Sanusi Lamido Sanusi: Banking reform and its impact on the Nigerian
economy
Lecture by Mr Sanusi Lamido Sanusi, Governor of the Central Bank of Nigeria, at the
University of Warwick's Economic Summit, Warwick, 17 February 2012.
* * *
Protocol
It is a great honor to be invited to address the Warwick Economic Summit, which has
become one of the largest academic conferences in Europe. I wish to commend the entire
students and staff of the University of Warwick for inviting me to share my experiences at the
Central Bank of Nigeria (CBN). I am highly delighted to be part of this summit where top
policymakers, professionals and technocrats around the world meet to debate and exchange
views on contemporary economic issues. The outcomes of the Summit had continued to
inspire policymakers in designing proactive micro and macroeconomic management policies
for solving emerging economic problems in both developed and developing countries. It is
against this backdrop that I urge you to sustain the Annual Summit. My address today will
focus on "Banking Reforms in Nigeria and Its Impact on the Economy". As you may all
be aware, the banking sector in Nigeria has recently witnessed significant reforms and hard
choices have had to be made to tackle the lingering effects of the global financial crisis,
which culminated in the contraction of some banks' balance sheets with the attendant
economic losses. I am pleased to note that these problems have been surmounted through
series of reforms undertaken by the Central Bank of Nigeria.
Introduction
Generally, the financial system is more than just institutions that facilitate payments and
extend credit. It encompasses all functions that direct real resources to their ultimate user. It
is the central nervous system of a market economy and contains a number of separate, yet
co-dependent, components all of which are essential to its effective and efficient functioning.
These components include financial intermediaries such as banks and insurance companies
which act as principal agents for assuming liabilities and acquiring claims. The second
component is the markets in which financial assets are exchanged, while the third is the
infrastructural component, which is necessary for the effective interaction of intermediaries
and markets.
The three components are inextricably intertwined. Banks need payments system
infrastructure to exchange claims securely and markets in which to hedge the risks arising
from their intermediation activities. The banking system therefore functions more efficiently
and effectively when there is a robust and efficient payments systems infrastructure.
Moreover the concern to ensure a sound banking system by the Central Bank is underscored
by the critical role of banks in national economic development. Banks for instance, mobilizes
savings for investment purposes which further generates growth and employment. The real
sector, which is the productive sector of the economy, relies heavily on the banking sector for
credit. Government also raises funds through the banking system to finance its
developmental programmes and strategic objectives. It is in view of these strategic roles of
the banking system to national economic development that the issue of a sound banking
system, through proactive reforms becomes imperative.
Rationale for banking reforms in Nigeria
Conceptually, economic reforms are undertaken to ensure that every part of the economy
functions efficiently in order to ensure the achievement of macroeconomic goals of price
stability, full employment, high economic growth and internal and external balances. Thus,
banking reform in Nigeria is an integral part of the country-wide reform program undertaken
to reposition the Nigerian economy to achieve the objective of becoming one of the
20 largest economies by the year 2020. As part of the vision, the banking sector is expected
to effectively play its actual role in intermediation and for the banks to be among global
players in the international financial markets.
As I will explore later, the various reforms we undertook in Nigeria were targeted at making
the system more effective and strengthening its growth potentials. In view of the fact that
banks take deposits from the public, there is a need for periodic reforms in order to foster
financial stability and confidence in the system.
The recent experience from the global financial crisis has further underscored the
imperatives of countries to embark on banking reforms on a regular basis. As you are all
aware, the world economy was hit by an unprecedented financial and economic crisis in
2007-2009 that resulted in a global recession. This crisis led to the collapse of many
worldrenowned financial institutions and even caused an entire nation to be rendered bankrupt.
In Nigeria, the economy faltered and was hit by the second round effect of the crisis as the
stock market collapsed by 70 per cent in 2008-2009 and many Nigerian banks sustained
huge losses, particularly as a result of their exposure to the capital market and downstream
oil and gas sector. Therefore, the CBN had to rescue 8 of the banks through capital and
liquidity injections, as well as removal of their top executives and consequent prosecution of
those who committed some infractions. These actions became necessary to restore
confidence and sanity in the banking system.
A holistic investigation into what went wrong in Nigeria leading up to the banking crisis in
2008 found eight interrelated factors responsible. These were macroeconomic instability
caused by large and sudden capital inflows, major failures in corporate governance at banks,
lack of investor and consumer sophistication, inadequate disclosure and transparency about
the financial position of banks, critical gaps in the regulatory framework and regulations,
uneven supervision and enforcement, unstructured governance & management processes at
the CBN/ and weaknesses in the business environment. Each of these factors is serious in
its own right. Acted together they brought the entire Nigerian financial system to the brink of
collapse.
