THE RECENT BANKING SECTOR REFORM AND OPPORTUNITIES FOR REAL SECTOR GROWTH IN NIGERIA
Economic reforms generally refer to the process of getting policy incentive right and / or restructuring key implementation institutions. As part of economic reforms, financial sector reforms focus mainly on restructuring financial sector institutions and incentives through institutional and policy measures. As a component of the financial sector, the reforms in the banking sector seek to get incentives right for the sector to take the lead role of enhancing the capacity at the private sector to contribute to economic growth…
…Real sector activities include agriculture, industry, building and construction, and services. The sector is strategic for a variety of reasons. First, the sector produces and distributes tangible goods and services required to satisfy aggregate demand in the economy. The performance of the sector provides a gauge or an indirect measure of the standard of living of the people. Second, the performance of the sector can be used to gauge the effectiveness of microeconomic policies. Government policies can only be adjudged to be successful if they impact positively on the production and distribution of goods and services which raise the welfare of the citizenry. Third, a vibrant real sector, particularly the agricultural and manufacturing activities, create more linkages in the economy than any other sector and thus, reduces the economic pressures on the external sector. Fourth, the relevance of the real sector is also manifested in its capacity building role, as well as in its high employment and income generating potential…
…Five distinct phase banking sector reforms since independence are easily discernible in Nigeria. The first occurred during 1986 to 1993, when the banking industry was deregulated in order to allow for private sector participation. Hitherto, the landscape was dominated by banks which emerged from the indigenization process leaving the Federal and the State government with majority stakes. He second was the re-regulation era of 1993-1998 following the deep financial distress. The third phase was initiated in 1999 with the return of liberalization and the adoption of the universal banking model. The fourth phase commence in 2004 with the banking sector consolidation and was meant to correct the structural and operational weaknesses that constrained the banks from efficiently playing the catalytic role in promoting private sector led growth. Following from the exercise, the aggregate capital of the consolidated banks rose by 439.4 percent between 2003 and 2009, while the deposit level rose by 241.8 percent. However, this was not reflected the flow of credit to the real economy as the growth rate of credit fell during this period, while actual credit did not reflect the sector’s proportionate contribution to the GDP.
The fifth and the current phase was triggered by the need to address the negative effects of the global financial and economic crises on our banking system…
…The examination showed that five banks were having high level of non-performing loans owing to poor corporate governance practices, lax credit administration processes and the absence or non-adherence to credit risk management practices. The percentage of non-performing loans to total loans ranged from 19 to 48 per cent; also the five banks needed to make additional provision of N539.09 billion. Of their total loan portfolio of N2,801.92 billion, exposure to margin loan and the oil and gas sector stood at N456.28 and N487.02 billion, respectively. Their aggregate non-performing loan stood at N1,143.0 billion, representing 40.81 per cent. Thus, it became obvious that these five banks accounted for a disproportionate component of the total exposure to the capital market and the oil and gas sector, hence, reflecting huge concentration in high risk areas relative to other banks in the industry…
It was also apparent that the banks were illiquid as they were either persistence net-takers of funds in the inter-bank market or enjoyed liquidity support from the CBN for long period of time. Collectively, these five banks accounted for 89.81 per cent of the total industry exposure to the CBN on its discount window facility as at end-July 2009. Their net guaranteed inter-bank takings stood at N253.30 billion as at May 31, 2009 as in spite of means to grow against the regulatory minimum of 25 per cent. Together, the five accounted for 39.93, 29.99, and 31.47 per cent of loans, deposits and total assets, respectively as of May 31, 2009.
