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NDIC QUARTERLY
Volume 19 March/June 2009 Nos 1/2 TABLE OF CONTENTS Content Page Review of Developments in Banking and Finance in the First and Second Review of Developments in Banking and Finance in the First and Second Review of Developments in Banking and Finance in the First and Second Review of Developments in Banking and Finance in the First and Second Quarters of 2009Quarters of 2009Quarters of 2009Quarters of 2009 By Research DepartmentBy Research DepartmentBy Research DepartmentBy Research Department The banking sector witnessed a number of developments during the first half of 2009. Chief amongst those developments were the expansion of some Nigerian deposit money banks(DMBs)to other African countries through acquisition and opening of foreign branches, the adoption of the International Financial Reporting Standards (IFRS) by some licensed banks and the restoration of the licence of Savannah Bank by the Court of Appeal. In addition, during the period under review, the Central Bank of Nigeria (CBN) amongst other things, deployed Resident Examiners to deposit money banks, rolled out policies to shore up the value of the Naira and also cut the lending rates by banks. In the second quarter of the year, a new Governor was appointed for the CBN following the expiration of the term of the serving Governor. These and developments in the Foreign Exchange market as well as movement in interest rates during the period have been reviewed. Other areas discussed in the report include developments in the stock market. Financial Condition and Performance of InsuredFinancial Condition and Performance of InsuredFinancial Condition and Performance of InsuredFinancial Condition and Performance of Insured Banks in the First and Banks in the First and Banks in the First and Banks in the First and Second Quarters of 2009Second Quarters of 2009Second Quarters of 2009Second Quarters of 2009 By Research & OffBy Research & OffBy Research & OffBy Research & Off----Site Supervision DepartmentsSite Supervision DepartmentsSite Supervision DepartmentsSite Supervision Departments The overall financial condition and performance of the insured banks during the second quarter of 2009 relative to the first quarter of 2009 were mixed. The total assets of the industry declined during the period under review. Similarly, there was a slight deterioration in the ratio of non-performing credit to total credit during the period under review. However, the banks were capitalized whilst 20 out of 21 of the banks had liquidity ratio above the minimum regulatory requirement Promoting Economic Inclusion In Nigeria: The Role Of Deposit InsurancePromoting Economic Inclusion In Nigeria: The Role Of Deposit InsurancePromoting Economic Inclusion In Nigeria: The Role Of Deposit InsurancePromoting Economic Inclusion In Nigeria: The Role Of Deposit Insurance By G.A. Ogunleye, Managing Director/ Chief ExecutiveBy G.A. Ogunleye, Managing Director/ Chief ExecutiveBy G.A. Ogunleye, Managing Director/ Chief ExecutiveBy G.A. Ogunleye, Managing Director/ Chief Executive The paper examines the role of deposit insurance in promoting financial inclusion in Nigeria. It addresses this issue by examining the place of microfinance institutions in enhancing financial inclusion of Nigerians. Does Financial Reform Raise Or Reduce Savings? EDoes Financial Reform Raise Or Reduce Savings? EDoes Financial Reform Raise Or Reduce Savings? EDoes Financial Reform Raise Or Reduce Savings? Evidence From NigeriaFrom NigeriaFrom NigeriaFrom Nigeria
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By Iganiga, B. O. & EnomBy Iganiga, B. O. & EnomBy Iganiga, B. O. & EnomBy Iganiga, B. O. & Enoma, A. I . (Ph.D)a, A. I . (Ph.D)a, A. I . (Ph.D)a, A. I . (Ph.D) Department Of Economics, Ambrose Alli University Ekpoma, N igeriaDepartment Of Economics, Ambrose Alli University Ekpoma, N igeriaDepartment Of Economics, Ambrose Alli University Ekpoma, N igeriaDepartment Of Economics, Ambrose Alli University Ekpoma, N igeria The importance of savings at individual, corporate and national level cannot be overemphasized. Since the commencement of comprehensive financial sector reforms in Nigeria in 1987, various instruments of financial reforms have been introduced to mobilize savings. Against this background, this paper examines the effect of these reforms over the years on savings in a matched pair approach of pre-reform and post-reform eras using trend and regression analysis. The major importance of our findings is that though the Nigerian financial sector reforms arsenal is growing in terms of size and instruments, its impacts on savings mobilization is still relatively thin. To this end, the paper emphasizes the need for proper manipulation of relevant monetary tools. In addition, financial sector reform programmes should be properly spaced and sequenced and most importantly, should be complemented by stable macroeconomic conditions and adequate regulatory and supervisory arrangements. Gauging Nigeria In Rural Finance: A Survey Of CountryGauging Nigeria In Rural Finance: A Survey Of CountryGauging Nigeria In Rural Finance: A Survey Of CountryGauging Nigeria In Rural Finance: A Survey Of Country----Experience 0020Experience 0020Experience 0020Experience 0020 ByByByBy Dr. Haruna Mohammed Aliero, Department Of Economics, Faculty of Social Dr. Haruna Mohammed Aliero, Department Of Economics, Faculty of Social Dr. Haruna Mohammed Aliero, Department Of Economics, Faculty of Social Dr. Haruna Mohammed Aliero, Department Of Economics, Faculty of Social Sciences, Usmanu Danfodiyo University, SokotoSciences, Usmanu Danfodiyo University, SokotoSciences, Usmanu Danfodiyo University, SokotoSciences, Usmanu Danfodiyo University, Sokoto The paper undertakes a survey of three Asian countries and one African country to analyse the efforts made by these countries in rural financial market development. Thereafter, Nigeria’s efforts at varying degrees and attention were also reviewed. The paper finally argues that there is a serious need for government intervention in Nigeria to develop its rural financial market. Specifically, the paper recommends that a Rural Financial Market Development Strategy be evolved as well as a body to regulate rural finance.
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REVIEW OF DEVELOPMENTS IN BANKING AND FINANCE IN THE FIRST & SECOND QUARTERS OF 2009
BY
RESEARCH DEPARTMENT
1.0 INTRODUCTION
The banking sector witnessed a number of developments during the first
half of 2009. Amongst those developments were the expansion of some
Nigerian deposit money banks(DMBs)to other African countries through
acquisition and opening of foreign branches, the adoption of the
International Financial Reporting Standards (IFRS) by some licensed banks
and the restoration of the licence of Savannah Bank by the Court of
Appeal. In addition, during the period under review, the Central Bank of
Nigeria (CBN) amongst other things, deployed Resident Examiners to
deposit money banks, rolled out policies to shore up the value of the Naira
and also cut the lending rates by banks. In the second quarter of the year,
a new Governor was appointed for the CBN following the expiration of the
term of the serving Governor. At the international scene, Liberia joined
Africa Finance Corporation.
Details of these developments and many others as well as the report on
interest rates on major financial instruments, the Naira exchange rate and
the average performance of quoted banks’ shares on the floor of the
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Nigerian Stock Exchange (NSE) for the first half of 2009 are presented
below.
2.0 Expansion of Operations of Nigerian Banks Abroad During the period under review, United Bank for Africa (UBA) plc acquired
56.4% shares of Continental Bank of Benin, Benin Republic. That
development according to UBA Plc marked its commencement of full scale
banking operations in the French West African country. The shares were
formerly owned by the Government of Benin Republic. The acquisition of
shares of Continental Bank of Benin was approved by the Central Bank of
Nigeria (CBN) and the Banking Commission UEMOA of Republic of Benin.
During the same period, Ecobank Group launched its banking operations in
Kampala, Uganda. That brought to 26 the number of countries in Africa in
which the bank has affiliates. According to a statement from the bank, the
launch would enable banking services to be easily accessed within the East
African Community (EAC) partner states namely, Uganda, Rwanda, and
Burundi where the bank already had visible presence.
In a related development, First Bank of Nigeria (FBN) Plc secured approval
from the China Banking Regulatory Commission (CBRC) to operate in
China. According to a statement from First Bank, the approval came after a
thorough due diligence process. This development provides First Bank of
Nigeria a solid foothold in the Asian region and the platform to blaze the
trail and provide both traditional and innovative financial services to the
government and people of China.
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Similarly, CBRC approved Oceanic Bank’s application to open a
representative office in Beijing, China’s capital city. According to the
Management of the bank the move to have a representative office in
China, was borne out of the fact that the bank wants to service its Chinese
clients better and also leverage on the growth fundamentals of the Chinese
economy.
Trade analysts are of the view that the entry of First Bank and Oceanic
Bank into the Chinese market will ease banking operations between
Nigeria’s growing business community in China and their Chinese
counterparts. In addition, these developments have further brought to the
fore the cross-border issues which should be of paramount importance to
the regulators in general and the Corporation in particular.
3.0 Resident Examiners Deployed to Banks by the CBN During the period under review, the CBN deployed Resident Examiners
(REs) to banks as part of its measures to closely monitor activities in the
licenced banks in order to ensure a continued healthy state of banking
system. According to the CBN, the REs were to monitor the observance of
safe and sound banking practices and compliance with bank laws, rules,
regulations, and guidelines/circulars issued by the CBN. They were also to
continuously monitor and assess the banks’ financial condition and risk
management systems through participating in meetings as observers,
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review of management reports and discussions with banks’ officials as and
when necessary. The REs were also authorized to attend banks’ Board and
Management meetings (including committees) as observers without
hindrance; query banks systems as and when necessary and carry all other
functions necessary to accomplish the objectives of supervision of banks.
Although the apex bank had barred banks from giving any form of
gratification, entertainment or remuneration to the REs, some stakeholders
were of the view that the CBN should rotate the REs. Some believed that
except the resident examiners were rotated, they stood the risk of being
compromised by banks.
4.0 Savannah Bank’s Operating Licence Restored By
Court of Appeal Seven (7) years after the Central Bank of Nigeria (CBN) revoked the
operating licence of Savannah Bank, the Court of Appeal sitting in Abuja
ordered that the operating licence of the bank be restored. It would be
recalled that the bank’s licence was withdrawn by the CBN on February 15,
2002 over issues bordering on unethical business conduct and unhealthy
financial condition. Following that development, the official liquidator,
Nigeria Deposit Insurance Corporation (NDIC), formally handed over the
premises of Savannah Bank Plc to its owners so that the bank could
commence stock taking and the process of reopening the financial
institution.
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5.0 Banks Engaged in De-Marketing Tactics
In what was suspected to be a build-up to the March 31 financial year-end
for majority of the banking institutions in the country, some banks, in a bid
to outsmart one another by way of accumulating deposits, resorted to de-
marketing tactics. De-marketing is a term used to describe competitors
trying to pull down one another by spreading destructive rumours about
others. The recent round of rumours was suspected to have been initiated
by some banks and stockbrokers though the identities of those responsible
for the rumours remained unknown. The major tool of the de-marketing
tactic was SMS where messages are sent stating that some banks are
distressed or unsound.
6.0 Guidelines For Non-Interest Banking Released By the CBN
The Central Bank of Nigeria (CBN) released a draft framework for the
regulation and supervision of non-interest banks in the country. This was
sequel to the increasing number of banks and other financial institutions
desiring to offer Islamic compliant products and services in Nigeria. The
CBN in a circular noted that the objective of the framework was to provide
minimum standards for the operation of non-interest banking in the
country.
A non-interest bank is a bank which transacts banking business, engages in
trading, investments and commercial activities, as well as the provision of
financial products and services in accordance with the principles and rules
of Islam jurisprudence. Transactions and contracts under this type of
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banking were non-permissible if they involve interest, gambling,
speculation, unjust enrichment, exploitation among others.
The document was issued as an exposure draft for comments, suggestions
or inputs by stakeholders. The guidelines, which were being issued
pursuant to Section 28 (1) (b) of the CBN Act 2007 and the provisions of
the Banking and Other Financial Institutions Act (BOFIA 1991 as
amended). Amongst other things, banks offering non-interest banking
products and services shall were not to include the words, “Islamic” as part
of their registered or licensed name. They would, however, be recognized
by a uniform logo to be designed and approved by the CBN. The CBN
would require all the banks’ signages and promotional materials to carry
the logo to facilitate recognition by customers.
On the issue of financial reporting, the framework emphasized that all non-
interest banks operating in the country must comply with the Generally
Accepted Accounting Principle (GAAP) codified in local standards issued by
the Nigerian Accounting Standards Board (NASB) and the International
Financial Reporting Standards (IFRS)/International Accounting Standards
(IAS). For transactions, products and activities not covered by these
standards, the relevant provisions of the Financial Accounting Standards
(FAS) issued by the Accounting and Auditing Organisation for Islamic
Financial Institutions (AAOIFI), would apply.
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7.0 Banks Agreed To Adopt A Common Year-End
During the period under review, the Bankers’ Committee which comprises
all the 24 banks’ Managing Directors/CEOs, top executives of the Central
Bank of Nigeria (CBN) and the Nigeria Deposit Insurance Corporation
(NDIC) unanimously agreed to implement a common accounting year-end
beginning from December 31, 2009. According to the Governor of CBN, the
agreement was aimed at getting Nigerian banks to make full disclosure of
their exposures to risks in the financial sector, which invariably, would also
encourage greater transparency in the sector.
8.0 Update On CBN Lending Window
In the first quarter of the year, the CBN reviewed some policy guidelines in
respect of its continued efforts to ensure that the banking system remained
liquid despite the global financial crisis. The main ones included the
following:
· Standing Lending Facility (SLF) Window
Ø The daily Standing Lending Facility (SLF) of the CBN was made
open to all the deposit money banks (DMBs) and the Discount
Houses (DHs).
Ø The rate for accessing this was to remain the CBN’s Monetary
Policy Rate (MPR), while the eligible collateral would continue to
be the Federal Government securities.
· Repurchase Facility Window
Ø The Repurchase (REPO) window of the CBN was made open to all
participants of the money market. This facility would be available
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up to a maximum tenor of 90 days, while the eligible collateral
remains the Federal Government Securities.
Ø The rate on the REPO window was still bench-marked to the CBN
MPR plus appropriate basis points to reflect the different tenors.
· Expanded Discount Window (EDW)
In order to further expand the scope of liquidity injection into the
money market, the eligible collateral for accessing facility from the
EDW were to include non-FGN securities as follows:
* State Government Bonds
* NDIC Accommodation Bills
* Bankers’ Acceptances
* Guaranteed Commercial Papers
* Promissory Notes
Ø Transactions on the EDW would continue to be for tenors
not exceeding 360 days whilst the rate on the EDW would
continue to be bench-marked to the CBN Monetary Policy
Rate (MPR) + appropriate basis points.
Ø All DMBs/DHs were to have unfettered access to these
windows to meet their liquidity needs so long as they satisfy
the minimum regulatory requirements. However to prevent
arbitrage opportunities, any DMB/DH that obtained funds
from any of the CBN’s lending windows would not be
allowed to, simultaneously, place funds in the inter-bank
money market.
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Ø Any institution that engages in lending activities in the inter-bank
money market, having accessed the CBN window would be
sanctioned appropriately. Sanctions would include denial of access to
the CBN window for a period of 3 months in the first instance, and
for six months for the second time, while the third time offence
would attract a 12-month suspension from CBN’s money market
window. In addition, the institution would be made tol forfeit the
profits it would have made on the transaction.
9.0 Licenced Banks Adopted New Reporting Standards
During the period under review, some deposit money banks adopted the
International Financial Reporting Standards (IFRS) in the preparation of
their financial statements. The banks included Access Bank PLC, First Bank
PLC, UBA PLC and Zenith International Band PLC. The IFRS is a standard of
financial reporting and disclosure which is recognized globally/worldwide
that forms the basis of presentation of Audited Financial Statements for
global institutions. IFRS promotes transparency and enhances the reliability
of a financial statement.
The adoption of IFRS by the banks would ensure that the banks’ financials
are comparable to all other global institutions and therefore provide an
objective basis for making investment and economic decisions to a more
diverse base of investors. Also, the adoption of IFRS by the bank would
enhance shareholders’ value and bring added benefits to its business
relationships with numerous overseas correspondent banks, multilateral
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organisations and international investors that require financial statements
to make informed decisions about the bank.
In order to ensure compliance with all local laws and regulations, these
banks were to continue to prepare financial statements that meet the
requirements of all relevant accounting standards and Generally Accepted
Accounting Principles (GAAP), especially Statements of Accounting
Standards (SAS) of the Nigerian Accounting Standards Board (NASB)
alongside IFRS financial statements.
10.0 Two Banks Selected To Administer The Agricultural
Credit Scheme During the period under review, the CBN selected two banks, namely, First
Bank of Nigeria (FBN) PLC and United Bank for Africa (UBA) PLC to
administer funds of the commercial agricultural credit scheme. The scheme
which would be financed from proceeds of the =N= 200 billion agricultural
bond, was a collaboration between the CBN and the Federal Ministry of
Agriculture and Water Resources, and was aimed at promoting commercial
agricultural enterprises in Nigeria. The bond would be floated by the Debt
Management Office (DMO) on behalf of the Federal Government.
In the guidelines released by the CBN, it was stated that the fund would be
made available to the participating banks to finance commercial agricultural
enterprises. Some of the commodities that would be financed through the
scheme include rice, cassava, cotton, oil palm, wheat, rubber, sugar cane,
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fruits and vegetables, livestock like dairy, poultry, piggery, as well as
fisheries.
11.0 Inter-bank Market For Micro-finance Banks Commenced
The Inter-Bank Market for Micro-Finance Banks was formally launched
during the period under review. The market had operated in the past few
months with the pioneer members trading actively among themselves, with
volumes of over N100 million. With the formal launch of the market, all
industry operators can now participate without any hindrance.
The Inter-Bank market was developed by the Financial Derivatives
Company as the project promoters and Kakawa Discount House as the
Settlement Institution. The market was launched because of the fact that
microfinance institutions with a single funding base face greater exposure
and vulnerability to the effects of exogenous shocks and market volatility.
It was expected that through the market, the country’s microfinance
institutions would be transformed into direct players in the Nigerian money
market. The market would provide opportunity for increased mobility of
funds among microfinance banking institutions thereby reducing their cost
of funds while improving their net interest margin.
