Good drives out bad

Nigerian regulators responded to impact of the global economic crisis with reforms that have strengthened the country’s banking system.

In 2009, Nigeria’s banking sector was on the verge of collapse as the aftershocks of the global financial crisis washed onto the country’s shores.

When the capital market bubble burst, the balance sheet of Nigeria’s banks became eroded to the extent that some of them remained for some time on “life support” from the Central Bank of Nigeria (CBN). Inter-bank rates spiked as banks tried to borrow at any rate to remain afloat, the size of non-performing loans significantly increased, customer panic reemerged and several instances of unethical conduct among the managements of banks were revealed.

A special audit of the country’s 24 banks (which accounted for more than 80% of the financial sector) showed that about half of them were exposed to margins and non-performing loans.

It was this scenario that set the stage for the broad set of bank reforms implemented by Lamido Sanusi, who took office as Governor of the CBN in 2009. Sanusi says that maintaining a safe and sound banking sector is essential due to the key role 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,” says Sanusi, who in 2011 was named Central Bank Governor of the Year by The Banker magazine and one of the 100 most influential people in the world by Time magazine.

Intervention

In August 2009, the CBN started imposing the reforms, which were of two types. In the first, the Central Bank intervened in ten banks, firing the chief executives of eight of them. It provided the financial sector with a $4 billion bailout and also created the Asset Management Corporation of Nigeria (AMCON) to buy up the non-performing loans in the banks and help bring the affected banks to capital adequacy.

Three of the bailed-out lenders failed to meet a September 2011 deadline to re-capitalize. They were nationalized by the state-owned Nigeria Deposit Insurance Corporation (NDIC), which insures banking deposits. The three lenders – Main Street Bank, Keystone Bank and Enterprise Bank – will be sold to new investors within two years.

The reforms have led to mergers and acquisitions that have reordered the banking sector rankings on the basis of assets and deposit. Nigerian lenders are now classified into three groups according to asset and deposit size. The total number of Nigerian banks has been reduced to 20, with seven lenders in the top tier controlling an average of 66% of total assets and deposits in the industry. This is down from a pre-reform average of 70%.

The tier two and three banks have been the biggest winners over the past two years, grabbing a greater share of the sector’s assets and deposits from the intervened banks, according to an August 2011 Renaissance Capital report on Nigeria’s banks.

As a result of the reshuffle, three banks – including Guaranty Trust Bank, Zenith Bank and First Bank – now account for more than two-thirds of the top ten Nigerian banks by index weight.

Development

The second set of reforms focused on more medium and long-term goals. The four parts of these reforms are enhancing the quality of banks, establishing financial stability, enabling healthy financial sector evolution, and ensuring that the financial sector contributes to the real sector.

The reforms have led to mergers and acquisitions that have reordered the banking sector rankings.

Bank quality is enhanced by industry remedial programs to fix the key causes of the crisis; risk-based supervision; reforming the regulatory framework; enhanced customer protection; and internal transformation of the CBN. Consumer confidence is being tackled in the reform program as complaint desks have been opened to ensure that financial services are delivered to customers as transparently and fairly as possible.

Financial stability is being addressed by actions to stem wide fluctuations in the key macroeconomic indicators, such as limiting capital market lending to a set proportion of bank’s balance sheet, and prohibiting banks from using depositors’ funds for proprietary trading, private equity or venture capital investment, and adjusting capital adequacy and capital requirements driven by stress tests by the CBN.

Healthy financial sector evolution entails a review of the basic one-size-fits-all model of banking. This has made possible the emergence of international, national, regional, mono-line and specialized banks, such as non-interest banks.

The fourth part of the reform is focused directly on developing the real sector as it positions the banking system to contribute to the growth and development of the various sectors of the economy. The reform has identified priority sectors and developed tailored interventions to support and promote their growth.

These include a $1.3 billion Commercial Agricultural Credit Scheme (CACS) funded through the issuance of bonds. The scheme was initially to promote commercial agricultural enterprises but was later expanded to accommodate small scale farmers. As of December 2010, $617 million had been disbursed to 104 projects through 11 banks and 18 state governments.

The Power and Aviation Intervention Fund made available $1.9 billion to stimulate credit to the domestic power sector to help finance badly needed power projects and to refinance loans to the heavily indebted airline industry. To ensure that credit flows to the real sector of the economy, $1.3 billion has been made available for re-financing banks’ existing loan portfolios to the manufacturing sector and SMEs.

Finally, the $1.3 billion Small and Medium Scale Enterprises Guarantee Scheme aims to promote access to credit by SMEs by guaranteeing loans by banks to the sector. The activities covered under the scheme include manufacturing and agricultural value chains; SMEs, processing, packaging and distribution of primary products.

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For more information:
Central Bank of Nigeria
Chartered Institute of Bankers of Nigeria