PERISCOPE - Zenith Bank Plc

EDITORIAL TEAM

MARCEL OKEKEEditor

EUNICE SAMPSONDeputy Editor

ELAINE DELANEYAssociate Editor

IBRAHIM ABUBAKARSUNDAY ENEBELI-UZOR

Analysts

SYLVESTER UKUTROTIMI AROWOBUSOYE

Layout/Design

EDITORIAL BOARD OF ADVISERS

UDOM EMMANUELNONYE AYENI

GIDEON JARIKREMICHAEL OSILAMA OTU

ZENITH ECONOMIC QUARTERLYis published four times a year

by Zenith Bank Plc.

Printed by PLANET PRESS LTD.Tel 234-1-7731899, 4701279, 08024624306,

E-mail:[email protected]

The views and opinionsexpressed in this journal

do not necessarily reflectthose of the Bank.

All correspondence to:The Editor,

Zenith Economic Quarterly,Research & EIG,Zenith Bank Plc

7th Floor, Zenith HeightsPlot 87, Ajose Adeogun Street,

Victoria Island, Lagos.Tel. Nos.: 2781046-49, 2781064-65

Fax: 2703192.E-mail:[email protected],

[email protected]: 0189-9732

FROM THE MAIL BOXThis contains some of the acknowledgments/commendation letters from our teeming readersacross the globe

PERISCOPEThis contains a panoramic analysis of major de-velopments in the economy during the periodunder review and the factors underpinning them

POLICYThe concluding part of the Central Bank ofNigeria’s ‘Guidelines for the Operations of Mi-cro, Small and Medium Enterprises DevelopmentFund for Nigeria’. The first part was published inthe immediate past edition of the Zenith Eco-nomic Quarterly (ZEQ)

GLOBAL WATCHAn in-depth study of the evolving global shiftaway from crude oil consumption and the op-tions open to net exporting countries if they areto survive the impending drop in the demand forthe commodity

ISSUES IA review of the Nigerian banking environmentwith emphasis on risk management practices andthe options for tackling the menace of non-per-forming loans

ISSUES IIAn analysis of Nigeria’s new Automotive Indus-try policy – issues, challenges, critical success fac-tors, and the prospects presented by the policy

FOREIGN INSIGHTSA review of the recovery prospects in the globaleconomy, with the performance of, and develop-ments in the G-7 economies (US, Canada, UK,Japan, France, Germany and Italy) as yardsticks

DISCOURSEProvides insight into the perennial challenges as-sociated with youths’ entrepreneurial aspirationsin Nigeria with emphasis on the reasons for thebottlenecks, prospects and the way forward

FACTS & FIGURESThis contains economic, financial and businessindicators with annotations

2 Zenith Economic Quarterly October 2013

T

Tup with motley of policies directed at dealing with the situ-ation. However, these initiatives rather than dealing withthe challenge end up allowing or encouraging the unre-strained importation of ‘everything’ automobile.

Even today, the avoidable capital outflow arising fromthe trend is staggering, to say the least. Statistics show thatin 2010 alone, Nigeria spent a whopping sum of US$4.2billion on importation of ve-hicles; in 2012, the figurecame down to US$3.4 bil-lion—reflecting the determi-nation of the Government tocheck the ‘drain’. It is againstthis backdrop that the new au-tomobile policy recently an-nounced by the Federal Gov-ernment of Nigeria is seen asnot only appropriate but alsonecessary. This is also why ourlead article: “New Auto Policy:Key to Nigeria’s IndustrialRevolution?” is a focus on theissues, challenges and prospects presented by the new ini-tiative. The author sums up that the policy offers one ofthe best routes to diversifying the Nigerian economy andrevenue base, and could have huge multiplier effects interms of income, employment generation and wealth cre-ation.

As we use the new auto policy to peer into the Nigerianeconomy, we also through the piece: “Oil Resource De-pendency: Emerging Threats and Concerns,” dilated ourview to do a critical analysis of the evolving global shiftaway from crude oil consumption and the options open tonet exporting countries of the commodity. The author notesthat the West had in the last few decades conceived initia-tives that would adequately prepare them for a crude-oil-free world, wondering the fate of commodity-dependenteconomies like Nigeria in the face of the impending dropin the demand for crude oil. All said however, the authorposits that the growing campaign to transit from fossil en-

ergy consumption to renewable energy “will not be an easyride, considering how deeply addicted we all have becometo fossil energy.”

Yet, from another perspective, we still focused on theNigerian economy, in the write-up “Risk Management inthe Nigerian Banking System”—really ‘part one’ of a se-ries. Here, the writer commences a panoptic discourse ofthis all-important subject, starting with the introductory is-sues—including the relevance of risk management in bank-ing. Still on Nigeria, the topic “Youth and Entrepreneur-ship in Nigeria: The Way Forward” deals with this criticalchallenge. Marshalling the impediments that confront youngNigerian entrepreneurs, the author cites examples of someyouth that have surmounted such obstacles and how they

so did. The author however holds the view that youngentrepreneurs are the greatest victims of the unfriendlybusiness climate in Nigeria.

On the global scene, Neil Hitchens, our man in Lon-don, analyses the state of major economies—concludingthat “recovery is on its way…eventually.”

Masterpieces in our ‘Periscope’, ‘Policy’ and ‘Facts &Figures’ sections complete this package…again, for yourdelight as a business and intellectual builder.

Cheerio!

here is no doubt that the Nigerianeconomy has been a ‘junk yard’ of sortsto several countries in terms of ‘dump-ing’ of all manner and brands of automo-biles over the years. This persistent sce-nario has, in point of fact, made succes-sive administrations in the country to come

Statistics show that in 2010 alone, Nigeria spent

a whopping sum of US$4.2 billion on importation

of vehicles; in 2012, the figure came down to

US$4.4 billion—reflecting the determination of

the Government to check the ‘drain’.


I am directed to acknowledge with thanksthe receipt of your letter dated 28th July, 2013from your reputable organization, forwardinga copy of your quarterly economic magazine.The Embassy found the information containedtherein very useful and would be used to pro-mote Nigeria in host Country.

Please accept the assurances of HisExcellency’s highest regards.

Sunday AiborFor: The AmbassadorEmbassy of NigeriaBucharest, Romania

I write to acknowledge with thanks, the re-ceipt of a copy of April 2013 edition of theZenith Economic Quarterly of your Bank,which focused on issues that are paramount indeveloping countries like ours, having dealtwith “Sustainable Development: Issues, Strat-egies and Goals, Analysis of the Nigerian OilSector: Trends and Direction and also infor-mation on the Nigerian and Global Economyfor Strategic Policy decisions.

The publication is very good and will pro-vide sound awareness to our patrons especiallyon the areas mentioned above.

Once more, accept my sincere appreciation.Yours faithfully,Christian. O. AjeCentre LibrarianNational Mathematical Centre, Abuja

I am directed to acknowledge receipt of theApril, 2013 edition of the Zenith EconomicQuarterly (ZEQ), which focuses on “Sustain-able Development: Issues, Strategies & Goals”with an analysis of The Nigerian Oil Sector:Trends and Direction dated July 28, 2013 andto thank you sincerely for this gesture. Themagazine would be made accessible to staffof the Ministry and other users of our library.

It is our hope that the Ministry will con-tinue to be on your mailing list.

Please accept the assurances of theHonourable Minister’s kind regards.

I.C.I. Mbanefo (Mrs)For: Honourable MinisterFederal Ministry of Education

The Attorney-General and Commissioner forJustice, Mr. Ade Ipaye, has directed me to ac-knowledge receipt of a copy of the April 2013edition of the Zenith Economic Quarterlypublished by Zenith Bank Plc.

I am further directed to commend ZenithBank and the Editorial Crew under your lead-ership for the painstaking and detailed man-ner in which the subjects of the publicationwere treated.

The Attorney-General is of the view thatthe magazine will continue to be an invalu-able mine of information for policymakers andstakeholders both within and outside Nigeria.

Thank you.For: Attorney-General and Commissioner for

JusticeOlanrewaju AkinsolaSenior Special Assistant to the Gover-

nor (Justice Sector Reforms)

I am directed to acknowledge with thanks,the receipt of your April 2013 edition of Ze-nith Economic Quarterly (ZEQ) which fo-cuses on sustainable Development: Issues,Strategies and Goals.

Indeed the journal is rich in information onthe Nigerian and global economy for strategicpolicy decision which the Embassy has already

put to good use.Please accept the assurances of the highest

consideration of his Excellency, the Ambas-sador of Nigeria to Thailand.

G.S. JaloSecond SecretaryFor: AmbassadorEmbassy of NigeriaBangkok, Thailand

We write to acknowledge with thanks thereceipt of a copy of your Economic Quar-terly and to appreciate your continuous recog-nition of NASME as a critical stakeholder inEconomic Development.

As usual the content is quite educative, in-formative and gives a clear investment guideand strategic policy decisions to readers.

Best regards,Nerus EkezieAg. Executive SecretaryNigerian Association of Small and

Medium Enterprises

I am directed to acknowledge with thanks,receipt of the above mentioned Publication,which provides very vital information on glo-bal, as well as, Nigerian economy that wouldimmensely assist the Mission in its quest toattract Investors to Nigeria.

Please accept the assurances of HisExcellency’s highest consideration.

Warm regards.M. S. IsaFor: AmbassadorEmbassy of the Federal Republic of

Nigeria, Zamalek, CairoArab Republic of Egypt

“...Indeed the journal

is rich in information

on the Nigerian and

global economy for

strategic policy deci-

sion which the Em-

bassy has already put

to good use...”

October 2013 Zenith Economic Quarterly 5

PERISCOPE

rate reports, pinned their positions on the continuing struc-tural reforms that brought faster, more diverse and inclu-sive growth and higher employment and per capita incomes.They also noted “improved governance as reflected inWorld Bank and anti-corruption indicators” as well as “alonger track record of low single-digit inflation” and im-proved “external buffers.”

The World Bank in its own report re-classified Nigeria’seconomic status from ‘poor’ by income per capita to ‘lowincome country’. This, according to the Bank, followed itsresolve to give Nigeria a ‘blend’ status in its 2014—2017Country Partnership Strategy (CPS). This reclassification

was a sequel to a review of Nigeria’s economic indicatorswhich showed reduction in poverty rate per capita, from64.2 per cent to 62.6 per cent, as well as an improvementin revenue accretion. In yet another report underlining thegood outlook for the economy the World Bank projectsremittances to Nigeria to hit US$21 billion this year—thehighest for any Sub-Saharan African country. The report,‘Migration and Remittance Flows: Recent Trends andOutlook 2013-2016’ says officially recorded remittanceflows to Sub-Saharan Africa are expected to increase by6.20 per cent in 2013 to US$32 billion.

To a very large extent these affirmations and reportsby a number of global institutions and agencies reflect theoutcome of the transformation initiatives and policies ofthe Federal Government of Nigeria. Specifically, in thethird quarter 2013 and in deed all through the year so far,power sector reform leading to the unbundling of thePower Holding Company of Nigeria (PHCN) took the

n their recent reports on the Nigerian economy,several global agencies and institutions not onlyaffirmed its stability but also presented a cheeryoutlook for the country. Standards & Poor’s (S &P) and Fitch rating agencies while affirming the“Stability Status” for the economy in their sepa-

IBy Marcel Okeke


PERISCOPE | Nigeria: EconomicStability, Good Outlook Persist

front burner. The privatization processof the successor companies (the gen-eration and distribution firms) of thePHCN got to a feverish pitch duringthe period under review. Indeed, by thepayment deadline of 21 August, 2013,private sector core investors in thepower generation companies (Gencos)and distribution companies (Discos)had paid up their equity ‘controlling’stakes in these entities. The NationalCouncil on Privatization (NCP) alsoapproved the sale of two newly com-pleted PHCN power plants(Olorunsogo and Omotosho) via debtfor equity swaps with the Chinese con-tractor that built these plants.

Reforms in other sectors of theeconomy equally remained upbeat dur-ing the quarter under review, especiallyin agriculture, housing, aviation, capi-tal market, banking, transport, amongothers. In the transport sector, conces-sion agreement of some sea ports andrail projects across the country reachedvarious levels of completion during theperiod. In the banking sector, the Cen-tral Bank of Nigeria (CBN) extendedthe ‘cashless’ policy to six more states,outside the pilot state of Lagos. Also,the Asset Management Corporation ofNigeria (AMCON) effectively com-menced the sale of the ‘bridged’ banks;its call for the expression of interest(EoI) for the acquisition of EnterpriseBank Limited closed on September 20,2013. During the same month,Dangote Industries Limited (DIL) anda consortium of banks signed an agree-ment for a US$3.3 billion facility forthe construction of a refinery/petro-chemical and fertilizer complex in Ni-geria by DIL. The plant, when opera-tional, is expected to reduce by 50 percent, the importation of refined pe-troleum products for local consump-tion.

Obviously this flurry of activitiesand programmes both in the public andprivate sectors reflected in generallyencouraging economic outcomes as theindicators show. For instance, inflation-ary pressures continued to moderatein response to the tight stance of mon-etary policy and improved public fi-nance management. Thus, the inflationrate for the month of September 2013

stood at eight per cent, lower than 8.2per cent and 8.7 per cent recorded inAugust and July respectively. All theseare far lower than 12.9 per cent as-sumed inflation rate in the 2013 bud-get. With these figures, headline infla-tion has remained below 10.0 per centfor eight (8) straight months and rep-resented the lowest level achieved overthe past 5 years, the longest such stretchsince 2008.

Furthermore, inflation rate aver-aged 8.7 per cent for the first ninemonths of 2013; while year-on-yearcore inflation rate (all items less farmproduce) stood at 7.4 per cent in Sep-tember, from 7.2 per cent in August2013. Also, the overall growth rate ofthe economy as measured by the GrossDomestic Product (GDP) stayedaround the 2013 budget benchmarkof 6.5 per cent: from 6.56 per cent inthe first quarter 2013 it came to 6.20


PERISCOPE | Nigeria: Economic Stability,Good Outlook Persist

per cent in the second quarter. Avail-able National Bureau of Statistics(NBS) figures show that the GDP grewby 6.81 percent in the third quarter of2013. Supply disruptions continued tohamper output in the oil sector whilethe non-oil sector output increased inthe third quarter of 2013, accordingto the NBS. The non-oil sector growthwas driven by growth in activities re-corded in the agriculture, hotels & res-taurants, building & construction and

telecommunications sectors. Specifi-cally, the Oil sector contributed ap-proximately 12.50 percent to real GDPin the third quarter of 2013, which islower than the 12.90 percent contri-bution in the second quarter of 2013.On the other hand, during the thirdquarter of 2013, the non-oil sectorrecorded 7.95 percent growth com-pared with 7.55 percent at the corre-sponding period in 2012, and 7.36 per-cent in the second quarter of 2013.

Like the inflation rate that keptmoving in the desired direction (i.e.declining) during the period under re-view, recovery in the Nigerian capitalmarket also continued; equities mar-ket indicators all trended upward in linewith the pattern since the beginning ofthe year. The benchmark index, theNigerian Stock Exchange All-ShareIndex (NSE-ASI) which opened thethird quarter at 36,164.30 points closedat 36,585.08 points. This represents areturn of 1.16 per cent for the quar-ter, and a year-to-date (30th Septem-ber) return of 30.29 per cent. Capi-talization for the same period rose by1.98 per cent from N11.426 trillion toN11.653 trillion amounting to an ac-tual increase of N1.02 trillion, essen-tially owing to supplemental listingsfrom bonus and rights issues.

Also positive for the economy dur-ing the period under review was thegeneral stability of the exchange rateof the naira especially at the wDASsegment of the foreign exchange mar-ket. The exchange rate of the Naira atthe wDAS segment during the thirdquarter 2013 was N157.32/US$ at thebeginning and close of the period. Theaverage wDAS exchange rate duringthe period was N157.31/US$. How-ever, at the inter-bank segment, thenaira exchange rate opened atN160.75/US$ and closed at N161.47/US$, representing a depreciation ofN0.72/US$ or 0.45 per cent. The av-erage inter-bank exchange rate duringthe period was N160.78/US$. At theBureau De Chang (BDC) segment, theselling rate opened at N162.50/US$and closed at N163.00/US$, represent-ing a depreciation of N0.50k/US$ or0.31 per cent.

The average BDC exchange ratefor the period was N162.14/US$. Thestability of the exchange rate reflectedthe commitment of the monetary au-thorities to supporting the currency ata time of massive depreciation in thecurrencies of emerging and frontiereconomies across the world. Indeed,the apex bank in its continued defenceof the Naira announced plans to re-voke the licenses of up to 20 BDCsover alleged money laundering. It hasalso suspended the Wholesale Dutch


ure of N7.55 trillion. A breakdown ofthe public debt shows that the externaldebt accounted for N1.29 trillion (i.e.US$8.26 billion at exchange rate ofN155.75/US$1) or 15.50 per cent ofthe total debt stock, while the domes-tic component accounted for N7.03trillion or 84.50 per cent. Furtherbreakdown of the debt figures showsthat the external component as at Sep-tember 30, 2013 which stood atUS$8.26 billion, was an increase of19.36 per cent from the US$6.92 bil-

Auction System and reintroduced theRetail equivalent (effective October 2,2013). The CBN has also banned theimportation of cash dollars, except withits prior approval, to check persistentmassive importation of US Dollars intothe economy.

Apparently, the strategic defence ofthe value of the national currency re-flected in some decline in the stock ofthe nation’s external reserves, whichstood at US$47.03 billion by mid-July2013. In August, the reserves declinedto US$46.85 billion and dropped fur-

ther to US$45.90 billion at the closeof the third quarter 2013. However,this reserves level is much higher rela-tive to the position of US$44.26 bil-lion at the end of 2012. While the stockof external reserves was experiencingsome decline, the nation’s public debtwas on the increase. Available datafrom the Debt Management Office(DMO) show that Nigeria’s debt stock(external and domestic) as at Septem-ber 30, 2013 stood at N8.32 trillion,representing an increase of 10.20 percent from the December 31, 2012 fig-




Nigerian Treasury Bills (NTBs) ac-counted for N2.48 trillion, represent-ing 35.31 per cent and Treasury Bonds(TBs) accounted for N334.56 billion,or 4.76 per cent.

THE CAPITAL MARKETThe consistent recovery of the Nige-rian capital market since 2012 follow-ing the 2008/9 crash continued dur-ing the period under review. The rallytranslated into appreciable rise in allmarket indices, especially the NigerianStock Exchange All-Share Index(NSE-ASI) and the Market Capitali-zation (MC) of the equities. The ASIwhich opened the third quarter 2013at 36,164.30 points rose to 36,248.53points in August and further inchedup to 36,585.08 points at the close ofthe quarter. In the same pattern, theMC which stood at N11.426 trillionin July rose to N11.496 trillion in Au-gust, and closed the quarter at N11.652trillion. The trend was driven essen-tially by supplemental listings frombonus and rights issues and influx oflocal investors. Banks remained themost actively traded stocks, account-ing for about 70 per cent of volumetraded by end-September 2013.

Both the Securities and ExchangeCommission (SEC) and the NigerianStock Exchange (NSE) continued withgusto their various reformprogrammes and activities during theperiod under review. Indeed, the NSEcommenced the introduction of ‘newlisting rules’ that will guide board andgeneral meetings by quoted companies.According to the NSE, the objectiveof the new rules is to establish certainreporting requirements in respect ofspecific meetings; and institutionalizebest corporate governance. A sum-mary of the draft rules by the NSEshows that they (the rules), amongother things, highlight the importanceof Annual General Meetings and pro-vide guidelines for notice, date, andvenue of such meetings as well as rightof attendance. The NSE said the newrules are subject to approval by SEC,and called comments from issuers andother stakeholders.

In a related measure, the NSEstated its readiness to commence trad-

ing activities on its new trading plat-form called X-GEN early October2013. According to the NSE, the newtrading platform has the capacity toopen up “an unprecedented level ofinnovative trading capabilities” for theNigerian capital market; providing lowlatency trading, and straight throughprocessing from broker order man-agement systems to the Exchange.The new platform is also expected toprovide direct market access for mo-bile access through smartphones to theretail investor, among others. TheNSE said it had conducted three mar-ket readiness tests, adding that “bro-kers and the NSE technical team wereable to successfully place orders, mi-grate data and complete a series offull dress rehearsal.”

On its own part, the SEC inaugu-rated a ‘10-year Capital Market Mas-ter Plan’ committee which will, amongother things, articulate a developmentstrategy for the entire market. Themaster plan is expected to cover suchareas as investor protection and edu-cation, professionalism, product inno-vation and expansion of the role ofthe capital market in economic devel-opment. The committee is also ex-pected to examine successful growthstrategies in other jurisdictions and con-sider relevant factors that impact mar-ket growth, entrench robust corporategovernance for improved efficiency,transparency and enhance market ac-cess.

BANKING AND FINANCEThe banking industry continued to beupbeat, remaining the leading sectoramong the quoted companies allthrough the third quarter 2013. Com-petition, generated and re-enforced byCBN reform measures and policies,kept the operators very active. Branchexpansion, fresh capital injection, ac-quisitions and merger moves and newproducts development remain key fea-tures of the industry. Specifically, theimpact of the financial inclusion policyof the CBN, particularly the cashlessinitiative had begun to manifest. In-deed, from the pilot phase which cov-ered Lagos State alone, the policy hasbeen extended to six states, including

lion as at June 30, 2012. As at Sep-tember 30, 2013, 71.23 per cent ofthe external debt was owed multilat-eral agencies; 10.29 per cent was owedto Bilateral Parties and 18.47 per centwas owed to others. The domestic debtstock which stood at N7.03 trillion asat end-September 2013, was up by2.63 per cent from N6.85 trillion asat June 30, 2012. A breakdown of thedomestic debt as at September 30,2013 by instrument by type shows thatthe FGN Bonds accounted for N4.22trillion, representing 59.93 per cent;



Rivers, Kano, Anambra, Ogun andAbia and the Federal Capital Territory(FCT), Abuja.