12.0 Wema Bank Plc Acquired By Core Investors
A new core investor, XWH Investment Limited, acquired a total of 2.7
billion warehoused shares of Wema Bank Plc, representing 26.50 percent
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of the bank’s issued and paid-up share capital during the period under
review. The acquisition was done through a cross-deal on the floor of the
Nigerian Stock Exchange (NSE). The warehoused shares were a portion of
the holding of the O’dua Investment Company Limited.
Odua Investment Company Limited, the founding investor of Wema bank
Plc, had planned to reduce its stake in the company from 40 percent to 10
percent in line with the directive from Central Bank of Nigeria (CBN) during
the consolidation programme that public (federal and state governments)
interest in banks should not be more than 10 percent post-consolidation.
As a result, 38.5 million ordinary shares of the bank were offered as a
special sale on the floor of the Nigerian Stock Exchange (NSE) last year.
But the sale was characterized by irregularities under the former
management of the bank and that led to the decision of regulatory
authorities to warehouse the shares.
13.0 Final Licence Granted To XDS Credit Bureau Limited By the
CBN
The Central Bank of Nigeria (CBN) during the period under review granted
final operating licence to XDS Credit Bureau Limited to carry on its work as
a credit bureau. The licence was granted in line with the CBN Act 2007
which empowers the CBN Governor to award licences to worthy
organizations. The credit bureau was granted the licence having met all
specified requirements such as sufficiency of equity, governance structure,
expertise of operational staff and internal controls.
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14.0 New Governor Appointed for Central Bank Of Nigeria (CBN)
President Umaru Yar’Adua appointed Mr. Sanusi Lamido Aminu Sanusi as
the new Governor of Central Bank of Nigeria (CBN). Mr. Sanusi replaced
the former Governor, Professor Charles Soludo, whose tenure expired on
3rd June, 2009. Until his recent appointment, Mr. Sanusi was the Group
Managing Director (GMD), First Bank of Nigeria (FBN) Plc.
Born in 1961, Mr. Sanusi holds degrees in Economics from Ahmadu Bello
University, Zaria and Shariah and Islamic Studies from the International
University of Africa, Khartoum, Sudan.
15.0 New Managing Director Appointed For First Bank Of Nigeria
(FBN) Plc
The Governance Committee of the First Bank of Nigeria (FBN) Plc’s Board
of Directors appointed Mr. Stephen Olabisi Onasanya, Executive Director,
Banking Operations & Retail Services as the bank’s new Group Managing
Director/Chief Executive Officer (CEO). Mr. Onasanya succeeded the bank’s
former GMD, Mr. Lamido Sanusi, who was recently appointed the Governor
of the Central Bank of Nigeria (CBN).
16.0 Liberia Joined Africa Finance Corporation (AFC)
Liberia signed the Instrument of Accession and Acceptance of Membership
of the Africa Finance Corporation (AFC) and by that action became the
newest member of the Corporation. Liberia has thus joined other African
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nations such as Nigeria, Guinea-Bissau, Gambia and Sierra Leone in the
AFC, an organization that was initiated by the former Governor of the
Central Bank of Nigeria (CBN) Professor Chukwuma Soludo.
17.0 The Central Bank Of Nigeria (CBN) Specified Accounting
Period for Banks
During the period under review, the CBN specified the maximum and
minimum number of months that will constitute the accounting period for
banks for the purpose of compliance with the common accounting year-end
scheduled to take effect from 31st December, 2009. According to the apex
bank, a maximum accounting period of 18 months and a minimum
accounting period of 6 months are allowable as a full accounting year for
the policy.
As specified in the circular, banks whose year-ends do not coincide with
December 31, should inform the CBN of the number of months to be
covered by their next audited accounts bearing in mind the maximum and
minimum accounting period stated above.
A financial or accounting year-end usually refers to the period used for
calculating the annual financial statements of corporate entities or other
organisations.
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18.0 Interest Rates
The average interest rates prevailing in the system during the first half of
2009 are presented in Table 1.1
Table 1.1
AVERAGE INTEREST RATES FOR FIRST HALF OF 2009
Financial Instrument
Rates (%) Increase/(Decrease)between January and June
January 2009
February 2009
March 2009
April 2009
May 2009
June 2009
Savings
6.25 6.25 6.25 6.25 6.25 6.25 0.0
Call
4.00 15.88 13.88 12.38 13.5 14.25 10.25
7-Day
8.25 17.12 17.08 16.02 14 18 9.75
30-Day
14.28 18.04 0.00 17.79 15.50 18.83 4.45
60-Day 15.33 18.45 20.29 18.35 15.59 19.5 4.17
90-Day 15.54 18.20 20.58 18.28 16.42 19.88 4.34
180-Day
15.92 18.33 20.88 18.42 16.84 20.17 4.25
360-Day
15.83 18.37 20.88 18.29 17.17 20.25 4.42
Prime Lending
24 24 24 24 24 24 0.0
MPR
9.50 9.5 9.75 8.0 8.0 8.00 (1.50)
T/Bills Rate
9.50 9.5 5.24 6.12 7.45 6.24 (3.26)
FGN Bond
10.7 10.7 10.7 10.75 10.75 11.5 0.8
Source: NDIC Market Survey
As shown in Table 1.1, rates on all types of deposits increased significantly
except for rates on Savings deposit which was stagnant for the six month
period. Paradoxically, the MPR, the rediscount rate, was down by 1.50
percentage points during the same period whilst the payable rate on
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government bills reduced by 3.26 percentage points. The changes in the
deposits rates during the period under review were due to market forces.
19.0 The Naira Exchange Rate
During the period under review, the CBN rolled out several rules,
regulations and policy guidelines to shape activities in the foreign exchange
market. Amongst the main ones, the CBN reverted to the Retail Dutch
System in intervening in the foreign exchange market as against the
Wholesale Dutch Auction System formerly in use. Other major policy
guidelines included the following:
· Funds purchased from CBN at the Auction could be used for eligible
transactions only, subject to stipulated documentation requirements.
Such funds were not allowed to be transferable in the inter-bank
foreign exchange market.
· Authorised Dealers were expected to return to the Central Bank of
Nigeria any unutilized funds within five (5) business days after
delivery, at the rate of purchase.
· Reduction In Forex Net Open Position (NOP) Of Banks from 10% to
1% of shareholders funds
· The Central Bank of Nigeria (CBN) barred oil firms, oil service
companies, the Nigerian National Petroleum Corporation (NNPC), the
Nigerian Ports Authority (NPA) and other government agencies from
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selling foreign exchange directly to commercial banks in the
country.. The ban which became effective from March 1, 2009, had
made the apex bank the only source of foreign exchange to banks
that bid on behalf of their clients at the Retail Dutch Auction System
(RDAS) which holds bi-weekly
· Deposit ,money banks were to apply for Bureaux De Change (BDC)
licences as a means of plugging all the loop holes in the system
· Bureaux de Change operators were classified into two: Class “A” and
Class “B”. Under the new guidelines, only Class A operators were
allowed to participate in the sale and purchase of foreign exchange;
prepaid cards; travelers’ cheques; have the authority to import
foreign exchange (subject to compliance with anti-money laundering
requirements); transfer money and participate in the CBN foreign
exchange cash auction.
Ø Class A operators must have a minimum paid-up capital
of N500 million verifiable at all times. They must also
maintain a mandatory deposit with the CBN of
$200,000.00 that is non-interest bearing; must pay a
non-refundable application fee of N1 million, and an
annual renewal fee of N250,000.00. Class A operators
were also required to maintain IT infrastructure that
enables them to make daily returns to CBN.
Ø Class B operators could buy and sell foreign exchange
provided they do not exceed $5,000.00 per transaction.
They could also source foreign exchange from
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autonomous sources. According to the CBN, these
guidelines were designed to promote efficiency and
effectiveness in the foreign exchange market.
· Business travelers entitled to the Business Travel Allowance (BTA)
were barred from obtaining Private Travel Allowance (PTA) while on
the same trip and vice versa.
The above policy guidelines were expected to exert some positive
influence on the Naira Exchange rate during the period under
review. Presented in Table 1.2 are the Naira exchange rates in
different segments of the market.
Table 1.2
NAIRA EXCHANGE RATE IN THE FIRST HALF OF 2009
Market Segment
Exchange Rate (N to US$)
%change in the N/US$
Exchange Rate between
January and June, 2009
January 2009
February
2009
March 2009
April 2009
May 2009
June 2009
WDAS
143.8
145.5
146.08
145.84
146.215
146.75
2.01
Bureaux
De Change
146.3
150.75
166.25
147.83
178.25
168.75
13.3 113.313
Parallel Market
(PM)
148
151.75
169
149
180.5
170
12.94
Source: NDIC Market Survey
A review of the developments in the foreign exchange market in the first
half of 2009 indicated that there was relative stability in official (RDAS)
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segment of the market throughout the period with the Naira marginally
depreciating from N143.8 to $1 in January 2009 to N146.75 to $1 as at the
end of June 2009 depicting a depreciation of 2.001%. That was still within
the -/+3%band targeted by the CBN. However, at the Bureau De Change
(BDCs) and Parallel Market the Naira sharply depreciated by 13.3% and
12.94% respectively probably as a result of inadequate supply to these
market occasioned by the strings of new policy guidelines put in place by
the CBN.
2.43 PERFORMANCE OF INSURED BANKS QUOTED ON THE
NIGERIAN STOCK EXCHANGE (NSE)
Statistics on the performance of insured banks’ share on the Nigerian Stock
Exchange as at June 22, 2009 are presented in Table 1.3. As evidenced
from the table, 21 insured banks had their shares traded on the stock
exchange. Ecobank Bank Plc was the price leader during the period under
review with a quoted price of 2796 kobo. Other banks that followed
included First Bank of Nigeria Plc (2081kobo), Union Bank Plc (1805 kobo),
Zenith Bank Plc (1604kobo) (United Bank for Africa (1155kobo) and GT
Bank (1300).
As can be observed from Table1.3, the share prices of 16 banks were on
the upward trend during the period under review. That may be regarded as
are re-bound of those stocks given the collapse experienced in the past
quarters. The prices hares of three bank stocks via: Fidelity BANK,
FirstInland Bank and Wema Bank were on the decline whilst the share
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prices of Ecobank and Spring Bank remained dormant throughout the
period under consideration.
Table 1.3
Performance of Insured Banks’ Shares on the Nigerian Stock Exchange (NSE) As At June 22, 2009 (With the comparative statistics of January 23, 2009)
BANK
Par value (k)
Quotation (k)
Price Change Increase/ Decrease
Year’s High (k)
Year’s Low (k)
Earnings /share (k)
Price/Earning Ratio (%)
Jan June
ACCESS BANK NIGERIA PLC 50 477 950+ 473 730 477 1.34 3.56 AFRIBANK NIGERIA PLC 50 614+ 905+ 291 961 614 1.24 4.95
DIAMOND BANK NIGERIA PLC
50 441+ 952+ 511 748 441 1.16 3.80
ECOBANK NIG. PLC 50 2,796 2,796 0 2796 2796 1.04 26.58
FIDELITY BANK PLC
50 415- 392- -23 469 415 0.47 8.83
FIRST BANK OF NIG. PLC 50 1,657+ 2220+ 563 2111 1657 1.81 9.15
FIRST CITY MONUMENT BANK PLC 50 391+ 870+ 479 615 391 1.17 3.34 FIRSTINLAND BANK PLC
50 338- 278- -60 445 338 0.47 7.18
GUARANTY TRUST BANK PLC 50 919+ 1300+ 381 1300 919 1.94 4.74 INTERCONTINENTAL BANK PLC 50 714+ 1234+ 520 1346 714 2.28 3.13 OCEANIC BANK PLC 50 777+ 821+ 44 1205 777 1.86 4.18 PLATINUMHABIB BANK PLC 50 610+ 760+ 150 1024 610 1.12 5.45
23
BANK
Par value (k)
Quotation (k)
Price Change Increase/ Decrease
Year’s High (k)
Year’s Low (k)
Earnings /share (k)
Price/Earning Ratio (%)
Jan June
SKYE BANK PLC 50 444+ 719+ 275 859 444 2.03 2.19
SPRING BANK PLC 50 559 559 0 559 559 0.00 0.00
STANBIC IBTC BANK PLC 50 527+ 817+ 290
1090 527 0.56 9.41
STERLING BANK PLC 50 188 229 41 242 188 0.32 5.88 UBA PLC 50 858+ 1439+ 581 1340 858 1.89 4.54 UNION BANK NIG. PLC 50 1,262+ 1805+ 543 1627 1262 1.99 6.34 UNITY BANK PLC 50 187+ 258+ 71 300 187 0.09 20.78
WEMA BANK PLC 50 1,429+ 416+ -1013 1429 1429 0.55 25.98 ZENITH BANK PLC 50 1,419+ 1,604+ 185 2200 1419 2.62 5.42
Source: The Nigerian Stock Exchange, Lagos
24
FINANCIAL CONDITION AND PERFORMANCE OF INSURED BANKS
IN THE FIRST AND SECOND QUARTERS OF 2009
BY
RESEARCH & OFF-SITE SUPERVISION DEPARTMENTS
1.0 INTRODUCTION
The condition and performance of the insured banks were mixed during
the period under review. Total assets of the banks declined from N14.93
trillion as at the end of the first quarter of 2009 to N14.80 trillion as at the
end of the second quarter of 2009, representing a decrease of 0.88
percent. The industry total loans and advances increased by 4.15 percent,
from N6.26 trillion as at the end of March 2009 to N6.52 trillion as at the
end of June 2009. Non-performing credits increased by 29.85 percent from
N494.01 billion as at the end of March 2009 to N641.48 billion as at the
end of June 2009. This impacted negatively on the overall industry’s asset
quality as typified by the increase in the ratio of Non-performing Credits to
Total Credits from 6.61 percent as at March 2009 to 8.36 percent as at
June 2009. Profit before tax (PBT) which amounted to N164.40 billion as at
the end of the first quarter of 2009 declined significantly by 42.97 percent
25
to N93.75 billion as at the end of the second quarter of 2009. The capital
to risk-weighted asset ratio increased by 0.10 percentage points from
22.52 percent at the end of March 2009 to 22.42 percent at the end of
June 2009. The industry average liquidity ratio also increased slightly by
2.59 percentage points from 37.72 percent as at the end of March 2009 to
40.31 percent as at the end of June 2009.
Apart from this introduction, the rest of the paper is divided into three
sections. Section 2 presents the structure of assets and liabilities of the
banking industry, while section 3 examines the financial condition of
insured banks. Section 4 concludes the paper.
2.0 STRUCTURE OF ASSETS AND LIABILITIES
The total assets of the banking industry declined slightly from N14.93
trillion as at the end of March 2009 to N14.80 trillion as at the end of June
2009. The structure of banks’ total assets and liabilities as at the end of the
first and second quarters of 2009 are presented in Table 1 and Charts 1A &
1B below.
26
TABLE 1
STRUCTURE OF BANKS’ ASSETS AND LIABILITIES AS AT THE END OF MARCH AND JUNE 2009 Assets (%)
1st Quarter 2009
2nd Quarter 2009
Liabilities (%)
1st Quarter 2009
2nd Quarter 2009
Cash & Due from Other Banks
17.36
15.45
Deposits
58.22
59.08
Inter-bank Placement
8.46 5.98 Inter-bank Takings 4.34 3.35
Government Securities
4.12
4.90
CBN Overdraft
0.86
0.47
Other Short-term Funds
5.82
4.88
Due to Other Banks
0.58
0.49
Loans & Advances
41.92
44.04
Other Borrowed Funds
0.00
0.00
Investments 9.88 11.77 Other Liabilities 14.76 14.27 Other Assets 8.44 8.73 Long-term Loans 1.92 2.63 Fixed Assets
4.00
4.26
Shareholders’ Funds (Unadjusted)
1.43
1.46
Reserves 17.88 18.25 Total 100.00 100.00 Total 100.00 100.00 Source: Bank Returns NOTE: TOTAL ASSETS (=N= TRILLION) 1ST QUARTER OF 2009 14.93 2ND QUARTER OF 2009 14.80 OFF-BALANCE SHEET (As a Proportion of Balance Sheet Items) 23.84 % 24.74 %
27
05
1015202530354045
1st qtr 2009 2nd Qtr 2009
CHART 1 A: STRUCTURE OF BANKS' ASSETS FOR THE 1ST AND 2ND QUARTERS OF 2009
Cash & Due from Other Banks Interbank PlacementsGovernment Securities Other Short-term FundsLoans & Advances/Leases InvestmentsOther Assets Fixed Assets
28
0
10
20
30
40
50
60
1st Qtr 2009 2nd Qtr 2009
CHART 1 B: STRUCTURE OF BANKS' LIABILITIES FOR THE 1ST AND 2ND QUARTERS OF 2008
Total Deposits Interbank Takings CBN OverdraftsDue to Other Banks Other Borrowed Funds Other LiabilitiesLong-term Loans Shareholders' Funds (Unadjusted) Reserves
29
Like other previous quarters, the largest proportion of total assets during
the second quarter of 2009 was Loans & Advances, which accounted for
44.04 percent. That was higher than its share as at the end of the first
quarter when it recorded 41.92 percent of the total assets. The relative
share of Cash & Due from Other Banks declined from 17.36 percent as
at the end of March 2009 to 15.45 percent as at the end of June 2009,
which represents a decrease of 1.91 percentage points. Thus, it retained its
position as the second largest component of total assets. Total
Investment which constituted 9.88 percent of total assets in the first
quarter of 2009 retained its third position on the log, as its contribution
even increased by 1.89 percentage points to 11.77 percent in the second
quarter of 2009. However, Inter-bank Placements, which was the
fourth largest component of total assets at the end of the first quarter of
2009 with a contribution of 8.46 percent, declined to 5.98 percent as at the
end of the second quarter of 2009. The share of Other Assets increased
from 8.44 percent as at March 2009 to 8.73 as at June 2009. Similarly, Net
Fixed Assets also increased in its contribution to total assets from 4.00 as
at the end of the first quarter of 2009 to 4.26 percent as at the end of the
second quarter of 2009. On the other hand, Other Short-term Funds which
had a share of 5.82 percent as at the end of the first quarter of 2009
declined to 4.88 percent as at the end of the second quarter of 2009.
