Gov Lecture To Sylvester Monye Foundation

By Sanusi Lamido Sanusi Governor Central Bank of Nigeria Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010 Introduction  The Banking Sector Reforms  Immediate Impact of the Reforms  Outlook for the Economy  Key Challenges  Concluding Remarks  Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010.2 Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010 The mandate of the Central Bank of Nigeria is to:  Ensure monetary and price stability  Issue legal tender currency in Nigeria  Maintain external reserves to safeguard the international value of the legal tender currency  Promote a sound financial system in Nigeria; and  Act as banker and provide economic and financial advice to the Federal Government Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010.4  Having a sound financial system in any country is very critical to economic growth  Theoretical and empirical evidences confirm that Financial Sector development is growth enhancing  In recent years, the banking sector has witnessed series of reforms aimed at enhancing the banking system’s effectiveness and efficiency as well as positioning the banks to be more involved in promoting economic growth and development  The current reform is designed to build on the successes of earlier reforms with the overriding objective of fostering financial stability Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010.5 Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010 After the consolidation, eight major interdependent factors led to an extremely fragile financial system that was tipped into crisis by the global financial crisis and recession  Factors affecting th e banking sector since consolidation Macro-economic instability caused by large capital inflows Major weaknesses in the business environment Banking Consolidation ● When: 2005 ● 89 to 25 banks ● Minimum capital requirement increased to N25bn Major failures in corporate governance at banks Lack of investor and consumer sophistication Inadequate disclosure and transparency Unstructured governance & management processes at the CBN Uneven supervision and enforcement Global Financial Crisis Financial crisis in Nigeria Asset bubble ● Liquidity injection by CBN of N620bn in 2009 ● Stock market collapse of 70% in 2008 to 2009 ● ED’s for banks replaced by CBN Critical gaps in regulatory framework and regulations Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010.7  The reports of the special examination team carried out by CBN/NDIC revealed that nine out of the 24 banks were in grave situation, prompting immediate intervention by CBN  Non-performing loans in the ten banks totaled N1, 696 billion, representing 44.38% of total loans  Aggregate provisioning required in the ten banks amounted to N1,221.52 billion  Capital Adequacy Ratio in the ten banks ranged between (1.01) and 7.41%, which were below the minimum ratio of 10%  The additional capital injection required by the banks was N495.83 billion  One key aspect of earlier reforms was Universal Banking which allowed banks to venture into different business which posed a serious challenge to the regulators Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010.8 When the nine banks were identified to be in a grave situation, the CBN took proactive steps to prevent further deterioration, instead of suspending / revoking licenses or handing the banks over to the NDIC  The CBN’s initiatives to date include:  injecting N620 billion into the nine banks  replacing the chief executives/executive directors of eight of the banks with competent managers with experience and integrity  reaffirming guarantee of the local interbank market to ensure continued liquidity for all banks  guaranteeing foreign creditors and correspondent banks’ credit lines to ensure confidence and maintain important correspondent banking relationships  The capital injection enabled the nine banks to continue normal business operations and prevented a run on the banks Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010.9  The current banking reform is meant to encapsulate a holistic set of strategies and initiatives designed to stabilize the banking sector and promote long term sustainable growth of the sector and the economy as a whole  The reform is based on four pillars 10 Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010 20 Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010  Monetary underperformed and credit aggregates  Monetary and credit aggregates underperforme d  This is not peculiar to Nigeria as other countries faced similar outcomes due to the global financial crisis 21 Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010  Steady decline in various measures of inflation   Headline inflation declined steadily from 15.1% end2008 to 11.0% end-May 2010 Food inflation fell gradually from 18.0% end2008 to 12.3% end-May 2010, while non-food (core) inflation followed the same downward trend except