We all know that a well-functioning financial system matters to everyone and to the economy
at large. The Nigerian economy has huge potential for growth. To realize this potential, it is
imperative that we learn lessons from the crisis and take steps to not only fix the problems,
but to also introduce measures to establish financial stability, a healthy evolution of the
financial sector and ensure the banking sector contributes to the development of the real
economy.
As a result, the Nigerian banking system has steadily evolved, following wide and
farreaching reforms embarked upon by the regulatory authorities. Following the banking crisis
of 2008, the Central Bank of Nigeria articulated a blue print known as "The Project Alpha
Initiative" for reforming the Nigerian financial system in general and the banking sector in
particular. The reforms aimed at removing the inherent weaknesses and fragmentation of the
financial system, integrating the various ad-hoc and piecemeal reforms and unleashing of the
huge potential of the economy.
Critical elements of banking reform in Nigeria
The current reforms which began in 2004 with the consolidation programme were
necessitated by the need to strengthen the banks. The policy thrust at inception, was to grow
the banks and position them to play pivotal roles in driving development across the sectors of
the economy. As a result, banks were consolidated through mergers and acquisitions, raising
the capital base from N2 billion to a minimum of N25 billion, which reduced the number of
banks from 89 to 25 in 2005, and later to 24.
Beyond the need to recapitalize the banks, the regulatory reforms also focused on the
following:
 Risk-focused and rule-based regulatory framework;
Zero tolerance in regulatory framework in data/information rendition/reporting and

infractions;
Strict enforcement of corporate governance principles in banking;

 Expeditious process for rendition of returns by banks and other financial institutions
through e-FASS;
 Revision and updating of relevant laws for effective corporate governance and
ensuring greater transparency and accountability in the implementation of banking
laws and regulations, as well as;
 The introduction of a flexible interest rate based framework that made the monetary
policy rate the operating target. The new framework has enabled the bank to be
proactive in countering inflationary pressures. The corridor regime has helped to
check wide fluctuations in the interbank rates and also engendered orderly
development of the money market segment and payments system reforms, among
others.
The Bank has over the years identified key priority sectors and developed tailored
interventions to support and promote their growth. Some of the key interventions in the real
sector include:
 N200 Billion Refinancing/Restructuring of SME/Manufacturing Fund
 N300 billion for long term funding of Power and Aviation
 Commercial Agricultural Credit Scheme (CACS)
 The Small and Medium Enterprises (SME) Credit Guarantee Scheme (SMECGS)
 In addition the Nigerian Incentive-Based Risk Sharing System for Agricultural
Lending (NIRSAL) was established. The programme is a demand-driven credit
facility that would build the capacity of banks to engage and deliver loans to
agriculture by providing technical assistance and reducing counterparty risks facing
banks. It also seeks to pool the current resources under the CBN agricultural
financing schemes into different components of the programme.
Furthermore, the Bank has been collaborating with the Securities and Exchange Commission
(SEC) and the Nigerian Stock Exchange (NSE), to reduce the cost of transactions,
particularly bond issues, so as to diversify funding sources away from banks as well as
attract more foreign portfolio investors into the sector.
In 2010, the Asset Management Corporation of Nigeria (AMCON) was established following
the promulgation of its enabling Act by the National Assembly. It is a special purpose vehicle
aimed at addressing the problem of non-performing loans in the Nigerian banking industry,
among others. In line with its mandate, AMCON recently acquired the non-performing
risk assets of some banks worth over N1.7 trillion, which is expected to boost their
liquidity as well as enhance their safety and soundness. With the intervention of AMCON,
the banking industry ratio of non-performing loans to total credit has significantly reduced
from 34.4 per cent in November 2010 to 4.95 per cent as at December 2011.
In order to ensure that AMCON achieves its mandate, the CBN and all the deposit money
banks have signed an MOU on the financing of AMCON. The CBN shall contribute N50
billion annually to AMCON, while each of the participating banks shall contribute an amount
equivalent to 0.3 per cent of its total assets annually into a sinking fund as at the date of their
audited financial statement for the immediate preceding financial year. Therefore, the cost of
the resolution to the Nigerian taxpayer is significantly minimized.
To further engender public confidence in the banking system and enhance customer
protection, the CBN established the Consumer and Financial Protection Division to provide a
platform through which consumers can seek redress. In the first three months of its
operation, the Division received over 600 consumer complaints, which was a manifestation of
the absence of an effective consumer complaints resolution mechanism in the banks. The
CBN has also issued a directive to banks to establish Customer Help Desks at their head
offices and branches.