On the liabilities side of the balance sheet, Deposits accounted for 58.22
percent of the total as at the end of March 2009. That was slightly lower
30
than its contribution of 59.08 percent at the end of June 2009. The second
largest liability of the banking industry as at the end of the March 2009 was
Other Liabilities which accounted for 14.76 percent. That was 0.49
percentage points higher than its contribution in the second quarter of
2009. Other sources of funding in the industry during the second quarter of
2009 included the following: Inter-bank Takings (3.35%); Due to
Other Banks (0.49%); Long-term Loans (2.63%); Shareholders’
Funds (1.46%); and Reserves (18.25%).
3.0 ASSESSMENT OF THE FINANCIAL CONDITION OF INSURED
BANKS
3.1 Asset Quality
The industry’s total loans and advances increased by 4.15 percent from
N6.26 trillion as at the end of March 2009 to N6.52 trillion as at the end of
June 2009. However, the quality of those assets deteriorated slightly
during the same period. Table 2 and Chart 2 present the indicators of
insured banks’ asset quality for the first and second quarters of 2009. Non-
performing Loans increased by 29.85 percent from N494.01 billion as at
the end of the first quarter of 2009 to N641.48 billion as at the end of the
second quarter of 2009. The proportion of Non-performing Credit to Total
Credit increased from 6.61 percent at the end of March 2009 to 8.36
percent at the end of June 2009. But, the proportion of Non-performing
31
Loans to Shareholders’ Funds declined by 4.90 percentage points from
17.27 percent as at the end of March 2009 to 22.17 percent as at the end
of June 2009.
TABLE 2 INDICATORS OF INSURED BANKS’ ASSET QUALITY FOR THE FIRST AND SECOND QUARTERS OF 2009 Asset Quality Indicator (%)
Industry 1st Quarter of 2009
2nd Quarter of 2009
Non-performing Credit to Total Credit
6.61
8.36
Provision for Non-performing Loans to Total Non-performing Credit
81.40
76.55
Non-performing Credit to Shareholders’ Funds
17.27
22.17
Source: Bank Returns
32
0
10
20
30
40
50
60
70
80
90
1st Qtr of 2009 2nd Qtr of 2009
CHART 2: INSURED BANKS' ASSET QUALITY FOR THE 1ST AND SECOND QUARTERS OF 2009
Non-performing Credit to total CreditProvision for Non-performing Loans to non-performing CreditNon-performing Credit to Shareholders' Funds
3.2 EARNINGS AND ROFITABILITY
The banking industry recorded a significant decline of 14.33 percent in
Interest Income from N597.70 billion in the first quarter of 2009 to
N512.06 billion in the second quarter of 2009. Similarly, Non-Interest
Income declined by 19.40 per cent from N203.20 billion in the first
quarter of 2009 to N163.80 billion as at the end of the second quarter of
33
2009. Following the same trend, Operating Expenses declined from
N368.67 billion as at the end of March 2009 to N328.71 billion as at the
end of June 2009. Notwithstanding the latter, Total Profit Before Tax (PBT)
of the banking industry declined significantly by 42.97 percent from
N164.40 billion as at March 2009 to N93.75 billion as at June 2009. Table 3
and Chart 3 present the Earnings and Profitability Indicators for the
first and second quarters of 2009.
TABLE 3
EARNINGS AND PROFITABILITY INDICATORS FOR THE FIRST AND SECOND QUARTERS 2009 Earnings/Profitability Indicator
Industry 1st Quarter of 2009
2nd Qtr of 2009
Interest Income (=N= Billion)
597.70
512.06
Non-Interest Income (=N= Billion)
203.20
163.80
Operating Expenses (=N= Billion)
368.67
328.71
Profit Before Tax (=N= Billion)
164.40
93.75
Return on Assets (%)
1.10
0.63
Return on Equity (%)
5.81
3.28
Net Interest Margin (%)
3.28
2.57
Yield on Earning Assets (%)
6.10
5.22
Source: Bank Returns
34
0
1
2
3
4
5
6
7
1st Qtr of 2009 2nd Qtr of 2009
CHART 3: INSURED BANKS' EARNINGS AND PROFITABILITY FOR FIRST AND SECOND QUARTERS OF
2009
Return on Assets Return on Equity
Yield on Earning Assets Net Interest Margin
Following the decline in profitability, the industry’s Return on Assets
(ROA) declined by 0.47 percentage points from 1.10 percent in March
2009 to 0.63 percent in June 2009. Similarly, Return on Equity (ROE)
also declined from 5.81 percent as at the end of March 2009 to 3.28
percent as at end of June 2009. Similarly, the Yield on Earning Asset
(YEA) also witnessed an appreciable decline from 6.10 as at March 2009
to 5.22 percent as at June 2009, representing a decline of 0.88 percentage
points.
35
3.3 LIQUIDITY PROFILE
The industry’s average liquidity ratio increased during the second quarter
of 2009 relative to the first quarter of 2009. Table 4 presents the indicators
of insured banks’ liquidity profile for the first and second quarters of 2009.
The average liquidity ratio increased from 37.72 percent as at the end of
March 2009 to 40.31 percent as at the end of June 2009. Thus, as at the
end of the period under review the ratio remained higher than the 40
percent minimum regulatory requirement.
TABLE 4 INDICATORS OF INSURED BANKS’ LIQUIDITY PROFILE FOR
THE FIRST AND SECOND QUARTERS OF 2009 Liquidity
Period 1st Quarter of 2009
2nd Quarter of 2009
Average Liquidity Ratio (%)
37.72
40.31
Net Loans to Deposit Ratio (%)
81.35
82.10
Inter-bank Takings to Deposit Ratio (%)
7.45
5.68
No. of Banks with Liquidity Ratio of Less than the prescribed 40%
3
1
Source: Bank Returns
36
From Table 4, it can be observed that the industry slightly reduced its
dependence on inter-bank takings as the ratio of Inter-bank Takings to
Deposits declined by 1.77 percentage points from 7.45 percent as at March
2009 to 5.68 percent at the end of June 2009. The number of banks that
could not meet up with the liquidity ratio of 40 percent prescribed by the
regulatory authorities also declined from 3 in the first quarter of 2009 to 1
in the second quarter of 2009.
3.4 CAPITAL ADEQUACY
On the aggregate, the banking industry remained adequately capitalized as
at the end of the second quarter of 2009. The average Capital to Risk
Weighted Assets Ratio far exceeded the required minimum of 10 percent.
Thus, the industry required no additional capital. Table 5 and Chart 4
below show insured banks’ capital adequacy positions as at the end of
March and June 2009.
37
TABLE 5 INDICATORS OF INSURED BANKS’ CAPITAL ADEQUACY POSITION FOR THE FIRST AND SECOND QUARTERS OF 2009 Capital Adequacy Indicator
Period 1st Quarter of 2009
2nd Quarter of 2009
Capital to Risk Weighted Asset Ratio (%)
22.51
22.42
Capital to Total Asset Ratio (%)
18.94
19.33
Adjusted Capital to Loan Ratio (%)
40.22
40.72
Source: Bank Returns
38
0
10
20
30
40
50
1st Qtr of2009
2nd Qtr of2009
CHART 4: INSURED BANKS' CAPITAL ADEQUACY FOR THE FIRST AND SECOND QUARTERS OF 2009
Capital to Risk Weighted Asset RatioCapital to total Asset RatioAdjusted Capital to Loan Ratio
On the one hand, the Capital to Risk Assets Ratio increased slightly by
0.09 percentage points from 22.42 percent as at the end of March 2009 to
22.51 percent as at the end of June 2009. On the other hand, the Ratio of
Capital to Total Assets for the industry decreased from 19.33 percent in
March 2009 to 18.94 percent in June 2009. Similarly, the Adjusted
Capital to Loan Ratio declined from 40.72 percent as at the end of the
first quarter of 2009 to 40.22 percent as at the end of the second quarter
of 2009.
39
4.0 CONCLUSION
The overall financial condition and performance of the insured banks
during the second quarter of 2009 relative to the first quarter of 2009 were
mixed. The total assets of the industry declined during the period under
review. Similarly, there was a slight deterioration in the ratio of non-
performing credit to total credit during the period under review. In terms of
earnings and profitability, the industry did not perform creditably well
during the period under review as most of the earnings indicators were on
the downward trend. Overall, the banks were capitalized whilst 20 out of
21 of the banks had liquidity ratio above the minimum regulatory
requirementg
40
PROMOTING ECONOMIC INCLUSION IN NIGERIA: THE ROLE OF DEPOSIT INSURANCE1
By G. A. Ogunleye,
Managing Director/Chief Executive Officer Nigeria Deposit Insurance Corporation
1.0 INTRODUCTION
Extant literature on economic development has recognized the need to
engage all sectors (urban and rural or formal and informal) in economic
activities as a strategy for achieving rapid and sustainable economic growth
and development. The goal has been achieved in many countries by
putting in place a well focused programme to reduce poverty through
empowering the people by increasing their access to factors of production,
especially credit. It is believed that by increasing their access to finance,
through the provision of micro-finance, the latent capacity of the poor for
entrepreneurship would be significantly enhanced thereby paving way for
their increased participation in economic activities and consequently reduce
poverty, increase employment and overall standard of living.
Over the years, one way successive administrations in Nigeria had
responded to the need for enhancing the participation of rural community
1 The original paper was presented at the 7th Annual Conference of the International Association of Deposit Insurers (IADI) hosted by the Federal Deposit Insurance Corporation (FDIC), Arlington, VA Washington DC, USA October, 2008.
41
in economic activities was the creation of micro credit schemes. The main
aim of these schemes was to increase the productive capacity of the poor
and the vulnerable basically through the provision of credit facilities
thereby enhancing the pace of economic development in the country. This
is based on the fact that in Nigeria, for instance, for “ poor small-scale
agricultural producers and enterprises have long been identified to account
for a large share of the economic activity in developing countries,” Babalola
(1991). It is also generally believed that financial support for this group is
crucial for effective economic management and the process of economic
development, Umoh and Ibanga (1997).
The most recent addition to the stream of measures aimed at enhancing
economic inclusion was the micro finance policy which was launched in
December 2005. The micro-finance framework provided for the
establishment of micro-finance banks (MFBs) which are to serve as vehicle
for providing financial services to the economically active poor in the
society. In other to ensure the success of the initiative, the need for
effective safety-net, including deposit insurance was considered imperative.
The purpose of this paper is to indicate the role of deposit insurance in
promoting economic inclusion in Nigeria. In order to appreciate the
discussion better, the next section reviews the concept of economic
inclusion.
42
2.0 CONCEPT OF ECONOMIC INCLUSION
Economic inclusion describes the process of overcoming the barriers that
prevent people from participating in the economic growth of the society to
which they belong. An inclusive society promotes economic, human and
social development. The elements of economic inclusion cover a whole
range of areas encompassing health, income, employment, education,
community and environment.
There is growing realization that while the ‘trickle down’ effect of economic
growth works, it takes too long a time. Hence there is a need to focus on
“inclusive growth”. Inclusive growth is a little more than just the benefits of
growth being distributed equitably; it is the participation of all sections and
regions of society in the growth process and their reaping the benefits of
growth. In a country like Nigeria, where a large section of the society is still
deprived of the benefits of growth, inclusive growth and the resultant
prosperity of the hitherto under-privileged would lead to substantial
increase in demand for the goods and services produced by the expanding
corporate sector, which will ultimately lead to a much faster growth of the
economy.
While economic inclusion is a broader concept and needs to be addressed
through various fiscal measures, one of the ways in which the financial
system can support economic inclusion is through ‘Financial Inclusion’.
Financial inclusion may be defined as the process of ensuring access to
financial services and timely and adequate credit, where needed, by
43
vulnerable groups at an affordable cost, (Prahlad, 2005). Both theoretical
and empirical researches highlight the role of financial development in
facilitating economic development (Rajan and Zingales, 2004). At the cross-
country level, evidence indicates that various measures of financial
development are positively related to economic growth (King and Levine,
1993 ; Levine and Zervous, 1998). Even the recent endogenous growth
literature, building on ‘learning by doing’ processes, assigns a special role to
finance (Aghion and Hewitt, 1998 and 2005).
While in developed countries, the formal financial sector, comprising mainly
the banking system, serves most of the population, in developing countries,
a large segment of the society, mainly the low-income group, has little
access to financial services, either formal or semi formal. As a result, many
people have to necessarily depend either on their own sources or informal
sources of finance, which are generally at high cost. Most of the population
in developed countries (99 per cent in Denmark, 96 per cent in Germany,
91 per cent in the USA and 96 per cent in France) have bank accounts
(Peachy and Roe, 2004). However, formal financial sectors in most
developing countries serve relatively a small segment, often no more than
20-30 per cent of the population, the vast majority of whom are low income
households in rural areas (ADB,2007).
44
3.0 LINKAGES BETWEEN ECONOMIC INCLUSION, FINANCIAL STABILITY AND DEPOSIT INSURANCE
Financial intermediation through formal and well regulated financial
institutions is required to efficiently intermediate between savings and
investment. Apart from providing an intermediation role between savings
and investments, financial inclusion is important for ensuring economic
inclusion. Currently the financially excluded people tend to avail themselves
of savings services provided by mutual benefit groups and in some cases by
cooperative societies or by some get-rich-quick operators who lure the
savings from such excluded groups. Loan services are similarly provided by
indigenous moneylenders or other informal lenders, who might be charging
outrageously high interest rates or adopt harsh recovery practices.
Nevertheless such groups do depend heavily on informal sources as they
are readily willing to give loans without collateral at any time and also
possess intimate knowledge about the repayment record.
By ensuring access to formal financial system, the un-banked and under-
banked households can build savings and promote asset accumulation,
which ultimately would contribute to financial stability, all things being
equal. Thus, financial inclusion promotes financial stability by facilitating
inclusive growth. However, with more and more hitherto excluded
households coming within the fold of banking, the relevance of deposit
insurance gets more pronounced in as much as such households need to
be assured that their hard earned savings, kept as deposits with banks, are
protected. Without such assurance, financial / economic inclusion may not
45
be sustained. Thus, financial/economic inclusion, financial stability and
deposit insurance are inter- related and mutually supportive.
4.0 ECONOMIC INCLUSION THROUGH MICROFINANCE POLICY
FRAMEWORK IN NIGERIA
The Nigeria economy is characterized by a large informal sector. Only
about 35% of economically active population has access to financial
services while about 65% rely on the informal sector. In fact, less than
2% of rural households have access to formal financial/banking services.
The aggregate micro-credit facilities account for about 0.2% of the Gross
Domestic Product (GDP) and less than 1% of total credit to the economy.
In response to the foregoing, successive administrations in Nigeria had
intervened through supply-led subsidized credit strategy. Notable among
such programmes were the Rural Banking Programme, sectoral allocation
of credits, concessionary interest rate, and the Agricultural Credit
Guarantee Scheme (ACGS). Other institutional arrangements were the
establishment of the Nigerian Agricultural and Cooperative Bank Limited
(NACB), the National Directorate of Employment (NDE), the Nigerian
Agricultural Insurance Corporation (NAIC), the People Bank of Nigeria
(PBN), the Community Banks (CBs), and the Family Economic
Advancement Programme (FEAP). In year 2000, Government merged the
NACB with the PBN and FEAP to form the Nigerian Agricultural Co-
operative and Rural Development Bank Limited (NACRDB), to enhance the
46
provision of finance to the agricultural sector. It also created the National
Poverty Eradication Programme (NAPEP) with the mandate of providing
financial services to alleviate poverty. Most of the intervention agencies
had no sustainable sources of funding, hence, virtually all the initiatives
could not be sustained.
The ineffectiveness of the government economic inclusion strategies
obviously left a huge gap which the non-governmental organizations
(NGOs) sought to fill. For instance, since the 1980s, NGOs have emerged
in Nigeria to champion the cause of the micro and rural entrepreneurs,
with a shift from the supply-led approach to demand-driven strategy. Most
of the NGOs are charity, capital lending and credit-only membership based
institutions. They are generally registered under the Trusteeship Act as the
sole package or part of their charity and social programmes of poverty
alleviation. The NGOs obtain their funds from grants, fees, interest on
loans and contributions from their members. However, they have limited
outreach due, largely, to unsustainable sources of funds. To a large
extent, the NGOs’ initiatives through demand-driven strategy had
generated little impact on economic inclusion just like the government
supply-led credit strategies.
The observed ineffectiveness of both supply-led and demand-driven credit
strategies in broadening economic inclusion on the one hand, and the
existence of huge unserved and savings opportunities in the country, on
the other hand, largely informed the introduction of the micro-finance
47
policy in 2005. The policy was introduced to complement the banking
sector reforms introduced in 2004 with a view to enhancing
economic/financial inclusion in the country.
According to the micro-finance policy framework, MFBs were promoted to
provide financial services to the economically active poor in the society.
The policy was targeted at creating an environment of financial inclusion to
boost capacity of micro, small and medium enterprises (MSMEs) to
contribute to economic growth and development through job creation that
would lead to improved standard of living and poverty reduction.
The specific objectives of microfinance policy are as follows:
Ø Make financial services accessible to a large segment of the
potentially productive Nigerian population which otherwise would
have little or no access to financial services;
Ø Promote synergy and mainstreaming of the informal sub-sector
into the national financial system;
Ø Enhance service delivery by microfinance institutions to micro,
small and medium entrepreneurs;
Ø Contribute to rural transformation; and
Ø Promote linkage programmes between Universal/Development
banks, specialized institutions and microfinance banks.
The Microfinance Policy permits the establishment of two categories of
MFBs, namely:
48
Ø MFB operating as a unit bank with a minimum capital requirement of
N20 million; and
Ø MFB operating in a State with a minimum capital requirement of N1.0
billion.
