Nigeria Banking Update

THE Central Bank of Nigeria (CBN) identified the absence of an effective national identification system as one of the factors working against the desire of banks to lend money to
Nigerians and the problem must be urgently addressed according to Prof. Soludo.He made this known during his presentation at a national seminar on 'Banks and National Economy: Progress, Challenges and the Road Ahead' put together by the apex bank,he noted that the banking and telecoms sectors were the fastest growing in the economy. He maintained that the sectors were driving the emergence of a new economy and growth.

He mentioned that finance alone will not see Nigeria to Financial Systems Strategy (FSS) 2020 - a vision to make Nigeria one of the 20 biggest economies by 2020 - as other ingredients of economic growth which will depend on an accelerated reform in other sectors.The CBN boss also stressed the need to fast track other reforms, particularly infrastructure, security, judiciary, education, among others.He said that credit to the private sector grew by 51.2 per cent in 2007, while that of SMEs grew by 9.8 per cent in 2007.

The paper looked at the progress so far with respect to the contributions of banks to the Nigerian economy, post-consolidation, the challenges faced by them and the prospects in the medium to long-term. Drawing attention to why lending rates are still high in the country, he pointed out that the cost of funds for banks was still high.He said in a risky business environment, banks price risks differently for different borrowers. There is also uncertainty about future inflationary trends. Poor infrastructure means that banks' operating costs are very high. The high overhead costs of banks also affect emoluments while financing of budget deficits crowds out the private sector.

He wants the government to continue to maintain macro stability through low price inflation, calling on the National Assembly to amend the Banks and Other Financial Institutions Act before it. To fast-track markets/institutions for efficient credit system, Soludo called attention to the need to fast-track legal and institutional reforms. Speaking on the need to mainstream a commercial court system throughout Nigeria, the CBN governor said this would help to dispose off commercial cases fast and efficiently.

And to reduce cost of funds for banks, Soludo identified the need to address the problems in critical infrastructure like power, transport, ports and water. Others, according to him, are the need to implement mortgage and consumer credit, deepened and mainstream microfinance system, continued strengthening of regulatory and supervisory capacity and capacity building for bank staff

The Central Bank of Nigeria (CBN) announced that it would publish the names of debtors of those community banks that have closed shop or failed to meet the minimum capital requirement for conversion to microfinance bank. Director, Other Finance Department of the CBN, Mr. Sam Oni made this known in a circular titled ‘Notice to Debtors of Community Banks’, he said the apex bank has began compiling the list of debtors of these community banks, which would be purblished in all widely-read newspapers. He added that those whose name appears on the list would be blacklisted and not be allowed to hold directorship or management positions in any financial institution in Nigeria.

The list would be forwarded to the Economic and Financial Crimes Commission (EFCC) for prosecution. All debtors whose names appear on the list shall be blacklisted and shall be unable to hold directorship or management positions in any financial institution in Nigeria.Similarly, a comprehensive list of all the debtors shall be circulated to the twenty four (24) commercial banks and other financial institutions, as this may adversely affect their ability to access any other financial services. He noted that “this would serve as final notice to the debtors to pay up all outstanding indebtedness, with the accrued interest, on or before 15th February, 2008, failing which appropriate legal and other regulatory actions shall be taken against them”.

It would be recalled that the CBN, had on December 15, 2005, launched the Microfinance Policy, Regulatory and Supervisory Framework into the nation’s financial system.Under the regulatory guidelines, Unit Microfinance Banks were authorised to have a minimum of N20 million capital base, while the State Microfinance Banks were required to beef up their capital base to the tune of N1 billion.By the end of December 2007, 600 out of 761 community banks successfully converted to microfinance banks, while the licenses of the remaining 161 community banks that were unable to scale through the recapitalization exercises were withdrawn by the CBN. In addition, 117 comprising 40 final licences and 67 approval-in-principles (A-I-Ps) were granted new investors respectively

The Central Bank of Nigeria (CBN) has begun the process of outsourcing the currency distribution and processing function to the private sector to enable it focus more on its core mandate.By implication, the CBN will be disengaging from the handling of currency and their movement from one point to another across the country.Indications to this effect came at a recent meeting of the Bankers’ Committee when the committee’s chairman, Prof. Chukwuma Soludo, dropped the hint.He told members of the committee to prepare their minds towards the new dispensation as the apex bank planned to devote time to its core mandate of formulating and implementing monetary policies for the economy.

Currency is issued to deposit money banks through the branches of the CBN, and old notes retrieved through the same channel. Currency deposited in the CBN by the banks are processed and sorted to fit and unfit notes in line with the clean note policy. The clean notes are re-issued while the dirty notes are destroyed.The CBN had similarly ceded its deposit taking function, in addition to others such as its medical, educational, among others.On July 1st, 1959 the Central Bank of Nigeria issued the Nigerian currency notes and coins and the West African Currency Board notes and coins were withdrawn.It was not until 1st July, 1962 however, that legal tender status was withdrawn from West African Currency Board. In 1963, Nigeria became a Republic, and this eventually led to the changing of the bank notes in 1965 to reflect the country's new status. The notes were again changed in 1968 following the misuse of the country's currency notes, during the civil war.