In a related development, the apexbank took steps in preparation for thetake-off of agency banking in the coun-try. Through a circular, it directed fi-nancial institutions that wish to rendersuch services to write to the CentralBank of Nigeria (CBN) requesting fora one-off approval to offer agencybanking services. In the circular titled“Clarification on the Requirements forAgent Banking in Nigeria,” the CBNpointed out that agents are not requiredto apply directly to it for approval butwould be appointed and monitored by

their principals (i.e. DMBs, MFBs andPMBs), based on the requirements foragents recruitment as contained in the

guideline. The apex bank had releasedthe guidelines for agent banking in Feb-ruary 2013, to guide the industry onthe requirements and conditions foragent banking in Nigeria. Part of theguidelines stipulates that notwithstand-ing the responsibility of the financialinstitutions to monitor and supervisetheir agents, the CBN may at any timerequest for any information or carryout inspections, as it deems necessary.

The apex bank during the periodunder review also took a critical mea-sure to curtail ‘excess liquidity’ in theDMBs and redirect their credit focus.Specifically, the CBN introduced a 50percent Cash Reserve Requirement(CRR) on all public funds deposits in

In a related development, theapex bank took steps inpreparation for the take-off ofagency banking in the coun-try. Through a circular, itdirected financial institutionsthat wish to render suchservices to write to theCentral Bank of Nigeria (CBN)requesting for a one-offapproval to offer agencybanking services.


the DMBs have since embarked onaggressive private sector deposits mo-bilization through an assortment ofstrategic initiatives, including new prod-ucts creation, leveraging on electronicand mobile banking, among others.

The CBN also in a move to checkmoney laundering and halt the declin-ing exchange rate of the national cur-rency suspended the Wholesale DutchAuction System (WDAS) and re-intro-duced the Retail Dutch Auction Sys-tem (RDAS), effective October 2,2013. In a circular titled: “Develop-ments in the Foreign Exchange Mar-

ket,” the CBN explained that the mini-mum bid by authorized dealers shallbe US$100,000.00, saying that just likethe WDAS, auction at the newly intro-duced RDAS would be held everyMonday and Wednesday. It added that“the existing limit of US$40,000 perannum on naira debit and credit cardshas been reviewed upwards toUS$150,000 per annum, subject tomonthly rendition of returns by au-thorized dealer banks and card issuers(MasterCard and Visa) to the CBN.

Noting that “available statistics in-dicate that Nigeria has become the larg-

the DMBs (CRR was at 12% before).The policy, according to the CBN wasto among other things, check “the per-verse incentive structure” under whichDeposit Money Banks (DMBs)“source huge amounts of public sec-tor deposits and lend same to the gov-ernment.” The policy which becameeffect on August 7, 2013, saw the with-drawal of an estimated N1trillion(US$6.27 billion) from the banking sys-tem that day, causing interbank lend-ing rates to spike by about seven per-centage points from the previous day.In adjustment to the ‘shock’ however,



est importer of U.S. dollars due to importation of cash byDeposit Money Banks (DMBs), the CBN said that dealerswould now have to obtain its prior approval to importforeign exchange. “Any authorized dealer, intending to im-port foreign currency cash, is required to forward an ap-plication stating the amount and purpose to the Director,Trade and Exchange, CBN, Abuja,” it said. The apex bankfurther directed that recipients of proceeds from interna-tional money transfer firms such as Western Union and

Money Gram would be paid only in naira.Apart from responding to these CBN policies and di-

rectives, the DMBs on their part embarked on branchexpansion, new products development, some acquisitionsand mergers as well as recapitalization, etc. For instance,First Bank of Nigeria Limited, a subsidiary of FBN Hold-ings Plc during the period under review, consummated theacquisition of the West Africa operations of InternationalCommercial Bank, Financial Group Holdings AG



(ICBFGH). The transaction terms provide for the acqui-sition of 100 per cent equity interest in ICB (Ghana), ICB(Sierra Leone), ICB (Guinea) and ICB (Gambia). Guar-anty Trust Bank (GTBank) similarly acquired Fina Bankof Kenya, in a deal worth about US$100 million. EcobankTransnational Incorporated opened its South Sudan bank-ing affiliate during the period under review to “support theyoungest African state in addressing developmental chal-lenges”.

During the third quarter 2013, Wema Bank Plc com-pleted its N40 billion capital raising through a mixture ofprivate and institutional investors. Unity Bank also com-menced the process of raising its share capital from N30billion to N40 billion, when it got the unanimous approval

of its shareholder. On its part the First City MonumentBank (FCMB) Plc completed its transformation into aHolding Company (Holdco) structure.

OIL AND GAS, POWER ANDELECTRICITYThe average daily production of crude oil in the third quar-ter of 2013 stood at 2.26 million barrels per day, an in-crease from 2.11 million barrels per day recorded in thesecond quarter of the year, according to the NBS data.Crude production was however lower compared to the2.52 million barrels per day recorded in the third quarterof 2012. These figures with their associated gas compo-


PERISCOPE | Nigeria: FiguresHighlight Strong Economy

nents, resulted in a decline in the growth (year-on year) ofthe value added of output in oil GDP by 0.53 percent forthe third quarter of 2013, an increase from the negative1.15 percent growth recorded in the second quarter of2013, but lower from the 0.08 percent growth recorded inthe corresponding period of 2012. The persisting shortfallin oil production (and lifting) in Nigeria which mainly ac-counted for the declining oil GDP was due to oil theft,illegal bunkering, production shut-in and pipeline vandal-ism which is already posing some threat to the revenueprojections of the government in the 2013 budget. Thisscenario has led to draw-downs on Excess Crude Account(ECA) for the monthly Federations Account Allocations tothe three tiers of government.

Data from the Organization of the Petroleum Export-ing Countries (OPEC) show that oil produced in Nigeriabetween January and October 2013 averaged about1.94million barrels per day (mb/d), lower than the 2.53mb/d benchmark used to prepare the 2013 budget. However,the consistently high price of crude, of above US$100 perbarrel in the international oil market, has kept cushioningthe inevitable effect of the decline in production volume.Benchmark price of oil adopted for 2013 is US$79 perbarrel while oil production was set at 2.52 million barrelper day (mbpd); but provisional data from the NigerianNational Petroleum Corporation (NNPC) show that theaverage oil lifting (including condensates) during the pe-riod under review was about 2.06 million barrels per day(mbpd) as against the 2.52mbpd projected for 2013.

Uncertainty surrounding the Petroleum Industry Bill(PIB) - a yet-to-be-passed piece of legislation which will,among other things, define foreign participation in the sec-tor - has also led to a severe slowdown in exploration activ-ity. Indeed, some international oil companies (IOCs) havesince begun to sell their marginal oil fields and acreages.

In the power and electricity sector, the privatization ofthe successor-companies of the Power Holding Companyof Nigeria (PHCN) remained on the front burner duringthe period under review. Data from the Bureau for PublicEnterprises (BPE) which midwifes the process show thatfrom the onset, a total of 19 PHCN successor-companieswere scheduled for “privatization” and these were brokendown into 11 Distribution Companies (“Discos”), sevenGeneration Companies (“Gencos”). Through a biddingprocess, ‘preferred bidders’ were selected and, by the pay-ment deadline of August 21, 2013, private sector coreinvestors (successful bidders) had paid a total of US$1.130billion for 60 per cent equity controlling stakes in nineDiscos (namely Abuja, Benin, Eko, Ibadan, Ikeja, Jos, Kano,Port Harcourt and Yola).

The core investors for the 10th Disco (Enugu) and thepreferred bidder for the 11th Disco (Kaduna), after fur-ther negotiations with the privatization supervisory body—National Council on Privatization (NCP)—also completedtheir payments, bringing the total sum paid to aboutUS$1.419 billion. For the Gencos, a total of about US$1.077billion was received from the core investors by the same

August 21, 2013deadline for equity stakes ranging between51per cent and 100 per cent in four Gencos (Egbin,Geregu, Kainji and Ughelli). The core investor for the 5thGenco (Shiroro) joined them when it completed the pay-ment of about US$111.6 million. Bidders for the othertwo Gencos (Afam and Sapele) are still in negotiations withthe NCP at the time of this report. The NCP also ap-proved the sale of two newly completed PHCN power



plants (Olorunsogo and Omotosho) during the period un-der review via debt for equity swaps with the Chinese con-tractor that built those plants at valuations ofUS$177.3million and US$217.5million respectively.

Also, in pursuit of the transformation of the energysector, President Goodluck Jonathan during the periodunder review approved the reconstituted Nigerian man-agement staff and supervisory board members for the

Transmission Company of Nigeria (TCN).The 17-mem-ber board is under the chairmanship of Engr. HamanTukur, while the Vice chairman is Akinsola Akinfemiwa.The Federal Government has also engaged Xian ElectricEngineering Company Ltd, a Chinese firm, to expand thetransmission lines to make for easier evacuation of elec-tricity to consumers across the country, in preparation foranticipated increased activities in the electricity sector with

Source: http://media.wbur.org/wordpress/11/files/2011/04/0415_oil-rig.jpg



the recent take-over of the assets of the Power HoldingCompany of Nigeria (PHCN) by private investors. Thememorandum of understanding (MoU) on the project,expected to costs $500 million in the next two years, wassigned by minister of power Prof. Chinedu Nebo and Jijun Hua, general manager, Xian Electric. Evacuation ofgenerated electricity has been a challenge for the powersector and the country as a whole, as larger percentage ofthe transmission lines in the country are said to be weakand incapable of carrying clean power.In the area of theNational Integrated Power Plants (NIPPs), no fewer than82 companies have been requested to submit proposalsfor 10 power plants, in the next round of the nation’s elec-tricity privatisation programme. This shortlist is a sequel toa decision at the second joint meeting of the National

Council on Privatisation, NCP, and the Board of the NigerDelta Power Holding Company Limited, NDPHC duringthe period under review. BPE reports said NCP approvedthe pre-qualification of 386 expressions of interest, EOIs,submitted by 82 of the 110 consortia that earlier expressedinterest in the acquisition of 80 percent equity in the 10NIPP power plants jointly owned by the Federal, state andlocal governments. BPE and NDPHC are partners in thejoint sale transaction process for the sale of the 10 powerplants. While NCP and BPE are legally authorised to sellFederal Government’s 47 percent shares, NDPHC has theauthorisation of the states and local governments to sell53 percent of their equities in the power plants.

Source: http://saharareporters.com/sites/default/files/page_images/galleriesNational%20Union%20of%20Electricity%20Employees%20FCT%20Branch%20in%20a%20Prayer%20protest%20secession%20(17).jpg?1309266333


TELECOMMUNICATIONSThe telecommunications sector recorded a real GDPgrowth of 24.42 percent in the third quarter of 2013, upfrom 22.12 percent in the second quarter of the year,according to the National Bureau of Statistics (NBS). Year-on-year however, growth has slowed by 7.2 percentagepoints as 31.57 percent was the recorded figure in the thirdquarter of 2012. Growth in the sector slowed in the thirdquarter of 2013 as a result of power supply and otherinfrastructure constraints. Effective demand by consum-ers coupled with highly competitive markets as a result ofproduct differentiation and market strategies to cater tomultiple market segments has resulted in higher value addedservices for operators.However, the drop in GDP contri-bution notwithstanding, the telecommunications sector re-mains active and attractive to investors and operators. Fol-lowing the SIM cards registration exercise carried out ear-lier on in the sector, the industry regulator—Nigerian Com-munications Commission (NCC) during the period underreview issued a directive mandating Mobile Network Op-erators (MNO) to forward on a weekly basis the summaryof all reactivated lines in addition to newly registered SIMcards on their networks. This followed the expiration ofthe deadline for the full deactivation of all unregisteredSIM cards as at 30th June, 2013. During the registrationexercise, a total of 121, 657,433 (One Hundred andTwenty-One Million, Six Hundred and Fifty-Seven Thou-sand, Four Hundred and Thirty-Three) lines were regis-tered by all the networks providers. On the other hand, atotal of 17, 231, 463 (Seventeen Million, Two Hundredand Thirty One Thousand, Four Hundred and Sixty-Three)

unregistered lines were deactivated from the networks.Datafrom the NCC show that active lines in the industry stoodat 121.27 million at the close of the third quarter 2913, upfrom 120.63 million in June 2013. With these figures, ac-cording to the NCC, Nigeria remains one of the biggestand fastest growing telecoms markets in Africa. The keydriver of the growth, the GSM sub-sector, continues towax stronger, recording 118.47 million active lines at end-September 2013. Of this figure, MTN has 55,596,025;Globacom 24,129,183; Airtel 22,726,698 and Etisalat15,759,810. In the Code Division Multiple Access (CDMA)sub-sector, Visafone is the leader, also standing as the fifthlargest operator by subscriber-base in the entire industry.The CDMA segment had combined active lines of2,054,410 as at end-September 2013.The telecoms mar-ket statistics show that a growing number of Nigeriansnow have access to telecoms services as operators keepextending their reach across the country. This is reflectedin increasing teledensity (that is, the number of phone con-nections for every hundred persons within the population),which stood at 86.62 at end-September 2013, from 80.47a month earlier. In the same vein, telecoms industry in-stalled capacity increased from 237.48 million at end-June2013 to 240.67 million at the end of the third quarter2013. These figures aptly indicate the appetite of thetelecoms operators to continue to invest in network up-grades to accommodate more subscribers and improve thequality of their services.(Marcel Okeke is the Editor, Zenith Economic Quar-terly)


Polic

y

GUIDELINES FOR THEOPERATION OF MICRO,SMALL AND MEDIUMENTERPRISESDEVELOPMENT FUNDFOR NIGERIA (2)

4.0 REFINANCING FACILITY4.1 OverviewOne of the key components of the Fund is to avail PFIs awindow to bridge temporary liquidity gaps that may arisefrom time to time due to their exposure to clients and otherlending activities. The facility is meant to address challengeswhich the PFIs might face that might make it difficult forthem to honour customer obligations, such as need forwithdrawals.

4.2 Objectives of the Refinancing Facility• Enable the PFIs take advantage of a better interest

rate in meeting its liquidity requirements.• Promote confidence in the sub-sector• Provide resources for continued operations by the

PFIs.

4.3 Eligible InstitutionsEligible institutions shall include Microfinance Banks(MFBs), Non-Governmental Organization (NGO) -Microfinance Institutions (NGO-MFIs), Financial Coop-eratives and Finance Companies who are not utilizing whole-

Chapter Four

sale funding facility under the MSMEDF.

4.4 Eligibility Criteria4.5.1 Microfinance BanksFor a microfinance bank/Finance Company to be eligiblefor support from the Fund, it shall satisfy the followingconditions as obtained from its latest CBN and NDIC ex-amination reports:

• Compliance with Regulatory Capital• Compliance with prevailing Prudential Ratios• Risk Management Framework acceptable to the regu-

lators• Corporate Governance Culture acceptable to the

regulators and as indicated by:- Adherence to Sound Ethical Values- Degree of Separation of Ownership from Con-

trol Management- Number of non-performing Insider Related Fa-

cilities- Financial member of Apex Association.

• Compliance with up-to-date and timely rendition ofmonthly returns to the CBN as stipulated in the re-vised Microfinance Policy, Regulatory and Supervi-sory Framework for Nigeria.

Continued from last edition


POLICY | Guidelines for the Operation of Micro, Smalland Medium Enterprises Development Fund for Nigeria (2)

• Evidence of Membership of apex association andup to date payment of annual subscription

• Irrevocable Standing Payment Order signed by au-thorized signatories of the PFI to debit its accountwith its correspondent DMB to recover the principaland accrued interest of the Wholesale Fund and re-mit same to Managing Agent.

4.5.2 Microfinance Institutions(NGO/MFIs and FCs)

• Registration with Corporate Affairs Commission orCooperative Department of the State or FederalGovernment.

• Evidence of acceptable corporate profile• Evidence of acceptable Risk Management Frame-

work.• Soundness of Corporate Governance acceptable to

the Managing Agent.• Membership of the apex association with evidence

of up to date payment of subscription.• Compliance with up-to date and timely rendition of

monthly returns to the CBN as stipulated in the re-vised Microfinance Policy, Regulatory and Supervi-sory Framework for Nigeria.

• Irrevocable Standing Payment Order signed by au-thorized signatories of the PFI to debit its accountwith its correspondent DMB to recover the princi-pal and accrued interest of the Wholesale Fund andremit same to Managing Agent.

4.6 Method of Application for RefinancingFacility

• A PFI shall submit request in the prescribed formatto the Fund including details of the loans to be refi-nanced.

• Within 14 working days of receipt of the applica-tion, the Fund shall inform the PFI of the status ofthe application.

• If the request is granted, a Refinancing Agreementshall be signed between the Fund and the PFI.

• Release of fund will be effected after all conditionsprecedent to drawdown are fully met.

4.7 Mechanisms of the RefinancingScheme

i. LimitThe Fund shall refinance a maximum of 80% of the loanportfolio of the PFIs for which refinancing is sought.

ii. Interest RateThe Refinancing Facility shall be administered at anall-in Interest rate of 9% per annum.

ii. Tenor of FacilityThe facility shall have a maximum tenor of 2 years.

4.8 Acceptable Collateral.Any of the following collaterals may be accepted by theMA as security for exposure to PFIs:

i. Legal Mortgage over appropriately valued asset includ-ing undeveloped land.

i. Guarantees from promoters of PFIs and their legalpartners.

ii. Any other collateral acceptable by the MA from timeto time.

4.9 Booking of New Loans afterRefinancingIn a bid to further encourage lending to MSME businesses,every PFI that has its portfolio of loans refinanced shall berequired to provide evidence of new MSME loans bookedwith the freed-up funds to the tune of at least 50% ofamount refinanced.

4.10 Repayment of the RefinancedFacility

i. PFIs shall be required to open a dedicated accountwith their correspondent DMBs for the purpose ofthe MSMEDF and advice the Fund of the accountdetails.

ii. The PFIs must submit a standing order for bulletrepayment of the facility from the correspondentDMB in favour of the Fund on the advised ac-count.

iii. The standing payment order shall be due on a datenot later than the tenor of the facility from the Fund.



5.0 GRANTS5.1 OverviewThe Grant will be funds given to eligible activities/entitiesto support the social and developmental objectives of theFund. The purpose shall be specified in advance and instrict adherence to the guidelines governing disbursement.Grants are usually not repaid as long as the guidelines arefollowed; however it might be called in, if specified condi-tions are not met. It shall be used to support activities speci-fied in the guidelines and the eligible institutions/activitiesshall demonstrate counterpart resource support, wherenecessary.

5.2 Eligible Activities for Grants5.2.1 Capacity/Institutional Building

• An initiative to upscale the capacity and skills ofstaff of PFIs.

• Business Development and Advisory Services• ICT/Infrastructural Support• Mobilization, Training and Linkages• Development of Apex Associations of MFBs/MFIs

5.2.2 Technical Assistance• Internship• Secondment• Mentoring• Registration with Mix Market• Sponsorship of Ratings• Credit Bureau• Movable Asset Registry

5.2.3 Research, Innovation and Product

Development• Studies/Surveys

5.2.4 Eligibility Criteria for Accessing the Grant.

Eligible institutions where applicable shall fulfill thefollowing conditions:

• Certificate of Incorporation• Latest financial statements• Latest Audited accounts• In case of MFBs, submission of last CBN and NDIC

Examination Reports showing satisfactory perfor-mance on key indices as may be specified by the MAfrom time to time.

• Must be a member of the apex association with evi-dence of up to date payment of subscription.

5.3. Mechanism for GrantsA Selection Committee shall review all proposals takinginto account the capacity, organization and the proposedprograms of all applicants before they are considered forthe grant. Priority shall be accorded to institutions/activi-ties based in the rural areas, in order to promote financialinclusion.

i Procedure• Association/institution shall submit its request in the pre-

scribed format to the Fund.• The Fund shall respond on the status of the application

within 10 working days.• The Fund shall subject the application to appraisal by

the Selection Committee and upon satisfaction approvethe grant.

• The Fund shall spell out the modalities for the disburse-ment in the offer letter, such as the need to have ex-ecuted previous activities before subsequent disburse-ments and evidence of counterpart funding.

Chapter Five



Chapter Six

6.0 Additional Incentives to PFIs under the Wholesale Lending and RefinancingFacilitiesThe following incentives shall be put in place to ensure that PFIs perform well in the utilization and repayment of theirfacilities:



7.1 Roles and Responsibilities ofStakeholdersIn order to achieve the desired objectives, the responsibili-ties of the stakeholders shall include:

7.1.1 The CBNThe Central Bank of Nigeria shall:

• Provide Fund for the Scheme and ensure that theFederal Government provides its own part/contri-butions.

