institutions shall continue to render returns to the CBN and
comply with all relevant circulars and guidelines.
ii.
Establishment of Private Credit Bureaux
The operations of the CRMS as a public credit bureau are limited when compared to a
normal credit bureau which provides credit information on all persons and sectors of the
economy. Also the CRMS only captures credits of 1 million and above, as against the
best practice which places no limits on the amount to be captured.
These limitations, together with the reforms in the financial services sector, especially in
the provision of access to credit at the micro level, informed the establishment of credit
bureaux that would meet international best practices in Nigeria. Consequently, the CBN
Act, 2007 has been amended to empower the CBN to license and regulate private credit
bureau operations in Nigeria.
The private credit bureaux are mandated to cover all sectors of the economy, with a view
to providing credit reports on all individuals and corporate bodies that intend to enjoy, or
are enjoying, any type of facilities in the country. In order to streamline the operations of
the bureaux, guidelines covering their licensing as well as their operational and
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

regulatory requirements, were issued in October 2008. In doing so, full account was
taken of the best practices in credit bureau operations as well as Nigeria's environmental
peculiarities. Inputs from various stakeholders, including the World Bank's MSME
project, the IFC, individuals and corporate organizations, were taken into consideration.
The challenges that are unfolding, consequent upon the commencement of operations by
the private credit bureaux, are the following:
Lack of public awareness of the relevance and operational modalities of
CBs;
Lack of an acceptable unique identifier in Nigeria (as a result of the failure of
the National Identity card); and
Absence of reliable and regular data collection and dissemination
mechanism.
In 2010 the CBN would embark on the following measures aimed at addressing the
identified challenges of this sub-sector of the financial system:
i.
Liaison with National Identity Management Commission (NIMC), with a
view to enhancing the National Identity Card project;
ii.
Whenever the National Identity scheme takes off, circulars would be issued
to ensure that no new credit shall be extended to anybody unless the person
has a national identity card;
iii.
Conduct a nationwide awareness programme on credit bureau operations, in
order to get the buy-in of other stakeholders, especially the non-financial
sectors;
iv.
Offer technical assistance by organising capacity building programmes for
the personnel of the licensed credit bureaux;
v.
Issue a circular directing banks and other financial institutions to sign data
exchange agreements with at least two licensed credit bureaux from which
they would be required to obtain credit reports on current and intending
borrowers;
a.
Operational Challenges in the Credit Bureaux (CBs)
b.
The Outlook for Credit Bureaux in 2010

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

vi.
Develop an appropriate reporting format for lending institutions and
bureaux for ease of regulation and monitoring by the CBN; and
vii. Ensure that risk management and corporate governance tenets would be
properly entrenched in the operations of licensed credit bureaux.
As at end-June 2010, three credit bureaux had been licensed by the CBN to operate in
Nigeria, while one has been granted an Approval-in-Principle. They have since
commenced operations.
Box 2: Financial Stability Going Forward


The CBN is making strenuous efforts to strengthen the framework for financial stability in
Nigeria going forward. In particular, the following steps are being taken:


Adoption of the macro prudential regulation/supervision

approach;

CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

8.0
CONCLUDING REMARKS
The principal mandate of the CBN, as encapsulated in its enabling Act, includes the
promotion of a sound financial system and ensuring monetary and price stability in
Nigeria. Thus, the issue of stability in the financial system has been central to the
functioning of the CBN since its inception. This responsibility has, however, attained
added importance in recent times as a result of events in the financial system, especially
the crises that have affected the Nigerian banking system between 2007 and 2009.
Following the rapid financial sector liberalisation in the 1990s and the consolidation
programme embarked upon in 2005, the financial system has witnessed a rapid growth
that has not been supported by appropriate measures designed to encourage prudent risk
management practices. This fact, taken along with other issues, such as corporate
governance failures, the absence of investor and consumer sophistication, inadequate
disclosure and transparency, critical gaps in the regulatory framework and regulation,
uneven supervision and enforcement by regulators, as well as macro-economic
instability that was caused by large and sudden capital inflows, among others, has
precipitated the crises that have negatively impacted the financial system.
In realization of the fact that the financial crises were caused by a myriad of issues and
that no single policy solution for dealing with them would suffice, the CBN aims to
introduce and implement various policies to address the causes of the crises, taking into
account the peculiarities of the domestic environment. In this regard, the CBN, as part of
its ongoing efforts to attain and promote financial stability, has recently articulated
various policies aimed at addressing any likely constraint to the stability of the financial
system. Consequently, a four-pillar reform programme aimed at correcting the
anomalies that have hampered the effective functioning of the financial system was
introduced and is being vigorously implemented.
The reform programme, as well as other policy measures by the CBN to promote
financial stability, constitutes the bedrock of this Report. It is pertinent to state that the
decision to publish this Report at this time when the risk to financial stability in Nigeria is
still high, is quite courageous in the light of the reasoning that such report could
precipitate the very crisis that we seek to mitigate. However, the need to demonstrate our
commitment to the efforts being implemented to address the challenges in our financial
system has swayed our decision in favour of the publication of this Report. It is hoped
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