In 1973, Nigeria adopted a truly national currency in decimal form instead of the pounds, to replace the imperial system which she inherited from the British colonial administration. The pounds and shillings were changed to Naira (N) and kobo (k), and four denominations of notes were issued as follows: 50 kobo; N1; N5 and N10. In response to rapid economic growth made possible by the oil boom, N20, and N50 note denominations were added in 1977 and 1991 respectively. Considering cost effectiveness and expansion of economic activities, higher denomination notes were issued. These are 100 Naira (1999), 200 Naira note (2000). 500 Naira was released in April, 2001 while the 1000 Naira note was released in October 2005.On February 28th 2007, as part of the economic reforms, N50, N20, N10 and N5 banknotes and N1 and 50K coins, were reissued in new designs. While a new denomination N2 coin was introduced.The new naira notes were issued to make them more secure, make them last longer in circulation and look cleaner, reduce the cost of replacing dirty notes, and to ensure that the new currency notes are now smaller in size and would easily fit into wallets.

The Central Bank of Nigeria (CBN) has attributed the appreciation of the naira since the second half of year 2007 to the sustained foreign exchange inflows engendered by the favorable macroeconomic environment. It also attributed strengthening of the naria to the investment climate as well as high rates of return in domestic financial markets.

The MPC, after expressing satisfaction with the performance of the economy, also decided to leave the Monetary Policy Rate (MPR) unchanged at 9.5 per cent, and to continue the use of Open Market Operations (OMO) for liquidity management and appropriate exchange rate policies. The apex bank’s disclosure was contained in communiqué 54 of the Monetary Policy Committee (MPC) issued after its meeting held in Abuja yesterday. The communiqué was signed by the CBN Governor, Prof. Chukwuma Soludo.The MPC restated its commitment to ensuring continued monetary and price stability through the pursuit of appropriate monetary and exchange rate policies.The MPC noted the steady appreciation in the Naira exchange rate, particularly in the second half of 2007. In January, 2008 the Naira exchange rate appreciated further and the weekly Dutch Auction System (WDAS) rate stood at N116.81/US$1 as at end-January.The Committee recognised that inflows could continue as they were in December and January.

However, it felt that the exchange rate would settle down at a reasonable level once the uncertainties in the global economy are reduced as a result of the monetary and fiscal actions being taken by industrialized economies.On inflation, the MPC noted with satisfaction the improvement in inflation outcomes in 2007 compared with the previous year. It said from 8.5 per cent at end-December 2006, the year- on-year (headline) inflation closed at 6.6 per cent in 2007, approximately 2 percentage points lower. “The decline in inflation in 2007 was attributable to the restrictive stance of monetary policy, complemented by considerable fiscal restraint and favorable climatic conditions for food production in some parts of the country”, the MPC said.

The communiqué, however, said inflation in December 2007 was in contrast to inflation rates in the months of December 2005 and December 2006. The committee, therefore, expressed its concern that given the rise in food prices in December 2007 and the overall global and domestic outlook, it will be necessary to ensure that inflation in 2008 is within single digit.The Committee noted that credit to the private sector maintained an upward trend in the last quarter of 2007. It said credit to the private sector grew by 96 per cent which is unprecedented in Nigeria’s history.

The integrity of the naira appears to be a major issue of concern to the apex bank, and this is understandable. For quite some time now, the CBN has been promoting campaigns aimed at enlightening the public on how to handle the naira. This is against the backdrop of the observed rough handling of the currency by most Nigerians. The bank is particularly worried about the way members of the public spray and march upon the naira at social functions. In the bank's view, this amounts to abuse and derogation of the currency.Ironically,despite the campaign, the culture of abuse seems to persist. The CBN is serious in its desire to stop the practice and there is now a legal framework to enforce the campaign and punish offenders.

It is now an offence punishable by a jail term of not less than five years for offenders and the establishment of commercial courts to enhance quick adjudication and dispensation of justice in such matters.Our low level of development and the harsh economic environment is to blame for the way and manner the naira exchanges hands. The menace of thieves and pickpockets compounds the problem. It is inconceivable and unnecessary for the CBN to think that it could change an age-long social behaviour using coercive law. The spraying of naira notes at parties has become an aspect of the people's self-expression in many parts of the country. Most Nigerians grew up with it. A new piece of law is probably not the solution to this.

Five years ago, the Dollar and the Euro were about the same in value. However, the picture is not the same anymore: One American Dollar is now worth about 0.71 Euros, or 0.49 British Pound. The Dollar has weakened by about 35 per cent against the Euro and by 25 per cent against the Japanese Yen. Thanks to the economic downturn in the U.S. made worse by the subprime crisis. Even against the currencies of other emerging economic powers like China and Japan, the dollar has been ebbing.