7.1.2 Managing Agent (Special Purpose Vehicle)• Act as the Managing Agent of the Fund.• Carry out verification/monitoring of projects un-

der the Fund.• Process Applications for the various facilities from

PFIs/LIs.• Request PFIs and LIs to render periodic returns as

may be specified from time to time.• Determine the limits of the Fund.• Specify the rate at which PFIs will lend under the

Fund.• Ensure the implementation of the Fund and pub-

lish periodic reports on its performance.• Build capacity of stakeholders• Review the Fund guidelines as may be necessary

from time to time

7.1.3 Role of Lending Institutions• Provision of credit facilities for PFIs• Request for guarantees on behalf of the PFIs• Monitor the on-lending activities of PFIs• Submission of returns to MA and CBN as may be

required from time to time.

7.1.4 Government.• Support for the Fund’s activities• Participation in review of the Fund activities as

maybe required from time to time.

7.1.5 The Participating Financial Institutions(PFIs)

The PFI(s) shall:

i Grant credit facilities to MSME Promotersii. Approve loan requests under the Scheme based on

normal business consideration by exercising appro-priate due diligence

iii Monitor the projects during the loan period.

iv Put in place appropriate institutional arrangementsfor disbursing, monitoring and recovering the amountobtained under the Fund

v. Ensure that at least 60 per cent of the Fund ac-cessed under the MSMEDF is disbursed to womenentrepreneurs.

vi Render periodic returns on the performance of theFund to the Central Bank of Nigeria and the MAas may be specified from time to time..

vii Comply with the guidelines of the Fund

7.1.6 The Apex Associations (NAMBs, FHAN and

ANMFIN)The Apex Associations of the NAMB, FHAN andANMFIN shall:

• Introduce would-be beneficiaries of the Fund• Monitor performance of members• Ensure prompt repayment of loans by members• Build capacity of members to enable them qualify

for the Fund’s facilities

7.1.7 BorrowerThe borrower shall:

• Utilize the funds for the purpose for which it wasgranted.

• Insure the charged assets being financed.• Adhere strictly to the terms and conditions of the

Scheme.• Make the project and records available for inspec-

tion/verification by the MA, PFIs and LIs.

7.2 PenaltiesAny infractions such as the following, will be a conditionfor barring a PFI from further benefiting under any sup-port from the Fund:

• Diversion to unauthorized activities• Default resulting to invocation of guarantee

7.3 AmendmentsThese Guidelines shall be subject to review from time totime as may be deemed necessary by the CBN and Man-aging Agent. 24

7.4 Enquiries and Returns

All enquiries and returns should be addressed to:Director, Development Finance Department,Central Bank of Nigeria, Corporate HeadquartersCentral Business District, Abuja.Fax No. 09-46238655www.cbn.gov.ng

Chapter Seven

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Source: http://www.parker.com/parkerimages/Parker.com/Divisions-2011/Engineered%20Seals%20Division/Images/Oil%20and%20Gas%20ESD%20Site.jpg


The Oil MagicSince the 18th century when the worldexperienced an industrial revolution tilldate, fossil fuel has becomeindispensible in the lifestyle of humans.And every industrial discovery that hadbeen made since then had been builtto run on fossil fuel. Without fossilenergy today, industrial machines wouldnot work; aeroplanes would not fly;automobiles would not move; neitherwould trains and other modern meansof transportation. Even businesseswould be grounded and the worldwould practically be brought to a halt– economically, socially and industri-ally. Such a world is, to put it mildly,inconceivable. Fossil fuel has in the lasttwo hundred years or more becomethe grease that lubricates the globaleconomic engine and dictates the paceand direction of economic activities.It is no wonder that the commodityhad been aptly described in some quar-ters as the ‘black gold’.

Aside from Canada and the UnitedStates, all the other countries in the listof the world’s top crude oil producersare developing economies - SaudiArabia, Iran, Iraq, Nigeria, Kuwait,Libya, United Arab Emirate, and sev-eral others. And these developing oilexporting countries are highly depen-dent on crude oil earnings for theireconomic survival. In some instances,crude oil revenues account for up to80 to 90 per cent of their total exportearnings.

Huge reserves of fossil energy havebecome a revered and effective socio-economic and diplomatic weapon in thehands of the discerning wielders, andan effective management of earningsfrom these resources has changed thesocio-economic fortunes of severalnations, almost overnight. A typicalexample is the United Arab Emiratewhich within few decades was trans-formed from a backward, insignificantdesert country to a country that todayhosts some of the world’s best archi-tectural masterpieces – all thanks tothe billions of dollars of annual earn-ings from crude oil exports. In fact,several of the oil producing develop-ing nations are rated among the fast-est growing economies of the world

as they leverage their relatively hugefossil energy commodities earnings tobuild strong socioeconomic and physi-cal structures.

The Changing TidesFor too long, several emerging and lowincome economies have been run onproceeds from crude oil exports. Manyof them including Russia, SaudiArabia, Iran, Iraq, United Arab Emir-ate, Kuwait and Nigeria have dependedheavily on crude oil revenue for thedevelopment of much needed infra-structure and management of publicservices as they strive to catch up withtheir highly developed western coun-terparts. And with oil proceeds, sev-eral of them have been able reverseor ameliorate high rate of poverty intheir countries; create jobs for theirteeming youths; and build healthcarefacilities and other needed social infra-structures. Some of them have alsobeen lifted from their previous low in-come economic status to medium in-come ones – thanks to their highly-in-demand oil and gas resources. Severalof these countries have set mediumand long term strategic economic anddevelopmental visions for themselves,benchmarked on their actual and pro-jected favorable earnings from currentand future crude oil sales. In fact, ifthe oil resources continue to flourishat the current rate (unhindered), in thenext few decades, some of the low in-come oil exporters today would havemoved up to occupy a position in thelist of the biggest economies of theworld.

But the story is about to change.Responsible for this impending changeis the ‘bad name’ that crude oil, coaland natural gas had earned in the in-ternational arena, especially owing totheir proven negative impact on thehuman environment. According to theUnited States’ Environmental Protec-tion Agency (EPA), “the largest sourceof greenhouse gas emissions from hu-man activities in the United States isfrom burning fossil fuels for electric-ity, heat, and transportation.” (http://w w w. e p a . g ov / c l i m a t e ch a n g e /ghgemissions/sources.html). The con-tinued consumption of fossil fuel has


GLOBAL WATCH | Oil Resource Dependency:Emerging Threats & Concerns

been identified as posing dangers tohuman health, the natural environmentand the wellbeing of unborn genera-tions.

Very many reasons have beengiven for the growing outcry againstfossil fuel consumption (coal, naturalgas and of course, crude oil). But chiefamong these today is the fact that fos-sil energy releases carbon dioxide intothe atmosphere when it is burnt. Thisreleased carbon (a type of greenhousegas) traps heat and makes the planetwarmer than it should be, causing cli-mate, global warming and severe dam-ages to the human eco-system.

Very few oil exporting countriesincluding Nigeria produce a variety ofcrude oil called ‘light sweet crude’. Thisvariety of crude is in high demand inthe global commodities market becauseit is, among other revered features, lowin carbon and therefore poses lesserdamage to the human environment.But this still does not immune the coun-try from the growing ‘fossil fuel mustgo’ campaign that is intensifying aroundthe world, especially in the most indus-trialized nations. (Un)fortunately, theseindustrialized nations are the biggestand most important customers of crudeoil exporting countries.

In discussing the topic “Water: Isthe glass half empty or half full?” therenowned Japanese-Canadian aca-demic, scientist and environmental ac-tivist, David Suzuki said that “beyondreducing individual use, one of our toppriorities must be to move from fossilfuels to energy that has fewer detri-mental effects on water supplies andfewer environmental impacts overall.”(http://www.davidsuzuki.org/blogs/science-matters/2012/08/water-is-the-glass-half-empty-or-half-full/; August30, 2012)

The United State’s President BarackObama in his speech captioned “Oil &Alternative Fuels” stressed a similarpoint when he said that “the issue ofclimate change is one that we ignore atour own peril. There may still be dis-putes about exactly how much we’recontributing to the warming of theearth’s atmosphere and how much isnaturally occurring, but what we canbe scientifically certain of is that our

continued use of fossil fuels is push-ing us to a point of no return. Andunless we free ourselves from a de-pendence on these fossil fuels and charta new course on energy in this coun-try, we are condemning future genera-tions to global catastrophe.” (http://obamaspeeches.com/060-Energy-In-dependence-and-the-Safety-of-Our-Planet-Obama-Speech.htm; (April 3,2006).

With these new realities on thenegative impact crude oil productionand consumption has on the environ-ment, the developed economies whichare the biggest consumers of crude oilhave started to search frantically foralternatives to fossil energy.

Why the Campaign againstFossil EnergyThere are numerous reasons why thewest and several developing economiesare now anxiously searching for more‘sustainable’ energy options.

High cost of crude oil – Froman average of about $30 per barrel tenyears ago, the price of crude oil had inJuly 2008 risen to about $147 beforefalling to the current levels of around$100-120 per barrel. For economieslike the United States and China thatimport billions of barrels per year, thisis indeed a huge spending burden whichis ultimately passed on to the end con-sumers – households. In fact, in theUnited States, energy spending consti-tutes one of the highest priced itemsin the monthly expense list households.Households in that country spend about4 per cent of their total monthly pretaxincome on gasoline purchases.

The US Energy Information Ad-ministration (EIA) reported that in2012, an average US household spentan estimated $2,912 on the purchaseof gasoline. If you multiply this sumby the total number of US households(estimated at about 115,031,000 as atDecember 2012), it means that the



country’s households spent over $334billion on just gasoline consumptionalone that year. (http://www.eia.gov/todayinenergy/detail.cfm?id=9831)

Incessant Supply Disruptions –Another reason why the west is strug-gling to break away from the age longdependence on crude oil consumptionis the uncertainties that surround itssupply. Because crude oil is predomi-nantly produced and exported by thedeveloping economies, some of whichare prone to periods of social, politicaland civil unrests (for example, the re-cent Arab Spring, the Gulf wars andseveral others), crude oil availabilityand supply is never fully guaranteed,leaving the consumer nations perpetu-

ally at the mercy of the net exportersand their national circumstances at dif-ferent points in time.

Erratic Price Movements – Anotherproblem with crude oil dependency isthat the prices of the commodity arehardly ever stable over time. The worldhas witnessed countless instances ofmajor sudden upswings and down-swings in the pricing of crude oil, de-velopments that have resulted in se-vere economic distortions and in someinstances, had been partly blamed forregional and global economic reces-sions. The global economic crisis thatoccurred between 2007 and 2009 forexample, was blamed partly on indis-criminate and uncontrollable spikes in

the prices of crude oil. Any sharp risein crude oil price results in a sharp cutin the disposable income of globalhouseholds, reducing savings, standardof living and increasing the costs ofliving in households around the world.Experts have also calculated that suchspikes trim down global growth pros-pects anytime they happen.

The Fear of Peak Oil – Experts havewarned that global crude oil reservesand production may have peaked asfar back as in the 1960s and may al-ready have entered a period of termi-nal decline. In other words, any timefrom now, crude oil reserves may be-gin to dry up, leaving the world strug-gling with an unprepared withdrawalsymptom. If this actually happens, ev-ery country of the world, developedor developing would be in serious cri-sis since no one country today can boastof having found a viable, sustainablesource of renewable energy that couldreplace crude oil. So, one of the rea-sons why countries of the world arebeginning to ‘withdraw’ from their over-dependence on crude oil is to be ableto find ways to adjust to a possibleworld where there would be no morecrude oil. Since none of them wouldlike to be caught unawares, countrieshave tasked their best brains, research-ers, scientists and industrialists to workout ways to move from fossil to re-newable energy sources which wouldbe clean, environmentally friendly, costeffective (at least, in the long term) andsustainable.

Climate Change and GHG – An-other reason why the world is waging awar against crude oil usage is the nega-tive impact the fossil has on the hu-man and natural environment. Carbonemission from fossil fuel is known topollute the environment and cause themuch dreaded global warming. Reduc-ing global consumption of fossil fuelis a crucial countermeasure for globalwarming. In fact, this has become themost important reason why ‘the crudeoil must go” campaign is being wagedaround the world, championed by theOECD countries. And it will not belong before the developing economies


of the world join fully in this campaign.China, South Korea and several otherdeveloping economies are already inthe forefront of the struggle to findalternatives. This has resulted in theambitious search for renewable energysources that are environmentallyfriendly and less costly in the long term.

Zee News (India) in a report “Car-bon emissions from fossil fuels to im-pact global warming” published onAugust 06, 2013, cited the outcomeof a new study by Richard Zeebe atthe University of Hawaii on the im-pact of fossil fuel on climate change.According to this report, “over thepast 250 years, human activities suchas fossil fuel burning have raised theatmospheric CO2 concentration bymore than 40% over its preindustriallevel of 280 ppm (parts per million).In May 2013, the CO2 concentrationin Earth’s atmosphere surpassed a mile-stone of 400 ppm for the first time inhuman history, a level that many sci-entists consider dangerous for its im-pact on Earth’s climate. The globe is

likely to become warmer in the nearfuture and probably a lot warmer inthe distant future.” http://zeenews.india.com/news/eco-news/carbon-emissions-from-fossil-fuels-to-impact-global-warming_867288.html.

Experts have repeatedly warnedthat climate change and the fear ofglobal warming have the potential todestroy the earth and its biodiversity,reduce water quality and availability,destroy the soil and agricultural pro-ductivity and if left unchecked, ren-der the earth uninhabitable for humansand other living organisms. This fearis perhaps the single most importantreason why the world is now strivingso hard to reduce the consumption andheavy dependence on crude oil.

The Measures to ReplaceCrude OilThe west had in the last few decadesconceived initiatives that would ad-equately prepare them for a crude-oil-free world. The objective seems to be,

to achieve a lifestyle that is similar tothe pre-industrial age when fossil en-ergy (Petroleum, coal, and natural gas)had not become an indispensible partof our every day existence.

Some of the measures being takento rid the world of crude oil include acampaign to drastically reduce fossilenergy consumption. Individuals, com-munities, businesses and even govern-ments are being educated on the eco-logical and economic disadvantage ofa continued overreliance on crude oil.The impact of the burning of fossilon the natural and human environmentis being preached with the dangers ofclimate change and atmospheric car-bonation as the major weapons of fearthat are being unleashed.

Also, several communities in Eu-rope and America are beginning toadopt the Transition Town Initiative.Transition Town is an initiative that wasconceived by the Irish man andpermaculture instructor, Rob Hopkins,between 2005 and 2006 as part of hisstudents’ project work. The whole con-

Shiroro Dam,Niger State

http://static.panoramio.com/photos/large/45897995.jpg




cept is borne out of the need to adaptto a world threatened by two majorphenomenon- the Peak Oil and climatechange. And these twin problems arefallouts of man’s overreliance andoverconsumption of fossil energy inhis everyday life. Transition Townsendeavor to achieve self sufficiencyand break away from over-dependenceon fossil fuel usage. Today, there arethousands of Transition Towns aroundthe world, located mostly in westerncountries, and with the mandate tochange people’s way of life to one thatis free from the traditional dependenceon fossil fuel and make the natural en-vironment cleaner and greener.

In addition to Transition Town ini-tiatives, businesses are being encour-aged and (in some instances) regulatedto reduce their carbon imprint on thenatural environment. Some of theways this is being achieved is by reduc-ing their consumption of fossil and de-vising energy saving business policiesand practices. The introduction of thecontroversial carbon credit, which in

layman’s language is a way of reward-ing or sanctioning environmentalfriendly or unfriendly practices, is an-other measure being taken by the west-ern economies to compel businessesto go ‘green’.

Governments and businesses arealso being encouraged to invest in thedevelopment and production of re-newable energy including wind, ther-mal (sun), hydro (water) and otherforms of sustainable energy. In sev-eral countries, policies and practices arebeing put in place to ensure a calcu-lated reduction in fossil energy usageand an increase in the proportion ofrenewable energy in the total nationalenergy mix over a specified period oftime. Some countries are already imple-menting rewards and penalty systemsfor compliance with or defiance of laiddown renewable energy and environ-mental enhancement policies.

Of course the development ofethanol from food commodities andrecycled waste is also gaining promi-nence around the world, even thoughthis had come with severe criticisms,especially owing to the impact of thetechnology on food price and availabil-ity, among other sustainability concerns.Researches are also ongoing on thepossibility of using water and othernon-fossil commodities to power au-tomobiles and other industrial and do-mestic machines, all in the bid to finda way around what has become a prob-lematic fossil fuel production and con-sumption pattern.

Shale Oil – a SustainableAlternative?The global media had been replete withnews about the increasing focus of theUnited States on the exploitation ofits shale oil reserves. Shale oil is an or-ganic, fine grained sedimentary rockthat contains chemical compoundscalled kerogen. When heated at hightemperature, shale oil undergoes a pro-cess that releases vapour. And whencooled, this vapour generates shale oil(different from conventional fuel) asone of its byproducts. Shale oil couldbe used to perform much of the func-tions that crude oil byproducts alsoperform. It is therefore an alternative

to crude oil.The world is estimated to have

shale oil resources that could yield upto the equivalent of almost 2 trillionbarrels (about 400 billion cubic metres)of oil, deposited in about 600 locationsaround the globe. This is almost twicethe estimated total global crude oil re-serves of 1.3 trillion barrels. TheUnited States holds the world’s largestshale oil reserves with an estimated yieldequivalent to about 1 trillion barrels(160 billion cubic metres). China alsohas a major shale oil reserve that couldyield up to 4 billion metric tons.

Despite growing fears among oilproducing developing economies onhow shale oil exploration in the westcould displace the demand for crudeoil, shale oil production and consump-tion is as ‘unsustainable’ as crude oilfor several reasons. To start with, shaleoil exploration and consumption hasvirtually all the environmental chal-lenges for which crude oil is being per-secuted – air pollution, soil erosion,water degradation, and the release ofgreenhouse gas. Moreover, shale oilproduction is much more expensive andeven more environmentally damaging.While the west and other economieslike China and Brazil that has shale oilreserves in abundance may continueto exploit it for their convenience fromtime to time, especially during periodsof high crude oil price or supply dis-ruptions, it is never likely that shale oilwould become a sustainable alternativeto crude oil, now or in the future. Infact, for reasons of its negative envi-ronmental impact and high costs ofproduction, shale oil is as endangeredas crude oil. Shale oil is not the majorthreat to crude oil – the search for re-newable energy is.

The Politics of crude oilThe quest for an unhindered access tocrude oil for the lubrication of west-ern industrial machines and to sustaintheir ‘luxurious’ lifestyles has beenknown to have resulted in several glo-bal and regional conflicts. There is nocommodity that has generated as muchconflict and infighting as crude oil. Theabsence of this all important commod-ity has the potential to ground even



the most important of economies andresult in a major global socioeconomiccalamity. As it currently stands, with-out oil, millions of industries aroundthe world would be closed, and so wouldmillions of jobs go down with them.In fact, the power of the black gold inglobal politics cannot be overrated. Theworld currently runs on crude oil anddiscerning crude oil producing nationshave been able to wield much powerin international diplomacy and succeedin having their ways despite their sta-tus as developing economies.

Oil Alternatives:Propaganda or Real?While western economies are intensi-fying efforts to find alternatives to fossilfuel, several countries, especially theoil producing ones, still consider muchof the talks on ‘alternatives’ as a pro-paganda aimed by the west to discreditcrude oil as a commodity – or as theyput it, an effort to ‘give the dog a badname in order to hang it”. Some evenprefer to assume that there can neverbe an alternative to crude oil. But thesituation has gone past the issue of as-sumptions. It is about time to face theemerging reality. For the oil producingnations, the bubble seems about toburst and it is time to start taking muchmore seriously, that issue that had beentreated with lip service for way too long– the need to diversify their economiesaway from the current overreliance oncrude oil earnings. Sooner than weknow, demand for crude oil may dropas more countries find ways of pro-ducing renewable energy. And with thebillions of dollars that are being investedin research and the development ofrenewable energy, it might not be longbefore a cost effective, sustainable al-ternative to crude oil is found.

Options for Oil ResourceDependent EconomiesWhile the crude oil consuming nationsare wailing about the negative impactof fossil consumption on the eco-sys-tem, for the oil producers, it is actuallya double-jeopardy. Not only do theyalso suffer the same damages to theirnatural environment owing to their

consumption of the commodity, theyalso face another critical challenge –the negative impact of the explorationof crude oil on the human and eco-logical environment. The experiencesin Nigeria’s Niger Delta and severalother oil producing communities attestto this problem. The negative impactof gas flaring, oil spills, degraded soil,debased aquatic life, loss of flora andfauna biodiversity, are some of thenumerous environmental repercussions

suffered by oil producing nations as aresult of oil exploration activities. Andbecause of this double-impact, ideally,the oil producing economies should beeven more concerned about findingalternatives to oil in the long term thanthe oil consumers.

The world’s major oil consumersare putting measures in place to finallydo away with their centuries-longoverdependence on crude oil. But what

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do the major oil exporters need to doto be able to finally do away with theirover-dependence on crude oil pro-ceeds?

The first thing oil producers mustdo is the same old sermon – diversifytheir economies away from crude oildependency, for the reasons that thewest is right now diversifying awayfrom crude oil consumption, and muchmore. For a start, climate change is nota western problem, it is a global dan-

ger. Carbon and greenhouse gas emis-sions is also not a western challenge, itis a global one. If the sea levels aroundthe world rise to uncontainable levels,the resulting devastation will not berestricted to the western world; it wouldbe a global crisis. if the earth comescrumbling down owing to the constantviolations on it arising from massivecases of deforestation, greenhouse gasemissions, climate change and globalwarming, it will not be caving in onwestern economies alone but on allhumans. Diversifying away from crudeoil has gone beyond being a politicalor economic issue – it is now an eco-logical one and a moral responsibilityof all nations, including nations thattoday earn tens of billions of dollarsfrom the export of the commodity.

