Central Bank of Nigeria: Reforms drive robust macroeconomic environment and engender financial stability

OECD Observer Business brief
Governor of the Central Bank of Nigeria
"To strengthen fi nancial stability, a macro-prudential framework was established to ensure that counter-cyclical effects of fi scal policies by the government and further downward trend in capital markets do not affect macroeconomic stability."


 

 

 

 

Mallam Sanusi Lamido Sanusi
Governor of the Central Bank
of Nigeria

The Central Bank of Nigeria (CBN) in 2004, embarked on a policy-induced consolidation exercise to strengthen the banks and position them to play pivotal roles in driving economic development. Through mergers and acquisitions, and raising the capital base from 2 billion Naira to a minimum of 25 billion Naira, the number of banks was reduced to 25 from 89 in 2005 and later to 24. Also, the aggregate capital base of the sector rose from about US$3 billion to US$5.9 billion.

In December 2006, the Bank introduced a flexible interest rate based framework and made the monetary policy rate the operating target. The new framework has enabled the Bank to be proactive in countering inflationary pressures. The corridor regime has helped to check wide fluctuations in the interbank rates and also engendered orderly development of the money market.

The 2008/2009 financial crisis, however, undermined some of the benefits of the exercise as most banks were exposed to maturity mismatch and illiquidity problems, owing to the drying-up of foreign inflows, portfolio divestments from banking equities on the stock market, and margin loans, which created a bubble on banking stocks.

Consequently, in 2009, the CBN initiated policies aimed at strengthening the banking sector. The policies were built around four major pillars, namely: enhancing the quality of banks; establishing financial stability; enabling a healthy financial sector evolution and ensuring that the financial sector contributes to the real economy.

To enhance the quality of banks, the CBN undertook to deal with the issues of poor reporting, lack of enforcement, poor corporate governance and risk management. Risk-based supervision was introduced along with reforms in regulations and regulatory framework, and consumer literacy and protection.

To strengthen financial stability, a macro-prudential framework was established to ensure that counter-cyclical effects of fiscal policies by the government and further downward trend in capital markets do not affect macroeconomic stability. Furthermore, the universal banking model introduced in 2001 was replaced with a new model under which banks are not allowed to invest in non-bank subsidiaries. The industry has also been segmented into international, national, regional, monoline and specialised banks with varying capital requirements.

The Asset Management Corporation of Nigeria (AMCON) was established in 2010 to sustain the stability of the financial system. AMCON is a multipurpose resolution vehicle, empowered to purchase non-performing assets from banks, inject needed capital through the issuance of bonds, and engender mergers and acquisitions as well as capital injection by new investors. So far AMCON has acquired several trillion Naira of toxic assets of the troubled banks in which the CBN intervened, provided liquidity to them and facilitated their re-capitalization.

The Bank, in collaboration with other stakeholders, implemented a number of policies, guidelines and initiatives to strengthen the payments system. In this regard, the CBN in 2011 introduced the cash-less policy and commenced its implementation in April 2012 in Lagos.

OUTCOMES

The macroeconomic environment
The reform efforts have impacted positively on the macroeconomic environment. Gross domestic product growth averaged 6.2% and lending rates, though above single digit level, have trended downwards. The CBN has also through its monetary policy been able to bring inflation under control since 2009.

The effective management of the foreign exchange and external reserves has ensured a stable value for the Naira and made Nigeria a choice destination for foreign investments. Nigeria’s gross external reserves as at end-June 2013 stood at US$44.96 billion.

Banking sector soundness
The health of banks has improved tremendously since the reforms. The industry’s average capital adequacy ratio (CAR) stood at 19.1% at end-June 2013, compared with the global threshold of 10.0 per cent. Similarly, the ratio of Tier-1 capital to risk weighted assets rose from 4.9% at end-December 2009 to 18.5% at end-first half of 2013. The quality of asset measured by the ratio of non-performing loans to industry total loans has improved significantly while the industry liquidity ratio has been consistently high and above the stipulated minimum within the post-reforms period, compared with the pre-reforms period.

Overall, Nigeria’s macroeconomic environment remains resilient and the outlook is positive. The economy continues to be attractive to foreign investors while the banking system remains sound. 

Visit: www.cenbank.org/

See also: www.oecd.org/finance/financial-markets/48501035.pdf 

 

 

 

©OECD Observer No 296, Q3 2013

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