Nigerian Financial System in 2012: Motion Without Movement?

Federal Republic of Nigeria Minister of Finance, Dr. Ngozi Okonjo-Iweala, has addressed the Nigerian press saying that the level of domestic debt needs to be curbed. She is a former official of the World Bank., a photo by Pan-African News Wire File Photos on Flickr.

Nigeria’s financial system in 2012: Motion without movement? .

Wednesday, 02 January 2013 00:00
By Chijioke Nelson Business Services - Money Watch
Nigerian Guardian

JUST like the development stages of a baby from conception to adulthood, Nigeria’s financial system has evolved many steps in its quests to develop. But, in the development processes, sometimes genetic causes, lack of care for the baby, lack of courage on the part of the baby and/or sudden sickness may retard, stall or slow each stage. This is also true of the nation’s financial system.

Reform in the financial system across the globe is trending now, especially with the advances in technology and processes, which demand updates in knowledge, to ensure efficiency. But the germane issue in reform is the outcome, which in our system, has not been in tandem with declared objectives.

In 2012, reforms in the financial system were sustained in an unusual tempo, but the similarities were underscored on the fact that it was the same issue being treated over the years- financial system stability, banking reforms, e-payment system, financial inclusion, high interest rates, unethical practices, rising suspicion in the system, among others. The terrain has not been too unfamiliar for at least in the last decade.

The Central Bank of Nigeria (CBN), at the last count, reeled out growth figures in our nation’s third quarter Gross Domestic Product (GDP). Though marginal improvement was recorded, it also released forecast for the fourth quarter, with a better growth projection for the overall fiscal year 2012. But, we are yet to know how these figures have impacted positively on over 160 million people, with over 45 million jobless and another significant number not gainfully employed.

The nation’s Gross Domestic Product (GDP) in real terms, in the third quarter of 2012, stood at N243.26 billion, representing 6.48 per cent growth, against 6.39 per cent it recorded in the second quarter of the year and 7.37 per cent in the corresponding period of 2011. This showed 0.09 per cent quarter-to-quarter increase and 0.89 per cent decrease when compared with the third quarter of 2011.

CBN has projected an improved GDP growth of N263.93 billion for fourth quarter, representing 7.09 per cent growth and 0.61 per cent increase over the third quarter, which will translate to the overall GDP growth of 6.61 per cent in 2012.

Also in the front burner in the year was the nation’s foreign reserve, which goes back and forth. At the last count, $80 million has depleted from the new high of over $45 billion. The CBN Governor, Lamido Sanusi, had at the last Bankers’ Nite, said, “it is important not to be complacent and it is important also to recognise that there are dark clouds in the horizon and it is extremely important to start building and continue building the fiscal buffers, go into a period of strong restraints and serious fiscal restraints and consolidation.

“We must continue to build up the external reserves and protect the economy from external shocks to oil prices and focus on the strength and resilience of the banking system. Banks are not set up to invest in government bills alone, banks are not set up to use depositors’ funds to bet on the capital and real estate markets, banks are set up primarily to mobilise savings and move these savings into the real economy where real production, real jobs and real income are created.”

Last year, Sanusi said the e-payment system had recorded a remarkable improvement. This included increase in the number of Point of Sale terminals and other e-payment channels, which created transactions worth billions of Naira. However, he did not fall short of pointing many challenges facing the scheme.

“There have been some improvements in the move to drive financial inclusion in Nigeria, however, we still have a lot of issues to cover, such as access to financial services and to the right financial product.

“In addition, consumer protection and financial literacy are critical issues that are paramount to making financial inclusion work. The Central Bank has, therefore, set a target to reduce the percentage of financially excluded adults to 20 per cent by 2020, as stated in the National Financial Inclusion Strategy.”

Also, Enhancing Financial Innovation and Access (EFInA), said the absence of relevant and reliable data, analysis about how individuals and households manage their finances, the right financial products, consumer protection and financial literacy, among other critical issues, were the biggest hurdles to improving access to financial services in Nigeria.

The Chief Executive Officer, EFInA, Ms. Modupe Ladipo, while unveiling the 2012 survey, said, “only 37.8 million Nigerians, representing 43 per cent of the adult population, have access to and/or use formal financial services, while 34.9 million Nigerians representing 39.7 per cent of the adult population, are financially excluded. The good news is that between 2008 and 2012, the number of adults that are financially excluded decreased by 10.5 million.

Highlighting the major threats being posed to the economy by high levels of financial exclusion, EFInA, said the nation is presently losing opportunities for business growth. In the absence of finance, people, who are not connected with the formal financial system lack opportunities to maximise their income and expand their businesses.

It also noted that the country’s economic growth could be stifled. Vast unutilised resources, in the form of money in the hands of people who are in the informal sector could limit a country’s economic growth potential.

The body said the opportunity for the private sector in providing financial products and services to the low-income population represents a large business opportunity for it. Providers of financial products and services should develop innovative products and services that better suit the needs of the low income unbanked and under-banked population.

Also in 2012, Nigeria’s Monetary Policy Rate- the benchmark interest rate, sustained the plummeting investment and development profile of the country, even as it could not rank among the first 50 low interest rates in the world. Even in the continent, over 10 countries are ahead.

The countries are Kenya, seven per cent, Burkina Faso, 4.2 per cent, South Africa, five per cent; Rwanda, seven per cent; Egypt, 9.5 per cent, Central African Republic, Chad, and Equatorial Guinea, 5.8 per cent each, Democratic Republic of Congo, six per cent, Mali, Cot d’Ivoire, Niger, Togo, Senegal, and Libya, 4.25 per cent respectively, with Ghana trailing behind Nigeria’s 12 per cent at 15 per cent.