The policy framework also specifies the objectives of the creation of
microfinance banks as:
a. Providing diversified, affordable and dependable financial services to
the active poor, in a timely and competitive manner, that would
enable them to undertake and develop long-term, sustainable
entrepreneurial activities;
b. Mobilizing savings for intermediation;
c. Creating employment opportunities and increase the productivity of
the active poor in the country, thereby increasing their individual
household income and uplifting their standard of living;
d. Enhancing organized, systematic and focused participation of the
poor in the socio-economic development and resource allocation
process;
e. Providing veritable avenues for the administration of the micro credit
programmes of government and high net worth individuals on a non-
recourse basis. In particular, this policy ensures that state
governments shall dedicate an amount of not less tan 1% of tieir
annual budgets for the on-lending activities of microfinance banks in
favour of their residents; and
49
f. Rendering payment services, such as salaries, gratuities, and
pensions for various tiers of government.
Community Banks (CBs) hitherto in existence were allowed to convert to
MFBs provided they met the licensing requirements. Of the 1,259 CBs in
operation as at December 31, 2007, the total number that met the
minimum capital requirement of N20 million Shareholders’ Funds,
unimpaired by losses, and converted to MFBs were 607 as at the end of
2008. An analysis of the CBs that converted to MFBs showed that 308 CBs
had completed the process and obtained final licence, while 299 were still
carrying provisional approval as at December 31, 2008. Delays in
registering increases in capital, change of name and registration of new
directors at the Corporate Affairs Commission (CAC), due to non-payment
of penal charges for non-submission of statutory returns by the institutions
(despite the concessions granted by the CAC), were largely responsible for
the slow conversion of their provisional approvals to final licence during the
year.
In addition to the 607 CBs converted to MFBs, a total of 138 new micro-
finance banking licences were granted, while 95 approvals-in-principle
(AIPs) had been granted as at December 31, 2008. With that
development, the total number of approved MFBs as at the end of year
2008 were 840. Presented in Table 1 is the distribution of the 840 MFBs
on a state-by-state basis, including the Federal Capital Territory, Abuja.
50
Table 1Table 1Table 1Table 1
Distribution of the MFBs on State Basis As At December 2008Distribution of the MFBs on State Basis As At December 2008Distribution of the MFBs on State Basis As At December 2008Distribution of the MFBs on State Basis As At December 2008 STATE CBs CONVERTED TO MFBs NEW INVESTORS
FINAL
LICENCE
PROVISIONAL
APPROVAL
SUB-
TOTAL
FINAL
LICENCE
AIP SUB-
TOTAL
TOTAL
ABUJA FCT 7 1 8 14 9 23 31
ABIA 7 10 17 1 6 7 24
ADAMAWA 3 4 7 1 0 1 8
AKWA IBOM 4 3 7 3 2 5 12
ANAMBRA 59 16 75 3 1 4 79
BAUCHI 2 7 9 1 2 3 12
BATELSA 1 0 1 2 0 2 3
BENUE 6 1 7 2 0 2 9
BORNO - 3 3 1 1 4
CROSS
RIVER
10 5 15 0 0 15
DELTA 10 15 25 3 1 4 29
EBONYI 1 4 5 1 0 1 6
EDO 11 12 23 2 0 2 25
EKITI 5 8 13 - - 0 13
ENUGU 14 6 20 1 1 2 22
GOMBE 2 1 3 1 1 4
IMO 13 26 39 3 1 4 43
JIGAWA 1 3 4 2 2 6
KADUNA 4 14 18 2 3 5 23
KANO - 5 5 1 0 1 6
KATSINA 2 2 4 1 0 1 5
KEBBI 1 5 6 0 6
KOGI 9 12 21 0 21
KWARA 9 9 18 2 2 4 22
LAGOS 30 30 60 79 50 129 189
NASARAWA 2 1 3 1 1 4
NIGER 7 2 9 1 1 10
OGUN 29 21 50 2 2 4 54
ONDO 4 12 16 0 1 1 17
OSUN 19 9 28 3 1 4 32
OYO 19 24 43 3 2 5 48
51
PLATEAU 4 7 11 1 1 12
RIVERS 10 8 18 6 6 12 30
SOKOTO 2 3 5 0 5
TARABA - 4 4 0 4
YOBE - 1 1 0 1
ZAMFARA 1 5 6 0 6
TOTAL 308 299 607 138 95 233 840
Sources: Committee on the Implementation of the NSources: Committee on the Implementation of the NSources: Committee on the Implementation of the NSources: Committee on the Implementation of the National M icrofinance ational M icrofinance ational M icrofinance ational M icrofinance
PolicyPolicyPolicyPolicy
As evidenced in the above table, the highest concentrations of MFBs, as at
December 2008, were in the urban and semi-urban areas of the country.
The analysis shows that the MFBs were concentrated in Lagos (189),
Anambra (79), Ogun (54), Oyo (48) and Imo (43) States. The five states
accounted for 413 or 49.17 per cent of the total number of approved MFBs.
The remaining 31 states and Abuja, FCT accounted for 427 or 50.83 per
cent of the total number of approved MFBs as at the end of 2008. In
terms of the spread across geo-political zones, the Northern states had few
MFBs with Yobe state having only one MFB in 2008. Similarly, about 42%
or 353 MFBs were located in the South West geopolitical zone followed by
South East with 20.7% or 174 MFBs. North East Zone had the least with
3.9% or 33 MFBs in 2008.
Nine (9) out of the 840 MFBs as at the end of 2008, were licensed as state-
wide MFBs. The list of the state-wide MFBs is presented in Table 2.
52
Table 2Table 2Table 2Table 2
LIST OF STATELIST OF STATELIST OF STATELIST OF STATE----WIDE MICROWIDE MICROWIDE MICROWIDE MICROFINANCE BANKS IN 2008FINANCE BANKS IN 2008FINANCE BANKS IN 2008FINANCE BANKS IN 2008
S/NO Name Status Dominant State of
Operation
Branch Expansion
to Other States
1 NPF Microfinance Bank Ltd Converted CB Lagos Abuja, Rivers
2 Integrated Microfinance Bank
Ltd.
New MFB Lagos Ogun, Oyo
3 UBA Microfinance Bank Ltd. Subsidiary of a
DMB*
Lagos None yet
4 FBN Mocrofinance Bank Ltd Subsidiary of a
DMB*
Lagos None yet
5 Blue Intercontinental
Microfinance Bank Ltd
Subsidiary of a
DMB*
Lagos None yet
6 AB Microfinance Bank Ltd New MFB Foreign
Ownership
Lagos None yet
7 Afribank Microfinance Bank
Ltd
Subsidiary of a
DMB; AIP granted
Lagos None yet
8 LAPO Microfinance Bank Ltd Transforming
NGO-MFI AIP
granted
Edo 18 Others
9 COWAN Microfinance Bank
Ltd
Transforming
NGO-MFI AIP
granted
Ondo 16 Others
Sources: Committee on tCommittee on tCommittee on tCommittee on the Implementation of the National Microfinance Policyhe Implementation of the National Microfinance Policyhe Implementation of the National Microfinance Policyhe Implementation of the National Microfinance Policy
* DMB is deposit money bank* DMB is deposit money bank* DMB is deposit money bank* DMB is deposit money bank
Table 3 shows ten (10) universal banks with interest in MFBs. As shown in
the table, three (3) of the universal banks had established microfinance
units at their Head Offices, whilst the remaining seven (7) had ownership
interest in various proportions in MFBs.
53
Table 3Table 3Table 3Table 3
UNIVERSAL UNIVERSAL UNIVERSAL UNIVERSAL BANKS BANKS BANKS BANKS WITH MFBs AS SUBSIDIARIES/WINDOWS AS AT DECEMBER 31, WITH MFBs AS SUBSIDIARIES/WINDOWS AS AT DECEMBER 31, WITH MFBs AS SUBSIDIARIES/WINDOWS AS AT DECEMBER 31, WITH MFBs AS SUBSIDIARIES/WINDOWS AS AT DECEMBER 31,
2008200820082008 S/N Universal Bank Subsidiary/Window Ownership Status
1. UBA Plc UBA MFB Ltd UBA – 100% (Wholly
Owned)
Final Licence approved
2. First Bank of Nigeria
Plc
FBN MFB Ltd FBN – 100% (Wholly
Owned)
Final Licence approved
3. Intercontinental Bank
Plc
Blue Intercontinental
MFB Ltf
Intercontinental Bank –
35%
Final Licence approved
4. Ecobank Plc ACCION Ltd Ecobank – 18.47% Final Licence approved
5. Zenith Plc ACCION Ltd NIB – 10.00% Final Licence approved
6. NIB (Citibank) ACCION Ltd NIB – 19.90% Final Licence approved
7. Afribank Nigeria Plc Afribank MFB
Afribank – 100%
(Wholly owned)
Underprocessing
8. Oceanic Bank Plc Microfinance
Unit/Dept
N/A N/A
9. Diamond Bank Plc Microfinance
Unit/Dept
N/A N/A
10.. Union Bank of Nigeria
Plc
Microfinance
Unit/Dept
N/A N/A
Sources: Committee on the Implementation of the National Microfinance PoCommittee on the Implementation of the National Microfinance PoCommittee on the Implementation of the National Microfinance PoCommittee on the Implementation of the National Microfinance Policylicylicylicy
In order to ensure easy entrance into the market place by microfinance
banks, some regulatory incentives were provided either directly by
government or through the relevant regulatory authorities. Some of these
measures included, but not limited to the, following:
a. Tax exemption:
Ø Value added tax (VAT)
Ø Non – taxable interest income
b. Central Bank liquidity support through a Rediscount and Refinancing
Facility (RRF);
54
c. Creation of N50 billion Micro-credit Fund in February 2008 mainly
funded by the universal banks; and
d. The requirement on the part of State Governments to allocate not less
than 1% of their annual budgets for micro-finance activities.
5.0 ROLE OF DEPOSIT INSURANCE IN FINANCIAL INCLUSION-
THE NIGERIA EXPERIENCE One of the important pre-requisites for building confidence of the
depositors, even among the under-privileged, in the formal banking
system, is deposit insurance. In that regard, the Nigeria Deposit Insurance
Corporation (NDIC) becomes the tool through which such service can be
rendered. Fortunately, the NDIC was established to perform functions
such as the following, among others:
i. insuring all deposit liabilities of all licensed banks and such other
deposit – taking financial institutions, such as micro-finance banks,
operating in Nigeria, so as to engender confidence in the Nigerian
banking system;
ii. giving assistance in the interest of depositors, in case of imminent or
actual financial difficulties of banks particularly where suspension of
payments is threatened; and
iii. guaranteeing payments to depositors, in case of imminent or actual
suspension of payments by insured banks or financial institutions up
to the maximum deposit insurance coverage.
55
It was based on that statutory requirement that the NDIC extended deposit
insurance cover to MFBs in 2008. Even before the extension of formal
deposit insurance to MFBs in 2008, the Corporation had participated
actively in the supervision of the erstwhile Community Banks (CBs), many
of which transformed to MFBs in order to ensure safe and sound
management practices in those institutions and boost depositors’
confidence most of whom belonged to the under-privileged members of
the society.
The extension of deposit insurance services to MFBs by the NDIC involves
the following:
5.1 Membership
By the provision of the NDIC Act of 2006, membership of the MFBs in
deposit insurance is mandatory/compulsory. This is line with the dictate of
best practice in deposit insurance so as to avoid the problem of adverse
selection. That requirement also helps in engendering public confidence in
the MFBs.
5.2 Coverage
All deposit products of the MFBs are isured up to a maximum of N100,000
per depositor per insured institution. With that level of coverage over 95%
of depositors in MFBs are fully covered.
56
5.3 Funding
The NDIC established a separate Deposit Insurance Fund (DIF) known as
Special Insured Institutions Fund (SIIF). The fund is generated through
the annual premium contribution by the insured institutions. In order to
give some kind of incentives for the MFBs, their premium rate was reduced
to 50 basis points instead of the maximum of 80 basis points payable by an
insured universal bank. All deposit products of the MFBs are insured up to
a maximum of N100,000 per depositor per insured institution. In order to
ensure a rapid build-up of the SIIF, the sum of N5 billion was made
available to it from the NDIC’s 2007 operating surplus.
5.4 Supervision
A separate department known as Special Insured Institutions Department
was created for off-site surveillance and on-site examination of the MFBs.
Through that department, the NDIC has been carrying out on-site
examinations, premium assessment and off-site surveillance of licensed
Microfinance Banks (MFBs) and Primary Mortgage Institutions (PMIs). It
had also participated in joint and special investigations and examinations of
the institutions with the CBN. During the routine examinations of these
institutions, their books and records are perused with a view to identifying,
analyzing and measuring the risks the institutions are exposed to and
recommending mitigating measures that could reduce or eliminate such
risks.
The Corporation has also been carrying out off-site surveillance of licensed
MFBs and PMIs on a quarterly basis. In that respect, the prudential returns
57
of the reporting institutions are analyzed and reports generated. The off-
site surveillance framework provides the basis for early detection of
problems which could facilitate timely intervention.
5.5 Capacity Building
Microfinance was a novel idea in the country and both regulators and
operators did not have adequate knowledge and skills for microfinance
operations. In that regard, the Corporation have been partnering with the
CBN to build capacity of its staff. In 2008, some examiners were sent to
The Philippines and Bangladesh (which had recorded great success in
microfinance), to learn about the operations of microfinance. In addition,
facilitators were invited from Social Enterprises Development Partnerships
Incorporated (SEDPI) Anteneo De-Manila University of Philippines for
implant courses organized by the Corporation to train the bulk of
examiners in 2008. A total of forty (40) examiners benefited from the
courses.
5.6 Public Awareness/Advocacy
Public awareness about the deposit insurance cover available to depositors
and related procedural/legal aspect are also necessary for promoting
financial inclusion by strengthening public confidence in this banking sub-
sector. This is also underlined by International Deposit Insurance
Association. The NDIC uses various methods for spreading awareness
about Deposit Insurance in Nigeria. In the case of the MFBs, public
awareness of extension of DIS to MFBs was conducted in 2008 through
58
sensitization workshops for Board Management and External Auditors of
MFBs at various centres nationwide. In addition, a sensitization workshop
was held for Finance Correspondents Association of Nigeria (FICAN) to
enhance public advocacy. Furthermore, advertisements on introduction of
DIS for MFBs were placed in print and electronic media, while stickers
(decals) were provided for MFB offices/business premises.
7.0 CHALLENGES OF MFBs
The Microfinance bank sub-sector is faced with a number of challenges
which have restricted its effectiveness in enhancing economic inclusion.
Some of these challenges are enumerated as follows:
i. Skewed Distribution of MFBs
As shown in Table 1, the MFBs, as at December 2008, were concentrated
mainly in the urban and semi-urban areas of the country. That
development runs counter to the basic objective of the microfinance policy
of enhancing economic inclusion in the country.
ii. High Operating Cost
Majority of the MFBs operate as if they are in competition with the
universal banks. The cost of office accommodation mostly in urban
centres, heavy wage bills and fringe benefits have resulted in very high
operating costs thereby reducing the loanable funds available to most of
the MFBs.
59
iii. Inadequate Executive and Regulatory/Supervisory Capacity
Microfinance is a novel idea in the country, therefore majority of the staff
of MFBs do not have requisite knowledge and skills in microfinance. Most
of the MFBs staff had universal banking job experience and that explains
why some of them focus mainly on conventional banking products with
little efforts in developing products for the desired target members of the
society. In the same vein, there is dearth of capacity on the part of
regulators and supervisors to effectively discharge their role. That has
limited the effectiveness of the safety-net arrangement in ensuring safe
and sound practices in the institutions, a situation which threatens the
stability of the sub-sector in particular and the entire financial system in
general.
iv. Lack of Exit Mechanism for CBs that Failed to Meet the Requirements for MFB licence
Some community banks that failed to meet the requirements for MFB
licence are still operating as community banks even when many of them
are exhibiting distress symptoms of which most unsuspecting depositors
are not aware. Even for those CBs that are viable, the fact remains that
the legal framework for their existence is no longer tenable. There is
therefore, the need on the part of the regulators to address this problem
by working out an appropriate exit mechanism for the affected CBs with
minimal interruption to the operations of the MFB sub-sector in particular
and the entire financial system in general. Such mechanism is currently
not available.
60
v. Inhibited Ability to Mobilize Deposits
As a result of the high failure rate of community banks, finance houses and
“wonder banks” in the recent past, members of public have been weary of
patronizing MFBs. That has to a great extent created problems in deposit
mobilization by the MFBs, thereby inhibiting their intermediation process.
In addition, there is inadequate access to sustainable source of funding as
most State Governments are yet to make good the requirement of
contributing 1% of the annual budgets to microfinance credits through the
instrumentality of micro-finance banks.
vi. Challenge of Management Information System
Many of the MFBs are yet to be computerized. That could be expected
since the cost of computerization could be too much for MFBs to bear at
inception, hence, most of them resort to manual operation with attendant
adverse consequences on accurate record keeping.
vii. Poor Corporate Governance
The Boards of MFBs should be responsible for establishing strategic
objectives, policies and procedures that would guide and direct the
activities of the banks. These are lacking in most of the existing MFBs, as
revealed by Examination Reports. Majority of the existing MFBs operate
without strategic plans, policies and procedures. Also, there are issues of
self-serving practices and insider abuse by the owners, board and
management of some of the MFBs.
61
viii. Loan Recovery Challenges
Various Examination Reports of these institutions have revealed a rapid
build-up of non-performing loans in the sub-sector. The subsisting legal
and judicial system has equally made it difficult for the MFBs to recover
loans and realize collaterals obtained to secure loans.
ix. Collateral Security Challenge
In other jurisdictions where microfinance operations have been successful,
emphasis has not been laid on collaterals for micro credit. Many MFBs in
Nigeria are yet to embrace that lending practice because of the poor
borrowing culture in Nigeria. That challenge has been exacerbated by the
slow judicial processes in adjudicating loan recovery cases.
8.0 CONCLUDING REMARKS
Even though still evolving in Nigeria, micro-finance has been recognized as
a veritable tool for economic inclusion. It has a great potential for savings
mobilization, economic empowerment, poverty reduction and accelerated
economic growth and development. In this paper the experience of
Nigeria in that respect has been discussed. The paper has equally
demonstrated that the provision of deposit insurance helps to enhance the
effectiveness of microfinance policy via the creation of micro-finance banks
by reinforcing public confidence in MFBs. In order to derive maximum
benefits from the initiative, concerted efforts are still required to address
some of the daunting challenges facing the MFB sub-sector. In that
regard, there is urgent need for the MFBs to design customized financial
62
products for the target members of society. Also, there is the need
funding of the MFBs from sources other than money and credit market.