Also, there should be stricter regu-lations and implementations of envi-ronmental laws. The current environ-mentally degrading practices whichleave oil spills unattended and destroythe eco-system with impunity need tobe addressed. The least oil explorerscould do in the short term is to im-prove on their environmental impactassessment and management practicesto reduce the ecological impact of theirexploration activities.

Another measure crude oil export-ers should take is to begin to find al-ternative sources of energy for them-selves. The whole world has now seenthe ‘unsustainability’ of the over reli-ance on crude oil. Oil producing econo-mies are not immune to the crisis thatcould follow should we all wake up oneday to discover that oil wells have driedup. The rest of the world is preparingto hedge such a development; and soshould the major oil exporters. Luck-ily, sources of renewable energy actu-ally abound in several of these coun-tries – sunshine for thermal energy,wind for wind energy, water for hydroenergy, among others. African majoroil producers such as Nigeria, Angolaand Libya are also currently fightingthe problem of inadequate electricitysupply. Leveraging these natural, renew-able sources of energy would enablethem use one stone to kill two birds.

Energy efficiency should becomea way of life. People should learn to

walk again as was the tradition in thedays of old, instead of bringing outtheir cars to embark on journeys thatare just few kilometers away. Peopleshould learn to ride bicycles on thestreets again, while local authoritiesshould ensure the safety of such com-muters by building walkways and bi-cycle pathways. There is also the needto develop the habit of switching offelectrical gadgets that are not in useand to learn to deliberately abstain fromusing energy when there is no pressingneed for it. Energy wastefulness is oneof the scourges to fight in the new dis-pensation.

It is time that major oil producingdeveloping nations begin to establishfull fledged agencies dedicated strictlyto Renewable Energy research anddevelopment. It is also time to trainand retrain the workforce on majorglobal emerging trends – sustainabledevelopment, renewable energy, en-ergy efficiency, waste management andrecycling, environmental preservation,bio-degradability management, and sev-eral others. Delay is indeed dangerousas most of these oil exporters are al-ready far behind in the global campaignto walk away from fossil energy andgo ‘green’.

Luckily, several of the major oilproducers in Africa and Asia have othercommercially viable natural resourcesat their disposal. It is time to invest intheir sustainable exploration and devel-opment.

Also, businesses must begin to seethe transition towards renewable en-ergy production and usage as their cor-porate social responsibility. In fact, thisshould become a major performancemeasurement indicator going forward.In addition to the gradual reduction infossil energy usage, at the communal,national, individual and corporate lev-els, energy efficient bulbs and homeappliances should be introduced in ex-isting and new buildings; waste and re-cycling bins should be deployed in stra-tegic locations and made accessible toall.

Governments of these oil depen-dent economies must begin to create avery conducive environment for busi-nesses of all sizes to thrive, to attract



local and foreign investors. The smalland medium sized enterprises must beencouraged with the provision of nec-essary infrastructure, access to fund-ing and a favorable tax regime. Theblossoming local industries must alsobe protected from harsh and unfavor-able competition posed by importedgoods and services. The developmentof the productive sector is one way todiversify the economy, provide jobs,enhance the quality and standard ofliving and fight the scourge of highpoverty rate prevalent in several de-veloping and low income economies.

Massive investment in agriculturalshould be implemented, along withpolicies that encourage environmentallyfriendly agric practices that do not de-stroy the forests or downgrade thenatural environment. A flourishing ag-ricultural sector would ensure foodsecurity and self sufficiency in one oflife’s most indispensible need – food.It is also a way to protect the localeconomy from imported inflation, highfood costs and possible supply disrup-tions and shocks. A viable agricultureindustry would also provide meaning-ful employment for the populace andalleviate the scourge of poverty andhunger while also diversifying thesources of local and foreign exchangeearnings.

Also, it is time for oil producingeconomies that have not already incul-cated that practice to begin to save theircrude oil earnings for future genera-tions and invest in projects that aresustainable and with the potential toturn around their economic fortunes.It is also time to ensure fiscal and mon-etary prudence and avoid wastefulspending that do not in any way im-pact the socio-economic bottom-line.It is time to fight corrupt practices inpublic administration and ensure atransparent and efficient managementof crude oil and other national re-sources.

Also, preparatory to that era whenthere will be no more billions of dol-lars in foreign exchange to be earnedfrom crude oil exports, major oil ex-porting countries should begin to builda viable, educated, skilled and globallycompetitive workforce. This would go

a long way in encouraging innovation,entrepreneurship and a sustainable eco-nomic diversification.

In conclusion, it is important to flagthe fact that fossil energy producingeconomies are not in any way immuneto the current concerns about the nega-tive impact of fossil consumption onthe environment. It is a global prob-lem and of global concern. The oilproducing economies should not seeongoing campaigns against fossil fuelconsumption as a façade or anotherwestern-styled imperialistic tool. Thistime, the threats are real and noeconomy should be caught unawares.

Also, it is important for developingeconomies to understand that the effi-cient management of crude oil re-sources is the only way they would beable to use oil wealth to build a lastinglegacy. In fact, you could call this theera of consolidation of oil wealth, pre-paratory to the worst possible out-comes. Oil reserves may not last for-ever, but they can utilize what they earnfrom the commodity today to buildsolid economic structures and gener-ate sustainable wealth that the future

generations could leverage. With thethreat of Peak Oil, this might be theonly way to convince posterity that‘once upon a time’ there were huge oilreserves and great oil wealth in thesemajor exporting countries.

From all indications, the worldseems all out to get rid of fossil fuelconsumption. And it is time for crudeoil resource dependent economies tobegin to chart a new economic pathfor themselves. If they fail to do this,and quickly too, the end result couldbe economically catastrophic.

Of course the growing campaignto transition from the consumption offossil energy to renewable energy willnot be an easy ride, considering howdeeply addicted we all are to fossil en-ergy; and how indispensible it has be-come in our everyday lives. But withthe appropriate political will, motiva-tion and resources to make it happen,the mission could be accomplishedsooner than we think.(Eunice Sampson is the DeputyEditor, Zenith Economic Quar-terly)

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Factoryburningfossil fuel


Issues (

I)

By Chuks Nwaze

In the last edition of this serial, welooked at the transformation agendafrom the point of view of the deficitsin the delivery of affordable residen-tial housing as well as the pattern ofutility derived or expected to be de-rived not only by the incumbenthouse owners but also the prospec-tive ones in that regard. The pointwas made that the transformationagenda with respect to the housingsector would be incomplete ifhouses are being delivered withoutrecourse to the feelings, tastes orpreferences of ‘consumers’ of theproduct.

NON-PERFORMING LOANS:

FAILURE OF RISK MANAGEMENTFrom this edition, we shall commence anew segment in the serial that will ad-dress the perennial albatross of risk man-agement in the Nigerian banking sys-tem. There is no doubt, whatsoever, thatlack of adequate attention to the basicchallenges and dictates of risk manage-ment have been largely responsible notonly for the stunted growth of our finan-cial system, generally, but also for theuntimely eclipse of otherwise very prom-ising institutions.


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To enable us beam a search-light on the issue in an organizedand informed manner, we intendto carry out an empirical study onthe failure of risk management onthe assets side of the banking bal-ance sheet which is loans, other-wise called risk assets or credit, andthe specific reasons for that failurein our own environment. In otherwords, we are going to focus on thecauses of non-performing loans,which is obviously a fundamentalfailure of risk management, as wellas the related issue of remedialmanagement which is an attemptto mitigate the extent of damage orlosses suffered by the lender.

BACKGROUND TOCREDIT RISKMANAGEMENTThe basis for the existence of thebanking industry in an economy isprimarily premised on the age-longconcept of financial inter-media-tion which involves the art of bring-ing together the surplus and defi-cit sectors or units of the economywith a view to satisfying eachsector’s financial needs (Chang,2006). In other words, the fundsfrom the surplus section obtainedin the form of deposits, are madeavailable to the deficit sector

through credit facilities which canbe short-term (overdraft), mediumterm or\ long-term, depending onthe nature of the deposit liabilityas well as the needs of the end-users (borrowers).

This inter-mediation role ofbanks encompasses not only de-posit-taking but also risk-taking.Banks have five main constituen-cies, which they satisfy in thecourse of carrying out their func-tions as financial institutions(Nwankwo, 1991). These constitu-encies include the surplus unit(creditors), the deficit unit (bor-rowers), the community in whichthe banks operate, the regulatoryauthority and the bank’s share-holders. A very important constitu-ency is the surplus unit from whichthe bank derives its resource base(deposits) with which it meets theneeds of the other constituencies.It is instructive to note that this unitdemands the best terms as re-gards rate of interest which con-stitutes the reward or return for thedeposit, maturity structures andmaximum liquidity to enable ithave the funds back.

Another constituency is thedeficit unit which makes up theother end of the intermediationprocess as the funds obtained fromthe surplus unit will be ultimately


disbursed to members of this unitin a similar manner the funds wereobtained from the surplus unit bythe bank. The bank obtains itscompensation from the ‘spread’between the borrowing and lend-ing rates from the surplus to thedeficit units respectively (Freixas& Roch, 1997).

The bank shareholders that re-quire optimal return on their invest-ments is the third constituency tocontend with while the fourth con-stituency is the regulatory author-ity which formulates the frameworkwithin which banks operate pru-dently and within stipulated regu-latory requirements or guidelines.Finally, there is the community,which provides a conducive envi-ronment in which the banks oper-ate. This requires the bank to be agood corporate citizen not only bymaximizing the environmental op-portunities but also minimize thethreats that abound in the commu-nity (Olokoyo, 2011).

A feature which runs through allthe constituencies is the perceivedconflict of interests (Gehrig, 1996).For instance, the obligation ofmaximum liquidity owed to thesurplus unit can only be satisfiedby holding all the deposited fundsin cash since it is this that has thehighest liquidity. However, sincecash in this form earns nil returns,the obligation of optimal return tothe shareholders’ investments can-not at the same time be fulfilled.To achieve this specific objectiveto the fullest, the bank will need toinvest all its funds in loans and ad-vances (known as risk assets).These are the bank’s highest yield-ing assets as well as the most riskyand, as the saying goes, maximumreturn accompanies maximumrisk.

>>


ISSUES (I) | Risk Management in the

Nigerian Banking System (1)

EFFECTIVE LENDING:THE ANTIDOTEIt is clear enough that this apparentconflict of interest between the expec-tations of the major stakeholders inthe banking horizon posses a majorchallenge to risk management. Thechallenge has to do with how to har-monize or synchronize the various in-terests in the deployment of organiza-tional resources without jeopardizingthe continued existence or survival ofthe institution. The solution lies in theconcept of effective lending whichis the only way to satisfy all the con-stituencies. Effective lending refers tothat quantum of lending that maximizesnot only the bank’s objectives of liquid-ity and profitability, but also the nation’sfiscal and monetary objectives at large.

Effective lending which serves asa vista for meeting the above-men-tioned conflicting objectives also servesas a tool for national economic devel-opment. The banks assist in achievingthis objective through the intermedia-tion role by mobilizing funds in quan-tities and terms acceptable to the sur-plus sector and disbursing same to thedeficit sector under acceptable condi-tions for viable economic ventures. Itis logical to state that the extent to whicheffective lending can influence eco-nomic development is premised onhow many credit facilities are initiatedand consummated in the agreed termsand conditions between the parties(Nkusu, 2011).

One of the fundamental challengesthat confront banking institutions is thefact that at the end of the day, severalof these credits end up being substan-dard, non-performing or even bad inthe worst cases (Chidechai 2004). Whatis responsible for this scenario? Thechoice of this study is informed by theneed to elicit answers to this questionas any effort on this regard would, nodoubt, make some positive impact inthe national economy which should bethe focus of the citizens of this coun-try at this material time.

Although this yawning gap has al-ways existed, I am not aware whetherany previous evaluation of this naturehas been undertaken on the vexed is-sue of non-performing loans in Nige-

ria, especially from the point of viewof symptoms, causes, remedial man-agement and implications for the en-tire system. It is believed, therefore,that this is a pioneering work on thevexed issue of risk management in theNigerian financial system.

STATEMENT OFPROBLEMThe extent to which financial inter-mediation through the extension ofcredit facilities can favourably influ-ence the national economy depends onthe number of facilities that are takento the end in accordance with the agree-ments upon which the facilities wereconsummated by the parties involved(Olokoyo, 2011). The research prob-lem, therefore, is the prevalent highloan default rate by loan beneficiariesand the factors responsible for the ap-parent failure of risk management inthis regard. In other words, what is re-

sponsible for this state of affairs?The risk management factors in

question with respect to borrowers in-clude: character, collateral, environ-mental conditions, corporate gover-nance as well as remedial managementmeasures with respect to the lendingorganization (bank). These are the fac-tors we are going to empirically inves-tigate in this and the next few editionsof this serial.

Another fundamental problemwhich needs to be properly analyzedhas to do with the possible effects ofthe plethora of non-performing facili-ties that dot the banking landscape,especially its negative effect on the li-quidity or solvency position of banks(Sanusi, 2012). Surely, insolvency is theinescapable route to financial distresswhich is a regular occurrence in ourown jurisdiction. Despite the severalprudential guidelines as well as frequentregulatory interventions designed tostave off the malaise, the fear of bank-




ing distress in our financial landscaperemains the beginning of wisdom forall the stakeholders, especially deposi-tors.

The concern is that loan delin-quency has ominous impact on theeconomy in that it reduces the volumeof funds available for credit facilitiesas it limits the lender’s capacity to dis-burse further loans (Wilson, 1997).Lenders (banks) become increasinglyunwilling to grant credit facilities asmore loans in their credit portfoliobecome bad, thereby impacting nega-tively on the national economic plans,programmes, policies and developmentstrategy. According to Wilson, non-per-forming loans can bring down inves-tors’ confidence in the banking system,pilling up unproductive economic re-sources and impede the resource allo-cation process (Woo, 2000:2). Also,non-performing loans can thwart eco-nomic recovery by shrinking operat-ing margins and eroding the capital base

of the banks, practically making it dif-ficult for new loans to be advanced.This is sometimes referred to as ‘creditcrunch’.

NON-PERFORMINGLOANS AND RISKMANAGEMENT FACTORSThe central objective of this enquiryis to evaluate the effects of acustomer’s character, collateral, envi-ronmental conditions, corporate gov-ernance and remedial managementmeasures on non-performing loans inthe Nigerian banking system. Specifi-cally, the above gen-eral objective can bebroken down as fol-lows:

• To investigatethe impact of custom-ers’ character on non-performing loans inthe Nigerian bankingsystem.

• To evaluate theeffect of environ-mental conditions onnon-performing loanssyndrome in Nigeria.

• To evaluate therole of collateral onnon-performing loansin the Nigerian bank-ing system.

• To examine theeffect of bank corpo-rate governance on non-performingloans in the Nigerian banking system.

• To assess the effectiveness of re-medial management measures on non-performing loans in the Nigerian bank-ing system.

RESEARCH QUESTIONSAs a consequence of the objectiveshighlighted above, this study will at-tempt to provide answers to the fol-lowing questions:i. In what way does the customers’

character give rise to non-perform-ing loans in the Nigerian banking sys-tem?

ii. How do environmental conditionsaffect non-performing loans?

iii. What is the effect of collateral on

non-performing loans?iv. How does corporate governance

impact on non-performing loansv. How effective are remedial manage-

ment measures in the resolution ofbad loans?

RELEVANT RESEARCHHYPOTHESESAs a logical follow-up to the objectivesof this study as well as the researchquestions stated above, the followingtestable research hypotheses can beformulated:

Hypothesis1: (Ho1): Characterhas no significant effect on non-per-

forming facilities in the Nigerian bank-ing system

Hypothesis2: (Ho2): There is nosignificant relationship between envi-ronmental conditions and non-per-forming loans

Hypothesis3: (Ho3): Collateralhas no significant effect on non-per-forming facilities in the Nigerian bank-ing system

Hypothesis4: (Ho4): There is nosignificant relationship between corpo-rate governance and non-performingloans

Hypothesis5: (Ho5): Remedialmanagement measures are not signifi-cantly effective in the resolution ofnon-performing loans

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The concern is that loan delin-

quency has ominous impact on

the economy in that it reduces the

volume of funds available for

credit facilities as it limits the

lender’s capacity to disburse

further loans (Wilson, 1997).




SCOPE OF STUDYThe research focuses more specificallyon all the sub-sectors of the bankingindustry as well as the corporate lend-ers who are the first line victims ofloan defaults. Although the issue ofnon-performing loans has no timelimit, the specific period under consid-eration is the post-consolidation era of2006 to 2013. This period was chosenbecause the consolidation policy intro-duced some measure of sanity into theindustry and marked a new beginningin the annals of the banking system inNigeria, not only by considerablydownsizing the number of depositmoney banks from 89 to 24 but alsoby compelling them to increase theirminimum capital base. At the moment,each bank has been directed to oper-ate with a capital base of N10billion,N25billion or N50billion depending onwhether it wants to operate regionally,nationally or internationally in line withthe regulatory guidelines.

As a result of the various stagesof regulation and deregulation whichthe Nigerian banking industry has tra-versed over the years, the number ofdeposit money banks as at October2013 stands at 22 (commercial andmerchant banks), 4 development fi-nance institutions (development banks),several specialized banks (mortgagebanks, microfinance banks and onenon-interest bank). This is the outcomeof several regulatory interventions, dis-tress-induced revocation of operatinglicenses, consolidations, recapitaliza-tions and peer acquisitions as witnessedin our financial system in recent times.Two new deposit money banks werealso licensed in the last two years.

For practical purposes, however,this study will be limited to only a rep-resentative sample of credit staff ofthe deposit money banks but care willbe taken in the sampling technique toensure that all the deposit money banksin the industry are represented. It isexpected that this representative natureof the institutions will present an op-portunity for a national outlook andalso provide a robust academic insightinto the issue of non-performing loansin Nigeria. Hence, the specialized bankssuch as microfinance banks, primary

mortgage and non-interest banks arespecifically outside the coverage of thiswork because their modus-operandi,regulatory requirements and targetmarket are essentially different fromthe deposit money banks.

This work will also examine themeaning and the place of credit or loanin the national economy. The traditionalapproach to credit analysis and admin-istration structure and practice are alsoexamined. The study lays special em-phasis on non-performing risk assetsor credit facilities, symptoms, rootcauses, remedial management as wellas effects.

RELEVANCE OF RISKMANAGEMENT INBANKING BUSINESSAs outlined in the earlier sections, therelevance or significance of risk man-agement in the banking industry strikesat the root of the business itself.Hence, this study is not only timely butindispensable to the practitioners them-

selves. Primarily, this particular seg-ment on non-performing loans is pre-mised on the need to provide banks,the hard-hit of loan delinquency, witha better understanding of the salientissues in risk management with specialemphasis on loan default and recov-ery as well as proffering better strate-gies on remedial management of non-performing loans in line with the Pru-dential Guidelines for performing andnon-performing risk assets as well asprovisioning for perceived losses.

A study of this nature is also wel-come at a time like this when manyfinancial institutions are under pressureto explain the basis of the lofty earn-ings being declared in the face of in-creasing loan delinquency which haseven prompted various governmentsaround the world, including Nigeria, toestablish the Asset Management Cor-porations (AMCON) charged with theresponsibility of dealing with the toxicassets (non-performing credits) of thebanks.

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It is also pertinent to note that theprevalent high rate of loan defaultsimpacts heavily on banks’ capital ad-equacy. Capital adequacy as defined byNwankwo (1991) is that quantum offunds which a bank should have orplans to maintain in order to conductits business in a prudent manner. Themajor tenet of the November 1991Prudential Guidelines is the timely rec-ognition and provisioning for delin-quent credit facilities; based on this,more facilities are being classified asnon-performing resulting in an increasein the total provision for bad anddoubtful debts. This most banks nowaugment with their capital by postingvery low profit figures.

In the national horizon, it would nodoubt be of immense importance sincefinancial inter-mediation is one of theindispensable tools of the governmentin national economic developmentprogrammes. The government is ableto achieve this through the banks bychanneling funds from the surplus unitto the deficit unit which then applies

the funds for meaningful national eco-nomic purposes.

The government monetary and fis-cal policies are also implemented andmonitored through the instrumental-ity of the banking system. Credit inthe form of loans and advances is pri-marily the means of achieving thesenational goals. On balance, the rel-evance of the study in the light of theforegoing is, first and foremost, the factthat the banking system is the life-wireof the economy while credit is the en-gine of the banking system. It standsto reason, therefore, that by studyingand addressing the malaise of loan de-fault, we are contributing not only tothe economic progress of Nigeria butalso to the development of the societyat large.

LIMITATIONS OFTHIS STUDYThe first limitation is the fact that thisstudy will not, for practical reasons,cover all the banks within the financialsystem, hence only a representativesample comprising of the sub-sectorsof the industry will constitute the ba-sis of the study. It is possible, there-fore, that some factors that are pecu-liar to some banks could be omitted.However, this tendency will be mini-mized by increasing the sample as wellas ensuring that every stratum is satis-factorily represented.

Preparatory to the delivery of ques-tionnaires, which is the research instru-ment to be used for this study, a pro-cess of consultation and fixing appoint-ment for interview sessions has alreadycommenced. This is to allow the bank-ers ample time to respond accuratelyand objectively to the questions withina reasonable time frame. In addition,the questionnaires will all be deliveredand collected by hand or e-mail. Nopostage.