The benchmark interest rate is the rate at which central bank lends to money deposit banks, which in turn determines how much individual borrowers pay for the use of money they borrow from lenders (banks).

Interests rates are fundamental to a capitalist society and are normally expressed as a percentage rate over the period of one Gregorian year.

It is also a vital tool of monetary policy and are taken into account when dealing with variables like investment, inflation, and unemployment.

Some analysts said, “the problem is that the regulators are focusing only on money supply (price stability), which is only one aspect of the macro-economic variables. Certain level of inflation is needed to drive economic activities. What is bad is high-level inflation. The monetary policy rate of the country and the growth projections are contradictory. If small-scale enterprises cannot get facilities at lower single digit rates, the development and growth projections are just mere talks.

“How can employment be generated without SMEs and subsequent industrial growth, coupled with with infrastructure development? How can these be attained when borrowing costs are beyond the reach? Even government that is preaching the development is borrowing at the same high rate. Is this not counter-productive?

The CBN and Nigeria Deposit Insurance Corporation (NDIC) recently gave the nation’s money deposit banks a mixed clean bill of health, courtesy of the ongoing reforms in the sector, adding that they are on the path of profitability now.

However, the commendations were greeted with another warning from the NDIC, that only five banks were sound, 13 were satisfactory, while two were marginal, warning the financial institutions not to let down the guard on corporate governance, which caused the near collapse of the nation’s financial system recently, pointing out that its 2011 report showed that lapses in corporate governance may have started again in some banks.

The warning may have raised another poser over the sustainability of their respective profits so far declared and the end to persistent rounds of banking reforms, which would always weed out the weak links in the system, leaving few that would eventually dominate the rest.

The apex bank in its ongoing reform in the sector, recently released a circular, insisting on April 30, 2013, deadline for the enforcement of the revised operational guidelines for all Primary Mortgage Banks (PMBs) in the country, an indication that the nation’s banking reform is still ongoing.

The apex bank, which considered the deadline as sacrosanct, also reeled out additional information and guidance that will help PMBs meet the prescribed capital requirements of N5 billion for national operations and N2.5 billion for state, including documentation requirements for regulatory approval in either option.

CBN, had in a circular earlier this year, notified all the mortgage institutions about compliance with the revised guidelines and the April 30, 2013 implementation deadline, saying, “it cannot be extended.”

Specifically, it advised the PMBs to shore up it capital base through rights issue, private placement, public offer, mergers and acquisition, takeover and downscaling, saying that the mortgage firms should conduct due diligence and seek professional, legal and financial advice for any decision.

According to a statement from the apex bank, it also suggested timelines that could help PMBs that might opt for rights issue, private placement, or public offer, to complete the process and submit the documentary requirements for verification on or before March 31, 2013.

Reiterating its stance on the issue, it warned that it was practically impossible, at this time, to complete the process for a public offer, given the remaining timeline, unless the process had commenced much earlier adding that PMBs that are unable to scale-up to the new capital requirements may choose the downscaling option, that is, to surrender the existing licence.

Asset Management Company of Nigeria (AMCON) also defended the N2.3 trillion loss it recorded this year, saying it was used to bail out the three acquired banks from liquidation.

The Managing Director, Mustapha Chike-Obi, said that despite the loss, the institution was still “healthy and stronger than ever”, adding that the loss was incurred in the effort to rescue Mainstreet, Keystone and Enterprise banks from total liquidation.

“AMCON derived it’s N2.3 trillion loss from the purchase of banks assets and total intervention is zero after 10 years, because the banks are going to give us money in sinking fund. The total amount of money we put into the banks, as intervention was N5.6 trillion.

“If you look at our cash flow position, you will see that it is very strong, we have a lot of cash. And I will tell you that by 2013, we would probably have about N2 trillion in cash when the bonds mature.

“So, this concern whether we can finance our bonds in 2013, it’s a little bit overblown. We would have plenty of cash at that point for refinancing of our bond. We will not have N5.4 trillion in cash, I can tell you that, but the fact remains that there is no financial crisis in December 2013, if we chose to refinance our bonds completely from cash. But again, is a restructuring exercise, which we cannot move into right now. That is how we do it. So it’s not really that there will be a crisis in December 2013,” he said.

The 2013 fiscal year is has come. As with other fiscal years, it would soon begin with unended issues, pending ones, perhaps uncharted ones and at least, create its own along the way.

The AMCON boss assured Nigerians that the corporation would continue with its refinancing operations without any hitch, despite the huge loss in its financial statement results because of the need to boost investors’ confidence in the nation’s banking system.

“When we take you through our figures this year, it is important to note that N2.3 trillion was the money we used to fill up depositors fund this year and it’s a non recurrent. What we reoccurred was the finance cost and the interest on bond issue, but the way our accountants make us to understand it is that you must take the interest as expense in the year, because it’s a non-performing loan. So, when the loan start performing again then we will restructure the loan and we can now take it,” he said.

He said that the corporation would recover all monies that are owed by people, adding that it has so far recovered N83 billion in cash from debtors.

“As at now in terms of restructuring, we have restructured 11 per cent of our loans. And in terms of cash, which has come in, we have recovered N83 billion in cash, while other cash received from our assets is N49 billion. For example, only last month, the asset we foreclosed was over a N100 billion from a single debtor.”

The 2013 fiscal year is around the corner. As with other fiscal years, it would soon begin with unended issues, pending ones, perhaps uncharted ones and at least, create its own along the way.