Furthermore, the need for requisite skill acquisition by managements of
MFBs as well as for their regulators/supervisors cannot be overemphasized.
Finally, there is the need to heighten the pace of financial literacy for the
clienteles of the financial sub-sector.
63
REFERENCES Aghion P and P. Howitt (1998), Endogenous Growth Theory, MIT Press.
--------------------------- (2005), “Appropriate Growth Policy: A Unifying
Framework”, The 2005 Joseph Schumpeter Lecture, European Economic
Association, Amsterdam.
Central Bank of NIGERIA (2005), Regulatory and Supervisory
Guidelines for Microfinance Banks in Nigeria, Abuja
King Robert. G. and R. Levine (1993), “Finance and Growth: Schumpeter
Might Be Right”, The Quarterly Journal of Economics, August, 717-737.
Levine, R and S. Zervous (1998), “Stock Markets, Banks and Economic
Growth”, America Economic Review, Vol.88, pp 537-58.
Peachy, S. and A Roe (2004), “Access to Finance-What Does it Mean and
How Do Savings Bank Foster Access?” Brussels: World Savings Bank
Institute.
Prahlad, C K The Fortune at the Bottom of the Pyramid- Eradicating
Poverty Through Profits, Pearson Publication, 2005.
Rajan, R.G and L Zinales (2003), Saving Capitalism from Capitalists,
Crown Business, New York.
64
Rangarajan, C. (2008), Report of the Committee of Financial
Inclusion (Final), January 2008
Asian Development Bank, (2007) “Low-Income Households’ Access to
Financial Services”, International Experience, Measures for Improvement
and the Future; Asian Development Bank.
65
DOES FINANCIAL REFORM RAISE OR REDUCE SAVINGS?
EVIDENCE FROM NIGEVIDENCE FROM NIGEVIDENCE FROM NIGEVIDENCE FROM NIGERIAERIAERIAERIA
BY
IGANIGA, B. O. & ENOMA, A. I. (PhD)
DEPARTMENT OF ECONOMICS
AMBROSE ALLI UNIVERSITY, EKPOMA, NIGERIA 1. INTRODUCTION
Financial reforms and attendant policy prescriptions are age-long
phenomena. They represent the various transformations and policy
adjustments and overhaul that are directed at the art, practice, and
activities of financial institutions and markets overtime in response to
the nominal need for operational improvement and growth of both the
institutions and the general economy. They could be internal or external
in nature, reflecting critical-cum – comprehensive amendments,
restructuring, and/or additions to the existing body of laws, guidelines
and policies (Chinedu and Muoghalu, 2004).
In Nigeria’s economic history, the strides of the last few years, which
have been internationally acclaimed, was unprecedented. The many
reforms that have engendered the current success have largely included
those in the financial sector, particularly, the positive policy shifts in the
domestic money market as first step towards a more robust and
66
enduring facilities for the sector. Parts of the expectations are that the
improved enabling environment from the reforms would continue to
make more investment funds readily available through savings.
It is often held that capital accumulation is necessary and sufficient
condition for growth and capital accumulation is almost synonymous
with savings, hence, the route to growth is often on raising savings and
smoothing consumption (Deatin, 1991). Savings is one of the key
relevant macroeconomic variables in an economy. High level of
domestic savings will accelerate the rate of investment, enhance
productivity and hence, economic growth (Adam and Agba, 2006).
Country’s level of savings or its savings rate relative to other countries
can be used as a yardstick for measuring its growth prospect. As noted
by Summer (1986), raising domestic savings rate is “sin-qua-non” to
enjoying rapid productivity growth and success in international
competition. It is no accident that Germany, France, United States and
Japan with savings rate three times Nigeria’s have enjoyed very high
productivity growth rates over the last fifteen years (Afolabi and
Mamman, 1994).
However, the domestic level of savings in some countries is so low that
foreign borrowing must be resorted to. If the elasticity of substitution of
foreign for domestic savings is high, then, such a country suffers from a
perpetual balance of payments deficit. The debt-service burden may be
such that the prospects for future economic growth are limited. A lot of
developing countries (Nigeria inclusive) have fallen into such financial
crisis. Given this sordid financial crisis, many emerging economies,
67
including Nigeria embraced financial sector reforms (Akyus and Kotte,
1991).
Starting in 1986, Nigeria’s financial system began to be deregulated
and by 1992, substantial changes had taken place. In July, 2004, the
“mother” of reforms came in Nigeria when 89 banks were forced to
merge culminating in 25 universal banks. This was further reduced to
24 banks at the end of December, 2007 with the merge of Stanbic Bank
Plc and IBTC Bank to form Stanbic IBTC Bank Plc.
The aim of this paper is motivated to take a detailed review of the
Nigerian financial sector reforms till date, attempt a savings profile of
Nigeria and above all, assess the impact of financial sector reforms on
savings mobilization in Nigeria. Thus, apart from this introduction, Section
Two dwells on theoretical issues and attempts a brief review of literature.
Section Three contains the Nigerian savings profile under alternative policy
reforms, while Section Four takes a detailed analysis of the Nigerian
financial sector reforms. Section Five discusses the impact of financial
sector reforms on some measures of financial development. Method of
analysis, data sources and empirical results are contained in Section Six.
Conclusion and policy recommendations are presented in Section Seven.
2. THEORETICAL ISSUES AND REVIEW OF LITERATURE
One element of the Mackinnon – Shaw thesis is that abolition of
ceilings on interest rates stimulates savings. Increased interest rates
68
however, may reduce rather than increase the volume of savings for a
number of reasons. First, the negative income effect of increased interest
rates might offset the positive substitution effect between consumption and
savings. Second, an increase in the real interest rate may merely reallocate
the existing volume of savings in favour of financial savings as opposed to
other forms of savings and leave the total volume of savings unchanged
(Gupta, 1984, Rangarajan, 1997). Such a reallocation may also occur if
reforms provide a new range of financial instruments such as shares,
mutual funds, postal savings and pension funds.
Theoretically, even at relatively high levels of income, financial
reforms which ease borrowing constraints may stimulate consumption
rather than savings (Hall, 1978, Jappelli and Pagano, 1989, 1994). Also,
increased interest rates may restrict the ability of the corporate sector to
restructure production methods and hence its productivity and growth.
And if the savings propensity of the household sector is lower than that of
the corporate sector, total savings may decline (Singh, 1993). In addition,
it has been postulated that a relaxation of liquidity constraints will be
associated with a consumption boom and a decline in aggregate savings
(Campbell and Mankiv, 1990).
The Stone – Geary utility function stressed that the inter-temporal
elasticity of substitution determines the sensitivity of consumption to real
interest rates based on permanent income and subsistence consumption.
Thus, increased in real interest rates will affect consumption/saving
decision in varying degrees. In countries where the representative
household is close to subsistence consumption (and saving) level, they may
69
not be sensitive to changes in the real rate of interest. Only in wealthier
countries would consumption decline and savings increase following an
increase in real interest rates.
Financial reforms, however, may stimulate financial savings in other
ways than through an increase in interest rates. A reduction in controls of
the financial system along with increased competition and improved
customer service may result in increased savings. Access to savings
instruments may not only enhance the willingness to save, but also results
in the substitution of financial savings for investments in assets such as
gold and jewelry (Onwioduokit, 2006). Reforms which reduce high
marginal income tax rates and increase disposable incomes may not only
serve to eliminate tax evasion, but also stimulate savings (Angela, 2008).
Onwioduokit [2006] stressed that reforms which tend to reduce the
profligacy of the public sector would increase public savings and hence
total savings.
Empirical results of studies on the impact of financial reforms in
saving have not been consistent across countries. Hussarin (1996)
estimated that, in three years following financial reforms, savings in Egypt
increases 6 percent of GDP over the level that would have occurred in the
absence of financial liberalization. Chapple (1991), however, reported a
decline in both household and corporate savings in New-Zealand following
liberalization. Evidence from Turkey during 1970s and 1980s demonstrated
that a negative effect from interest rate outweighed the positive
substitution effect on the private savings rate (Uyger, 1993). Kelly and
Mavrotas (2001) examined the impact of financial sector development on
70
savings in seventeen African countries, but found the evidence to be rather
inconclusive though, in most of these countries appositive relation between
these two variables was evident
Seck and El Nil (1993) pooled cross-section and time series data and
examined the determinants of financial savings in nine, and then twenty-
one African countries over the period 1974-1989. The econometric tests for
both the 9 and 21 countries yielded positive and significant estimates for
the real interest rate lending credence to the financial repression
hypothesis.
Azam (1996) examined how savings responded to interest rate
changes in Kenya. Using data for the period 1974-1989, he used the
national savings rate as the dependent variable, and the explanatory
variables were: growth rate of terms of trade, the lagged value of the
growth rate of the terms of trade, real deposit rate of interest and an
indicator of the degree financial repression. All the variables were positive
and statistically significant. The results did not change much when the real
rate of interest was introduced in a non-linear way. All the variables were
still positive and statistically significant.
Matsheka (1998) used data for Bostswana from 1976 to 1995 to
examine the relationship between savings and interest rates. The
dependent variables were financial savings, private savings, and total
savings. Explanatory variables were the real deposit rate of interest and
real income. The results were mixed. Financial and total savings were
negatively related to the real interest rate in the total savings equation with
the coefficient of the real in the savings equation statistically significant.
71
Private savings on the other hand was positively and significantly related to
the real rate of interest. Real income had a positive and significant
coefficient in all savings equations.
Elbadawi and Mwega (2000) examined the determinants of private
savings for fifteen SSA countries in the World Savings Database for the
period 1970-1995. The explanatory variables used were: per capita gross
private disposable income (GPDI), growth in per capita GPDI growth in
terms of trade, dependency ratio, urbanization ratio, public savings/GPDI,
government consumption expenditure/GPDI, real deposit rate of interest,
interest rate spread, M2/GPDI, private sector credit/GPDI, inflation,
transitory income, transitory terms of trade, and foreign aid/GPDI. Panel
data were used with both fixed effects and then GMM estimation. For the
fixed effects estimation, the real rate of interest had a negative and
insignificant coefficient while the interest rate spread coefficient was
significant. The coefficient of M2/GPDI was negative and significant, while
the private sector credit/GPDI coefficient was negative and significant.
Zioruklui and Barbee (2003) used data from 1971 to 2000 to examine
savings behaviour in Ghana. The dependent variable was the private
savings ratio. Explanatory variables were: real deposit rate, real Treasury
bill rate, inflation rate, changes in foreign exchange rate, and per capita
GNI. The results showed negative coefficients of all the variables with the
exception of per capita GNI. However, only the coefficients of the inflation
rate and per capita GNI were statistically significant.
In Nigeria, there exists a few numbers of studies in the area of
aggregate savings – consumption behaviour. These studies on aggregate
72
consumption – saving behaviour are scanty (see Pinto, 1987, Afolabi and
Mamman, 1994, Ikhide, 1994, Nyong, 1987, Essien and Onwioduokit,
1998, Adam, 1998, Obadan and Odusola, 1999 and Onwioduokit, 2006).
Most detailed of the studies was that of Afolabi and Mamman (1994) which
examined the determinants of consumption and the effect of deregulation
on savings in Nigeria by adopting cointegration and Error Correction Model
(ECM) for both pre and post – Structural Adjustment Programme (SAP)
periods (1970 – 1994). They estimated the equilibrium value of the
marginal propensity to save (MPS) before deregulation at 0.12 and 0.23
during the SAP period. They also found that SAP policies relating to
savings mobilization had positive effect on saving behaviour of individuals
in the economy. These results, apart from the limitation that the model
contained fewer explanatory variables and the use of nominal values, may
be regarded as tentative because the method of analysis, cointegration and
Error Correction Model which did not create room for policy initiative (see
Egbon, 1998).
Another study that used the Nigerian data was that of Oyaromade
(2005) which examined the impact of financial liberalization on savings
using cointegration and error correction mechanism. From the savings
equation that was estimated, it was found that interest rate exerts a
positive influence on financial savings. This analysis was fraught because
too much emphasis was laid on interest rate to the detriment of other
components of financial reforms in Nigeria It is to remedy these lapses that
this study was enunciated.
73
In summary, there are no settled conclusions on the impact of
financial reforms on the savings rate. One proposition which seems to be
robust is that financial reform is likely to promote savings because of its
impact on growth and not the other way round. Nigeria’s experience
provides an opportunity to test this proposition. Unfortunately, not all of
the propositions in the literature on financial reforms and saving can be
empirically tested. Some of the variables cannot be quantified, and for
some others data in the required form are not available. This study utilizes
the available data for Nigeria to assess the impact of financial sector
reforms on savings mobilization.
3. THE NIGERIAN ECONOMY AND SAVINGS PROFILE
The 1980s and 1990s, were years of macroeconomic upheavals for
many developing countries including Nigeria, (Kama, 2006). The upheavals
manifested in the form of unprecedented debt crisis, high international
interest rates, low external resource transfers, mass unemployment,
persistent increasing inflation, exchange rate crises, and economic
stagnation amongst others.
For instance, in Nigeria, external debt rose from $4.1 billion in 1980
to $24.6 billion in 1986 and moved to $28 billion in 1999. At the same
time, real GDP growth was less than 3% on the average. Also, between
1993 and 1999, GDP growth average 2.5%, while overall fiscal deficit/GDP
ratio moved down from 15.4% in 1993 to 7.7% in 1994 and was 8.8% in
1999. In the 1980s, the average annual rate of inflation was 20.3%; this
escalated to 35.9% in the 1990s with all high two digits of rate 72.8 in
74
1995. The national unemployment rate rose to an all time high value of 7.1
percent in 1987. However, from this peak in 1987, unemployment declined
drastically to 1.8 percent in 1995. It then rose again to 3.4 percent in
1996 and hovered between 3.4 and 4.7 percents between 1996 and 1999.
Foreign Direct Investment as a percentage of GDP average of 7.8% in the
1980s. It plummeted to average value of 2.89% in the 1990s.
During the past two decades, in order for Nigeria to maintain its
consumption and investment levels, there has been rapid accumulation of
external debt as imports exceeded exports. That led to the winding down
of the country’s external current account deficits and exchange rate
overvaluation. The government introduced economic stabilization Act in
1982 leading to ban on some imported items and foreign exchange
rationing. The adoption of Structural Adjustment Programme (SAP) in
1986 was another response to the lingering economic crisis. Despite these
measures, government expenditure kept rising beyond her revenue. The
naira exchange rates continued to depreciate, while output grew
marginally.
Given the above scenario, what has been the trend of savings both at
domestic and national level? To start with, conceptual definition of savings
is necessary. Savings is a sacrifice of current consumption for capital
accumulation which leads to investment and subsequently additional
output that can be used for consumption in future. Savings per se, is the
converse of consumption.[Babajide,2004]
It is important to clarify that savings does not necessarily means
making deposits at banks or financial institutions. It is sufficed to say that
75
before the advent of banking, savings have been on among the people,
though in an informal ways. It is sufficient to increase one’s cash holding
by refraining from consumption. Savings could be at domestic level
[(individual, and corporate (retained profits)] and national level (Gross
National Savings). Gross National savings is defined as the residual of
what is consumed from Gross Domestic income.
Furthermore, there is need to distinguish between saving and
savings. Saving is a flow, while savings is a stock. Thus, saving is the rate
of change in savings per time period, savings, being a stock is cumulative
amount put aside over time.
In order to further enlighten the review, we present below statistical
data on national savings in Nigeria from1970 to 2005
76
Table 1; Trend in National Savings 1970-2005.
YEARS GDP[Nbn]
1
National
Savings(NS)
[Nbn]
2
Growth rate of National
Savings
3
N.S/GDP
[ratio %]
4
1970 7.200 0.34 0.9 0.04
1975 12.09 1.82 5.96 0.15
1980 149.6 5.77 3.86 0.04
1985 253.00 12.52 1.00 0.05
1986 257.8 15.09 3.83 0.06
1987 255.95 16.32 4.31 0.06
1988 275.41 18.32 1.36 0.07
1989 295.12 20.09 5.61 0.07
1990 472..60 29.65 2.41 0.07
1991 328.61 52.03 2.12 0.16
1992 337.31 49.31 1.02 0.15
1993 342.58 86.95 2.1 0.25
1994 345.23 96.32 1.9 0.28
1995 352.6 108.49 -2.2 0.31
1996 367.21 132.80 2.20 0.35
1997 377.84 177.65 3.28 0.47
1998 388.52 198.65 1.18 0.51
1999 393.1 272.61 3.70 0.69
2000 412.31 379.52 3.98 0.92
2001 431.8 488.04 2.86 1.13
2002 451.81 592.09 2.13 1.31
2003 495.09 840.1 4.19 1.69
2004 527.61 1033.4 2.31 1.95
2005 561.90 1034.3 1.45 1.84
Source; CBN Statistical Bulletin [various editions]
77
From Table I above, the stock of savings rose steadily from N341.6
million in 1970 to N1,812.2 million in 1975 and by 1980, national savings
had trebled to N5,769.9 million. In 1985, it was N12,521.8 million and by
1990 it had reached an all time high of N29,651.2 million. The upward
tend continued with national savings reaching N108,490.3 million in 1995,
increased to N379,528 million in 2000, and further increased to N592,094
million in 2002. By 2004, it has moved to N1,033,400.00 million.