The secrecy of banking businessas evidenced by the conservativenessof the banks and its officers may alsoconstitute a practical constraint in ob-taining completely fair, accurate andhonest answers to the questionnairesin addition to the fact that respondentswould not want their names or placesof work disclosed. However, other

sources of data, including the manda-tory statutory returns sent by the banksthemselves to regulatory and statutoryagencies will also be consulted. Thissecondary source of data will assist tomaintain checks and balances over theprimary sources.

DEFINITION OF TERMSAsset Management Company(AMCS): A company that invests itsclient’s pooled fund into securities thatmatch its declared financial objectives.AMC’s provide investors with morediversification and investing optionsthan they would have done by them-selves or on their own. With respect tobank loans (risk assets), AMCS per-form the crucial role of buying the badloans from the books of banks therebyimproving their liquidity and ability tocontinue in business.

Bad Loan: This refers to a debtthat is not collectable and thereforeworthless to the creditor. This occursafter all attempts are made to collecton the debt. Although bad debt is usu-ally a product of the debtor going intobankruptcy due to business failure orunexpected circumstances in whichcase the additional cost of pursuing thedebt will be more than the amount thecreditor could collect, some bad debtsalso have to do with the character ofthe debtor and his patent unwillingnessto pay, even when he can afford it.This particular scenario is often asso-ciated with insider abuse and fraudwhich is prevalent in less-developedeconomies. The debt, once consideredto be bad, will be written off by thecompany as expense. In the case of abank, however, only full provisions aremade; the indebtedness remains in theaccount of the debtor for possible fu-ture settlement.

Banking System: By this wemean the structural network of insti-tutions offering financial serviceswithin a country. The members of thebanking system and the functions theytypically perform include commercialand merchant banks that accept de-posits and make loans; investmentbanks which specialize in capital mar-ket issues and trading; developmentbanks that provide additional long-term




financing for national development andnational central banks that issue cur-rency, control monetary policy and actas banker to government.

Credit: This refers to a system al-lowing payment for purchases to bediffered to a future date; a contractualagreement in which a borrower receivessomething of value now and agrees torepay the lender at some date in thefuture, generally with interest. Theterm also refers to the borrowing ca-pacity of an individual or company.The amount of money available to beborrowed by an individual or a com-pany is referred to as credit because itmust be paid back to the lender at

some point in the future.However, the term ‘credit facili-

ties’ includes loans, advances, over-drafts, commercial papers, bankersacceptances, bills discounted, guaran-tees, and all other obligations that arerequired to be settled at a future date,with or without interest.

Collateral: In lending agreements,collateral is a borrower’s pledge of spe-cific property to a lender, to secure therepayment of loan. The collateralserves as protection for a lender againsta borrower’s default, that is any bor-rower failing to pay the principal andinterest under the terms of a loan ob-ligation. If a borrower does default ona loan (due to insolvency or other

event), that borrower forfeits (givesup) the property pledged as collateraland the lender then assumes the own-ership of the property.

Credit Appraisal: This can bedefined as the assessment of the vari-ous risks that can impact on the re-payment of a loan. In short you aredetermining ‘will I get my moneyback?’ Depending on the purpose ofa loan and the quantum, the appraisalprocess may be simple or elaborate.For small personal loans, credit scor-ing based on income, lifestyle and ex-isting liabilities may suffice. But forproject financing, the process includestechnical, commercial, marketing, fi-

nancial, managerial appraisals as wellas implementation schedule and abil-ity. Credit appraisal revolves aroundcharacter, collateral capability and ca-pacity. For individuals, it takes into ac-count various factor like income ofthe applicant, number of dependants,monthly expenditure, repayment ca-pacity, employment history, number ofyears of service and other factorswhich affect credit rating of the bor-rowers.

Delinquent Loan: A loan that is30 to 60 days past due, with no pay-ments being made.

Loan: A sum of money lent; theact of lending. In finance parlance, aloan is a debt evidenced by a note

which specifies, among other things, theprincipal amount, interest rate and dateof repayment. A loan entails the real-location of the subject asset(s) for aperiod of time, between the lendersand the borrowers. In a loan arrange-ment, the borrower initially receives orborrows an amount of money, calledthe principal from the lender, and isobligated to pay back or repay an equalamount of money to the lender at alater date. The loan is generally pro-vided at a cost referred to as intereston the debt; this provides an incentivefor the lender to engage in the deal notonly to cover his cost but also to makeprofit.

Non-performing Loan(NPL): Borrowed money uponwhich the debtor has not madethe scheduled payments for atleast ninety days. Anonperforming loan is either indefault or close to being in de-fault. Once a loan is non-per-forming, the odds that it will berepaid in line with the agreementare considered to be substan-tially lower. If the debtor startsmaking payments on a non-per-forming loan, it becomes a re-performing loan, even if he hasnot caught up on all the missedpayments.

Past Due Loan: A loan onwhich payment in full is 30 to60 days past due, but partialpayments are being made. Inother words, payments are in

arrears.Risk Asset: Any asset that carries

some degree of risk. Specifically, in thebanking context, risk asset refers to anasset owned by a bank or financial in-stitution whose value may fluctuate dueto changes in interest rate, credit qual-ity, repayment risk, etc. In practicalterms, this refers to loans granted toborrowers at specific terms and con-ditions. It is a risk asset because theseterms and conditions can be breachedand repayment can be in default. Theextent of inherent risk will determinethe extent of possible default.(Chuks Nwaze is the ManagingConsultant/CEO, Control & Sur-veillance Associates Ltd.)


A

Issues (

II)

pparently, owing to the need to ur-gently resuscitate the moribund auto-motive industry in order to conserveforeign exchange, domesticate auto-motive technology, and create employ-ment opportunities, the Nigerian gov-ernment recently unveiled the Auto-motive Industrial Policy DevelopmentPlan. The new automotive policy isdesigned to attract new investments intothe automotive industry, encourage andprotect local automotive manufactur-ers and ultimately put Nigeria amongthe league of auto-producing countries.

The plan is a mix of protective mea-sures, incentives, regulatory activities,and local content programmes seekingto leverage on Nigeria’s comparativeand competitive advantages tojumpstart the automotive industry. Itis part of the holistic Nigerian Indus-trial Revolution Plan (NIRP) aimed atdiversifying the Nigerian economy andrevenue base through industry, and in-creasing the manufacturing sector’scontribution to Gross Domestic Prod-uct (GDP). The new automotive policyrepresents another concerted effort by

By Sunday Enebeli-Uzor


the present government to wean thecountry from its chronic import-de-pendency and steer it towards the pathof self-sufficiency in essential com-modities, and local value addition.

Road transportation (for whichautomobile vehicle is the mode) playsa critical role in the entire national trans-portation chain. It connects othermodes of transportation and perme-ates all aspects of modern economicactivity in the economy. Road trans-portation has enormous influence oneconomic growth, development, and

social cohesion. Availability andaffordability of automobile vehicles istherefore a sine qua non for efficientroad transportation. Commuting byautomobile vehicles is ubiquitous andprovides connectivity to numerousdestinations and enables mobility acrossthe country. In Nigeria, it is estimatedthat road transportation accounts forabout 90 percent of the national pas-senger and freight services and pro-vides access to rural areas where ma-jority of the economically active seg-ment of the population lives. The fore-

going therefore underscores the signifi-cance of the automotive industry inthe national transportation chain.

The New AutomotivePolicyThe main emphasis of the Automo-tive Industrial Policy DevelopmentPlan as enunciated by the Federal Min-istry of Industry, Trade and Invest-ments, is to encourage and patroniselocally assembled vehicles in the shortrun and ultimately, the manufacture ofinexpensive made-in-Nigeria vehiclesthat would gradually substitute for im-ports in the long term. The core strat-egy will focus on competitiveness andincreased productivity of the automo-tive industry through the improvementof industrial infrastructure (automo-tive supplier parks and clusters), skillsdevelopment, standards, investmentpromotion, market development andanti-smuggling measures. The policycompletely overhauls the existing oneand offers protection to existing andpotential investors.

To achieve the lofty objectives ofthe plan, government will establish threeautomotive clusters in Lagos/Ogun,Kaduna/Kano, and Anambra/Enugustates. The locations of the clusters willenable automobile manufacturersshare resources, reduce cost of invest-ments, enhance productivity and en-joy other benefits of localisation ofindustry. To support the clusters, theNigeria Automotive Council (NAC) hasproposed to establish automotive sup-plier parks around the clusters. In ad-dition, NAC also plans to develop mod-ern mechanic villages in fourteen statesin the country. It is expected that themechanic villages will be breedinggrounds for automotive technologyand technicians to support the indus-try. The Industrial Training Fund (ITF)is also collaborating with Cena (a ve-hicle manufacturer in Brazil), to estab-lish automotive training centres in Ni-geria. Similarly, two Nigerian universi-ties have been designated to commencedegree programmes in auto-mechani-cal engineering to provide suitable lo-cal manpower.

To incentivise and woo investors,the government proposes to take the

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ISSUES (III) | New Auto Policy: Key to Nigeria’s Industrial Revolution?

lead in patronising locally assembledvehicles as official cars for its Minis-tries, Departments and Agencies(MDAs). Also, to assure investors thatthere will be no sudden reversal ofpolicy, the new automotive policy is tobe backed by appropriate legislation.Government will hike tariff on im-ported vehicles to discourage importa-tion of Fully Built Unit (FBU) vehicles.New Fully Built Unit vehicles are ex-pected to attract 35 percent duty and35 percent levy, totalling 70 percentcharges, up from the present 20 per-cent. However, vehicle importers couldstill clear imported vehicles at the oldrates until February 28, 2014, providedthey can prove that they had opened aLetter of Credit for the vehicles be-fore October 3, 2013. The policy willalso encourage banks to develop ve-hicle acquisition schemes in the formof payment in installments to ensureeasy affordability of cars by Nigeri-ans.

The policy ultimately seeks to pro-mote investments in the assembly ofinexpensive cars in the country at af-fordable prices (expected to cost be-tween N1.2million and N1.5million)and lead to the gradual phasing out ofimported used cars. This will amelio-rate the problem the masses face incommuting. Government envisagesthat the new automotive policy willkick-start the resuscitation and expan-sion of the petrochemical and metal/steel industries and also revive the co-matose tyre manufacturing industry.The new automotive policy isgovernment’s deliberate import substi-tution industrialisation strategy to res-cue the critical automotive industryfrom the economic menace of dump-ing. It essentially mimics theindustrialisation path followed by otheremerging economies like Brazil, China,Malaysia, India, Indonesia, Thailandand South Africa. The policy is ex-

pected to run as a ten-year plan andwill be reviewed every five years.

Leveraging the AutomotiveIndustry forIndustrialisationA good number of countries have suc-cessfully leveraged the performance oftheir automotive industry, and thebroader manufacturing sector for eco-nomic growth and development, andultimately industrialisation. These coun-tries successfully adopted policies whichinclude compulsory patronage of lo-cal automotive products and appropri-ate fiscal measures over the long termto industrialise their economies. Thereare also evidences of correlation be-tween the quality of a country’s roadtransportation system and its growthpotential. This derives from the easeof mobility of goods to markets andthe ability of skilled labour to move to

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New Auto Policy: Key to Nigeria’s Industrial Revolution? | ISSUES (III)

areas of demand. The extent to whicha country’s land mass is traversed byroad network is an index of the de-gree of mobility of people, goods andservices within the country, and theautomotive industry is the fulcrum ofroad transportation.

The automotive industry is one ofthe most important industries in somecountries. In Germany for instance, theautomotive industry is the country’smost important economic sector andEurope’s single largest auto market. Theindustry is one of the highest employ-ers of labour, accounting for more than14 percent of all workers in manufac-turing and about 8 percent of total in-dustrial added value. In the UnitedStates, the automotive industry is oneof the most important industries, his-torically contributing between 3 and 3.5percent to the overall Gross DomesticProduct (GDP), and directly employsover 1.7 million people engaged in de-

signing, engineering, manufacturing,and supplying parts and componentsto assemble, sell and service motorvehicles.

The auto industry contributes about6 percent to South Africa’s GDP andaccounts for almost 12 percent of thecountry’s manufacturing exports. InSouth Africa, over 28,000 people aredirectly employed in automotive manu-facturing, with another 65,000 em-ployed in the component manufactur-ing industry, while about 200,000 areemployed in retail and aftermarketactivities, with 6,600 employed in thetyre manufacturing industry. SouthAfrica has successfully positioned itsautomotive industry as a hub for themanufacture and export of vehicles.Components and major multinationalauto firms use the country to sourcecomponents and assemble vehicles forthe local and international markets. Theindustry has helped to reduce the bur-

den on South Africa’s trade balance.From the foregoing, it is obvious

that the automotive industry is strate-gic in nature and has catalytic effectsthat could transform the Nigerianeconomy from simple, mineral explo-ration, low-value activities to an indus-trialized economy, while generatingemployment opportunities and creat-ing wealth. Infact, a robust automo-tive industry offers one of the beststrategies to fast-track the realisationof Nigeria’s quest to join the league oftop 20 developed economies by the year2020. The industry is an importantdriver of growth, income, employ-ment, and innovation. It impacts eco-nomic activities in a variety of waysthrough its forward and backward link-ages with other sectors of the economy.It is estimated that Nigeria will save asmuch as $3.5 billion through the re-duction of importation of auto ve-hicles.

Potential of the NigerianAutomotive IndustryGiven an annual automotive import billin excess of $3billion, the potential ofthe Nigerian automotive industry isquite enormous. Nigeria currently im-port about 200,000 used and 80,000new vehicles annually, dissipating enor-mous foreign exchange and support-ing the automotive industries of othercountries as well as creating jobs else-where. In 2010 alone, Nigeria spent awhopping sum of $4.2 billion on im-portation of vehicles. In 2012, thecountry’s vehicle import bill declinedto $3.4billion, a level still considered tobe a serious drain on the economy. Atpresent, the Nigerian automotive in-dustry has the capacity to produce150,000 vehicles and has the potentialto create 70,000 skilled and semi-skilledjobs along with an estimated 210,000indirect jobs in ancillary Small andMedium Enterprises (SMEs) that willsupport the assembly plants. It is alsoestimated that around 490,000 otherjobs will be created in the raw materi-als supply industries that will supportthe auto industry.

With a huge population – estimatedto be around 170 million and a middleclass in excess of 40 million, the Nige-


ISSUES (III) | TNew Auto Policy: Key to Nigeria’s Industrial Revolution?

rian automotive industry offers a vi-able investment opportunity and prom-ises high returns on investment forautomotive companies seeking to havea stronghold on Africa’s biggest mar-ket. Nigeria is currently the 7th mostpopulated country in the world, with a5-year annual GDP growth rate ofabout 7 percent. The country’s middleclass is growing and the rising incomelevels are indications that the automo-tive industry has a bright prospect. Thecountry also has a large pool of train-able workforce that can easily be re-trained to fit into the industry. TheNigerian automotive industry will notneed to rely on the export market to

be successful. However, it has the po-tential to become the auto hub andgateway for West and Central Africa,especially the four land-locked AfricanCountries – Mali, Burkina-Faso, Nigerand Chad.

Incentives in the NigerianAutomotive IndustryAside from the general investment in-centives available to investors in Nige-ria, there are a wide range of gener-ous specific incentives for the automo-tive industry. For instance, the indus-try has Pioneer Status. Pioneer statusin Nigeria takes the form of a five-

year tax holiday for companies locatedanywhere in the country, and a seven-year tax holiday for those located ineconomically disadvantaged local gov-ernment areas. The granting of pio-neer status to the automotive industryis aimed at enabling investors to makea reasonable level of profit within theformative years during which periodthe profit is expected to be ploughedback into the business.

Also, automotive establishmentsthat have implant training facilities en-joy a 2 percent tax concession for aperiod of 5 years. Industries with highlabour to capital ratio are entitled tothe following concession: those employ-


New Auto Policy: Key to Nigeria’s Industrial Revolution? | ISSUES (III)

ing 1,000 persons will enjoy 15 per-cent tax concession, those employing200 or more will enjoy a 7 percent taxconcession, while those employing 100persons or more have a 6 percent taxconcession. Industries with up to 60percent local raw materials utilisationattract 20 percent tax credit for fiveyears. Up to 120 percent local expenseson Research and Development (R&D)are tax deductible, for R&D on localraw materials, 140 percent is allowed.Industries in economically disadvan-taged areas would have an additional 5percent capital depreciation allowanceover and above the initial allowance.Industries with high local value added

enjoy a 10 percent tax concession for10 years.

Same Old Route?Beyond the euphoria of the new auto-motive policy, some observers haveexpressed serious reservations owingto the fact this is not the first time anautomotive policy is being articulatedin Nigeria. Some have dismissed thenew policy as a wild goose-chase be-cause similar policies have beenchurned out for the industry in the pastas Nigeria has always had an automo-tive policy since independence. Be-tween 1970 and 1980 for instance, sixautomotive assembly plants (two forcars and four for trucks) were estab-lished in the country with a strategy toencourage backward integration withthe steel mills. These were: PeugeotAutomobile Nigeria Limited (PAN) inKaduna; Volkswagen of Nigeria Lim-ited (VWON) in Lagos; Anambra Mo-tor Manufacturing Limited(ANAMMCO) in Emene-Enugu;Steyr Nigeria Limited in Bauchi; Na-tional Truck Manufacturers (NTM) inKano; and Leyland Nigeria Limited inIbadan. Total combined productioncapacity of the six plants was about108,000 cars, 56,000 commercial ve-hicles and 10,000 tractors annually. Inthe 1960s, UAC, Leventis and Bewac,also had auto-assembly plants in thecountry. The only indigenous automanufacturer that is still in business isInnoson Vehicle Plant in AnambraState. The company assembles Com-pletely Knocked Down (CKD) partsof heavy duty vehicles, middle and highlevel buses from Chinese, German andJapanese makers.

The automotive policies of thepost-independence era encouraged thepatronage of locally manufacturedcars, led by the government. Duringthis period, the automotive assemblyplants were a beehive of activities, andencouraged the establishment andgrowth of ancillary industries thatmanufacture sundry products such astyres, wind shields, batteries and othervehicle components. These industriesgenerated additional employment op-portunities in the country. However,over time and due to regime changes

and policy reversals, some of the au-tomotive companies and ancillary firmshave become moribund while somehave closed shop due to inconsistentgovernment policies, high operationalcosts, uncompetitiveness and lack ofpatronage even from the governmentthat had equity stake in them.

A New Wave of InterestsSince the unveiling of the new auto-motive policy, some multinational au-tomotive manufacturers have indicatedinterests to establish automotive assem-bly plants in Nigeria. For instance,Nissan and Stallion Group have an-nounced their intention to jointly launchvehicle assembly in Nigeria. The par-ties have signed a Memorandum ofUnderstanding (Mou) which will resultin Stallion increasing capacity at its ex-isting plant, VON Automobile Ltd inLagos. The plant’s annual capacity willbe expanded to 45,000 units to as-semble light duty trucks, pickups andvans. Capacity at the plant will also beopened to Nissan’s Alliance partnerRenault, to be utilised according to fu-ture business needs. Similarly, Toyota,Nigeria’s largest supplier of new cars,has also indicated interest in setting upautomotive assembly plant in Nigeriaand is currently conducting a feasibil-ity study for the project. In an effortto encourage the existing automotivecomponents manufacturers and vehicleassembly plants, the National Automo-tive Council (NAC), recently an-nounced the disbursement of $46mil-lion in loans to Peugeot AutomobileNigeria, Dunlop and Innoson VehicleManufacturing. According to NAC, thefunding is directed at the productionof automotive parts.

A New Dawn, Political WillRequiredRecognizing the reservations of sec-tions of industry observers and howprevious governments had cowered inthe implementation of past automo-tive policies, the present administrationhas given assurance that the pitfallsencountered in the past will be avoidedin the execution of the new policy.There is sufficient reason to give the

Since the unveiling of thenew automotive policy,some multinational auto-motive manufacturers haveindicated interests to es-tablish automotive assem-bly plants in Nigeria.


ISSUES (III) | New Auto Policy: Key to Nigeria’s Industrial Revolution?

present government the benefit of thedoubt considering how other govern-ment policies – notably the Power Sec-tor Reform Roadmap and the Agri-cultural Transformation Agenda arebeing pursued conscientiously. Anotherindication that government means busi-ness this time around is the move toback the new policy with requisite leg-islation. This will no doubt boost theconfidence of investors and assurethem that there will not be a suddenreversal of policy.

To be able to circumvent the pit-falls that plagued earlier automotivepolicies, the government has to dili-gently implement the new policy andcheckmate the menace of smuggling.The latter is no doubt a herculean task

given the size of the country and itsporous borders. As with other businesssectors of the economy, governmentshould restrict its role to providing theenabling environment for the industryand encourage foreign and local inves-tors to play in line with global bestpractices and adhere to internationalindustry standards. Government shouldalso set specific targets and timelinesfor every stage of implementation ofthe policy and ensure strict adherence.The policy is not expected to yield re-sults overnight and it is estimated thatto successfully implement the new au-tomotive policy and attain self-suffi-ciency and possibly become a net ex-porter of automobiles, Nigeria needsa minimum of thirty years. The Auto-

motive Industrial Policy DevelopmentPlan no doubt has good economic andbusiness potential. The policy offersone of the best routes to diversifyingthe Nigerian economy and revenuebase and could have huge multipliereffects in terms of income, employ-ment generation and wealth creation.What is required to see it through tosuccess is political will and conscien-tious implementation.(Sunday Enebeli-Uzor is an Ana-lyst, Zenith Economic Quarterly)


Fore

ign In

sights

The G7 – a mixed out-look?Many finance ministers in theG7, the group of the sevenwealthiest nations on earth byglobal net worth, must be wish-ing that they, too, could just shuttheir eyes and ‘hope it all goesaway’. The current G7 compo-nent countries, the U.S.,Canada, UK, Japan, France,Germany and Italy, betweenthem represent more than 63%of the entire net global worth(c $241 trillion) and approxi-mately 50.4% of the globalnominal GDP. At present 3 oftheir members find their econo-mies in ever growing turmoil,three find they are finally recov-

ering and one wishes it was not sodependent on its associate mem-bers who continue to drain its hardearned savings.

