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The Nigerian Banking System and the Challenges of the Global Economic Crisis

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46 CONFIDENTIAL The Nigerian Banking System and the Challenges of the Global Economic Crisis Mr. Francis Atuche GMD/CEO, Bank PHB 14th CBN Seminar for Finance ... – PowerPoint PPT presentation

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Title: The Nigerian Banking System and the Challenges of the Global Economic Crisis


1
The Nigerian Banking System and the Challenges of
the Global Economic Crisis
46
CONFIDENTIAL
Mr. Francis Atuche GMD/CEO, Bank PHB 14th CBN
Seminar for Finance Correspondence and Business
Editors Makurdi, Benue State May 19th 23rd,
2009
2
Contents
SECTION 1 Evolution of the Nigerian Banking Sector
SECTION 2 Global Economic Crisis Impact on the Nigerian Economy and the Banking Sector
SECTION 3 Sustainability of the Nigerian Banking System
SECTION 4 Strategic Options for Industry Regulators and Market Players
SECTION 5 Key Learning Points
3
Preamble
4
Contents
SECTION 1 Evolution of the Nigerian Banking Sector
SECTION 2 Global Economic Crisis, impact on the Nigerian Economy and the Banking Industry
SECTION 3 Sustainability of the Nigerian Banking System
SECTION 4 Strategic Options for Industry Regulators and Market Players
SECTION 5 Key Learning Points
5
Historical Review of the Nigerian Banking Sector
  • 4th Reform Era
  • July 2004 Date
  • Increase in capitalization requirements by 1150
    to N25bn
  • No. of Banks reduced from 89 to 24
  • Industry revolutionized with competition leading
    to increased product roll out growth in credit
    to economy
  • Total Assets rose 439 to N15trn (latest
    available figures)
  • International Expansion with over 43 branches in
    Foreign markets
  • Nigerian banks accounted for over 65 of stock
    market capitalization
  • Global economic crisis structural lapses in
    NSE forces a collapse of the stock market with
    banks exposed to increased NPLs
  • Sharp downturn in oil price and revenue leads to
    introduction of unorthodox policies
  • Standard Poors downgrades Nigerias outlook
  • New CBN governor takes over vows to sanitize
    banking system with emphasis on regulation,
    reporting risk management
  • 1st Reform Era
  • 1929 1951
  • Over 100 banks established in the banking boom
    between 1940 and 1950
  • Attrition of 30 private banks due to poor mgt.,
    low capital, debt overhang the financial shock
    induced by the recession of the 1930s
  • British and French Bank established in 1949
  • Agbonmagbe (Wema Bank) established in 1945, ACB
    in 1948
  • 2nd Reform Era
  • 1952 - 1971
  • Enactment of the 1952 Banking Ordinance
  • Establishment of CBN
  • Number of tradable financial instruments
    increased in money market T/bills (1960), Money
    Fund (1962), Commercial Bills (1968), Treasury
    Certificates (1968), Certificates of Deposit,
    Bankers Unit Fund and Eligible Loan Stocks
    (1968)
  • Banking Amendment Act of June 1962 raised minimum
    share capital to GBP250,000
  • Banking decree No. 1 of February 1969 the
    Banking Amendment Decree No. 3 of 1970 imposed
    more stringent conditions in the industry
  • Industry dominated by govt. owned banks via
    Indigenization Act of 1971
  • Share capital raised to GBP600,000 (local)
    GBP1.5m (foreign)
  • By 1980 there were 26 banks
  • 3rd Reform Era
  • 1982 - 2004
  • National Economic Emergency Decree in the wake of
    Financial distress in the 80s and 90s (SAP era)
  • 120 banks (66 Commercial, 54 Merchant)
  • Prudential Guidelines Introduced in 1990
  • Bank branches jumped from 40 in 85 to over 2000
    in 92
  • Public sector accounts transferred from CBN to
    banks in 1999
  • Universal Banking in 2001 with N1bn capital
    base, later increased to N2bn with 2004 as
    deadline