Another way of looking at the national savings data is through an
examination of its rate of growth, from 0.9 percent in 1970, the growth
reached an astronomical rate of 5.96 percent IN 1975 resulting from the
Udoji award of that year. By 1980 it had plummeted to 3.86 percent, due
to the inflationary upheaval that accompanied the jumbo payments to civil
servants and other categories of workers. The trend fluctuated
continuously, reaching a low value of 2.46 per cent in 1990. An interesting
point to observe is that the negative figure of 2.2 percent for 1995 was
occasioned by all time high level of inflation rate of 72.8 in 1995, The
growth rate was however, positive during the period 1996 – 1998 and
averaged 1.15 per cent. The average growth rate from 1999 – 2004 was
3.19 per cent. The importance of such marginal performance is that future
consumption will also be marginal (see Rorner, 2006)
An analysis using national savings ratio (saving/GDP ratio) in Table I
show that between 1970 and 1975, national saving ratio averaged 9.5 per
cent, `1976 – 80 (2.0 per cent), 1981 – 85 (25 per cent), 1986 – 90 (6.4
per cent), 1991 – 95 (23 per cent), 1996 – 2000 (60 per cent), 2001 –
2005 (15,9 per cent). The result shows that savings performance was
78
more impressive during the present reforms era (1999 – 2005), other
period of good performance were the SAP era and period just before the
current reforms era. These facts tend to mask the rather dismal
performance during the reconstruction period after the civil war [1970-
1975] and the SAP era as reflected by the low ratio of savings to GDP for
the period.
It could be observed that the figure for 1985, 1986, 1987 and 1988
are single digit, not up to 10 per cent. The figures were also low during
the 1970 – 1974 periods under review whilst the 1990s were better,
particularly the post SAP period. The best performance has been recorded
during the present democratic regime (2000 – 2005). The analysis
supports Soyibo (1997), that national saving rate increased after the year
of reform. For instance, from 2001 – 2005, the data show surplus savings
which was not invested (See Adam and Agbav, 2006). These ratios are
depicted in Figure 1.
5
10
15
20
Fig. 1: National Savings – GDP Ratio and Savings Growth Rate in Nigeria
79
Note:Note:Note:Note: (1) The bars represent National Savings – GDP ratio
(2) The Graph represents the polygon which proxied National saving growth
rate
4. THE NIGERIAN FINANCIAL SECTOR REFORMS: THE JOURNEY
SO FAR.
In the last two decades after independence, Nigeria was faced with a
myriad of economic problems. Some of these were high inflation and
unemployment, increasing poverty, low economic growth rate, high
fiscal deficits, huge balance of payments deficits, financial sector
repression and worsening terms of trade. The economic crises have
been attributed to two main factors, i.e. domestic policy failures and
inadequate institutional capacity (Afolabi and Mamma, 1994). This
implies that the necessary conditions for growth and efficient economic
management are the need for adoption of a consistent and appropriate
macroeconomic policy framework and the existence of high quality
institutions. The introduction of Structural Adjustment Programme
(SAP) in July, 1986 was an effort to set the macroeconomic policy
framework right. One of the components of SAP was the reform of the
financial sector, aimed at increasing its efficiency amongst others.
Reforms are naturally predicated upon the need for reorientation and
repositioning of an existing status quo in order to attain an effective and
efficient state. The financial sector reforms are conducted in order to
enhance its competitiveness and capacity to play a fundamental role of
financial investment. Anecdotal literature indicates that financial sector
80
reforms are propelled by the need to deepen the financial sector and
reposition it for growth to become integrated into the global financial
architecture: (Nnanna, Englama & Odoko, 2004).
Lemo (2005) posited that the primary objective of most reforms was to
guarantee an efficient and sound financial sector. According to him, the
Nigerian financial reforms were designed to enable the banking industry
develop the required resilience to support the economic development of
the nation by efficiently performing its function of financial
intermediation. He further stressed that a fundamental objective of the
programme was to ensure the safety of “deposited” money, position
banks to play active development roles in the Nigerian economy, and
became major players in the sub-region, region and global financial
markets.
The four major financial sector reforms were introduced as components
of the Structural Adjustment Programme (SAP), which kicked off in
1986. The introduction of the programme was on the heels of the
rejection of the IMF loan package with its conditionalities, a decision
that reflected the consensus of a national debate. The major financial
sector reform policies implemented were the deregulation of interest
rates, exchange rate and the liberalization of entry/exit into banking
business. Other measures implemented included, establishment of the
Nigerian Deposit Insurance Corporation (NDIC), strengthening the
regulatory and supervisory institutions, upward review of capital
adequacy standards, capital market deregulation and the privatization of
81
many government banks. For the purpose of this analysis, a bird-eye
view will be taken of some financial sector reforms in recent times
4.1 Establishment of the Nigeria Deposit Insurance Corporation
(NDIC)
Deposit insurance system are largely established to protect the
banking system against possible bank “run” (unrestricted demand for cash
by savers) that can cripple the financial intermediation process, disrupt the
payments system, and have severe macroeconomic effects (Mass and
Talley, 1990). Deposit insurance system protects small depositors from
losses in the event of bank failure and gives the nation a formal and
consistent mechanism for resolving failing bank situations.
The establishment of NDIC was informed by economic circumstance under
the Structural Adjustment Programme (SAP), especially policies relating to
banks shareholders support, and because of the bitter experience of
previous bank failures in Nigeria and the lesson of other countries with
bank deposit insurance scheme (Ebhodaghe, 1991). The establishment of
NDIC was aimed at re-enacting public confidence in the banking sector to
encourage savings
The NDIC was established by Decree No. 22 of 1988 (now repealed
and replaced by Act No.16 of 2006) and charged with the following
responsibilities.
(a) Insuring all deposit liabilities of licensed banks and such other
financial institutions operating in Nigeria so as to engender
82
confidence in the Nigerian banking system. Certain deposit
liabilities are exempted-insider deposit (i.e. deposits of staff), and
counter-claims, where a customer uses one type of account to
collateralize another account.
(b) Giving assistance in the interest of depositors, in case of imminent
or actual financial difficulties of banks, particularly where
suspension of payments is threatened and avoiding damage to
public confidence in the banking system. Such assistance could be
(1) taking over the management of a distressed bank, (2) specific
changes recommended to be made in the management of the
distressed bank (3) a merge with another bank is carried out.
(c) Guaranteeing payments to depositors in case of imminent or
actual suspension of payment by insured banks or financial
institutions up to the maximum amount of specified by the Board
of Directors of the Corporation.
(d) Assisting monetary authorities in the formulation and
implementation of banking policies so as to ensure sound banking
practice and fair competition among banks in the country.
Over the years, the corporation has made significant contribution to
the banking system through deposit guarantee, banking supervision, failure
reduction and bank liquidation. In 1989, the sudden withdrawal of
government funds from the licensed banks to the Central Bank of Nigeria
brought the nascent institution into focus when the NDIC/CBN jointly
organized accommodation facility was introduced to assist banks in serious
liquidity crises. Financial assistance amounting to N2.3 billion was provided
83
under the scheme. Moreso, the importance of NDIC was brought to focus
in 1994 and 2006 when more than half of the nation’s banks and other
financial institutions were submerged in distress and the bank consolidation
exercise of 2004 – 2005 respectively.
4.2 Promulgation of the CBN Act No. 24 of 1991 and the Banks
and Other Financial Institutions Act (BOFIA) No. 25 of 1991.
The CBN Act No. 24 of 1991 repealed the CBN Act of 1959 whilst the
Banking Decree of 1969 was replaced by the Banks, and Other Financial
Institutions Act No. 25 of 1991. Following further amendments of CBN
Act of 1991, in 1998 and 1999, the powers of CBN with respect to the
maintenance of monetary stability and sound financial systems was
significantly enlarged. The amendments further granted autonomy to
CBN in the formulation and implementation of monetary and financial
policies. Furthermore, the CBN Decree No. 24 and the Banks and Other
Financial Institutions Act No 25 (BOFIA) also introduced changes in
regulations that can promote the development of the financial sector in
a deregulated environment.
4.3 Introduction of Prudential Guidelines in 1990
84
The prudential guidelines issued by CBN in November 1990 were
aimed at ensuring a stable, safe and sound banking system. The guidelines
were introduced to guide banks in
(i) Ensuring a more prudent approach in their credit portfolio
classification, provision for non-performance facilities, credit portfolio
disclosure and interest accrual on non-performing assets.
(ii) Ensuring uniformity of their approach in (1) above and ensuring the
reliability of published accounting information and operation.
The ultimate justification for prudential guidelines was the failure of
the market not only to reflect a depository’s risk exposure, but more
importantly to control such exposures. A key objective of the prudential
regulations was therefore to identify and control such exposures, protect
the interest of depositors and the financial system as a whole.
Furthermore, minimum cost of operation with maximum returns [efficiency]
consideration was another justification for prudential regulation.
4.4 Increase in the capital base of the banks
For all reforms embarked upon by the Regulatory Authorities, steps
were also taken to strengthen the capital base of banks. The minimum
paid-up capital of banks was increased from N20 million to N50 million for
commercial banks with effect from 1992. In the light of depreciation of
the naira exchange depreciation, the persistence of inflationary pressures,
and the erosion of the capital funds of banks by non-performing credit, the
minimum paid-up capital requirement of commercial banks were increased
85
from N50 million to N500 million in December 31, 1998. Existing banks
were required to meet this requirement over a transitional period of two
years, expiring December 31, 1998 while new banks shall comply fully with
that condition before they are licensed. In 2002, the capital requirement
was further reviewed upward from N500 million to N2 billion. Following the
consolidation programme introduced in July, 2004, the required capital was
reviewed up to#25 billion.
4.5 Introduction of Universal Banking
In 2001, the Central Bank of Nigeria adopted the universal banking
policy thereby abrogating the classification of banks by the nature of
their business that existed hitherto. The essence of the adoption of
universal banking was to provide a level playing field for retail and
wholesale bankers.
4.6 Establishment of More Discount Houses
In order to facilitate the development of a secondary market for
government debt instruments so as to reducing government dependence
on the CBN financing of its deficit, three discount houses were licensed in
1992. In addition to intermediating funds among financial institutions, the
discount houses were also expected to promote primary and secondary
markets for government securities. They mobilize funds for investment in
securities by providing discounting/rediscounting facilities in government
short term securities. Over the years, the discount houses in Nigeria have
facilitated the use of open market operations, as well as promoted efficient
86
allocation of financial sector resources. Licensed banks have been able to
invest their surplus funds in DHs to serve as a liquidity fall back or buffer
whenever the need arose. As December, 2008, the number of DHs in
operations remained at 6
4.7] Removal of Credit Ceilings
In September 1992, credit ceilings on banks that are adjudged healthy
by CBN were lifted. A bank was considered healthy if it met CBN
guidelines on certain specified criteria in the preceding three months.
These criteria were: cash reserve, liquidity ratio, prudential guidelines,
statutory minimum paid-up capital, capital adequacy ratio, and sound
management (Nanna and Dogo, 1998). With the application of these
criteria, about 80 banks were endorsed as healthy and exempted from
credit ceilings, Nnanna (2005). The same criteria were applied for
determining banks that qualify to participate in the official foreign
exchange market.
4.8 The Nigerian Bank Consolidation Programme of 2004/2005
This was a wholesale reform programme that drastically reduced the
number of money deposit banks from 89 to 25 and subsequently 24. The
major element of the reform agenda was the requirement for Nigerian
banks to increase their shareholders’ funds to minimum of N25 billion by
the end of December, 2005 either as a standalone entity and/or through
mergers and acquisition (M & A). Other components of the reform agenda
included:
87
a) Phased withdrawal of public sector funds from banks
b) Adoption of a risk-focused and rule-based regulatory framework
c) Adoption of zero tolerance in the regulatory framework, especially
in the area of data and information rendition/reporting
d) The automation of the rendition processes of resource by banks and
other financial institutions through the electronic Financial Analysis
and Surveillance System (e-FASS).
e) Establishment of an Asset Management Company as an important
element of distress resolution
f) Promotion of the enforcement of dormant laws, especially those
relating to the issuance of dud cheques and the law relating to the
vicarious liability of the Board of banks in the case of bank failure
g) Closer collaboration with the Economic and Financial Crimes
Commission (EFCC) in the establishment of the Financial
Intelligence Unit (FIU) and the enforcement of the anti-money
laundering and other economic crime measures.
h) Rehabilitation and effective management of the Mint.
The bank consolidation programme of 2005 was aimed at fortifying the
banking subsector against systemic distress and de-savings among the
people.
5. THE IMPACT OF FINANCIAL SECTOR REFORMS ON SOME
MEASURES OF FINANCIAL DEVELOPMENT
A fascinating exercise is to assess the effect of financial reforms on
the measures of financial development that in turn are regarded as
88
correlating with economic growth. Development of the financial sector
requires a set of indicators that can be used for effective policy
formulation, implementation and evaluation. This involves a complete set
of indicators mainly covering credit intermediation, liquidity, management
and the risk management characteristics of the financial system, Goldsmith
(1969). It is hard to find “an indicator” that can directly measure the
development of the financial sector. However, under four assessment
periods, we therefore analyse the growth and role of some indicators that
are studied in the recent literature that encompass all the qualities of a
well-developed financial sector. This is shown in Table 2.
Table 2
Financial Sector Development Indicators in Nigeria 1980 – 2005
Indicator
Regulation
period 1980
– 1986
Deregulation
period 1987 –
1992
Systematic
Distress period:
1993 – 1998
Post Systematic
Distress period:
1999 – 2005
M2/GDP (%) 26.7 21.6 19.3 22.8
Private sector credit/GDP 16.8 15.2 14.2 14.4
Currency outside Bank/M2 23.0 23.5 35.8 15.7
Interest Rate spread 1.8 6.1 8.28 10.7
Real Interest Rate -8.1 -10.3 -14.6 -15.5
Gross Savings/GDP 4.12 8.3 10.4 12.6
Source: CBN Bullion, 2006 and CBN Statistical Bulletin, Various Editions
89
The Performance Indicators are as follows:
5.1 The level of Financial Deepening
Financial Deepening is usually measured as the ratio of broad money
to Gross Domestic Products (GDP). In Nigeria, the ratio worsened from
26.7 per cent in the regulation era to 22.8 per cent in the post distress era
when financial reforms was really intensified. This clearly indicated that
financial sector reforms in Nigeria did not achieve that purpose of financial
deepening that is purported by theory. This outcome is consistent with the
findings of Nissake and Aryeetey, (1998) and Iganiga, (2006). It could be
observed that the expected positive effects from liberalization in savings
mobilization had been slow to emerge.
5.2 Private Sector Credit as a Ratio of Gross Domestic Product
(GDP)
This ratio is a measure of financial sector widening (De Gregorio and
Guidotti, 1995). Thus, the higher the ratio, the more widened the financial
sector is assumed to be. The reason underpinning such assumption is that
the private sector utilization of credits is usually more efficient than the
government sector. From Table 2, it could be observed that in the
regulation era, the ratio stood at 16.8 per cent. However, the ratio
deteriorated to 14.2 per cent in the era of incessant bank failure. It rose
marginally to 14.4 per cent in the post-distress era. This shows that
despite the financial reforms, there was a relative narrowing of the
financial sector in Nigeria. This is very instructive as it contradicts the
much touted impact of Nigeria’s financial sector in economic development
90
confirming what some researchers, including Onwioduokit (2002) and
Iganiga (2006) referred to as nominal growth in the numbers of banks that
did not affect the financial sector positively, let alone the economy. It was
a case of growth without development.
5.3 The Rate of Cash Intensity in the Economy
Cash intensity in an economy is measured by the ratio of currency
outside the bank to broad money (M2). One of the expected gains of the
financial sector reforms was the development of the financial system that
would improve banking habits and by extension the development of the
payments system. The performance of the Nigeria’s financial system under
this criterion indicated a mixed trend. During the pre-reform period, this
ratio was 23.04 per cent. The ratio increased slightly to 23.5 percent
during the deregulation era. During the distress period, the ratio increased
significantly to 35.8 percent, the highest of all the periods. This latter
situation was due primarily, to the loss of public confidence in banks and
the introduction of higher currency denominations by Central Bank of
Nigeria. However, in the post-distress era, this ratio reduced drastically to
15.7 per cent resulting from increased confidence the public had on the
banking subsector hence the safety of their deposits. Thus, it can be
concluded that, to a greater extent, during the post reform era, the savings
habit of the public was revitalized as most people preferred saving their
funds in the bank.
91
5.4 Interest Rate Spread
Financial Sector reforms are expected to narrow the spread between
deposit and lending rates due to competition resulting from the reforms.
From Table 2, the interest rate spread has been on the increase over the
years, inspite of various financial reforms in Nigeria. The problem of
continual increases in lending rates and low deposit rates during the post
reform period is one of the most disappointing effects of financial sector
reforms in Nigeria. For instance, the spread widened by over 8.9
percentage points on the average from 1.8 per cent during the regulation
period to 10.7 per cent in the post- distress era. This higher lending
savings margins was capable of “crowding out” investment in
Nigeria.[Ndebio, 2004]
5.5 Real Interest Rate
Real interest rate is usually used to proxy the efficiency of financial
intermediation. Financial reforms are expected to deliver higher real
interest rates, reflecting the allocation of capital towards more productive,
higher return projects owing to a shift to more productive uses of financial
resources and enhanced financial intermediation. From Table 2, the
average real interest rate in Nigeria deteriorated from negative 8.1 per cent
during the regulation era to a negative 15.5 per cent during the post
distress era. Thus, the negative real interest rate in Nigeria across the
periods shows the high rate of inflation associated with fiscal prolificacy of
the military and civilian governments.
92
5.6 Gross Savings as a Ratio of GDP
This is a direct measure of savings mobilization in an economy. It is
expected that the ratio should improve with the assorted financial reform
policies in Nigeria. On the average, the ratio was 4.12 per cent in the
regulation period, but improved significantly to 12.6 per cent through the
deregulation to the post -distress era. This was one of the dividends of the
financial reform policies in Nigeria. On the average, since the various
financial reforms started in Nigeria, the savings habits of the people have
improved significantly by 8.48 per cent.
