Sanusi Lamido Sanusi: Evolving financial landscape - strategies for
economic resilience
Keynote address by Mr Sanusi Lamido Sanusi, Governor of the Central Bank of Nigeria, at
the 4th Annual Banking and Finance Conference of the Chartered Institute of Bankers of
Nigeria (CIBN), Abuja, 23 September 2010.
* * *
Protocol
1. Let me begin by appreciating the opportunity and the honour given to me to be part
of this important occasion, which is meant to chart a course for sustainable economic
development of our dear country, Nigeria. The theme of this conference "Evolving Financial
is indeed very apt and topical, and could
landscape: Strategies for economic Resilience"
not have come at a more opportune time than now, considering not only the needs of
country, but the rapid changes that are taking place in the financial sector and the role it is
expected to play in the evolving economic landscape. It is my expectation, therefore, that the
issues that will be discussed during this conference will further assist in laying a solid
foundation for the much needed economic transformation of the Nigerian economy. It is
usual at this conference for the Governor, if delivering the keynote address, to update the
industry on his stewardship in the past year, and the expected duration of policy.
2. As you are aware, since the commercial banking business commenced in 1892 in
Nigeria, the financial system has experienced several episodes of banking crisis. The first of
such crisis took place in the late 1940s and early 1950s, mainly as a result of lack of
appropriate regulation, leading to the collapse of about 21 of the 25 indigenous banks which
had been established by 1954. While these failures were resolved mainly through
self-liquidation, the outcome was a bitter experience, especially for depositors who lost their
money.
3. Systemic crises re-appeared in the Nigerian banking industry between 1989 and
1998, which many attributed to the withdrawal of public sector deposits from the banks, and
as a consequence exposed the weak financial condition of most financial institutions whose
financial fragility had been concealed by a combination of factors, including public subsidy
and improper accounting systems. The deregulation of the banking system in the mid-1980s
facilitated a dramatic increase in the number of financial institutions and also exposed the
banks to intense competition for which many of them were ill-prepared for. Some of the
banks attracted a significant market share through improved customer services at
competitive prices. In contrast, many banks appeared to have been set up largely to take
advantage of the arbitrage opportunities in the foreign exchange market, rather than
undertake more conventional/traditional banking business. The consequence was a mass
distress that laid the foundations for the bank consolidation exercise in 2004, which induced
a breath of life to our banks, enhanced their capital position and increased their involvement
in business activities.
4. The recent global financial crisis, however, strained the gains that had been
achieved post-consolidation in the sector. The immediate impact of the global financial
turbulence on the Nigerian financial system, particularly the banking system, mirrored global
trends but was largely contained because of the limited integration with the global financial
system. While offshore funding of the domestic banking system was growing before the
crisis, its scale was manageable and the Central Bank was able to accommodate
commercial banks foreign exchange needs in the depth of the global crisis. Coupled with
major internal management problems in some of the banks, the crises impacted the
economy through various channels - significant decline in oil revenue leading to revenue
attrition for all tiers of government; reduced capital inflows into the economy; significant
drawdown of external/foreign reserves; demand pressure in the foreign exchange market;
substantial decline in stock market capitalization and share prices; huge bank losses on
margin loans and share-backed facilities as well as loans to the downstream oil and gas
sector; low valuation with many banks trading below book value; declining asset values; and
declining credit growth.
5. Distinguished ladies and gentlemen, it became clear that the CBN had to act
decisively when it became evident that some of the banks had more deep-rooted problems
that were not discernable from the regular reports rendered to the regulatory authorities.
Some of these actions included replacing the chief executives/executive directors of the
banks identified as the source of instability in the industry and injection of the sum of
N620.0 billion into the banks in an effort to prevent a systemic banking crisis. The injection of
this fund (Tier II capital) into these banks then was considered sufficient to resolve and
stabilize them to enable them to continue normal business operations, with arrangements
made to recover non-performing loans from the banks' debtors while guaranteeing all foreign
credits and correspondent banking commitments.
6. As an additional measure to strengthen the reform process, the CBN commenced
the process of creating an Asset Management Company, as an important vehicle for dealing
with Non Performing Loans of the banks. As you are all aware, the Asset Management
Corporation of Nigeria (AMCON) has already been established by law and its Board is
awaiting Senate confirmation for it to formally take-off. As a resolution vehicle, AMCON is
expected to soak in the toxic assets of the CBN-intervened banks and provide liquidity to
them while facilitating their eventual re-capitalization.
7. While efforts are being made to stabilize the Banking system and, indeed, the
financial system and restore public confidence, the CBN is also focusing attention on
ensuring that the financial system, in general, and the banking system, in particular, begin to
serve the needs of the Nigerian economy so as to make the Nigerian economy to be
resilient. This, the Bank has been doing through ensuring the availability of long-term funds
at an affordable interest rate to drive industrial activities and infrastructural developments in
the country, having identified low industrial basis and huge infrastructural deficit as binding
constraints on achieving Nigeria's economic development objectives. In a bid to address the
problem of infrastructure deficit and enhance credit to the real sector, a total of N500.0 billion
Fund was set up by the CBN made up of N300.0 billion for Power/Infrastructure projects and
for intervention in the Aviation sector and N200.0 billion for the Refinancing/Restructuring of
banks' existing loan portfolios to manufacturers and small and medium enterprises (SMEs).