that the publication would provide a clearer understanding of the issues affecting
financial stability in the Nigerian financial system and the efforts that are being made to
address them.
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

LIST OF ABBREVIATIONS AND ACRONYMS
ACH
ACGSF
ACSE
ACSS
AfDB
AFC
AIP
AMCON
AML/CFT
ASI
ATB
ATMs
BAs
BDC
BOO
BOFIA
BOI
BOT
CAC
CACS
CAR
CB
CBN
CEO
CIBN
CP
CRMS
CRO
CRR
CTR
DFI
DH
DMB
-
Automated Clearing House
-
Agricultural Credit Guarantee Scheme Fund
-
Abuja Commodity and Securities Exchange
-
Agricultural Credit Support Scheme
-
African Development Bank
-
African Finance Corporation
-
Approval-in-Principle
-
Asset Management Corporation of Nigeria
-
Anti-Money Laundering/Combating the Financing of Terrorism
-
All Share Index
-
Anti-Terrorism Bill
-
Automated Teller Machines
-
Bankers Acceptances
-
Bureaux-de-Change
-
Build Operate and Own
-
Banks and Other Financial Institutions Act
-
Bank of Industry
-
Build Operate and Transfer
-
Corporate Affairs Commission
-
Commercial Agriculture Credit Scheme
-
Capital Adequacy Ratio
-
Credit Bureaux
-
Central Bank of Nigeria
-
Chief Executive Officer
-
Chartered Institute of Bankers of Nigeria
-
Commercial Paper
-
Credit Risk Management System
-
Chief Risk Officer
-
Cash Reserve Requirement
-
Currency Transaction Reports
-
Development Finance Institution
-
Discount House
-
Deposit Money Bank
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

ECOWAS
EDW
eFASS
EFCC
FATF
FAQ
FBN
FC
FDI
FGN
FHAN
FIRS
FITC
FMAWR
FMBN
FMC
FMF
FOB
FSA
FSC
FSRCC
FSS
GDP
GIABA

GMP
ICAN
ICD
ICPC
ICRG
ICT
IDB
IDC
IFC
IFEM
IFRS
-
Economic Community of West African States
-
Expanded Discount Window
-
electronic Financial Analysis and Surveillance System
-
Economic and Financial Crimes Commission
-
Financial Action Task Force
-
Frequently Asked Question
-
First Bank of Nigeria
-
Finance Companies
-
Foreign Direct Investment
-
Federal Government of Nigeria
-
Finance Houses Association of Nigeria
-
Federal Inland Revenue Service
-
Financial Institutions Training Centre
-
Federal Ministry of Agriculture and Water Resources
-
Federal Mortgage Bank of Nigeria
-
Federal Ministry of Commerce
-
Federal Ministry of finance
-
Free On Board
-
Financial Services Authority
-
Financial Stability Committee
-
Financial Services Regulation Co-ordinating Committee
-
Financial System Strategy
-
Gross Domestic Product
-
Inter-Governmental Action Group Against Money Laundering in
West Africa
-
Guaranteed Minimum Price
-
Institute of Chartered Accountants of Nigeria
-
Inland Container Depots
-
Independent Corrupt Practices and related offences Commission
-
International Cooperation Review Group
-
Information Communication Technology
-
Islamic Development Bank
-
Industrial Development Corporation
-
International Finance Corporation
-
Inter-bank Foreign Exchange Market
-
International Financial Reporting Standards
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