This may not be a pleasant time for Americans, with higher prices on almost everything imported from abroad. As the dollar loses value, it buys less and less from manufacturers in other countries. This effect is more pronounced when it comes to European imports: For instance, a pair of eyeglass frames from an European designer that cost about 150 euros — or $192 — in 2006 would now go for $211 because of the soft dollar.

The continued weakening of the dollar has begun to raise fears of the dollar losing its reserve currency status to another currency, the Euro. This fear may be well founded given the disposition of some countries to the proposition. To such proponents of adopting another currency in place of the dollar as the reserve currency, temporary protections like artificially low prices and contracts in American currency can't go on forever if the dollar keeps weakening.The subprime mortgage financial crisis of 2007 was a sharp rise in home foreclosures, which started in the United States during the fall of 2006 and became a global financial crisis within a year. The crisis began with the bursting of the housing bubble in the U.S. and high default rates on "subprime", and other adjustable rates. The mortgage lenders that retained credit risk (the risk of payment default) were the first to be affected, as borrowers became unable or unwilling to make payments. Major banks and other financial institutions have reported losses of approximately U.S. $130 billion as of January 25, 2008. Due to a form of financial engineering called securitisation, many mortgage lenders had passed the rights to the mortgage payments and related credit/default risk to third-party investors via mortgage-backed securities (MBS).
Individual and institutional investors holding MBS faced significant losses, as the value of the underlying mortgage assets and payment streams declined and became difficult to predict.The number of people getting kicked out of their homes for missing loan payments is rising.

Dollars’ Share of Global Reserves
The dollar's share of global foreign-exchange reserves fell to a record low of 63.8 percent in the third quarter as demand for U.S. assets waned after the collapse of the U.S. housing market, according to International Monetary Fund data. It accounted for 65 Per cent three months earlier. The euro's share rose to 26.4 per cent from 25.5 per cent. IMF quarterly figures go back to 1999, the year the euro was introduced. The U.S. currency has dropped 11 per cent against the euro and 13 per cent against the yen in the past year. It has declined in five of the past six years. Soros made $1 billion in 1992 betting against the pound, forcing the British government to abandon a peg to a basket of European currencies. He was also the biggest financial backer of the failed effort to deny President George W. Bush a second term in office. The euro has gained 55 per cent against the dollar since Bush entered theWhite House on Jan. 21, 2001.

From the 1980s we had the belief in the magic of the marketplace, and the authorities were so successful that they started to believe in this market fundamentalism,'' he said. “That's gone too far.'' In times of crisis, ``they suspended the rules and they bailed out the banks. That created an asymmetric incentive system, a moral hazard, that allowed the expansion of credit.'' Rising defaults on U.S. subprime mortgages sparked a rout in the credit markets last August, leading banks to cut money for consumer lending, hurting the U.S. economy's main engine. The Fed yesterday lowered its benchmark rate in an emergency move for the first time since 2001 after stock markets tumbled from Hong Kong to London amid signs the world's largest economy is sliding into recession. Soros has used past appearances in Davos to predict the dollar's decline.

In January 2004, he said the U.S. currency would drop for a third year. It then fell 7 percent, according to a Federal Reserve trade-weighted index of the currency.Comments by ExpertsAn American commentator, Michelle Tsai opines that global companies will see their U.S. businesses shrink — not because they are selling fewer products, but because $1 million in sales is worth less than it used to be. Businesses will need to recoup their losses at some point by raising prices.
According to him, if oil companies had to raise prices for that reason, the effects would be felt throughout the U.S. economy. Eventually, if too many things start costing just a bit more, he argues that the U.S. could have inflation hit her economy.Billionaire American investor George Soros said the fallout from the U.S. subprime crisis will bring about the end of the dollar's status as the world's reserve currency. “The current crisis is not only the bust that follows the housing boom, it's basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency,'' Soros said in a debate at the World Economic Forum in Davos, Switzerland.

Now the rest of the world is increasingly unwilling to accumulate dollars.''Stephen Roach, chairman of Morgan Stanley in Asia, said in Davos that while he remains a “dollar bear,'' the U.S. currency's slide may be reversed in the first half of this year as other economies in Asia and Europe are hurt by the U.S. slowdown. A Nigerian economist, Mr. Bismark Rewane, said the possibility of the U.S. Dollar losing its reserve currency status is remote. According to him, since oil is priced in Dollar, it will continue to enjoy the reserve currency status.Rewane who is the Chief Executive Officer of Economic Derivatives, said adopting another currency will not solve any problem since there is nothing fundamentally wrong with the reserves accumulated by nations.Specifically, he said the call by Venezuela that the Dollar should be rejected as the reserve currency should be understood within the context of the disagreement between the U.S. and the Venezuelan authorities.