A N200.0 billion Credit Guarantee Scheme for SMEs and N200.0 billion Commercial
Agricultural Fund for the agricultural sector were also established. In addition, the CBN had
recently released N150.0 billion credit facility to the manufacturers at a fixed rate of 7%
through the Bank of Industry (BOI) and deposit money banks. Pencom to unlock pension
assets for private sector - AGRA-UNIDO - Fund plan chain.
8. In addition, the Bank has also collaborated with the Securities and Exchange
Commission (SEC), the Nigerian Stock Exchange (NSE), FPLS and Ministry of Finance to
reduce the cost of transactions, particularly bond issues so as to diversify funding sources
away from banks as well as attract more long term foreign investors into the sector. Efforts
are also being intensified towards strengthening regulatory and supervisory framework and
enhancing monitoring of the operations of the Deposit Money Banks (DMBs) to ensure that
they remain safe, sound and healthy. These efforts are expected to ensure the sustenance of
public confidence through the enforcement of appropriate disclosures and reinvigorating the
policy of zero tolerance on all unprofessional and unethical banking practice, and greater
emphasis on enforcement of Code of Corporate Governance. FSRCC revamped, joint
CBN/SEC examinations.
9. Standby teams of target examiners are being deployed to any bank at any time to
ensure timely regulatory actions, if it is deemed necessary. In addition, 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 could seek redress, and directive has been given to banks to establish
Customer Help Desks at their head offices and branches. Also, a comprehensive review of
the Guide to Bank Charges has commenced with a view to making the charges realistic and
consumer-friendly. Furthermore, the Consumer and Financial Protection Division is expected
to commence a programme of consumer education and enlightenment and is also
collaborating with the Consumer Protection Council on the review of the Consumer
Protection Council Act No. 66 of 1992 to enforce discipline in the market.
10. The CBN has taken steps to integrate the banking system into the global best
practices in financial reporting and disclosure through the partial adoption of the International
Financial Reporting Standards (IFRS) in the Nigerian Banking Sector by end 2010. This is
expected to enhance market discipline, and reduce uncertainties which limit the risk of
unwarranted contagion. The CBN is also, closely collaborating with other stakeholders like
the Nigerian Accounting Standard Board (NASB), Federal Ministry of Finance (FMF), NDIC,
SEC, and NAICOM; PENCOM, Federal Inland Revenue Service (FIRS), and Institute of
Chartered Accountant of Nigeria (ICAN), among others, towards ensuring a seamless full
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 inaugurated by the NASB and facilitated by the World Bank.
11. The universal banking (UB) model adopted in 2001, allowed banks to diversify into
non-bank financial businesses. Following the consolidation programme in 2004, banks
became awash with capital, which was deployed into various high-risk areas. The system
was abused by operators with banks engaging in non-banking practices to the detriment of
core banking practices. Banks took unnecessary speculation provisions and bets on asset
prices. To address the observed challenges, the CBN has reviewed the UB Model with a
view to steering the banks towards core banking businesses. Under the new model, banks
would not be allowed to invest in non-bank subsidiaries, while banks currently with such
investments would be required to either divest or spin-off the businesses to holding
companies that will be licensed by the CBN as other financial institutions. Depositors' funds
can no longer be used for insurance, stock broking and other non-banking activities. This will
pave the way for the orderly development of the capital market.
12. Other measures that have been taken to drive the evolving financial landscape
include: the strengthening of the institutional coordination through the Financial Services
Regulation Coordinating Committee (FSRCC), adoption of a common accounting year end
for all banks, aimed at improving data integrity and comparability; conducting own-risk
assessments and relying less on classifications by rating agencies; limiting the tenor of Chief
Executives/Directors of Banks to 10 years and non-Executive Directors to 12 years; limiting
the tenor of a bank's auditing firm to 10 years; sound and timely regulation and supervision of
the financial sector; stringent demand for transparency in the financial sector; and improved
transparency in structured credit instruments for easy assessment of associated risk.
13. Activities at the Central Bank of Nigeria are being guided by the Bank's blue print,
christened "The Alpha Project (A4) Initiatives of the CBN", which is built on 4 pillars, of
enhancing the quality of banks, establishing financial stability, enabling healthy financial
sector evolution and ensuring that financial sector contributes to the real economy.
14. Furthermore, leveraging on the CBN Governor's role as Adviser to the President on
Economic Matters to ensure that the financial sector contributes to the real economy, the
CBN is taking the lead in measuring more accurately the relationship between the real
economy and financial sector, as well as cooperating with state governments to run pilot
programmes in directing the financial sector's contribution to social and economic
development within the states. Priority is being given to Power, Agriculture, Transportation
infrastructures. The Bank has continued to fine-tune its monetary policy instruments against
the backdrop of developments in the economy to ensure the effectiveness of monetary
policy. As adviser to the government, the CBN has played a critical catalytic role in
kickstarting the power programme and reopening the debate on deregulating the sector, we
are now engaging actively in the funding of agricultural and industrial policy to ensure that
banks' lending goes into the real economy.