In addition, the CBN has commenced a comprehensive review of the Guide to Bank Charges
with a view to making the charges realistic and consumer friendly.
The CBN has taken steps to integrate the banking system into global best practice in
financial reporting and disclosure through the adoption of the International Financial
Reporting Standards (IFRS) in the Nigerian banking sector by end-2010. This should help to
enhance market discipline, and reduce uncertainties, which limit the risk of unwarranted
contagion.
The Universal Banking (UB) model adopted in 2001, allowed banks to diversify into non-bank
financial businesses. Following the consolidation programme, banks became awash with
capital. Some operators abused the laudable objectives of the UB Model with banks
operating as private equity and venture capital funds to the detriment of core banking
practices. To address the observed challenges, the CBN reviewed the UB Model with a view
to directing banks to focus on their core banking business only. Under the new model,
licensed banks will be authorized to carry the following types of business:
 Commercial banking (with either regional, national and international authorization);
 Merchant (investment) banking;
 Specialized banking (microfinance, mortgage, non-interest banking (regional and
national); and
 Development finance institutions.
The introduction of the non-interest banking in Nigeria is expected to herald the entry of new
markets and institutional players thus deepening the nation's financial markets and further
the quest for financial inclusion. In fact, the first fully licensed non-interest bank in the country
(Jaiz Bank Plc.) started business on Friday, January 6, 2012.
Similarly, the importance of Microfinance in a growing economy cannot be over-emphasized,
given its potential in addressing the challenges of excluding a large population from full
participation in economic activities. As at December 2011 there were 24 deposit money
banks with 5,789 branches and 816 microfinance banks bringing the total bank branches to
6,605. The ratio of bank branch to total population is 24,224 persons, indicating a high level
of financial exclusion. This is further substantiated by the 2010 Enhancing Financial
Innovation and Access (EFInA) survey, which observed that 46.3 per cent of Nigeria's
population is still financially excluded compared to South Africa, Kenya, Botswana with
26.0 per cent, 32.7 per cent and 33.0 per cent, respectively. Thus, in 2012 the Bank is
looking to establish a Microfinance Development Fund (MDF) aimed at improving access to
affordable and sustainable sources of finance by Microfinance Institutions (MFIs) and
Microfinance Banks (MFBs). It would have both commercial and social components. This
would enhance their operations and outreach and support the capacity building activities of
the MFBs/MFIs.
The Bankers' Committee has declared 2012 the year of "Women Empowerment" in the
banking industry. A sub-committee on Women Empowerment has been formed, with the
CEO of Standard Chartered Bank Nigeria as Chairperson. The CBN is working on
establishing a special fund by the end of the year that would provide credit facilities to
women at a single digit interest rate. The CBN is also working with banks to ensure that a
certain percentage of senior management and board seats are reserved for women.
The Bank recently introduced a new policy "Cash less Policy" as part of ongoing reforms to
address currency management challenges in Nigeria, as well as enhance the national
payments system. As may be aware the Nigerian economy is heavily cash-oriented in the
transaction of goods and services. This huge cash transaction increases the operational
costs of the banking sector, which is passed on to the customers in the form of higher service
charges and high lending rates. These operational costs are significant due to the high cost
incurred in cash management, currency sorting, cash movements and frequent printing of
currency notes.
The direct cost of cash management to the banking industry is estimated to be about N192
billion by 2012. Research has shown that about 90 per cent of withdrawals by bank
customers' are typically below N150,000 whereas, only 10 per cent of bank customers who
withdraw over N150,000 were responsible for the rise in cost of cash management being
incurred by the generality of bank customers. There are also risks involved in keeping or
moving large amounts of cash, namely the high incidence of robberies, encouraging corrupt
practices and the public's propensity to abuse and mishandle currency notes.
The CBN, in collaboration with the Bankers' Committee, aims to achieve an environment
where a higher and increasing proportion of transactions are carried out through cheques
and electronic payments in line with global trends. The enforcement of the T+2 cheque
clearing cycle is being stepped up and efforts are on-going to reduce the cycle to T+1.
Anybody can now make payments of up to N10 million through the clearing system with a
cheque.
The CBN recognizes the need to balance the objectives of meeting genuine currency
transaction demand and combating speculative market behavior that may negatively affect
economic growth and stabilization measures. The new cash withdrawal policy will ensure
that a larger proportion of currency in circulation is captured within the banking system,
thereby enhancing the efficacy of monetary policy operations and economic stabilization
measures.