IFSB
IMF
ISA
IT
KOB
KYC
LCBO
MDA
MER
MFB
MFI
ML
MLPA
MOFI
MOU
MPD
MPR
MRR
MSME
NACOB
NACRDB
NACS
NAICOM
NASB
NASS
NCCT
NDIC
NDLEA
NEXIM
NFIU
NGAAP
NGO-MFI
NHF
NIBSS
NIMC
NIPOST
-
Islamic Financial Services Board
-
International Monetary Fund
-
Investment and Securities Act
-
Information Technology
-
Knowledge of Business
-
Know Your Customer
-
Large Complex Banking Organization
-
Ministries, Departments and Agencies
-
Mutual Evaluation Report
-
Microfinance Bank
-
Microfinance Institutions
-
Money Laundering
-
Money Laundering (Prohibition) Act
-
Ministry of Finance Incorporated
-
Memorandum of Understanding
-
Monetary Policy Department
-
Monetary Policy Rate
-
Minimum Rediscount Rate
-
Micro, Small and Medium Enterprise
-
National Association of Community Banks
-
Nigeria Agricultural Co-operative and Rural Development Bank
-
Nigeria Automated Clearing System
-
National Insurance Commission
-
Nigeria Accounting Standards Board
-
National Assembly
-
Non Co-operative Countries and Territories
-
Nigeria Deposit Insurance Corporation
-
National Drug Law Enforcement Agency
-
Nigeria Export Import Bank
-
Nigeria Financial Intelligent Unit
-
Nigerian Generally Accepted Accounting Principles
-
Non-governmental Organisation-Microfinance Institution
-
National Housing Fund
-
Nigerian Inter Bank Settlement System
-
National Identity Management Commission
-
Nigerian Postal Service
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

NPL
NSE
OBB
OECD
OFI
OFID
OFISD
OMO
OSFI
P&A
P&L
PBT
PENCOM
PEP
PFA
PFC
PLC
PMI
PN
POS
PPP
PSV
RBS
RI
RMP
ROA
ROE
ROSCAS
RRG
RTGS
SEC
SI
SME
SMECGS
SMEEIS
SMIEIS
-
Non-Performing Loan
-
Nigerian Stock Exchange
-
Open Buy back
-
Organisation for Economic Co-operation and Development
-
Other Financial Institutions
-
Other Financial Institutions Department
-
Other Financial Institutions Supervision Department
-
Open Market Operations
-
Office of the Superintendent of Financial Institution
-
Purchase and Assumption
-
Profit and Loss
-
Profit before Tax
-
National Pension Commission
-
Politically Exposed Person
-
Pension Fund Administrator
-
Pension Fund Custodian
-
Public Liability Company
-
Primary Mortgage Institutions
-
Promissory Note
-
Point of Sale
-
Public Private Partnership
-
Payment System Vision
-
Risk Based Supervision
-
Reporting Institution
-
Risk Mitigation Programme
-
Return on Assets
-
Return on Equity
-
Rotary Savings and Credit Association
-
Regional Review Group
-
Real Time Gross Settlement
-
Securities and Exchange Commission
-
Stability Instrument
-
Small and Medium Enterprises
-
Small and Medium Enterprises Credit Guarantee Scheme
-
Small and Medium Enterprises Equity Investment Scheme
Small and Medium Industries Equity Investment Scheme
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010

STR
UB
UDB
UN
UNSCMTT
WAFSA
WAIFEM
WAMA
WAMI
WAMU
WAMZ
WDAS
-
Suspicious Transaction Report
-
Universal Banking
-
Urban Development Bank
-
United Nations
-
United Nations Security Council Monitoring Team on Terrorism
-
West African Financial Supervisory Authority
-
West African Institute for Financial and Economic Management
-
West Africa Monetary Agency
-
West African Monetary Institute
-
West African Monetary Unit
-
West African Monetary Zone
-
Wholesale Dutch Auction System
CBN FINANCIAL STABILITY REPORT JANUARY 2009 - JUNE 2010