in March 2009 22 Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010  Stabilizing exchange rate 23 Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010  Increased new credit April '10 No May '10 N' Million No N' Million Non-intervened banks 7,682 127,270 10,069 145,885 Intervened banks 1,947 18,189 2,272 27,922 Total 9,629 145,459 12,341 173,807 24 Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010  New credits by banks along economic sectors May, 2010 BUSINESS LINES Oil & Gas Manufacturing Transportation & Storage General General Commerce Government Construction Real Estate Activities Professional, Scientific & Technical Activities 10 Agriculture, Forestry & Fishing 11Finance & Insurance 12 Information & Communication 13 Education 14 Human Health & Social Work Activities 15 Activities of Extraterrirorial Organisations & Bodies 16 Capital Market 17 Administration & Support Service Activities 18 Arts, Entertainment & Recreation 19 Power & Energy 20 Public Utilities 21 Water Supply, Sewerage, Waste Mgt, etc Total N' M 57,420.28 40,640.39 30,184.06 21,771.28 17,804.97 6,367.37 5,699.94 4,379.41 2,874.93 2,597.98 1,177.01 725.30 613.42 554.11 303.20 116.71 56.75 4.00 173,777.73 % of Total 33.04 23.39 17.37 12.53 10.25 3.66 3.28 2.52 1.65 1.50 0.68 0.42 0.35 0.32 0.17 0.07 0.03 0.00 0.00 0.00 0.00 100.00 25 Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010 Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010  Overall output in 2010 expected to be higher than 2009        Q1 ’09 – 4.50% Q2 ’09 – 7.22% Q3 ’09 – 7.07% Q4 ’09 – 7.44% 2009 – 6.66% Q1 ‘10 – 7.23% 2010 – 7.75% (NBS projection) 27 Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010 Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010  Economic growth has been robust, however, major challenges remain:  Generation of employment opportunities  Weak link between the major growth drivers, particularly agriculture, and manufacturing sector, hence, the manufacturing sector remains an insignificant contributor to growth  There is need to address the following binding constraints to growth: 29 Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010  Physical infrastructure constraints:  Electricity and transport – there is need to deepen the deregulation process to attract private investors  Need to review allocation of responsibility for infrastructure development among different levels of government  Inadequate Access to finance:  Regulatory interventions to develop all sectors of credit market, from microfinance to larger corporations  Acceleration of credit market reform such as dispute resolution mechanism, credit bureau regulation, and leasing laws  Development of the public-private partnership framework, legal framework for rental markets, etc  Reducing the high lending interest rate  Efforts in all these areas are being fast tracked 30 Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010  Investment     Simplification of the approval process for new business development Capacity building in various areas of the economy Provision of adequate security for lives and property Tackling the issue of corruption Existence   Climate of Skill Gap: Prioritizing technical and vocation education training Equipping enterprise and industrial clusters to develop capacities  High   Cost of Inputs Replacement of import bans with tariffs Deepening the ports reforms 31 Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010 Growing banking system liquidity is still desirable Thus:  Fiscal stimulus remains critical to support CBN actions to fast-tracking recovery process  Urgent need to inject fresh funds into the banks affected by regulatory actions  Ring-fencing/removal of ‘toxic assets’:  Establishment of asset management company (“AMC”) 32 Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010  Realising the limits of monetary policy  There is need to strike an appropriate balance between monetary and other policies  There is a limit to what monetary policy can to deliver economic growth  Other complimentary policies must be in place  Banking sector reform should not be an end in itself  It is a necessary but not a sufficient condition for economic growth and development  complementary reforms in other areas of the economy is absolutely necessary 33 Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010 34 Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010 ... Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010 19 Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July 9, 2010 20 Lecture to the Sylvester Monye. .. sector, hence, the manufacturing sector remains an insignificant contributor to growth  There is need to address the following binding constraints to growth: 29 Lecture to the Sylvester Monye. .. was Universal Banking which allowed banks to venture into different business which posed a serious challenge to the regulators Lecture to the Sylvester Monye Foundation , Asaba, Delta State, July