The three countries in need ofan economic miracle are, ofcourse, Japan, Italy and France.

Japan, as we have noted previ-ously, is the first developed nationto start experiencing sustained anduncontrolled population reversal.Even the short term statistics wouldgive actuarial accountants night-mares. In the 2010 census the coun-try had a population of 128,056,026.As at the end of 2012 it was126,659,683. While a drop of1,396,343 in two years may notseem much, this 1.09% decline inpopulation is only the beginningof a dire trend. In two years they

have lost the equivalent oftheentire population of cities suchas Brussels, Copenhagen orFreetown, Sierra Leone.

Projections by the Japanese gov-ernment indicate that if the cur-rent trend continues, the popula-tion of Japan will decline from itscurrent 126.7 million to 116.6 mil-lion in 2030 and 97 million in 2050.This is truly astonishing and putsJapan at the forefront of uncharteddemographic territory; but it is aterritory that many other industrialcountries are also beginning toenter as well. Such a decline inpopulation over the next few de-cades, and the shortage of youngpeople in particular, will have asignificant impact on the Japaneselabour force. Questions related to

By Neil Hitchens



Batman: A sound

observation, Robin

Robin: If we closeour eyes, we can’t

see anything

‘The Batman’ Television Show, 1966

how to maintain economicgrowth—an issue that has been atthe forefront of thinking about thecountry for the past twenty years,due to a generally sluggisheconomy—with a decreasingpopulation are both complex andon the minds of policymakers.One obvious solution to this wouldbe for Japan to relax immigrationpolicies and allow for more foreignworkers, particularly healthcareworkers, to enter the country. Not,as yet, a particularly palatable so-lution, but this may well changeas younger Japanese, with regularexperience and interactions withforeigners, move into positions ofpower and guide policy.



An alternative to this social-centred solution ofincreased immigration has been raised in recent years.Rather than relaxing immigration laws, some haveproposed increasing investment in robotics as a meansof addressing the conflict of a shortfall of labourwith the need for workers. This idea has been raisedparticularly in relation to care of the elderly, wheredemand for workers has increased rapidly with thepromulgation of the longer term care insurance pro-gram in 2001 and the continued growth of the eld-erly population. It may well be that a technologicalsolution to Japan’s population problem will be seenas preferable to other possible solutions.

Obviously, only time will tell. But Japan is facedwith an unprecedented population challenge that willhave social, economic, and political consequencesover the next century—consequences that will notonly affect Japan, but also influence Japan’s tradingpartners as well as its political and military allies.

There is, perhaps, no single variable in the com-plex web of East Asian politics more uncertain interms of how it may influence future relationsthroughout the region than the fate of Japan’s popu-lation, because the manner in which that populationchanges over the next several decades is both diffi-cult to predict and likely to have a profound influ-ence in shaping the regional role Japan is able to play

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highly loose monetary policy being fol-lowed. The unemployment rate in Ja-pan has lowered from 4.0% in the fi-nal quarter of 2012 to 3.7% in thefirst quarter of 2013, continuing a pasttrend. Whether it will work or not, re-mains to be seen as our suspicion isthat Japan will, eventually, continue tomuddle on in the way it has for thepast 20 years, hoping for something‘to turn up’ externally as the US andChina continue their recent growthtrends.

However, if you thought Japan wasin dire straits, then spare a thought forItaly and France.

In the latest OECD (theOrganisation for Economic Co-opera-tion and Development) regional reportfor Italy it notes that Italy’s recessionwill continue beyond 2013 as the ef-fects of fiscal tightening and restric-tive credit conditions bear down oneconomic activity.

Employment and hours workedwill continue to fall, constraining house-hold budgets and consumption spend-ing.

Despite recapitalisation, continuinglosses hinder the banking sector fromsupporting investment and consump-tion, though some relief will comefrom the government’s settlement ofits payment arrears. Notwithstandingstrengthening exports and less fiscalconsolidation, growth will remain lowin 2014 and the prospects for 2015/16 and 2017 remain fuzzy.

The projections assume fiscal tight-ening in line with government planspublished in April 2013 which, alongwith gains from lower interest rates onmaturing debt and a greater share ofshort-term borrowing, should keep theheadline deficit at around 3% of GDPin 2013 and around 2¼% in 2014.

Policy priorities must include con-solidating the growth-enhancing re-forms of 2012 while limiting overallpublic spending and avoiding prema-ture tax reductions so as to put debton a downward path. With this degreeof underlying tightening, automaticstabilisers should be allowed to work,with somewhat larger deficits if growthprojections are not met.

Not exactly a ringing endorsement

of the recent Eurozone fiscal relaxing.Italy, in reality, is once more acting as amajor constraint on the rest of the eurozone. On October 29th2013, AntonioGolini, the acting head of the NationalStatistics Office, said the economy hadpersisted in its decline in the third quar-ter. That totally contradicted thegovernment’s view that the country’slongest recession since World War IIhad begun to bottom out. On the sameday the finance minister, FabrizioSaccomanni, revised down growth to -1.8% from an earlier dismal forecastof -1.7%,continuing his pessimism forthe economy’s performance in 2013.Even if growth returns in the fourthquarter, it is widely expected that anysuch growth would be, at best, anaemic.Such a lack of economic growth willmake it even more difficult for thegovernment to hold its predicted defi-cit-to-GDP ratio below the euro zone-mandated 3% ceiling and prevent itsballooning debts of €2 trillion ($2.8trillion) from rising above today’s levelof 130% of GDP.

Italy’s depressing outlook is basicallybeing ignored by both local media andthe Italian Stock Market – The‘BorsaItaliana S.p.A.’ Only one main-stream daily Italian newspaper choseto report Mr Golini’s depressing eco-nomic predictions. On the next day glo-bal and domestic fixed incomeinvestorschose to ignore this astute andprobably correct prognosis by buying€3 billion of ten-year Italian treasurybonds which were issued with a mind-blowingly reduced coupon of just4.11%. The markets seem convincedthat America’s Federal Reserve willkeep money loose until at least nextspring and, above all, trust the under-taking from Mario Draghi, the Presi-dent of the European Central Bank,that he would do “whatever it takes”to save the Euro. Hence, investorshave let the spread between returns onItalian and German benchmark debtslip to 250 basis points from 475 basispoints when Mr Draghi made hispromise in July 2012.

Here I truly believe the global mar-ket has got it wrong. While we havepreviously commented that the Eurois weakening daily because of the plight

as a political, cultural, and economicpower.

However, Japan is, somewhat ‘oldnews’. The newly found enthusiasm for“Abenomics” – the economic policiesadvocated by Shinzo Abe, the JapanesePrime Minister.

Abe aims to expand the economyof Japan, still facing challenges relatedto the global economic recession, by acombination of measures such as ag-gressive quantitative easing from theBank of Japan, a surge in public infra-structure spending, and the devalua-tion of the Yen.

These policies can be compared andcontrasted to other government mea-sures across the world to stimulate eco-nomic growth. Keynesian theories ofdemand side macroeconomic changesare cited as partial inspiration forAbenomics.

Short-term, the results are work-ing, partially. The Yen weakened byabout 25% against the U.S. dollar inthe second quarter of 2013 comparedto the same period in 2012, with a


FOREIGN INSIGHT | Equities - The Good News Continues...for Now

of smaller participants such as Greece,Cyprus or Portugal, Italy is the elephantin the room that everyone is ignoring.At a pinch full ECB control of theGreek or Cypriot economies could befeasible. However if Italy truly livesup to these predictions this could in-volve the complete annihilation of theEuro.

Italians are rather like the Japanese– while they had the Lira as their cur-rency, the occasional devaluations here,the occasional interest rate changesthere, helped keep the economy tick-ing over, but it was always one of themore sluggish European economies.However, for Italians, it worked andthey remained sanguine about thelonger term potential problems.

The trouble with such a sanguineview is that Italy’s dismal fundamen-tals have so far done little to bringabout any political stability; somethingthat is critical for any structural eco-nomic reform. Mr Letta, the latest Ital-ian Prime Minister, formed a left-rightcoalition out of necessity in April 2013.

The government continues to op-erate under mounting fire from thesection of the PdL (Il Popolo dellaLibertà) the party of the disgracedformer Prime Minister, SilvioBerlusconi. The media proprietor andformer Prime Minister has bullied thegovernment into fulfilling his campaignpromise to kill off a property levy.Partly because of that, the Italian fi-nance Minister’s budget for 2014 willdo little to stimulate growth.

Mr Berlusconi, who was foundguilty of tax fraud in August, also seemsto feel that Mr Letta should have in-tervened to stop him being convicted,or at least save him from the conse-quences of the verdict. Life will cer-tainly be the less interesting when hefinally goes to jail.

Hot on the heels of the somewhatexpected continuing confusion andfuzziness from the Italian economycame some rather surprising newsabout the third of this unlikely trio ofdesperados – France.

Recent economic releases from theInsée – the French National Instituteof Statistics and Economic Studieshave been ringing the alarm bells the

length and breadth of the Euro zone.In September, manufacturing outputfell -0.7%. In the 3rd quarter of 2013manufacturing output decreased in total-1.1% and was lower than the sameperiod in 2012 by -2.0%. There was aslump in the 3rd quarter of the manu-facturing and processing of petroleumproducts by -10.6%, a figure than de-fies logical explanation. France is, weare continually told, recovering from

the recent slump – yet the official fig-ures give a mirror image to anythingthe politicians may well say. In manyrespects a similar situation to Italy.

Since becoming President last May,François Hollande entered officepledging to roll back the harsh Ger-manic prescription of austerity. How-ever having been in power for a littleunder 20 months the economic realityis hitting home fast. The Frencheconomy, so dutifully pandered to bysuccessive French administrations is

very slowly showing signs of extremefiscal fatigue. A hard hitting budgetwhere spending will slash borrowing to3% of GDP next year (interestinglyhalf the level the UK is planning for)sees about €30 billion of targeted sav-ings – mostly via higher taxes. How-ever, much as the observers in Berlinwere probably cheering this radicalmove, the budget failed to address theunderlying root cause of France’s eco-

nomic vulnerability. – Its lack of com-petitiveness and overbearing state.

This new found willingness for‘proper’ austerity prevented aFrenchbond market meltdown – buttheline that separates it from itsMediterraneanneighbours of Italy andSpain remains wafer thin.

It is France’s extreme reluctance toconfront the vested interests in thestate apparatus that sees no chancewhatsoever to reform the notoriouslyinflexible job market rules that are a

http://money-own.blogspot.com/2013/02/berlin-city-germany-tourism-wallapers.html


FOREIGN INSIGHT | The Global Economy -Recovery is on its way... eventually

persistent and growing drag on busi-ness and innovation and are helpingkeep the overall unemployment ratewell above 10%. French unemploy-ment stands at around double that ofGermany. For there to be any chanceof shifting this imbalance, growth cre-ation in the state dominated industrieswill mean one thing and one thing only– deeply unpopular restructuring ofdecades old industrial practices. In

short unemployment will have to risefurther to stimulate growth.

The carry through to the rest ofthe Euro zone again fills many observ-ers with dread. If the Eurozone’s sec-ond largest economy is unable to ad-just to the growing pressures ofglobalisation it will enforce the continu-ing arctic conditions affecting the wholecurrency bloc. The Euro zone as awhole has seen some notable positivesin the past few months. The ECB’s(European Central Bank) bond buying

programme; Chancellor Merkel’s re-election; Dutch elections which saw areturn to centrist policies were all re-flected in a generally better marketmood with peripheral bond spreads re-treating and shares in Europe’s biggestcompanies up well over 10% this year.

The danger remains that the moreperky markets become, the less pres-sure there is for more permanent andnecessary market reforms. It is stillhighly likely that Spain will ask for afurther bail-out, something thatFrance is keen to promote, but Ger-many does not want to see. We arealso seeing increasingly acidic negotia-tions in Greece where the latest coali-tion could well implode before Christ-mas.

The underlying financial and eco-nomic fragmentation of the Eurozonecontinues unchecked with Eastern Eu-rope emerging as the next big casualty– especially the Czech Republic andRomania where the lights are alreadyflashing and the bells are ringing butno-one wants to notice.

Indeed, as we were going to press,the almost inevitable has happened tothe French Credit ratings. From scoff-ing at the UK losing its coveted AAArating the French now have additional‘oeuf ’ on their faces as Standard &Poor’s (S&P) cut the French ratingfrom AA+ to AA The credit agencywarned that PresidentHollande had, es-sentially, backed himself into a fiscaldead-end with unemployment to re-main at dangerous levels well into 2015and beyond.

The assessment, even though it iscouched in the niceties of financialmanners, fuelled concerns about thepossibility of an eventual revolt by thegeneral public to the President’s poli-cies. It also warned that he could beforced into snap elections in 2014, es-pecially fi his Socialist Party performsas badly as predicted (though the even-tual result may be even worse that any-one can currently predict). While notexpecting a completely identical re-runof the Paris riots of the late 1960’s,there should be growing anxiety withinFrance that the spark now exists for aconcerted cycle of violence, civil un-rest and civil disobedience.

The downgrade now leaves thePresident with even less room for ma-noeuvre as he seeks to curtail a taxrebellion in Brittany whilesimultaneouslytrying to convince hisEU allies that he is capable of seeingthrough the necessary tough reforms.Things are so bad that even a plannedstrike by French professionalfootballers has been proposed, so sickare they of having to pay upwards of75% tax on their earnings. Come theweekend of November 30th there willbe no senior league matches in thecountry. However public opinion aboutthis measure remains firmly in the ‘No’camp as most people have managedto work out that 75% of €20 million ayear still leaves the ‘poor’ footballerswith more net salary than an individualcan expect to earn gross in 15 years.

The S&P downgrade does reflectglobal concerns that the current ap-proach to budgetary and structural re-forms to taxation, product, services andlabour markets is unlikely to raiseFrance’s medium term growth pros-pects. The good news, for there reallyis some, is that S&P said there was littlechance of a further ratings cuts as thestable outlook going forward reflectstheir expectation that the Governmentis committed to containing current debtlevels. The chance of a further cut inthe two years is now at one in three/33 1/3%.

For M. Hollande these are greatodds.

Personally I would not bet on it!

Germany – G7’s piggyin the middle?After Frau Merkel’s re-election asChancellor, Germany continues to finditself as the odd-one-out in the G7.Neither confident that its owneconomy is not going to be derailed byoutside supposedly friendly forces, norpessimistic that the measure it has takenare all for naught.

The German finance ministry hasrecently revised upwards its forecastfor economic growth in 2014 and be-yond amidst the prospect of recordlevels of employment. It is confidentlyhoped that the German economy in2014 will expand by +1.7% - this in


FOREIGN INSIGHTS | The Global Economy -Recovery is on its way... eventually

itself, because of the extremely heavyweighting that Germany gives theEurozone, assures that technicallythere will be no chance of the Eurozonee returning to recession.

On top of this exports are pre-dicted to pick up after a low +0.3%growth in 2013 to rise +3.8% nextyears.

Again the foundations for itsgrowth are the domestic economicforces. The mood of German compa-nies is good again and they are invest-ing in equipment and construction. Con-tinuing growing employment levels areforming a virtuous circle ensuring thatGerman economic momentum willspeed up sharply in 2104.

Recently there has also been in-creased criticism of the growing Ger-man trade surplus from, of all places,the US. There was a sense of indigna-tion form Berlin that the US couldcriticise Germany in this way; howeverthe US is only saying what Germany’spartners dare not. By maintaining a verylarge trade surplus, it is perceived thatGermany has hampered rebalancingin other Eurozone countries and hascreated an unnecessary deflationarybias for both the Euro and the Globaleconomy.

Germany’s projected trade surplusof $215 billion in 2013 is virtually thesame as China’s and is a big issue forthe Eurozone. Such export surplusesdo not reflect just innate competitive-ness but show an obvious excess ofoutput over spending. Surplus coun-tries such as Germany import thendemand they do not generate internally,which when overall global demand isbuoyant is not a problem provided themoney borrowed by those countriesthat are importing this trade surplus(net trade deficit areas) to cover itsdeficit is invested in activities that cansubsequently service the debt incurredby running a trade deficit. But thisether does not happen or as in currentconditions when short term interestrates are very close to zero and de-mand in these weak economies is low,such a deliberate trade surplus policyhas a distinctively weakening effect andactually increases overall global eco-nomic weakness.

It is no surprise that overallEurozone GDP is still 3.1% below itspre-crisis levels and 1.1% lower thanonly 2 years ago. Germany, as a highlycreditworthy economy (still with anAAA rating) is constricting demand, notadding to it.

Yet, again as we went to press –out of almost nowhere, the ECB de-cided that it was determined, again, toensure a lasting recovery in theEurozone ad slashed its interest rateto 0.25% from an already low 0.50%.Probably not quite what Germany hadwanted as this was likely to drive inter-nal demand to higher than requiredlevels as credit became even cheaper.

The ECB has now tried just abouteverything short of actual zero inter-est rates in an attempt to drive growth

in the wider European context. Be-cause demand remain overall l low, in-flation itself remains low. We are nowin danger of a sustained deflationaryperiod within the Euro, again not ex-actly something that Germany would

desire. Indeed, deflation is probably themost disastrous possible outcome forany heavily indebted nation such asGreece, Spain, Portugal or Cyprus.Here, again there is the growing possi-bility that the Eurozone could well endup like Japan in have a ‘lost decade’after the collapse in Japan of its assetprice bubble.

If such a scenario does appear thenultra-high unemployment is inescap-able. Indeed the policies pursued byGermany were almost doomed to havethis outcome given the demand de-stroying impact of austerity. Cumula-tive losses of 18% in Greek GDP,10% in Spain, 9% in France and 8%in Ireland are the result of this, albeitnecessary, strictness. Monetary policyalone is going to find it impossible to

offset these losses. Before the crisissuch monetary policy could work byexpanding credit in what turned intocrisis- countries – especially Spain. To-day it is working against the backgroundof a weak banking system, debt over-

http://www.heatherwick.com/wp-content/uploads/2011/12/NBfL-Bus-London-THA-3465.jpg



hangs in crisis hit countries and an aver-sion to borrowing in creditor countries.

There is one possible escape route– a devaluation of the Euro exchangerate. If the ECB adopted a beefed upbond buying policy of the Euro mem-bers in proportion to their weightedshare of the Euro, deprecation wouldensue and trade surpluses in weakercountries would start to recover andtheir own exports became proportion-ately cheaper. Germany though wouldalso gain as well.

Germany, again, must be wonder-ing quite why it bothers to maintainthe rigid fiscal discipline that just aboutall its neighbours seem to lack one wayor another. The problems in Greecemost certainly won’t be solved in 2014– in fact the possibility of yet another

bail-out remains. France seems to bedoing its level best to implode and thereis precious little that Germany can ac-tually do over the coming year to tryand find a solution to the on-going,growing and more unstable Euro

Union.In the Eurozone then, all is most

definitely not well. Deflation is com-ing; unemployment is rising; internal re-balancing is being thwarted; there is anoverreliance on external demand. Themyth that the crisis only came aboutbecause of fiscal errors, instead of ir-responsible cross-border lending is er-roneous. Fiscal policy has no role indemand, internal or external. Centralbank purchases of government debtcan lead towards ultimate hyperinfla-tion and above all competitiveness de-termines external surpluses not a sim-plistic balance between supply and de-mand.

Europe must be wary about theseerroneous statements. Weaker mem-bers run the most definite risk of be-ing in a semi-permanent slump or de-pression which will lead to an extendedbreak –up of the Euro.

What about the ‘dynamicduo’? – UK and the USshowing G7 the way.In marked contrast to the woes of Italy,Japan and France the dynamic duo ofthe US and the UK show the worldhow it should be done. Canada is alsogrowing well but as a neighbour of theUS its economy almost walks in tan-dem with the US.

From the ashes of the fiscal crisis,the US phoenix is about to emerge,just as the stressed Chinese economyis beginning to show signs of somesuffering. Indeed the US may be re-covering its economic edge just in thenick of time, preventing a further glo-bal depression.

Recent economic releases (delayedby the recent temporary shutdown)show that US companies expanded ata rate of 2.8% in the third quarter of2013. These figures were significantlyhigher than the 2.0% – 2.2% expectedby many economists and represent thefastest growth rate of 2013 so far.

The figures were boosted by growthin inventories and higher federal andstate spending. The public sector as awhole seems to be having a far lessnegative impact on the economy as awhole; yet the rate of growth is prob-

ably a little too low to rapidly bringdown unemployment towards themagical 7.0% level at which stage USfiscal policy would slowly be reversedand the artificial stimulus throughQuantitative Easing (QE) would ini-tially be reduced to zero and going for-ward start to lower overall money sup-ply. However this is not an instantevent – this could take many more yearsto fully bed down.