…The CBN introduced a reform programmed that was anchored on 4 pillars, namely:
• Enhancing the equality of banks: regulatory framework reform, risk base supervision, consumer protection, corporate governance and disclosure and transparency;
• Establishing financial stability: financial stability committee, macroprudential framework, capital market development ( as an alternative to bank funding), counter-cyclical fiscal policies;
• Enabling a healthy financial sector evolution: competitive banking industry structure, improved cost structure banks through cost control and business process outsourcing, reliable and secure payment system, greater financial inclusion, improving financial infrastructure, credit bureau;
• Ensuring that the financial sector contributes to the real economy: effectiveness of existing development finance institutions, examination of critical issues for economic development ( e.g. power, parts, railways), leverage on CBN’s role as an adviser to the government on economic matters, greater engagement with the banking industry (Sanusi 2010).
The recent CBN initiatives have created a lot of opportunities for real sector growth. These recent incentives include:
N240 Billion Commercial Agricultural Development Programme
Under this initiative, Government Committed about N240 billion drawn from the Natural Resources Fund for the take-off of full-blown commercial agriculture especially in the area of production, processing, storage and market infrastructure development over the next three years. Already, development partners like the World Bank, IFAD, FAO and the organized private sector have shown interest in the programme through financial and technical support. For instance, the World Bank has already given Nigeria the sum of $100 million grant. The objectives of the programme are to enhance food security, create jobs, diversify revenue base, and create wealth…
…N200 Billion Commercial Agricultural Credit Scheme (CACS)
The scheme was established in 2009 by the CBN in collaboration with the Federal Ministry of Agriculture and Water Resource (FMA&WR). The objectives of the scheme are to promote commercial agricultural enterprises in Nigeria. The scheme is funded through the issuance of FGN Bond worth N200 billion, by the Debt Management Office (DMO) in two tranches. The first tranche of N100 billion has been raised and passed on to participating banks for on—lending to farmers. All the deposit money banks in the country are expected to participate in the administration scheme. As at end of April 2012, the CBN had released the sum of N178.27 billion for disbursement to 227 projects/promoters…
…N200 Billion Small and Medium Scale Enterprise Guarantee Scheme (SMECGS)
The N200 billion Small and Medium Scale Enterprise Guarantee Scheme ( SMECGS) established by the CBN in 2010 is aimed at the promoting access to credit by SMEs in Nigeria. The scheme provides a guarantee on loans by banks to the sector in order to absorb the risk element that inhibits banks from lending to the real sector. The activities covered under the scheme include manufacturing and agricultural value chain; SMEs with assets not exceeding N300 million and labour force of 11 to 300 staff; private education institution; and processing packaging and distribution of primary products.
N200 Billion Restructuring/Refinancing to the Manufacturing Sector
As part of the effort towards unlocking the credit market and to ensure that credit flows to the real sector of the economy, the CBN had invested N500 billion out of which N200 is for re-financing/re-structuring of banks’ existing loan portfolios to the manufacturing sector and SMEs. The funding was from the investment of N500 billion debenture stocks issued by the bank of industry (BOI). The main objective of the fund is to fast-track the development of the manufacturing sector by improving access to credit by manufacturers as well as improving the financial position of the DMBs.
…N100 Billion Textile Revival Fund
In a complementary move, the Federal Government had earmarked the sum of N100 billion (from an initial amount of N70 billion) for the Cotton, Textile and Garment Industry Scheme to be disbursed as loans. The scheme is aimed at address the power collar of the multifaceted challenges facing the sector. The Bank of Industry had advance N10 billion to the industry for retooling and an additional N1 billion to UNTL PLC Kaduna to buy cotton for spinning. A supplementary budget provided another N10 billion for immediate disbursement to the Cotton, Textile and Garment (CTG) producers, to raise the total outlay so far made to N21 billion. The remaining balance of N79 billion would come from a bond to be floated by the Debt Management Office (DMO).
N300 Billion Power and Aviation Intervention Fund
Under this initiative, the CBN had released the sum of N300 billion from a fund set aside to stimulate credit to the domestic power and the troubled airline industry. The amount was part of the initial N500 billion intervention fund in a bid to catalyze financing of the real sector of the Nigerian Economy. The main objective of the initiative was to help finance badly needed power project and to allow banks refinance loan to the heavily-indebted airline industry….