The policy does NOT in any way stop account holders from withdrawing any amount of
money they desire from their accounts. The policy simply recognizes that banking is a
business and, as with any business, there are costs that are sometimes shared between the
business and the customers. The policy stipulates that to withdraw more than N150,000 (for
individual account holders) and more than N1,000,000 (for corporate account holders), there
will be a transaction cost.
The various measures notwithstanding, there was need for some intervened banks to merge
in order to strengthen their capital base and to remain competitive in the market. Accordingly,
five Transactions Implementation Agreements (TIAs) were signed among the banks, and the
CBN issued a letter of no objection to the banks being acquired to proceed with the merger
of the entities. The signing of legally binding TIAs for the five (5) banks and the full
capitalization of the 3 new banks by AMCON had resolved the issue of the combined
negative asset value of the eight CBN intervened banks. Similarly, the recapitalization of all
the five banks that signed TIAs was completed in 2011.
Impact of the reform
The current banking reforms have yielded the following results among others:
i. The reforms have brought about a new mindset to the industry as banks are putting
in place best practices in the areas of corporate governance and risk management.
Transparency and public disclosure of transactions have remarkably improved.
ii. A number of banks have returned to the profit-making path and improved their
balance sheets, as the recent results of their financial statements have shown.
iii. Banks are gradually resuming lending to the private sector with the additional
liquidity of more than N1.7 trillion injected into the banking system through the
issuance of AMCON bonds, and significant progress in re-directing credit to the
power sector and SMEs at single digit interest rates. These initiatives have saved
and helped create thousands of jobs in the economy.
iv. A new code of corporate governance has been issued by the Bank. The CEO of
banks shall serve a maximum tenure of 10 years. Furthermore, all CEOs who would
have served for 10 years by July 31, 2010 ceased to function in that capacity and
have handed over to their successors.
v. Nigerian Banks are now key players in the global financial market with many of them
falling within the Top 20 banks in Africa and among Top 1000 banks in the world.
vi. The reform has culminated in moderating the spread between the lending and
deposit rates to 9.7 per cent as at end-December 2011, from 12.2 per cent in 2010.
This has contributed to the existing macroeconomic stability in the economy with
inflation moderating to 10.3 per cent as at end-December 2011.
vii. The hitherto volatility in the exchange rate witnessed in the foreign exchange market
has been brought under control. The premium is within the international standard of
5.0 per cent.
viii. There is greater cooperation between the monetary authority and the banks through
regular meetings and collaboration on policy issues.
ix. The reforms have brought about greater confidence in the banking system with the
removal of distress banks and the adoption of a strict code of corporate governance.
x. Increased widespread use of e-payment services among Nigerians.
Challenges to the banking reforms
The Nigerian banking reform, despite its laudable achievements is confronted with certain
challenges. First and foremost is the wrong perception of the intent of the reform. The
introduction of the new banking model, especially specialized banking (non-interest banking),
is intended to broaden the scope of financial services offered by banks in Nigeria. However,
this has been given a religious connotation. The wrong perception and stiff resistance to the
policy could potentially deter prospective investors in the banking industry.
Second, the reluctance of Nigerians to accept positive changes in global dynamics is another
challenge. There is incontrovertible evidence that the excessive liquidity in the system
measured by broad money (M2), narrow money (M1) and currency in circulation is partly
attributable to the high cash transactions for economic activities, which has continued to
undermine the efforts to achieve price stability. Yet the cashless policy has faced significant
resistance, despite its prospect for economic growth and development and the global trend in
the intensity of usage of e-payments.
Third, the cost of doing business in Nigeria is still high when compared with developed
economies or some emerging and developing countries owing to the poor state of
infrastructure.
Another challenge is that the high growth rates recorded in the last five years have not been
inclusive, implying that this has not transcended into sustainable development. This situation
is responsible for the high unemployment and poverty levels, which inevitably affect the low
banking habit in the country.
Another key challenge is the quality of manpower: real strategic change can only take place
with competent and committed workforce that is constantly exposed to training and
development. The competitive financial sector environment requires a highly skilled
workforce that would effectively contribute to value creation within financial institutions.
Hitherto, employee recruitment was merely to comply with regulatory requirements, while
training was viewed as a non-revenue function that was costly and unnecessary.
Conclusion
The banking sector occupies a vital position in the economy and must be subject to
continuous reforms for it to function efficiently. The modest achievements recorded so far
have been largely due to greater collaboration and commitment of purpose among key
stakeholders. Thus, the CBN in its efforts to develop a sound and vibrant banking system will
strive to ensure that democratization of policy is sustained. It will also continue to ensure that
the banks abide strictly with the code of corporate governance for efficient functioning of the
banking industry.
Thank you for listening.