Essentially- America is regaining itsglobal economic dominance.

However a lot depends on on-go-ing negotiations in Congress about fu-ture tax increases. As theRepublicanParty managed to changeabsolutely nothing by its ill-timed deci-sion to bring the US to the edge of afiscalcliff, the negotiations have onlybeen postponed to the beginning of2104. It is now far more likely thatsense will prevail. Yes, certainly, theredoes need to be some modest tax in-creases and the slated $500 billion ofautomatic tax increases and spendingcuts for the beginning of 2104 wouldhave a negative impact on the USeconomy. However the Republicanshave seen their more radical ‘Tea Party’activists muzzled and the looming cliffis now more likely to be a more mod-est slope which would enable toeconomy to grow as it rebalances. Thehousing market slump is over inmoststates; US exports are on a rolland have risen by more than 3% ofGDP since 2007.

US labour costs are also showingsignificant falls compared to China andother previously ‘more competitive na-tions. We are seeing some significantproduction of high tech items movingback to the US. Helping the USeconomy are sharply lowering pricesfor gas and industrial electricity. Thisis a direct result of America’s strongposition in the development of shalegas and oil extraction technologies.

Further unexpected areas will alsoboost US productivity. In the area ofadditive manufacturing, or 3-D print-ing great strides are beingmade that willboost the US economy. 3-D printing,for those that have not seen it, is theability to create, layer by layer, com-puter design generated objects which



can be printed at homeor in theworkspace. There is growing evidencethat with such technology many com-panies will be bringing production backto the US as there is no need to holdlarge inventories of something than canbe created, literally, in minutes; there isno need to ship raw products in andfinished good back from foreign coun-tries and manufacturing costs (labour,packaging and transport) will simplyplummet.

Here the Silicon Valley businessmodel of innovation, advanced designand commercialisation is back,emphasising customised production,quality control, after sales service andintellectual rights. This is something theChinese have not been particularlygood it. Indeed the Chinese model withlong global supply chains, large scalefactory based manufacturing andeconomies of scale looks on its wayout in certain sectors.

The US is also being the ‘Batman’of the dynamic duo – almost any eco-nomic release over the past few weekshas shown the economy growing fasterthan predicted. Recent jobless surveysshow the economy is fast reaching aself-sustainable level at which pointfurther QE will not be required. Any-one but the most cynical observer ofrecent economic statistics has to ac-knowledge that the US economy overthe past six months or so has mostdefinitely picked up momentum rap-idly. Despite the figures from July 2013being soft, which encouraged the Fedto keep the bond purchase programmegoing, a much stronger than hoped forautumn US jobs market could beenough to trigger the Fed’s initial crite-ria point needed to scale back theamount required for QE.

I therefore suspect, if not predict,the Federal Reserve will signal the ‘be-ginning of the end’ for bond purchaseson December 18th 2013. However,before everyone panics and assumesthat the liquidity taps are simply goingto be switched off overnight – thinkagain.

Certainly the end of the currentlevel of QE is well overdue. As wehave advised previously, QE in itselfwill continue in smaller and smaller

amounts until, eventually, yes the bondbuying programme will be reduced tozero. Here it is feasible to suspect theFed will ease out this process over aperiod of 12-18 months, maybe longer.Certainly the 7% jobless rate triggerwill be the final signal that both QEmust start winding up and that officialinterest rates s must begin to return toa more normal level will be fairly wellflagged. Like all addicts, it will take timefor the financial system to both weanitself off QE and then learn to livewithout it – recovery in many sensesof the word.

However the next logical stage –that of the Fed starting to reduce li-quidity in the system is not one thatwill be taken ether lightly or soon. Cer-tainly it will need to wait well in to 2016to see the after effects of the QE tapsbeing switched off before it gives anysignal to markets that the era of easyliquidity is over.

The US bond buying has certainlybeen propping up global equity mar-kets and here it is highly possible thatthe recent emerging market fluctua-tions could be accentuated at this trig-ger point. Certainly the US Dollar hasbeen slowly gaining ground and the USbond market has also seen yields start-ing to rise the length of the curve.While these rises in pure basis pointterms are, in themselves, not gigantic,as an overallpercentagechange, theyhave been quite striking.

In the UK, the ‘Robin’ of the dy-namic duo, has also seen the economyrecover far faster than even predictedat the beginning of the year. The newGovernor of the Bank of England,Mark Carney, upon assuming office,stated that he did not, at that point,see a need for UK interest rates to riseuntil 2015 or 2016; some 2 or 3 yearsaway.

However, almost as if to spite him,as well as the opposition Labour Party,the UK economy has suddenly beenboosted by increasing levels of partici-pation in the workplace, along withbenign inflation and a housing marketthat appears to be gradually rising (Cen-tral London excepted where pricesroses of the large houses have, all mustadmit, been artificially boosted by for-

eign investment). Talk of the economyreaching escape velocity now appearsto have been justified.

While I do not expect interest ratesto rise in the next 12 months, unless,of course, the economy starts to over-heat dangerously, I am comfortable inthinking that there is a distinct possi-bility of UK interest rates to start ris-ing from Q1 2015, Q2 2015 being evenmore probable. Rates will then continueto rise slowly from the current low lev-els to return to something along theline of 3.5% - 4.0% within a few years.

This UK return to normality willbe a challenging one for any govern-ment – the current administration maywell ‘get lucky’ and ahead of the defi-nite election date of May 2015 aremore than likely to see the economyhaving recovered all the previous 7years losses and most probably be atnew, calmer, all times highs. Certainlywas I to be in with a chance of win-ning when the poll is called at the end

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of March 2015 I would be praying thatthe Bank of England may only con-sider raising rates in June that year.

Either way it will be a close run thing!

Oil – Fracking gains put theUS at a clear near termadvantage.As noted above, the US is starting tosee clear benefits to its enlightenedstance on fracking shale oil and gas re-serves. A direct result of this has beento see crude oil prices in the Gulf ofMexico pushed to record discount lev-els against the benchmark Brent Crudeprice. This latest sign of the suddenand dramatic impact of the shale oiland gas revolution on the US refiningindustry shows significant signs of ac-celerating the already booming US ex-port sector of petroleum products.

US oil production has surged tonew highs thanks to the longer term

planning of the industry to upgradelocal infrastructure. The main refininghubs of Texas and Louisiana haveseen the benefit and are able to notonly refine existing ‘traditional’ oil prod-ucts but also have been able to copewell with the tapping of shale fieldssuch as the North Dakota Bakken de-velopment.

The improvement in all aspects ofoil transportation in the Gulf ofMexico, an area traditionally account-ing for at least 50% of of US refiningcapacity, has enabled US independentrefiners such as Valero and Philips toside-step the profit hit seen at oil ma-jors like Shell and ExxonMobil, result-ing from the sudden increase in refin-ing capacity in the Middle East andAsia. This also enables US petroleumproduct exports to rise further at theexpense of their Europeancounterparties. The cheapness offracked assets will continue to benefit

the US producers for a longtime tocome as it is likely to take the Euro-pean fracking sectorbetween 5 and 10years to even get to the stage the US iscurrently at.

Profitability at many Gulf Coastrefiners has increased by at least $5 abarrel in the past 3 months. The USbenchmark, West Texas Intermediate(WTI) has fallen by almost 10 % inthe past month to just around $94 abarrel – a discount of more than $10to Brent. This reflects the fact that USrefiners are buying less crude – not onlybecause of the fracking boom, but alsoon season factors such as refinerymaintenance.

While in recent years the discountbetween the two benchmarks has beenwider, but transport bottlenecks aroundthe Cushing, Oklahoma delivery pointmade access all but impossible to a fewrefineries. Now, with ne pipelines open-ing as scheduled it is now significantlyeasier to move WTI to the Gulf Coast.A lesser known but important bench-mark, Louisiana Light Sweet (LLS), has,as a result of this infrastructure im-provement, been trading at a more than$10 a barrel discount to Brent, the larg-est discount since records began. Untilthe fracking revolution, Louisiana LightSweet traded at a premium to Brentreflecting its higher refining quality.

Oil, as a commodity, is due a smallbounce soon as the Europeanwinterseems to be beginning slightlyearlierthan usual. However gains are not go-ing to be as large or as exaggerated asin the past as the predominant factorbolstering oil prices, Iran, has begun todisappear from the equation.

The recent dovish stance taken bythe new Iranian regime is at odds withthe previously ferocious, sabre rattlingapproach. Indeed, such talk about theIranian nuclear programme seem, darewe to say, to be more honest and upfront than could have been thoughtpossible six months ago.

Yet, there is always a sting in thetale of such good news – Israel hasalready said that it is far from happywith the friendlier overtures being madeby the West to Iran and here I thinkwill be the sticking point for any rap-prochement that might be possible.



Equity Markets – a verygood run in 2013 – time totake profitsNovember this year reignites melan-choly memories for many. 50 years agoon November 22nd 1963, Dallas,Texas witnessed the assassination ofPresident Kennedy. There are many par-allels between Kennedy’s presidentialtenure then and Obama’s now. In theearly, 1960’s Kennedy ended a periodof tight fiscal policy and by the end of1963 had loosened monetary policy tokeep interest rates low and encouragegrowth in the economy. The economywas in recession when Kennedy tookoffice at the end of 1960 but duringthe latter part of his term fiscal easinghad worked well with overall growthof +5.5% between 1961 and 1963.

1963 also saw the S&P 500 moveahead rising from a low on January 1stof 63.10 to end the year at 75.02, anoverall rise of +18.89%. Dallas,though, marked a sharp market cor-rection with the market moving from72.56 to 69.61 (-4.07%) but it recov-ered on the next trading day, Novem-ber 26th, back to 72.25. From thiscorrection, the S&P continued to moveupwards over the coming years withrises in 1964 of +12.97% and 1965,+9.06%. 1966 saw a decline of -13.09% on the back of a sharply in-

Source: Bloomberg

creased US involvement in Vietnam,but the S&P continued its rises in 1967,+20.09% and 1968, +7.66%.

In 2013, US markets appearequally bullish. The S&P and the DowJones are already breaking new highson a regular basis as investors desper-ately try and gain yield from almostany source. At the end of October,the S&P has already managed to climb+23.16% this year and the Dow hasmoved almost similarly, +18.63%.Sense would suggest that we are likelyto end the year at around these levels;any move of more than +20% to+25% in a year from any index in

market conditions such as we have re-cently endured, should be a cause ofsome alarm and no small scepticism.It may indeed, be better to “Sell in No-vember and go away until January2014” – after all a gain is gain.

Currently the 2.01% yield on theS&P 500 index as a whole and the2.15% on the Dow Jones are in sharpcontrast to current US Treasury yieldsof 0.053% for 3 month T Bills,0.088% for 6-month bills and 0.103%for 12 month bills look positively en-ticing.

Indeed with just a little selective fil-tering in the Dow the 3 highest yield-ing stocks are AT&T, 5.14%, VerizonCommunications, 4.16% and IntelCorp., 3.79%. In the S&P 500, the threehighest yielding stocks are Windstreamholdings, 12.48%, Frontier Communi-cations 8.53% and Centurylink Inc.6.89%. However, while the yields areat face value, impressive, the underly-ing total returns for some of thesestocks carry some very large healthwarnings. The stocks included in theDow are, by the inherent safer natureof the index, likely to perform roughlyin line with the Dow as a whole. In theS&P 500, stocks are included basedon total value only and it is because ofthis the high yielder returns tends todisappoint overall.

Thus, we see that the AT&T stockprice has risen +4.90% in the past 12months, Verizon, +17.73% and Intel,+15.82% - all very good rises even if

Source: Bloomberg


there is some sector compression here. In the S&P 500,the returns are at best, mixed: Windstream, -5.65%, Fron-tier Communications, +7.82% and Centurylink, -19.27%.

However tempting it may be to start extrapolating thegains for 2013 forward into 2014, 2015 and beyond, likewe saw in the early 1960’s the US equity market is about toexperience a different version of the Vietnam offensive –the end of Quantitative Easing (QE).

Anyone but the most cynical observer of recent eco-nomic statistics has to acknowledge that the US economyover the past six months or so has most definitely pickedup momentum, apparently extremely rapidly in the pastthree months. Despite the figures from July 2013 beingsoft, which encouraged the Fed (erroneously as it turnedout) to keep the bond purchase programme going, a muchstronger than hoped for autumn US jobs market could beenough to trigger the Fed’s initial criteria point needed toscale back the amount required for QE.

Certainly, the end of the current level of QE participa-tion is well overdue.

Elsewhere in global equity markets, there have been,

overall, similarly positive results. In in the US and the UK,for so long as local bond yields remain meagre, the searchfor yield and income means that the only avenue left formost investors remains equities. However, even here, theresults of the continuing massive cash inflows have hadthe result of reducing the average yield on indices to levelsthat are starting to become a little low, but it should be said,even at these lower levels do not lead to a total aversion ofinterest in equities.

As can be seen in the chart, the peak in yields in 2009was when markets were at their weakest just after the Lehmancollapse. A more normal picture emerges from 2010 andcurrent yields in London and Berlin remain higher than thelong dated sovereign fixed income.

Market Index Yield 30 Year Bond yieldLondon 3.66% 3.51%Germany 2.97% 2.61%

Yields in New York and Tokyo are slightly less for equi-ties than the 30-year bond, but even at these lower levels,

you will always have the possibility of capital gainsin equities. Bonds are extremely unlikely to pro-duce further significant capital gains and certainlynot at the 5% - 10% that equities are generallyhoped to be rising by every year for the next fewyears. Indeed, with the eventual ending of QE inmany countries bond prices are likely to remainstatic at best and may indeed decline by a fewpercent a year as yields move towards more nor-mal ranges at the shorter end of the curve asliquidity lessens.

As we pointed out earlier, in the case of theS&P 500, 2013 has been one of the better yearson record.

It is also notable that the rally in the US hasbeen the broadest one on record with 443 risingstocks out of 500 (88.6%), 5 unchanged (1.0%)

Source: Bloomberg


http://2.bp.blogspot.com/_1O0GAQEaHl0/TBDzfzPUslI/AAAAAAAAA4U/lSzVvFLTBb0/s1600/london+stock+exchange.jpg


and 52 losing stocks (10.4%). It is look-ing as if we will havethe bestyear forstock in 16 years and given that stockshave climbed in the final two monthsof the year 82% of the timesince1928, they have shown an aver-age increase in these winning monthsof 6%.

Given that the index continues tomake new highs it is conceivable thatfrom the end of October reading of1,756.54, the S&P 500 could end theyear at around 1,860 – a potential risefor the year of 30%.

However, here, again, I urge con-siderable caution – any rally of morethan 20% does sometimes run intoextreme headwinds coming into year-end. The temptation for many money

managers, this one included, having hadsuch a good run is to call time early onthe year, sell in November, then spendDecember counting the profits.

Elsewhere in the world there havebeen some surprising gains and a fewdisappointing losses in the major mar-kets.

While the attraction of the Gulfregion have been highlighted before itis notable that many of the best per-forming markets are also the smallercapitalised ones, Ghana included.

We do find the sudden fascinationfor Greek stock extremely worryinggiven the totally negative sentiment for

the country as a whole – the possibilityof an enforced Euro exit or completecivil breakdown remain a possibility.While, of course, many investors havemade money it has been a selectiveprocess. The myth that hedge fundshave been buying bank stocks is ratherexploded when some of the worst per-forming stock are banks. Piraeus Bank,-54.79%, and the National Bank ofGreece, -36.55% are some of theworst performing stocks. Indeed mar-ket conditions in Greece are so badthat Coca Cola Hellenic decided mid-way through the year to scrap its list-ing in its home market and switchedto London!

We, though, note with interest theNigerian market performance and

while it is not totally our remit to com-ment on ‘local’ markets do hope thatthe 2014 performance could be equallyas good.

It is in the emerging markets thatthe real carnage has been seen. Againhaving warden about Mongolia in 2011when it closed the year at 21,687 an -18.80% fall in 2012 is followed by a -29.57% return for 2013 to date. Weshould not have to warn our readersabout the undesirability of investing inthinly traded smaller capitalised indi-ces. Rises in these are over-exagger-ated and as such suck in index track-ing money automatically, a process that

in itself usually leads to additional highs.However, as soon as one or two inves-tors decide the time is ripe to sell andcapitalise on their gains, the falls arealmost equally, if note more exagger-ated and participants wishing to exit willfinds that their paper profits have al-most always disappeared and the re-sulting losses in the mad scramble toexit a sharply falling market are a pain-ful reminder to never, ever, have morethan a nominal weighting to any suchmarket.

We also note with some disappoint-ment the continuing disaster that isunfolding in Brazil ahead of their host-ing both the World Cup in 2014 andthe Olympics in 2016. The generalmood of unrest has affected the stock

market majorly and the current -18.46% losses are more than likelyto exceed the -20% level before long.The once much hyped and muchvaunted BRICs (Brazil, Russia, In-dia, China) stock market power-houses of 10 years ago has, as I hadhopefully expected, failed to live upto the hype. Indeed the only marketthat should be worthy of more thana cursory look remains the Chineseone – not because there are going tobe any sudden upwards moves, butmore that the Shanghai exchangeremains a useful insight into the near-term prospects for the Chineseeconomy as a whole.

2013 for equities have exceededour expectations and the end ofQuantitative Easing will prove prob-lematic initially as markets weanthemselves off lower than trend in-

terest rates. While it has been unavoid-able the sooner we can return to nor-mal, regular market conditions the bet-ter.

Certainly, for the US, UK andCanada this cannot come quick enough,and the ending of state interference inthe banking sector can only be a goodthing. For the rest of the G7 it willtake considerable time to return tonormal, if at all.

Best of luck for 2014!(Neil Hitchens is a Senior Re-

lationship Manager and Head ofInvestment Management, ZenithBank (UK)

Source: Bloomberg



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By Ngutor Saaka

In Nigeria, the government is often blamed for thehigh unemployment rate among youths. However,instead of focusing on what the government cando, the youth should focus on how entrepreneur-ship and the private sector can resolve unemploy-ment.

Numerous impediments hinder young entrepreneursin Nigeria from growing their businesses, including

the challenges facing the economies ofour increasingly globalized world. Oftengovernments are blamed for the prevail-ing economic problems and the vitalrole that the private sector can play toresolve the issues is neglected. In Ni-geria, the high unemployment rate is amajor concern. Annually, thousands ofyoung people graduate from tertiary in-stitutions just to join the already exist-

ing number of unemployed youth wholitter the congested streets. Year afteryear, they lie helplessly waiting for thegovernment to formulate and implementcertain policies that will alleviate themenace of unemployment. Although thegovernment is an inevitable part of thefight, the frustrated youth’s most viableoption is to be self-employed and, fur-thermore, become an employer. Entre-preneurship is a firm path to attainingindependence from the government,and subsequently, creating employmentfor others.

Based on this belief, this essay exam-ines the impediments facing the youngNigerian entrepreneurs and inhibitingthem from expanding their businesses.It identifies the opportunities they couldleverage, as well as makes recommen-dations on how they could collaborateto pursue prosperity for small busi-nesses. This is done to create a roadmap for building formidable busi-nesses that will make the Nigerian pri-vate sector vibrant enough to set thepace for the country’s economicsustainability.

lack of access to capital, lack of mentorship, andlack of engagement with policymakers and relevantstakeholders.

In order for young entrepreneurs to scale up theirbusinesses, they must form a unified voice by col-lectively advocating for better business environmentsfor entrepreneurs.


ustainable entrepreneurshippractices and a healthy busi-ness climate are in high de-mand to proffer solutions to

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Discourse | Youth & Entrpreneurshipin Nigeria: The Way Forward

The term “youth entrepreneurship”is often universally used to refer toyouth-led businesses. Research hasshown that a larger percentage of Ni-gerian youth in business are at the be-ginner stage and they are mostly own-ers of micro, small, and medium-sizedenterprises. A larger chunk of them arestuck within the vicious circle of theinformal sector. It is worthy to note thatentrepreneurship in the informal sec-tor is responsible for employing a largepercentage of the 80 million Nigerianyouths, who make up 60 percent ofthe total population. Thus, if the ca-pacity of youth entrepreneurship is ex-panded, the widening gap between therich and poor will be reduced. Moreso,money finds a natural fountain for ef-fective re-distribution when the com-munity of private enterprise flourishes.Against this backdrop, the foregoingsuggests certain relatively limited invest-ment areas young Nigerian entrepre-neurs can leverage. The case study ofAdenike Ogunlesi, founder of Ruff ‘N’Tumble, demonstrates these potentialentrepreneurial opportunities. And fi-nally, this essay recommends how theyoung entrepreneurs can work as aunited group towards achieving theirbusiness goals.

Growth Problems of theYoung Nigerian Entrepre-neur and his EnterpriseYoung entrepreneurs are exposed tovarious challenging dynamics in thebusiness environment. They face toughcompetition, high financial cost bur-dens, complex market changes, and thetask of inventing or adopting workablemanagerial strategies and tactics forsurvival and expansion. However, in thecase of Nigeria, young entrepreneursalso suffer from age stigma, lack ofaccess to capital, unhealthy competitionfrom larger firms, a poor roadmap tointernational markets, lack of engage-ment with policymakers and relevantstakeholders, and lack of mentorship.