6.0. METHODOLOGY AND DATA
This study adopts Afolabi and Mamman (1994) approach. However,
unlike the Afolabi and Mamman, this study employ a reduced form
behavioural model within a partial equilibrium framework for the level of
Gross Domestic Savings (GDS) determined by financial sector reforms and
associated environmental (macroeconomic) factors properly deflated for
real values as follows:
( ) ( ) )1( ........ ,, ,,,,2
2
úúû
ù
êêë
é÷÷ø
öççè
æ÷÷ø
öççè
æ÷÷ø
öççè
æ÷øö
çèæ
÷øö
çèæ=÷
øö
çèæ
tttt
ttttt InfGDP
InfEXRInFRIS
MCOB
GDPPSC
GDPMf
GDPGDS
In a behavioural form, we have
)()( 542
322
10 tttttt
InFRISM
COBGDPPSC
GDPM
GDPGDS
bbbbbb ++÷÷ø
öççè
æ+÷
øö
çèæ
÷øö
çèæ+=÷
øö
çèæ
)2( .......................................................... 76 ttt
UInF
GDPInf
EXR+÷
øö
çèæ+÷÷
ø
öççè
æ+ bb
In logarithmic transformation
93
)log(logloglog 42
322
10 ttttt
RISM
COBGDPPSC
GDPM
GDPGDSLog bbbbb +÷÷
ø
öççè
æ+÷
øö
çèæ+÷
øö
çèæ+=÷
øö
çèæ
( ) )3( ......................... logloglog 765 ttt
t UInf
GDPInf
EXRInF +÷÷ø
öççè
æ+÷÷
ø
öççè
æ++ bbb
where;
=GDPGDS
Ratio of Gross Domestic Savings to Gross Domestic Products
=GDP
M 2 Ratio of Broad Money to Gross Domestic Products (MGt)
=GDPPSC
Ratio of Private Sector Credit to Gross Domestic Products (PCGt)
=2M
COB Ratio of Currency Outside Bank to Broad Money (COBt)
=RIS Interest rate spread (RISt)
=tInF Inflation Rate
=Inf
EXR Real Official Exchange Rate (EXRt)
=Inf
GDP Real Gross Domestic Products (GDPt)
The a’ Priori expectations are as follows
β1, β2 > 0, β3, β5, β6 < 0 and β4, β7 0
Data used for these variables were sourced from Central Bank of Nigeria
Publications, supplemented with data from National Bureau of Statistics
(NBS). The study used time series data for the period of 1970 to 2005
spanning through pre-financial sector reforms to post – financial reforms
eras.
Financial sector reforms is proxied by the specific indicators which
include; the ratio of Broad money to GDP, private sector credit to GDP,
94
currency outside Bank to M2 and interest rate spread. Since financial
sector reforms do not take place in vacuum, other macroeconomic
indicators representing environmental factors were included in the model
to correct one of the pitfalls in Nnanna’s analysis of the effect of financial
sectors’ reform in 1998. The use of dummy variables was avoided due to
its limitations. The variables included, are inflation rate, official exchange
rate and the level of economic activities as proxied by Gross Domestic
Products (GDP).
The choice of these variables is based on conceptual and theoretical
approaches to savings and the fact that savings are more likely to be
affected by macroeconomic policies than theoretical considerations (Adam
and Agba, 2006).
All data has been standardized to take care of changes in the general
level of prices (i.e. the real and not nominal value was used in the
analysis).
Equation 3 is our operational model. The equation is estimated for:
(a) Pre – reforms era (1970 – 1985)
(b) Post – reforms era (1986 – 2005)
(c) Pooled period (combination of pre and post reforms era (1970
– 2005)
This is done to enable us compare the impact of these variables at different
points in time. The equations were estimated using stepwise least squares
regression method and their logarithmic transformations as well as the
elasticity of the variables.
95
7.0 EMPIRICAL RESULTS
The estimated results are presented in Table 3. The Model was
estimated using published data from the Central Bank of Nigeria (CBN),
National Bureau of Statistic (NBS), the International Monetary Fund
(IMF), and the World Bank. The micro fit econometric software was
used in the estimation, while the OLS technique was applied.
Table III
Empirical Results on Savings Mobilization Due to the Financial Sector Reforms and Its Counterfactuals
Explanatory Variables Equation
Model I Model II Model III Constant -0.678
(-0.373) 5.040** (1.966)
12.559* (3.803)
MGt 0.385 (1.396)
-1.055** (-1.930)
0.321 (0.411)
PCGt -0.31 (-0.921)
-0.262 (-0.999)
0.242 (0.822)
COBt -0.589** (-1.803)
0.876* (4.603)
-0.160 (-0.776)
RISt 0.925* (12.937)
-7.716** (-2.446)
-1633* (-5.238)
InFt -0.321 (-0.021)
-0.258 (-1.002)
1.239* (3.151)
EXRt -1.565 (1.144)
-1.815* (-4.779)
1.031** (2.199)
GDPt -0.504** (-2.186)
0.848* (2.945)
-2.183* (-5.338)
R2 0.70 0.73 0.78
R2 Adj 0.63 0.90 0.72 DW 1.95 1.92 1.93
F-statistic 9.55 9.54 9.52 Source: Authors’ Computations.
96
Note:Note:Note:Note: *, ** and *** indicate that the variables are statistically significant at 1, 5 and
10 percent respectively (t-values are in parenthesis).
i. (a) Model I represents the pre-reforms era of 1970 – 1986
(b) Model II stands for the post-reforms era of 1987 – 2005
(c) Model III is an amalgam (pooled data) of pre and post reforms era of
1970 – 2005.
The discussions are as follows:
Model I :Model I :Model I :Model I :
The model represents the pre – reforms era which was characterized
by proper regulation of the financial sector in Nigeria including all its
paraphernalia. The dependent variable, gross savings as a ratio of GDP is
a direct measure of savings mobilization in the economy. The independent
variables include indices of financial sector reforms (MGt, PCGt, COBt and
RISt) and macroeconomic factors representing some environmental factors
(Inflt, EXRt and GDPt). Some of the variables were correctly signed and
significant in explaining changes in the savings habits of Nigerians. For
instance, cash intensity in the economy proxied by currency outside
Bank/M2 (COBt) and real Gross Domestic Products (GDP) which measures
the rate of economic activities were significant. This may not be
unconnected with the fact that the Nigerian economy at that point in time
was cash based and the velocity with which money changes hand was very
high. Thus, the more cash the populace has at their disposal, the higher
the marginal propensity to save (MPS). Thus, the populace was able to
mobilize enough savings from their income even corporate bodies were not
97
left out in these savings impact of money supply and exchange rate at that
point in time.
Model IIModel IIModel IIModel II
This is the model that represents the financial sector reforms
spanning from 1986 till 2005. One of the expected effects of financial
sector liberalization, according to theory and some empirical findings is
what have been known in the liberalization literature as “financial
deepening” and “savings mobilization” both at domestic, corporate and
national levels.
The indices of financial sector performed better in this model. The
ratio of Broad money to Gross Domestic Product (MGt), cash intensity
(COBt) and interest rate spread (RISt) are significant in explaining the
variation in savings in the Nigerian Economy. At 5 percent level of
significance, a unit increase in interest rate spread reduces national savings
by 7.72 percent. This further confirmed the theoretical crowding out
impact of lending rates. Against a’priori expectation, an increase in the
ratio of broad money supply to gross domestic products leads to 1.1
percent reduction in savings mobilization. The macroeconomic factors
including official exchange rate (EXR) and the level of economic activities
proxied by the growth rate of Gross Domestic Product (GDPt) are
significant though at 1 percent meaning a 10.0 percent increase in real
Gross Domestic Products would lead to 8.5 percentage increase in National
Savings while a 10 percent increase in official exchange crowds out
98
national savings by 18.2 percent. This shows that high level of economic
activities means production and consumption are on the increase and this
portends increase also, for profit and income for where savings is derived.
The goodness of fit (R2) of the model is higher than what obtains in model
I. Model II is very important in this analysis because, it shows that savings
mobilization is not the monopoly of financial sector reforms but a
combination of other macroeconomic variables.
Model III
This is a pooled data that cuts across both pre and post financial sector
reforms era. It represents total effects, of the specified variable on
savings mobilization. The gap between deposits and interest rates (RIS)
is significant, as shown by the sign and magnitude of (RIS). Moreso,
inflation rates and the level of economic activities proxied by the growth
rate of Gross Domestic Product had some mixed impacts of 1.24 and -
2.18 percent on national savings respectively. This implies that these
variables are time and reforms invariant. It shows the importance of
these variables amongst others in influencing savings mobilization in
Nigeria. Though some other variables are not statistically significant,
the goodness of fit (adjusted R2), DW and F – statistics point to the
robustness of the model.
9.0 CONCLUSION AND POLICY RECOMMENDATIONS
Savings is a sacrifice of current consumption for capital accumulation
which leads to investment and subsequent additional output that can be
99
used for consumption in future. Savings per se, is the converse of
consumption. Theories and studies abound agree that any growth
model must begin by adopting a savings theory if it is to yield definite
predictions as in the Solow Model. The growth factor of a closed
economy equals the savings – capital ratio, if the savings rate decreases
growth falls. This is due to the fact that capital – output ratio is
intimately tied to savings behaviour since capital is wealth and wealth is
the stock which saving flows into. In this way, wealth, savings, and
income together determine the outcome. In essence, savings is
strongly and positively related to growth. It was in realization of this
that various financial sector reforms were carried out by different
governments to galvanize the savings habit among the individuals,
corporate organizations and national economy.
Results from our model shows that a unit increase in interest rate
spread would reduce national savings by 7.72 percent. This further
buttressed the crowding out impact of increasing lending rate. Similarly, a
unit increase in the ratio of Broad Money Supply to Gross Domestic
Products also reduced national savings by 1.1 percent. On the
macroeconomic grand, the level of economic activities as proxied by real
Gross Domestic Product has the potential of increasing national savings by
8.5 percent, while increase in official exchange rate crowd outs national
savings by 18.2 percent.
From the findings, it could be observed that financial sector reforms
that culminated in the consolidation of banks in December, 2005 has some
significant impact on the savings habit of the individual, and corporate
100
organizations and the nation in general, as the confidence crises that has
besieged the sector over the year is gradually eroded. In addition to these
financial sector reforms, stable macroeconomic condition is also very
important as the analysis shows.
The policy prescription therefore is nothing other than proper
manipulation of the relevant monetary tools, spacing and sequencing of
financial sector reform programmes which should be complemented by
stable macroeconomic condition and adequate regulatory and supervisory
arrangements.
101
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GAUGING NIGERIA IN RURAL FINANCE: A SURVEY OF COUNTRY-EXPERIENCE
BY
DR. HARUNA MOHAMMED ALIERO DEPARTMENT OF ECONOMICS FACULTY OF SOCIAL SCIENCES
USMANU DANFODIYO UNIVERSITY SOKOTO, NIGERIA
1. INTRODUCTION
Most of the attempts to develop rural financial markets and rural credit
institutions in Africa have performed poorly, thus not satisfying the demand
for savings and credit services in the rural areas. In many cases, however,
the institutions continue to exist and could be revived, enlarged, or made
more efficient if suitable programmes to help them can be worked out.
According to World Bank (1999), some of the problems identified as
responsible for poor performance in the development of Africa’s rural
financial market include excessive controls, lack of guarantee for deposits,
ineffective supervision and dearth of qualified manpower. Financial
indiscipline and fraud were attributed to the quality of manpower, while the
policies have at one time or the other been influenced by political
considerations. In Asia however, the Asian Pacific Rural and Agricultural
109
Credit Association (APRACA) has made significant impacts on the
development of rural financial market. The association has particularly,
encouraged banks and Non-Governmental Organisations (NGOs) to
cooperate, on commercial terms, with existing financial self-help groups to
extend credit to the rural borrowers. However, in Africa, the policy
frameworks have not favoured financial innovations, cost-covering interest
rates and institutional viability. In addition, policy environment has been
unfavourable or less stable, as in Nigeria. Even the African Rural and
Agricultural Credit Association, has not done much in this regard, (Seibel,
2001). It is in the light of this scenario that, this paper examines the
development of rural financial market in some selected countries and tries
to gauge the efforts made in Nigeria visa-vis these selected countries. To
achieve this objective, the paper is divided into five sections. Section One
contains the introduction. Section Two discusses the concept of rural
finance, while Section Three examines cross-country experiences in rural
finance. In Section Four the paper looks at the experience of Nigeria in
rural finance whilst, Section Five presents the lessons that Nigeria could
learn from other countries’ experiences. Section Six contains the
conclusion and policy implications.
2. THE CONCEPT OF RURAL FINANCE
The heterogeneity of the socio-economic status of the rural people and the
diverse nature and scale of their economic activities would imply that the
demand for financial services by the rural inhabitants may not be met by a
unique financial institution or a uniform approach. The institutional mix,
110
the product variety and the operational approaches must be compatible
with the characteristics of different socio-economic categories if their
demands for financial services are to be met satisfactorily. However,
owing to high costs and risks associated with the early stages of rural
financial market development, private financial institutions are unlikely to
voluntarily play a major role in this process, Selvavinayagam (1995). What
then constitute rural finance?
De Klerk (2008) defined rural finance as the provision of financial
services including savings, lending, insurance and remittance services to
the rural households and entrepreneurs that can be provided by a variety
of actors, such as friends, relatives, shopkeepers, traders, money lenders,
traditional savings and lending groups and Microfinance banks
(programmes). FAO (2008) conceived rural finance as encompassing the
range of financial services offered and used in rural areas by the people of
all income levels. It includes agricultural finance, which is dedicated to
financing agricultural activities, and microfinance services. IFAD (2008)
defines rural finance to comprise formal and informal financial institutions,
small and large, that provide small size financial services to the rural poor,
as well as larger size financial services to agro-processing and other small
and medium enterprises. Accordinig to IFAD, rural finance covers a wide
array of Microfinance institutions, ranging from indigenous rotating savings
and credit associations and financial cooperatives to rural banks and
agricultural development banks.
A number of factors continue to thwart the development of vibrant
financial services in the rural areas of most countries. The high transaction
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costs, associated with dispersed population and inadequate infrastructure,
along with the particular needs and high risks factors inherent in
agriculture result in an under-provision of financial services in rural areas.
Further more, where services are available, products are often designed
without consideration for the needs and capacities of rural households and
agricultural producers, (FAO, 2008). Others include moral hazard,
fragmented market, contract enforcement (Yaron, Benjamin and
Stephanie,1998). Goodland et al (1999) opined that the range of financial
services provided by the actors in the rural areas could be grouped into
livelihood promoting (Production) and livelihood protecting (Consumption)
services.
3. CROSS-COUNTRY EXPERIENCES IN RURAL FINANCE
In this section, we present a survey of cross-country experiences in rural
finance highlighting their achievements in rural financial market
development. The countries surveyed include; India, Bangladesh,
Indonesia and Ghana.
3.1 Rural Finance in India
India has a very comprehensive rural financial system both in terms of its
operation and organization. As at March 2007, India has 923 state
cooperative banks and 12,802 branches of District Central Cooperative
Banks (DCCBs), 92,219 Primary Agricultural Credit Cooperative Societies,
and 14,802 branches of Regional Rural Bank (RRBs), (Bank of India, 2008).
These are in addition to a number of microfinance NGOs some of which
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have now developed to full-pledged banks, like the Self-Employed Women
Association (SEWA) Bank.
During the 1950s to 1980s, concerted efforts were made to extend
bank outreach to rural areas. However, since that period there had been
some reluctance in that regard. This led the National Bank for Agriculture
and Rural Development (NABARD) to initiate the Development Action Plan
(DAP), for all rural finance institutions in India. The basic philosophy of the
DAP was to prepare institutions specific action plan by taking into account
their strength and weaknesses, diagnosing the past and looking into the
future, anticipating the course of events and preparing coping strategies.
The implementation of DAP was to improve the viability of the existing
rural financial institutions.
NABARD, which was formed in 1982, is the apex refinancing
institution for the cooperative banks, RRB, and commercial banks engaged
in rural lending. The agency is also mandated to coordinate, supervise,
and build the capacity of rural financial institutions. The Indian Deposit
Insurance and Credit Guarantee Corporation insure small depositors and
guarantees the rural loans made by the formal institutions. On the other
hand, the National Cooperative Development Corporation promotes the
cooperative sector and provides loans and subsidies to cooperatives to
improve their performance.
In terms of outreach, more than 72% of the total 64,547 bank
branches in India are located in the rural areas as at 1998. This impressive
expansion is not, however, matched by outreach in terms of volume of
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loans made, depth of outreach in terms of poor people served, and length
of outreach in terms of the volume of short and medium term loans.
The major problem with India’s rural banking programme was poor
loan recovery. The recovery rate has been less than 60% throughout
1950’s to 1990’s. Other problems include political interference with loan
administration, lack of centralized coordinating body for the participating
institutions, as RRBs are controlled by NABARD while cooperatives are
controlled and regulated by the state governments (NABARD, 1998).
3.2 Rural Finance in Bangladesh
The financial system in Bangladesh comprised of the Central Bank
(Bangladesh Bank, BB), four nationalized commercial banks (Sonali, Janata,
Agrani, and Rupale), 18 private banks, 12 foreign commercial banks and
four nationalized specialized banks. Two of the nationalized banks served
agriculture, while two cooperative banks served the rural sector. At
independence in 1971, Bangladesh inherited a repressive financial system
(Khandker, Baqui, and Zabed, 1996). Throughout 1980s and 1990s, state
intervention continued but lending was still skewed towards the
economically and politically powerful areas leading to inefficiency in
investment and many other negative consequences.
An important development in the rural financial sector of Bangladesh
has been the emergence of member-based (owned by community
members) institutions that included the Grameen Bank (GB) that was
created in 1976 and hundreds of Micro-Finance Organisations (MFOs). The
Grameen Bank, started as NGO providing working capital loans to poor
114
people in the rural areas with local bank branches as the fund providers.
However, in 1983, GB was licensed as a specialized bank for the poor. The
promoter of GB adopted the idea of joint-liability group lending.
Individuals organise themselves into groups of five (5) persons, usually of
the same sex, while one person serve as a leader. Membership of the
group is limited to people who own less than one acre of land, are not from
the same household, have similar economic resources and live in the same
village. The groups meet weekly during which each member makes a
small obligatory savings. Initially, two group members are given credit if
they pay regularly, on weekly basis, the next two will take, but the leader
will be the last to take. If, however, one member defaults the whole group
is not eligible for additional loan. All groups that benefit from the loan are
required to subscribe to GB equity, by committing a certain percentage of
the loan to subscribe the bank’s equity. In addition to the weekly savings,
each member contribute 5% of loan received to a group fund, and 25% of
interest due on the principal to an emergency fund managed by GB. The
loan that each member can take ranges from $48 - $250.
