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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)

21

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

22

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

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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

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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,

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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

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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

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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

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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

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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

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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

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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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Bangladesh Bank (2005) Financial System Report www.bangladesh-

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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

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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

Policy Series No. 1, Natural Resources Institute, University of Greenwhich

Chatham, UK

Grameen Bank (2008) www.grameen.com

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Meryer, R.L. and Nagarajan, G., (1999). Rural Financial Markets in

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