6
The Nigerian Banking sector has continuously
evolved
  • Reforms introduced during Obasanjos second term
    has led to a
  • Reduction in Nigerias motley group of banks from
    89 anemic banks to 24 bigger, stronger and more
    resilient financial institutions.
  • Revolution in the financial services industry
    leading to an increase in the quality of services
    provided to the average Nigerian
  • Increased number and sophistication of financial
    products offered by the traditional bank.
  • The impact on the economy can be observed through
    the
  • Availability of credit to private sector, which
    grew by 435 from N1.52trn in 2003 to N8.13trn in
    Feb 2009.
  • Phenomenal growth in the usage of electronic
    payment systems including the issuance of debit
    and credit cards.
  • Issuance of over 25 million cards being used to
    process payment transactions on over 11,000 POS
    terminals, 7,000 ATMs, 200 web locations and
    50,000 mobile devices. (per E-business experts)
  • Improved standard of living via introduction of
    consumer finance products (i.e. Leasing of cars,
    electronic appliances, laptops/desktop computers
    and availability of mortgage loans and credit
    lines)

Stronger and more Resilient Financial
Institutions
Improved Service Quality
Increased number of Financial Products
7
Available data on the robustness of the banking
sector indicates
  • Increase in total assets/contingent liabilities
    after the reforms in 2005
  • Successive capital-raising over the last 2-3
    years, which has enabled massive local and
    regional expansion with total bank branches
    jumping by 41 (4,591 branches)
  • Average industry PBT growth rate of 141 in June
    2008 and CAR of 25.3 (higher than the regulatory
    benchmark of 10)
  • Competition for dominance within the industry,
    leading to East, West and Sub-Saharan Africa

Source CBN
8
Contents
SECTION 1 Evolution of the Nigerian Banking Sector
SECTION 2 Global Economic Crisis, impact on the Nigerian Economy and the Banking Industry
SECTION 3 Sustainability of the Nigerian Bank System
SECTION 4 Strategic Options for Industry Regulators and Market Players
SECTION 5 Key Learning Points
9
Significant challenges have already been
experienced in the Nigerian Economy
  • Niger Delta crisis and OPECs quota restriction
    are twin factors undermining the budgeted
    production target of 2.92mbd
  • Oil production has been declining since August
    08 impacting negatively on government revenue
  • Nigerias continued dependence on crude oil
    exports exposes it to external shocks
  • Increased inflationary pressure noticed since
    Nov/Dec 08 in line with the sharp depreciation
    of the naira

10
recent trends from the global economic crisis
highlights the adverse impact on the Nigerian
banking sector
Factors
Impact
The global crisis has the overall impact of
making banks more conservative and risk averse
thus reducing their propensity to advance credit
to the economy to stimulate productive investments
11
hence, the expected slow down in performance and
growth of the banking sector
  • The ability of banks to withstand the impact of
    the global economic crisis is highly dependent on
    the
  • Performance of the economy and the
  • Execution and successful implementation of
    appropriate regulatory policies
  • Strategic options taken by individual players to
    combat the emerging negative trends in the market
    and the markets perception of players resilience
  • However, the consensus forecast by international
    organizations for Nigerias economic growth in
    2009 is 2.8, which is about half of the growth
    rate in 2008.

Consequently, stakeholders are concerned whether
Nigerian banks are resilient enough to withstand
the impact of the global economic tsunami on the
economy.
12
Contents
SECTION 1 Evolution of the Nigerian Banking Sector
SECTION 2 Global Economic Crisis, impact on the Nigerian Economy and the Banking Industry
SECTION 3 Sustainability of the Nigerian Bank System
SECTION 4 Strategic Options for Industry Regulators and Market Players
SECTION 5 Key Learning Points
13
Is the Nigerian Banking system capable of
handling these economic challenges?
Rising Unemployment
14
What are the strategic options open to Industry
regulators and market players?
Introduction of Innovative Measures
Rising Unemployment
Adoption of Macro-Economic Policies
Industry Consolidation
15
International Analysts expect the Nigerian
Banking system to outperform the National
Economy.
Source EIU
  • EIU expects average growth rate of 13.3 for
    total banking assets between 2009 and 2011
  • Total deposits expected to grow by 22.3 on the
    average in the same period.