Apart from GB, there are ten (10) major MFOs that provide small
loans to rural and sub-urban people, most of whom rely on external
funding and to some extent, member-savings. The Palli Karma-Sahayak
Foundation (PKSF) is owned by the Bangladesh government, but is fully
autonomous. It serves as an intermediary and capacity builder for MFOs.
PKSF also strengthened and coordinated the delivery of micro-finance
through its affiliate partners, (MFOs and GB). As at March 1998, it serves
154 MFOs of which 20 have more than 50,000 clients each. The loan
115
recovery from its partner MFOs from their client has been around 99%,
(Bangladesh Bank, 2005).
In terms of outreach, it was estimated that as at 2008, 80% of the
rural households in Bangladesh were reached by the formal financial
sector. However, the greatest success was attributed to GB and MFOs.
For example, as at 2008, GB had 7.56 million borrowers, reaching 82,994
villages in the country, had a network of 2,529 branches, with staff
strength of 24,638. From its inception in 1976 to 2008, GB granted a total
loan of $7.6 billion and recovered $6.5 billion, and loan recovery rate
ranged between 98 – 99% (Grameen Bank 2008). Grameen Bank provides
the following services to their clients,:
a. Microfinance Loan
b. Housing for the Poor
c. Beggars loan
d. Education loan
e. Scholarship
f. Pension for the Borrowers; and
g. Life Insurance
Given the success of GB and other MFBs, it could be concluded that that
there is sustainability in Bangladesh rural financial system. However, some
of the problems that had bedevilled the Bangladesh financial system
included over dependence on subsidies and external funding. Others
included from building bad-debt from state-directed credit, political
intrusion and natural disasters that seriously afflict the agricultural output
and by implications also affects loan repayment.
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3.3 Rural Finance in Indonesia
The country has undergone several episodes of regulations followed by
deregulation and re-regulation. The five (5) state commercial banks were
assigned to serve particular sectors of the economy each. Bank Rakyat
Indonesia (BRI) was assigned rural development and small holder
agriculture. The central bank (Bank Indonesia) has been playing key role
in directing credit to priority sectors, sometimes with discriminatory interest
rates.
Indonesia has employed a variety of agricultural and rural
development strategies that have influenced the evolution of rural financial
market. The Badan Kredit Kecamatan (BKK) system in central Java and
the nationwide BRI unit desa (village banks) system as well as many
provincial and rural banks provide rural banking services along with
government and other donor agencies. 27 Regional Development Banks
were created in Surkano area, one for each province, and by 1971, there
were nearly 300 Peoples Credit Banks at the district level. It was estimated
that about 6,000 secondary banks and over 1,000 non-bank financial
institutions in addition to over 3,500 BRI unit Desa as at 1981, (Bank
Rukyat Indonesia, 2005).
In addition to the above, three nationwide programmes were
established to specifically benefit the rural economy. They are the Bima
(Rice Intensification Scheme), the small investment (KIK) and permanent
working capital (KMKP) schemes. These programmes were bedevilled by
high default rate, which stood at 55% as at 1983/84. This default was
117
attributed to frequent debt forgiveness, which created expectation of the
same gesture by borrowers all the time. The KIK and KMKP, which were
introduced in 1974 had to be terminated in 1990, because of heavy losses,
occasioned by widespread fraud and high default, (Meyer and Nagarajan,
1999).
Several other national and provincial efforts have expanded financial
services into rural area. Development banks were established in all the
provinces. In East Java, 220 KURKs (Kredit Usaha Rakyat Keul) i.e. credit
for the activities of the poor, were organised as regional enterprises, rather
than banks. They were largely capitalized by the provincial governments.
The PAKTO ‘88’ reform created the Peoples Credit Bank (Bank Perkredictan
Rakyat, BPR), which were to operate as partial banks. They were intended
to serve only rural areas, (Lapenju, 1998; Reille and Gallman, 1998). The
failure of KIK/KMKP led to the creation of DABANAS Foundation as a joint
enterprise of the Association of Indonesian Private Banks, and the
Association of Indonesian Rural Bank, which mobilizes funds from the
commercial banks at the nominal interest of 16.5%, an addition of a 1%
fee. These funds were on-lent to the rural banks, which will use the fund
to extend credit to the small-rural borrower, (Bank Rukyat Indonesia,
2005).
One unique feature of BRI unit desas over others, such as Grameen
Bank, is that they make individual loans based on collateral, often in the
form of land, and the loans are for one to two years. Local village officials
were involved in loan screening by acting as character reference for the
borrower. Borrowers under this scheme are charged an up-front penalty
118
fee of 0.5% per month but refunded on timely repayment of the loan. This
serves as incentive for timely repayment, (Bank Indonesia, 2007).
BRI has the widest network in Indonesia with 13 Regional Offices,
324 Domestic Branches, 4049 Unit Desas, 148 Sub-Branch Offices and 240
Village Service Post. BRI offers a wide range of deposit and credit
products. The main savings product available are:
a. SIMPEDES or Simpaman Pedesan (Village Saving); a deposit
instrument allowing an unlimited number of transactions and
therefore favoured by low-income household that need full
liquidity. There is no charge for opening the account and it has a
positive real interest rate. It represents 75% of micro-banking
accounts. Lotteries are organised every six months with prizes in
kind to attract more customers.
b. SIMASKOT is the equivalent of SIMPEDES for urban areas with
emphasis on collateral security.
c. TABANA BRI, a government saving programme offers features
similar to SIMPEDES. No more than two withdrawals per month
are allowed and its lottery offers prizes in cash.
The management of each Unit Desa is extremely effective.
Functioning as individual profit centers, their performance is monitored and
specific staff incentives are provided. In addition the Units are allowed to
move their excess funds to BRI where they are well remunerated and have
an excellent repayment period of over 98%. BRI unit desas have over 30
119
million savers and 22,000 staff. Its major source of funding are customer
deposits (75%) and support from donor agencies (IFAD 2008).
Although the Indonesian financial system has achieved a lot in
reaching rural populace with banking services, it was not without problems.
Some of these problems include; lack of transparency in financial
operations, politicization of policies, corruption in financial transactions,
influences of family as well as overdependence on subsidies and directed
credits.
3.4 Rural Finance in Ghana
The banking sector in Ghana comprises of a central bank (Bank of Ghana),
eight commercial banks, and 123 rural banks. Excluding rural banks, the
distribution of commercial banks is skewed towards urban areas. As at
1995, seven out of the thirteen districts in the Northern region had no
bank, and the ratio of clients to bank in Northern Ghana (100,000:1) was
much higher than in the country as a whole (16,000-26,000:1), (Jones et al
2000). Between 1988 and 1993. lending to agriculture by commercial
banks declines, from 17% to 5%, while for rural banks it dropped from
13% to 9%. This paved way for informal financial agents to flourish,
leading to the significant linkage between formal financial institutions and
informal agents. In addition, the Association of Rural Banks, the Credit
Union Association and the Ghana Susu Collectors Association influenced the
interface between intermediaries, particularly the last two have played
significant role in facilitating linkage-banking in rural areas. Moreover, the
Microfinance Institutions Action Research Network, formed in 1996, plays
120
an active role in policy discussion, formulation and advocacy, particularly in
linkages, (Jones, et-al, 2000). Since then, more formal and purposive
linkages were established between banks and informal finance sector in
Ghana and these include those of Metropolitan and Allied Bank and
Ahantaman Rural Bank with ROSCAS. Since 2002, the Bank of Ghana has
been implementing the Rural Financial Services Project (RFSP), whose
major focus is the development of strong rural and micro financial
institutions. As a major objective, the project aims at providing a coherent
framework for rural economic transformation and growth leading to
improved standard of living and reduced poverty rates. The project is
envisaged to broaden and deepen financial intermediation in the rural
areas through linkages between formal rural and micro financial
institutions, and the informal agents operating in the rural areas. The
RFSP is co-sponsored by International Development Agency (IDA),
International Fund for Agricultural Development (IFAD), African
Development Bank (AfDB) and the German Technical Assistance, i.e, GTZ
(Bank of Ghana, 2005).
4.0 RURAL FINANCE IN NIGERIA
Rural banking programme was officially launched in Nigeria, in 1977.
Before then, there was no policy that was directed at providing banking
services to the rural areas of the country. At the launch of rural banking
programme in 1977, thirteen (13) rural branches were opened,
representing 2.6% of all commercial bank branches, (CBN, 2005). Ever
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since, the number of rural branches has been growing. However, the
proportion in relation to total commercial bank branches has been
fluctuating. For example, it was 31.1% in 1982, 35.7% in 1987, 39.5% in
1990, and 32.9% in 1993, and has remained there about up to 2001,
(CBN, 2005). Over the years, evidence has shown that the performance of
those rural branches has not been very impressive, particularly when
measured in terms of credit delivery. Available data indicated that the
proportion of rural branches loan to the total commercial banks loans was
4.53% in 1992, 22.70% in 1993, 1.73% in 1994, and 6.13% in 1995.
From 1996 – 2000 it ranged between 2.19% and 4.63%. It declined
to1.55% in 2001, 0.94% in 2002 0.93% in 2003 (CBN, 2003).
Following the apparent failure of the rural banking programme, the
government in 1989 introduced Peoples Bank of Nigeria (PBN) to provide
saving and credit services to small borrowers who could not access the
conventional commercial banks. However, the PBN failed to achieve its
main objective because of problems such as government’s sole ownership,
high rate of default, fraud and corruption, among others. In 1990,
government introduced a new concept of unit banking known as
Community Bank (CB). The community banking system vested ownership
and management of the unit banks to the communities, but regulated by a
national body, known as the National Board for Community Banks (NBCB).
After a very impressive start, the banks started to collapse for a number of
problems, such as faulty formation, insider dealings, breach of laws, and
poor supervision, among others, (Mohammed, 1994). Up to the end of
2004, Six hundred and thirty four (634) CBs operated in Nigeria. The total
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assets of these CBs was N34.2 billion, loans and advances was N11.4
billion and total deposit liabilities amounted to N21.4 billion (Enechukwu,
2005). Both CBs and the PBN have to some extent introduced banking
habits to the rural dwellers.
Several other programmes and institutions have been introduced and
established to inculcate savings and banking habit among low-income
earners, particularly as it relates to agriculture. Such
programmes/institutions included, Nigerian Agricultural and Cooperative
Bank (NACB) and the Agricultural Credit Guarantee Scheme Fund, (ACGSF
introduced in 1976 and 1978 respectively. The NACB was to provide loans
for agricultural activities to both individual farmers and agro-based
cooperative societies. Its focus was therefore both small scale and large
scale farmers. Although the bank has used various strategies to reach
smallholder farmers, like the use of field officers to reach people in the
rural areas, it did not have the expected impact on the agricultural
activities neither did it inculcate banking habits among rural inhabitants.
The ACGSF, on the other hand, was established by the Central Bank
of Nigeria (CBN) in partnership with Federal Government of Nigeria (FGN),
with 60:40 shareholding ratios. The main objective of the fund was to
guarantee all agricultural loans created by banks in the country, (CBN,
2005). However, like other programmes, this also did not achieve much,
as the large-scale farmers, who are the major beneficiaries of most loans,
denied smallholder farmers access to the programme.
Other programmes include the Self-Help Group Linkage Banking
introduced by the CBN under the ACGSF. This programme was designed to
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use linkage banking using farmers groups with the commercial bank
branches. The Trust Fund Model (TFM) was another framework in which,
oil companies, governments, and NGOs will place funds in trust with
lending banks to augment the small group-savings of the farmer as
security for agricultural loans. The TFM secure 25% of the intended loans,
the farmers savings secures another 25%, while the ACGSF guarantee
75% of the remaining 50%, thereby leaving the lending bank with a risk
exposure of only 12.5%. Although, some states have benefited from the
programme, there was general unwillingness among states and local
governments to participate in the program
me, (CBN, 2005). The Interest Draw Back Programme (IDP) was is
another programme developed as an interest rate management framework
to assist small borrowers under ACGSF. It was to provide interest rebate
of a determined percentage for loans disbursed under ACGSF. Another
related scheme is the Refinancing scheme, which was aimed at providing
refinancing facility for banks that lend to farmers engaged in longer-
gestation activities. Finally, financial intermediation through NGOs was
recently introduced by the CBN. Under this scheme, state governments
can identify existing NGOs in their areas or encourage their formation,
particularly credit-based NGOs. The NGOs, will act as middlemen between
the formal lending institutions, agencies and the borrowers, (CBN, 2005).
Another recent development was the new Microfinance Banks, where all
operating CBs were directed to convert to Microfinance Banks and any
other NGO that is interested, after meeting a minimum capital of N20
million and N50 million for rural and urban Microfinance Banks respectively,
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as contained in the Microfinance Policy, Regulatory and Supervisory
Framework for Nigeria issued by the CBN in 2006.
It is significant note that with the exception of the 1977 Rural
Banking none of these programmes and innovations in Nigeria was
targeted at the rural popoulace. At most the policy direction has been low
and middle income groups, as in the case of Peoples Bank, which even
though did not exclude rural people is not also the exclusively for them.
5.0 LESSONS FOR NIGERIA
This section presents some of the lessons that Nigeria could learn from the
experiences of the countries studied.
5.1 Women Participation
The issue of gender is one of the prominent issues in the development
literature these days. It is often argued that the participation of women in
economic activities, particularly in the developing countries, has remained
limited. One of the lessons that could be learnt by Nigeria is that a rural
financial system could present an avenue where the level of participation of
women in economic activities could be increased. In Bangladesh, the
Grameen bank borrowers are 97% women.
5.2 Collateral Security in Rural Finance
Lack of collateral security has been one of the major constraints affecting
rural borrowers in accessing bank loan in Nigeria. Going by the country
experiences in Bangladesh and Indonesia where repayment rate has been
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between 80% - 95%, one can argue that their system of securing bank
loan could serve as a lesson for Nigeria. For example, we can combine the
system of the two countries; character assessment for Indonesia and group
lending for Bangladesh. Related to this is the issue of loan monitoring and
supervision which has been one of the reasons for loan loss. This could
also be checked using group lending approach.
5.3 Ownership of the Rural Finance Institutions
The two most prominent rural financial system in terms of outreach and
sustainability are the Grameen Bank of Bangladesh and the Bank Rakyat of
Indonesia. While the GB is privately owned by the masses whereas BRI is
owned by the Indonesian government. This implies that there is no
particular ownership arrangement that is most acceptable; it all depends
on a particular circumstance in reference.
5.4 Loan (Credit) Financing
The loans provided by Grameen Bank were 100% financed from customer
deposits, but for the BRI it was 75% deposits and 25% from development
partners. For India and Ghana, they also combined deposit with funding
from development partners as well as their governments loan to farmers.
All countries reviewed provide loans for a wide variety of rural activities, in
fact, non-farm activities seemed to be most favoured particularly with the
GB, while interest charge was as high as 20%. So this could a good
lessons for loan financing in Nigeria’s rural finance when introduced.
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5.55.55.55.5 Regulation and Control of Rural Finance Institutions
This is one area in which all arrangements for rural finance must address
squarely. It is almost a certain conclusion that unit banking system is the
most appropriate for rural finance delivery, which in turn implies regular
and in-depth supervision to avoid systematic bank failures. This is why in
almost all countries that have thrived in rural finance they also had, in
addition to the central bank, another independent rural finance regulatory
authority as well as providing insurance for customers deposits. India,
Bangladesh and Indonesia have these arrangements. This also implies that
rural finance should not be blurred into nation’s mainstream banking
system. This is another area in which Nigeria can learn.
6. CONCLUSION AND POLICY IMPLICATION
Even though Africa is lagging behind in the area of rural financial market
development, there are countries that are making giant strides in that
direction. One of such cases is Ghana. It has particularly taken bold steps
to reach rural people with banking and credit. In addition to its Rural
Financial Services Project, the country also has arrangement for Linkage
Banking. In the case of India, Bangladesh and Indonesia they have
established a well entrenched and sustainable rural financial systems in
their countries. Gauging Nigeria with any of the countries reviewed in this
paper, it will be clear that Nigeria has not done much in the development
of rural financial market. Although some will argue that programmes such
as National Poverty Eradication Programme (NAPEP), National Directorate
of Employment (NDE), Family Economic Advancement Programme (FEAP),
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and Better Life Programme were directed to serve as platform to develop
rural financial market , a critical understanding of what constitute rural
financial market landscape will reveal that such programmes could not be
considered as actors (service providers) in rural finance. In fact, right at
their introduction they were not intended for that purpose.
From the cross-country survey undertaken in this paper, it is very
apparent that all the countries have a nationally recognised strategy for
rural financial market development. India, Indonesia and Bangladesh also
have a wide range of financial institutions providing a wide range of
services to rural dwellers. Because of the existence of a body that looks
after the operations of rural financial market, the actors were able to
achieve sustainability, outreach and viability.
The implication of all the above for Nigeria is that there is the need to
urgently evolve a rural financial market development strategy in the
country. Secondly, government should establish a separate body that will
regulate and coordinate all activities in the rural financial market. This is
particularly important in the light of the target set for achieving Millennium
Development Goals (MDGs), particularly goal Number One (eradication of
extreme poverty and hunger by 2015).
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7.0 REFERENCES
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http://www.bog.gh/index.html.
Bangladesh Bank (2005) Financial System Report www.bangladesh-
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Bank Indonesia (2007) Rural Financial System Report www.bi.go.id/web/id
Central Bank of Nigeria (2003). Financial Statistics, Vol. 14, December
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De klerk, T. (2008) The Rural Finance Landscape: A Practitioners
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Enechukwu, I. C. (2005) “Role of Community Banks in Microfinance
Institutions” in the Proceedings of National Seminar to Mark the
International Year Of Microcredit, CBN, 2005
Food and Agricultural Organization (FAO) (2008) Rural Finance; A
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Goodland, A., Gideon O. Juliana, and A. Geoffrey G. (1999) Rural Finance
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