mallam sanusi lamido sanusi : developments in the banking system in nigeria address by mr mallam sanusi lamido sanusi, governor of the central bank of nigeria, lagos, 14 august 2009. * * * distinguished ladies and gentlemen of the press, as we are all aware, the world economy has been hit by the repercussion of the financial meltdown that started with the sub - prime mortgage crisis in the united states of america and spread to europe and other parts of the world. this crisis has led to the collapse of many banks and other financial institutions, and even rendered an entire nation bankrupt. in nigeria, the banking system appears to have weathered the storm due to a number of factors. among these are the facts that our financial system is not strongly integrated into the international financial system, as well as the relatively simple nature of financial products and strong capitalization and liquidity of nigerian banks. however, there are many who have been aware for a while now that whereas the system in general is likely to absorb and survive the effects of crisis, the effects vary from bank to bank. a few nigerian banks, mainly due to huge concentrations in their exposure to certain sectors ( capital market and oil and gas being the prominent ones ), but due to a general weakness in risk management and corporate governance, have continued to display signs of failure. as far as october last year, some of the banks showed serious liquidity strain and had to be given financial support by the central bank in the form of an " expanded discount window " ( edw ) where the cbn extended credit facilities to these banks on the basis of collateral in the form of commercial paper and bankers'acceptances, sometimes of doubtful value. as at june 4, 2009 when i assumed office as governor of the cbn, the total amount outstanding at the expanded discount window was n256. 571 billion most of which was owed by the 5 banks. a review of the activity in the edw showed that four banks had been almost permanently locked in as borrowers and were clearly unable to repay their obligations. a fifth bank had been a very frequent borrower when its profile ordinarily should have placed it among the net placers of funds in the market. whereas the five banks were by no means the only ones to have benefited from the edw, the persistence and frequency of their demand pointed to a deeper problem and the cbn identified them as probable source of financial instability, most likely suffering from

above, it is evident that the five banks accounted for a disproportionate component of the total exposure to capital market and oil and gas, thus reflecting heavy concentration to high risk areas relative to other banks in the industry. 4. the huge provisioning requirements have led to significant capital impairment. consequently, all the banks are undercapitalized for their current levels of operations and are required to increase their provisions for loan losses, which impacted negatively on their capital. indeed one is technically insolvent with a capital adequacy ratio of ( 1. 01 % ). thus, a minimum capital injection of n204, 94 billion will be required in the 5 banks to meet the minimum capital adequacy ratio of 10 %. 5. the five banks were either perennial net - takers of funds in the inter - bank market or enjoyed liquidity support from the cbn for long periods of time, a clear evidence of illiquidity. in other words, these banks were unable to meet their maturing obligations as they fall due without resorting to the cbn or the inter - bank market. as a matter of fact, the outstanding balance on the edw of the five banks amounted to n127. 85 billion by end july 2009, representing 89. 81 % of the total industry exposure to the cbn on its discount window while their net guaranteed inter - bank takings stood at n253. 30 billion as at august 02, 2009. their liquidity ratios ranged from 17. 65 % to 24 % as at may 31, 2009. ( regulatory minimum is 25 % ). it is important to note that at least three of the banks are systemically important ( accounting for more than 5 % of assets and deposits in the banking system ) and together the five banks account for 39. 93 % of loans, 29. 99 % of deposits, and 31. 47 % of total assets as at may 31, 2009. given the extent of the asset quality problem leading to liquidity stresses, and the variety of stress points on the banks'balance sheets, failure to act to secure the financial health of these banks will clearly place the system at risk. the central bank has a responsibility to act to protect all depositors and creditors and ensure that no one loses money due to bank failure. the bank also needs to move decisively to remove this principal cause of financial instability and restore confidence in the banking system. consequently, having reviewed all the reports of the examiner