16
Contents
SECTION 1 Evolution of the Nigerian Banking Sector
SECTION 2 Global Economic Crisis Impact on the Nigerian Economy and the Banking Sector
SECTION 3 Sustainability of the Nigerian Banking System
SECTION 4 Strategic Options for Industry Regulators and Market Players
SECTION 5 Key Learning Points
17
The following strategic options are open to
Industry regulators and market players
Industry Regulators
Adoption of Macro-Economic Policies
  • Introduction of monetary policy stabilization
    programmes and fiscal stimuli to restore
    confidence in the economy.
  • Isolation of toxic assets nestling in the banks
    balance sheets and parking them in a special
    purpose vehicle to be called bad bank or bad
    fund which would be treated as a long-term
    facility for both liquidity and accounting
    purposes.

Surgical Intervention/Piecemeal Remediation
  • Injection of liquidity into the banking system
    via government funded soft loans and
    recapitalization
  • Strengthening of capabilities and competencies
    via appropriate regulatory policies increased
    supervision
  • Regulatory induced consolidation encouraging
    the big/strong to acquire the weak/anaemic
  • Liquidation of weak and anemic banks to avoid
    contagion effect on total industry

Market Players
Introduction of Innovative Measures
  • Articulation of self-emancipation strategies to
    battle negative consequences of the current
    global economic meltdown
  • Incremental, radical, and revolutionary changes
    in thinking, products, processes and service
    delivery to customers.
  • Increased value to both the customer and the
    shareholders to boost investor confidence
  • Increased productivity and focus on core
    competencies, which should drive additional
    inflow of wealth into the economy .

18
Contents
SECTION 1 Evolution of the Nigerian Banking Sector
SECTION 2 Global Economic Crisis Impact on the Nigerian Economy and the Banking Sector
SECTION 3 Sustainability of the Nigerian Banking System
SECTION 4 Strategic Options for Industry Regulators and Market Players
SECTION 5 Key Learning Points
19
Key Learning Points
  • Declining oil prices and the production
    shortfalls driven by OPECs restrictions and the
    Niger Delta conflict means consistently lower oil
    and government revenues in the medium term. This
    implies lower statutory allocations and hence
    reduction in public sector deposits. It is
    therefore unwise for banks to continue to depend
    mainly on a declining sector in these dire times
  • Banks need to imbibe strict governance
    principles, including increased disclosure and
    transparency. The time-worn practice of
    operational opacity must be avoided completely in
    this dispensation of banking. Increased
    transparency will endear international and local
    investors and will help in building confidence.
  • Diversification of the sources of liability
    generation is vitally important (e.g. creating
    liability pools that adequately compensates
    investors for the risks assets that such pools
    are supposed to fund given the increasing
    sophistication of investors). This ensures a
    reduction in concentration risk.
  • The press corps/media plays a crucial role in
    driving the change needed to propel the banking
    sector to safety and profitability in these
    trying times. Consequently, the standards of
    reporting and knowledge of financial products and
    the industry in general must be deepened in order
    for the press to effectively perform this task.
    Reports on financial markets must be based on
    adequate research, responsible reporting and
    discipline.
  • Unless the above mentioned issues are given due
    consideration, the vision of making Nigeria one
    of the top 20 economies in the world and a
    leading emerging market country by 2020 will
    remain a mirage

20
Disclaimer
This presentation may contain certain
forward-looking statements, estimates and targets
with respect to the operating results, financial
condition and business of the Bank PHB Group.
Such statements and information, although based
upon Bank PHBs best knowledge at present are
certainly subject to unforeseen risk and change.
Future results or business performance could
differ materially from those expressed or implied
by such forward-looking statements and forecasts.
The statements have been based upon a reference
scenario drawing on current market conditions,
economic forecasts and assumptions, competitor
analysis including the regulatory environment.
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