15. The Microfinance Policy, Regulatory and Supervisory framework for Nigeria was
launched in December 2005 with the main objective of making financial services accessible
to the active poor, promoting synergy and mainstreaming of the informal sector in the
national financial system and contributing to rural transformation. Since the launch, quite a
number of microfinance institutions have been licensed while the policy is being reviewed to
address key challenges such as capital base, skill gaps, operational manual, geographical
spread and self regulation in the sub-sector. An audit exercise of all microfinance banks has
just been launched and the CBN is determined to clean up the sector and "sanitize" it as
thoroughly as it is sanitizing Deposit Money Banks.
16. Ladies and gentlemen, in order to remain relevant as financial intermediaries,
financial institutions in the country would need to be sensitive to customer needs for greater
efficiency and convenience. Customers' expectations have taken a quantum leap in the new
global financial landscape. Financial services no longer involve providing only standard
products to customers. The need for financial products to be personalized and customized to
the individual needs of corporate and retail clients is the order of the day. Financial
institutions would, therefore, need to be more proactive and innovative in packaging and
marketing their products. Furthermore, in the new financial environment, the need to ensure
adequate and effective consumer education and protection has also become even more
compelling and challenging so as to prevent any disruption in the level or reliability of
services to customers and their protection from potential unfair practices. Given the criticality
of ... efficiency to cost of funds, the Central Bank has recently started a shared services
project in collaboration with banks aimed at centralizing back offices and the industrialization
of common processes. In the next three years, we will reduce overhead costs in the banking
industry by 30%. We are also working towards establishing an IPP for independent power
supply for all banks operating in Lagos as a pilot cluster.
17. The intense competition among financial institutions call for the management of the
country's banks to re-examine their existing business models to see where their strengths lie
and to what opportunities these strengths could be applied to enhance returns. There may be
the need to move towards strategic differentiation among the financial institutions in order to
better serve the relevant market segment or niches. This may involve market or functional
specialization as institutions decide which functional areas or combinations of risk
management, customer services, product innovations, to exploit and maximize to their
advantage thereby buttressing the new blueprint of the CBN (specialized banking) for the
banking sector. The different levels of authorization introduced also allow banks to be
international, national or regional players.
18. One big lesson learned from the recent crisis is the need to review the existing rules
and laws relevant to the financial industry in Nigeria in line with the new financial
environment and international best practice. In the wake of growth in the volume and
complexity of financial transactions involving both local and foreign investors in the
postreform era, the challenge is to ensure the cooperation of both the legislature and the judiciary
to work closely in the enforcement of the existing laws relating to the financial system in
order to engender confidence in the system. There is a compelling need to reform the laws
that pertain to the mortgage sector particularly the Land Use Act. This requires the
strengthening of the primary mortgage institutions and the review of the relevant laws such
as the Land Use Act. With respect to loan recovery within the framework of the financial
services industry, there is need to establish special courts that will handle cases of loan
defaults, credit fraud and insider abuse-related cases promptly. The CBN is scaling through
on a number of legislative reforms aimed at unlocking the bottlenecks to the smooth flow of
credit to the real sector and especially to Small and Medium Enterprises.
19. A major challenge in the liquidation of the failed financial institutions in the country is
the prompt disposal of their assets for the settlement of the depositors. This calls for
expedited action on the operationalization of the Assets Management Corporation (AMCON)
as well as the revision of the necessary laws that will make it possible for both the CBN and
NDIC to liquidate failed institution(s) without prolonged litigation by the institution(s).
20. Maintaining a safe and sound banking sector is essential, given the key role that
banks play in facilitating economic growth and financing developmental projects, particularly
key infrastructure, agriculture and industry. Most emerging market economies have been
known to use the domestic financial institutions to execute real sector big ticket projects and
financial institutions in Nigeria should not be an exception if we hope to achieve our
developmental objectives.
21. Distinguished ladies and gentlemen, let me conclude by noting that the evolving
financial landscape, with benefit of hindsight, is capable of providing the platform for
sustainable economic growth and development and economic resilience if all stakeholders in
the Nigerian economic commit to all the various reforms and initiatives being implemented as
well as commit to good governance and transparency in their respective areas of operation. I
have no doubt in my mind that Nigeria is destined to be an economic power and a force to be
reckoned with in the global economic arena if we consistently do the right things at the right
time. But we have to end the past practice of seeking quick fixes and easy solution. A
resilient economy requires hard work, intelligence, consistency and time. We will go through
difficulties in the short term. Tough decisions have been taken and we will continue to take
them. Market condition must improve. We have made the point, and will continue to make
the point that there are lines in this country that cannot be crossed. And that no one can be
so rich or so powerful as to get away with putting an entire system at risk to feed personal
greed.
22. As a final thought, there is no uniform effect, neither is there a single remedy to
every crisis. Each brings its own surprises and risks. Clearly, we should not assume that past
remedies will fully solve the current and next set of problems or address all future crises. The
key is to take lessons from the past and tailor them appropriately to address future situations
of potential crisis.
Thank you for listening.