Age Stigma: It was not until re-cently that the government of Nigeriastarted taking profound steps to encour-age the youth to engage in business. Yet

the rate of stigma constraining the am-bitions and efforts of young businessowners has remained high. Young Ni-gerian entrepreneurs often suffer preju-dice and disrespect from potential fin-anciers as they seek for capital to fundtheir businesses.This is because severalof these potential financiers gained theirwealth through public offices and thuslack the relevant insight to motivateyoung and aspiring entrepreneurs. An-other complication is that some of theseyouths may have faked the proposalswith which they are soliciting for fund-ing. Faking proposals has been a formof survival strategy for some youthsin their effort to survive the excruciat-ing economic situation they are facedwith. But this anomaly reduces thechances of genuine aspiring young en-trepreneurs with genuine need for capi-tal. The cause of the stigma towardsyouth entrepreneurship emanates fromthese two parallel lines.

Lack of Access to Capital: It iscommon to hear of several existingloans and grants from the government,commercial, industrial, agricultural, andmicro finance banks. They amount tomillions of dollars, and yet they hardlyapply to youth-led businesses. Consis-tently, the categories of beneficiaries ofthese financing opportunities are civilservants, government officials, or theiropportuned relatives who squander thefunds on extravagant living or off tar-get investments.

I have had practical experiences thatattest to this. I am a founding memberof a cooperative which was started inaccordance with a World Bank agricul-ture project in Nigeria. Under the co-operative, we submitted a comprehen-sive loan application to the Benue StateMinistry of Finance in Makurdi for29,228,000 Naira on February 6, 2012.Later, a letter reached us dated April10, 2012, stating that the ministry hadapproved 2,000,000 Naira for the co-operative. Although the loan we receivedfrom the government was grossly in-sufficient for the project at hand, weadded over 2.5 million Naira to the firstinstalment of 1.5 million Naira we re-ceived from the ministry to make apayment for some necessary operations.When an inspection team from the





Benue State Ministry of Finance inMakurdi came on a supervision visitto the beneficiaries of the loan facilityin the Gboko local government area,many of the other beneficiaries hadlittle or nothing to show for the moneythey were given. This has always beenthe case in environments where nepo-tism and cronyism permeate. Suchcrooked arrangements hamper the es-sence of the loan scheme and hinderthe real entrepreneurs, especially theyouths from accessing the funds, espe-cially if they do not have personal con-nections with the relevant politicians.Even when the loan reached the youngentrepreneur, potential risks and lackof security for indemnity often preventeffective use of the resources. At times,the repayment terms of the loan maybe too stringent for the small businessesto meet.

Unhealthy Competition from LargerFirms: Smaller companies in Nigeriasuffer the repercussions of a weak le-gal system. Laws have failed to protectthem from the unhealthy competitionwith larger ones. More often than not,the larger companies enjoy virtualmonopoly over the small ones. Thus,the smaller firms find survival verytough, and are unable to achieve mean-ingful expansion.

Lack of Mentorship: In most com-munities of Nigeria, the richest peopleare politicians, high ranking militaryofficers, or a few businessmen who arean integral part of a corrupt politicalsystem. It has become rare to find es-tablished entrepreneurs who inspireyoung investors through exemplary glo-bal best practices. Just as children arenot born with manuals to life and mustlearn from responsible parents, so alsomust young entrepreneurs learn frommentors in their fields. It is easier tolearn from the practical experiences ofsuccessful indigenous entrepreneurs,than to learn concepts and theories thatare sometimes abstract to their pecu-liar experiences.

Poor Roadmap to the InternationalMarkets: Many young Nigerian entre-preneurs who try to expand their busi-

nesses beyond the domestic market, fallshort of the international standards. Forexample, the present trends in interna-tional markets require improved stan-dards and practices that promote qual-ity and customer protection. Recently,the Nigerian Export Promotion Coun-cil (NEPC) has been doing more toenlighten young entrepreneurs on ex-port requirements, providing them withtangible technical support. However,only a few young entrepreneurs haveenjoyed these services. More needs tobe done, especially in the area of pub-lic enlightenment on the services thatthe NEPC offers to potential export-ers.

Lack of Engagement withPolicymakers and Relevant Stake-holders: “In a democratic marketdriven economy, government can eitherhelp or hurt the expansion of businessenterprises.” There are several legisla-tions that negatively influence thegrowth of small and medium-sized en-terprises. In Nigeria, as stated earlier,most youth-led businesses are eithermicro, small or medium sized, whichare often vulnerable to manyunfavourable business legislations. In afunctioning democracy, however, busi-ness associations advocate for the busi-ness community and make sensitiveinput into relevant legislations. However,young entrepreneurs in Nigeria lackengagement with lawmakers. There aresome business associations that are cre-ated in order to make the private sec-tor representation more organized, suchas the Nigerian Association of SmallScale Industrialists (NASSI), InclusiveGrowth Youth Essay Winners Centerfor International Private Enterprise, theNigerian Association of Small andMedium Scale Enterprises (NASME),and All Farmers Association of Nige-ria (AFAN), among other trade andprofessional groups. These associations,nevertheless, have had limited impacton the prosperity of youth-led busi-nesses because they are not really youth-focused –either the associations areadulterated by a government sponsoredleadership or dominated by older en-trepreneurs that only promote theirpersonal interest. As such, it has become

difficult for the youth to achieve rea-sonable engagement with thepolicymakers.

But in the midst of these clusteredchallenges, some young people withwinning qualities including hardwork,perseverance, and innovation, haveovercome these limitations to make amark in their business. One of suchexamples is the case of AdenikeOgunlesi who founded Ruff ‘N’Tumble.

Adenike Ogunlesi: Founderand CEO of Ruff ‘N’ TumbleAdenike Ogunlesi is not just a rolemodel to young women in business, sheis also a mentor to all young strivingenterprenuers in Nigeria. Adenike wasat a crossroads when she opted out ofschool in her 200 level at Ahmadu BelloUniversity (ABU) Zaria. However, shereluctantly accepted her mother’s re-



quest to join her small tailor shop.Gradually, she began making clothesfor women until, as she says, ‘My kidsran out of pijamas.” She decided todesign some for them. Her experttouch prompted orders from familyand friends. Later, with the encourage-ment of her husband, she diversifiedinto making shirts, skirts, and shortsfor children.

Adenike, like most other young en-trepreneurs, was boxed in by harsh re-alities in the Nigerian business environ-ment. She had limited capital to rent ashop. But she overcame this challengeby summoning the courage to start theshop in the back of her car, with atable and suitcase, and she relentlesslysold her products at public gatherings.Later, the obvious need for a retailoutlet led her to employ more tailorsand also to secure a kiosk. By her thirdyear in business, she had managed torent a larger place and her market base

was also expanded. Bank loans nevercame and unreliable electricity supplypersistently ate away her profit. But herfinancial discipline propelled her to re-invest her profits and earnings into herbusiness and triggered a sustainablegrowth of the business. This is howRuff ‘N’ Tumble became a success.From the back of a car, Ruff ‘N’Tumble has grown into a leadingchildren’s clothing manufacturer in Ni-geria. It has become a brand with thereputation for best quality in children’sclothing in the country. Adenike, likemany other young Nigerians, are turn-ing their societal challenges into busi-ness opportunities.

Furthermore, information technol-ogy is effectively connecting diversepeoples with the unfolding trends inour business world. Even contempo-rary international and local transactionshave encouraged sharing of values anddiffusion of ideas. These have pre-

pared the ground for the young entre-preneurs in Nigeria to think outside thebox and confront the existing challengeswith new ideas and better practices.Nigeria is a developing nation with aneconomy almost absolutely financed bycrude oil sales. This has led to the ne-glect of other sectors which holds hugeopportunities for investors. Some ofthe sectors with huge potential for theyouths include:- Agriculture- Information Technology- Advanced Technical Skills Market-

ing- Fashion and Entertainment

Building a Central Platformfor a Robust YouthParticipationIn order for young entrepreneurs andprofessionals to build a unified advo-cacy platform that could create change,they must firstly recognize the powerof their numbers and close all roadsleading to individualism and segrega-tions. This will bring the various busi-nesses and professional associationsunder a youth coalition. It will collectthe diverging interests of the businesssociety under a strong harmoniousadvocacy tool. For example, the Nige-rian private sector is already organizedunder various business and profes-sional associations. They operate inde-pendently, but are together part of theNigerian Association of Chambers ofCommerce, Industries, Mines, andAgriculture (NACCIMA). This forma-tion makes networking with differentassociations much easier. Why not ap-ply this model for the youth? Youngentrepreneurs from the various asso-ciations can nurture an all encompass-ing institution similar to NACCIMA.They could initially operate under thelegal cover of their associations, andgradually take steps towards register-ing a youth coalition.

It is necessary that the youth-basedcoalition be constitutionally free ofgovernment sponsorship and control.This autonomy is absolutely necessaryif the coalition is to give direction onhow to effectively engage policymakersfor better development and

http://fc09.deviantart.net/fs10/i/2006/114/4/5/the_youth_of_the_nation_by_gavowzy.jpg



prioritization of business policies, es-pecially concerning expanding youth-led enterprises. Moreover, a coalitionwill spearhead collaboration with ex-ternal governments, multi-national cor-porations, companies, viable academicinstitutions, individuals and traditionalinstitutions to expand business oppor-tunities and share ideas and best prac-tices. The coalition must be orientedwith a strict financial control system,with crystal-clear records and a vibrantmembership management system. Ad-ditionally, the leadership structure mustbe well formed to ensure a sustainablegrowth for the organization. For ex-ample, in Edo State, a youth-basedgroup called The Rainbow Consoli-

dated Forum was started by a fewyoung intellectuals in 1998 with the aimof fighting against youth restivenessand political thugry. According to theircoordinator, John Osazuwa, who is alecturer of political science with theuniversity of Benin, Edo State, the or-ganization has grown with a member-ship strength of over 2 million. Mr.Osazuwa attributes this success in partto the peaceful conduct of the 2012governorship election in Edo State,which was an unprecedented feat.

Gradually, the organization has won therecognition of the state government.Today, the organisation is a force tobe reckoned with in the state; they arelarge in number and its members arefound in almost every sector of thestate.

In conclusion, Nigeria cannotachieve inclusive growth and a vi-brantly dynamic economy without anorganized private sector that is re-branded with solid value-added part-nerships. Such a change will reorientatethe ineffective areas of the systemthrough shared value and privatesector’s vigorous pursuit of advancedand responsible practices. Formationof a youth coalitions of business and

professional groups is therefore rec-ommended, as they are custodians ofthe future, occupying 60 percent ofthe country’s population. Furthermore,young entrepreneurs are purportedlythe greatest victims of the unfriendlybusiness climate in Nigeria. This armyof youth could champion their courseby deploying proper institutionalizationof the advocacy channels open tothem and employing effective dialoguewith governments at all levels to influ-ence policymaking and the achieve-

Notes and References• Aibangbee, Anthony. “The Nigerian Youth as a Tool for Na-

tional Development.” Sunday Observer 8 August 2013. Web.(http:www.nigeriaobservernews.com/18082013/ features4.htm/#.uidx7jjj5kg).

• Adyorough, Asortse. Personal interview. 11 June 2012.• Ogbemi, Francis. Solution to Mass Unemployment in Nige-

ria. Nigeria: Society for Linking Education and Problems Pub-lication, Obafemi Awolowo University, 1999. Print.

• Osazuwa, John. Personal interview. 26 September 2012.• Robinson, Emoh. “Venturing into the Export Market: Why and

How.” Nigerian Export Promotion Council. Benue, Nigeria.21 August 2010. Seminar.

• Sotunde, Oluwabusayo. “Building an African Clothing Em-pire: • Adenike Ogunlesi’s Ruff ‘n’ Tumble.” Ventures 26 Sep-tember 2012. Print.

• Suma, Chakrabarti Sir. “A Global Partnership to Achieve MDGs:The Role of Growth and of Collaboration and Competition inCorporate Strategies.” Kennedy School of Government.Harvard University. 18 October 2007. Web.

1. Asortse Adyorough (Former H.O.D Business ManagementDepartment, Benue State University Makurdi,) In discussionwith the author, June 11, 2012.

2. Anthony Aibangbee, “The Nigerian Youth as a Tool for Na-tional Development, Sunday Observer, last modified August 8,2013, http:www.nigeriaobservernews. com/18082013/features4.htm/#.uidx7jjj5kg

3. Francis Ogbemi, Solution to Mass Unemployment in Nigeria(Ile-Ife: Society for Linking Education and Problems Publica-tion, Obafemi Awolowo University, 1999), 5-61 AsortseAdyorough (Former H.O.D Business Management Depart-ment, Benue State University Makurdi,) In discussion with theauthor, June 11, 2012.

4. Emoh Robinson, “Venturing into the export market: Why andHow,” (A Seminar oganinized by Nigerian Export PromotionCouncil in Benue State Nigeria, August, 31, 2010)1 AsortseAdyorough (Former H.O.D Business Management Depart-ment, Benue State University Makurdi,) In discussion with theauthor, June 11, 2012.

5. Chakrabarti Sir Suma, “ A Global Partnership to Achieve MDGs:The Role of Growth and of Collaboration and Competition inCorporate Strategies,” Kennedy School of Government HavardUniversity, last modified October 18, 2007, http://www.hks.havard.edu/... /reports_29_havard%20fo%20dialogue%20su

6. Oluwabusayo Sotunde, “Building an African Clothing Empire:Adenike Ogunlesi’s Ruff ‘n’ Tumble,” Ventures, September26, 2012.

7. Oluwabusayo Sotunde, ibid8. John Osazuwa (The Co-ordinator, Rainbow Consolidated

Forum), in an interview with author, July 14, 2012.

ment of a sustainable business envi-ronment. The Nigerian youth couldbecome the protagonists of the neededchange if they responsibly coordinatethemselves into a single group with acommon vision and purpose, as calledfor in this essay.

(Ngutor Saaka received a bachelor’s de-gree in history from the Benue State Univer-sity in Makurdi, Nigeria. Saaka is also anassociate member of Institute of StrategicManagement Nigeria (ISMN). He is cur-rently a print journalist for the Nigerian Del-egate Newspaper based in Abuja. Saakaalso runs a farming business, which led himto co-found the Jotas FADAMA III FoodProcessing Co-operative Society Ltd.

We are grateful to the Center for Inter-national Private Enterprise (CIPE) for per-mission to publish this article.)

Source: http://www.milesandassoc.com/wp-content/uploads/2013/02/IMG00295-20130131-1715.jpg


MACROECONOMIC ENVIRONMENTA review of the Nigerian economy in the third quarter of 2013 shows a mixed performance in some of the keymeasurement indicators. Gross Domestic Product (GDP) for instance grew at a faster pace than witnessed in thepreceding quarter. Inflation eased significantly, while the Monetary Policy Rate remained steady all through. Thenation’s currency, the naira, held firm against other major currencies. However, the capital market started well but lostmomentum at the tail end. The External reserves shrank but ended the quarter with a comfortable outlook. In theinternational crude oil market, prices surged, recovering some initial losses.

GROSS DOMESTIC PRODUCTGross Domestic Product (GDP) in the third quarter was estimated at 6.81 percent, higher than the 6.18 percentrecorded in the preceding quarter. Real GDP growth continued to be driven by the non-oil sector of the economy.Despite the conflict-related population displacements in Borno and Yobe states as well as peak flood periods in theSouthern parts of the country, good rains and early harvest in other regions of the country continued to boostagriculture as a major con-tributor to GDP. For the oilsector, benefits of the Am-nesty Deal with Niger Deltamilitants continue to pushyields in the right directionwith output jumping 1.38percent between Augustand September. Real GDPgrowth in 2013 is projectedat 6.38 percent, slightlylower than the 6.58 percentrecorded in 2012.

Source: National Bureau of Statistics

INFLATIONInflation slowed to a 5 year low in the third quarter 2013, leaving room for monetary easing. The headline inflationclosed the quarter at 8 percent and has remained subdued around the authority’s single digit target since thebeginning of the year. Despite the slowdown, inflationary pressures resurfaced earlier in July due to higher food andhousing prices. Total cereal and tuber harvests were roughly six percent below average. It was nevertheless tempo-rary, as inflation eased again in August and September to 8.2 and 8 percent, respectively. The downward trend wasmainly driven by food prices decelerating due to the onset of the harvest season. Core inflation however, trendedupwards all through the period. Inflationary risk remains a threat in the months ahead due to increased spending inthe run-up to the 2015 elections.

Source: National Bureau of Statistics


EXTERNALRESERVESThe nation’s external re-serves shrank in the thirdquarter 2013, wiping outmuch of the gains fromstrong oil prices. It lost about7 percent of its stock to ab-sence of fiscal savings andcontinuous withdrawals afterclimbing to its highest level

in more than four years. Mounting pressures on the external reserves drained the stock by about $3.4bil-lion to $45.4billion as at end September 2013. The reserve level could finance over 11 months ofimports. In the short to medium term, the authorities project improvements in the stock of externalreserves, resulting from higher crude oil prices and output.

Source: Central Bank of Nigeria

INTEREST RATEIn line with expectations,

the Monetary Policy Com-

mittee voted to keep in-

terest rate on hold in its

September 23 and 24,

2013 meetings. The deci-

sion came as no surprise

as it was the thirteenth

consecutive hold since the

Monetary Policy Rate

(MPR) was raised by 275

basis points from 9.25

percent to 12.0 per cent in

October 2011, to curb in-

flationary pressures.

The average interbank rate

shot up in the third quar-

ter 2013 with significant

swings across most ten-

ors. For instance, rates

jumped to about 23 percent in August from 10.25 in June. Despite the pressure, the system was awash with liquidity

earlier in July due to inflows from about N350billion Statutory Revenue Allocation and N126billion maturing

treasury bills. However, liquidity dried up in August and September pushing rate higher to 23 percent following the

50 percent Cash Reserve Ratio (CRR) debit on public sector funds; banks remitting NNPC funds to the CBN; as well

as contribution of about N100billion to AMCON’s sinking fund. Rates nevertheless eased back to 10.7 percent as

at end September.

Source: FMDQOTC

Source: FMDQOTC


The average Prime Lending Rate (PLR) inched up slightly during the period, hovering around 17.9 percent as at end

September 2013. Returns on the average deposit rate went up across most investment horizons, with volatility

higher on the 30 Days and 60 Days tenors.

Source: FMDQOTC

EXCHANGE RATEThe nation’s currency, the naira, looked reassuringly stable against the world’s major currencies in the third quarter2013. It remained firm around the CBN’s target, at about N155.75/US$. Despite the remarkable stability, the nairadid experience its fair share of volatility. In August, it fell to its weakest level in 20 months due to non-interventionby the authorities and pressure coming from importers. The gap was nevertheless bridged by sufficient dollar salesfrom oil companies as well as renewed interest by foreign investors in the local debt market. Reacting positively, thenaira appreciated to a 3-month high in September. To keep a lid on pressures, the CBN introduced several measuressuch as a suspension of WDAs and replacing it with RDAs with effect from October 2, 2013; putting a maximumlimit of $250,000 in the amount sold by authorized dealers in dollars to BDCs; and reviewing upward the existinglimit of $40,000 per annum limit on naira debit and credit card to $150,000. Despite some nervy moments, demandwas matched on several occasions at the CBN’s twice weekly auction. It offered about $8.50billlion and sold $8.09bil-lion during the period. And despite the minor headwinds, the premium between the official and interbank droppedslightly to 3.6 per cent as at end September 2013, compared to 4.4 per cent in June. In the months ahead, the naira isprojected to be on a firm platform due to higher crude oil prices in the international market.

Source: Central Bank of Nigeria


CAPITAL MARKETThe capital market closed the third quarter almost flat, scratching out small gains in the period. The All-Share Index(ASI) and market capitalization started on a bullish note but erased earlier gains to finish lower at 36,585.08 andN11.65trillion, respectively, from 36,164.30 and N11.42trillion recorded in the preceding quarter. Having roaredahead with about 35 percent return when compared with 13 percent in the same period of 2012, the market lostmomentum towards the end of the quarter owing to profit taking activities and sell-offs during Eid el-Kabir festiveperiod. Stock prices traded sideways without any real good news to drive them up. On a more positive note, marketsentiment was lifted with the launch of a new trading platform, X-Gen, during the period. Market sentimentremained high as a number of quoted companies such as Oando, Roads Nigeria, Seven-Up, Stanbic Holdings, FlourMills, PZ Cussons, Conoil, and Guinness paid impressive dividends of 75kobo, 60kobo, N2.20, N70kobo, N2.00,56kobo, N1.00 and N7.00, respectively.

Source: Nigerian Stock Exchange

Source: Nigerian Stock Exchange


OIL & GASCrude oil prices picked up in third quarter 2013, rebounding after a long stretch of quarterly losses. Oil prices posteda gain of around 6 percent despite high levels of volatility in the world economy. Light sweet crude hovered near a30-month peak in the first week of September in response to supply outages and international alarm over Syria’s useof chemical weapons. It however moderated within the quarter on geopolitical concerns. Nigeria’s brand of crude oil,bonny light, traded within a band of $97.99-$110.53 per barrel. Industry analysts attributed the rise in oil prices toLabor strikes in Libya which removed an estimated 1 million barrel from daily supplies; slowdown in Iraq’s exportdue to maintenance on a major export terminals; threats of a possible military action against the Syrian regime whichagain stoked fears of a broader conflict in the region; Egyptian crisis which raised fears that crude oil shipping throughthe Suez Canal could be at risk; and stronger than expected demand from the world’s powerhouse economies- the USand China.

http://sofiaglobe.com/wp-content/uploads/2012/07/oil-rig.jpg

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