ZEQ 28.pmd

EDITORIAL TEAM

MARCEL OKEKEEditor

EUNICE SAMPSONDeputy Editor

ELAINE DELANEYAssociate Editor

CHARLES UJOMUIBRAHIM ABUBAKAR

SUNDAY ENEBELI-UZOROLUWASEUN OLAOYE

Analysts

JOHN LUCKY ETOHProduction Supervisor

SYLVESTER UKUTROTIMI AROWOBUSOYE

Layout/Design

EDITORIAL BOARD OF ADVISERS

UDOM EMMANUELGIDEON JARIKREPAT NWARACHE

OCHUKO OKITI

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

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All correspondence to:The Editor,

Zenith Economic Quarterly,Research & EIG,Zenith Bank Plc

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FROM THE MAIL BOXThis contains some of the acknowledgments/commendation letters from our teemingreaders across the globe

PERISCOPEThis is a panoramic analysis of majordevelopments in the economy during theperiod under review and the factorsunderpinning them

POLICYThis contains the recent CBN review ofNigeria’s Microfinance Policy Framework

GOLBAL WATCHAn indepth analysis of the deepeningEurozone debt crisis, the growing fears of acontagion and the possible way forward

ISSUES (I)Examines the new policy on cashlesseconomy in Nigeria with emphasis on theimplications, challenges and prospects

ISSUES (II)A critical analysis of due process andgovernance issues in the banking industryand steps to ensuring global best practices

ISSUES (III)A discourse on leveraging the sovereignwealth fund as a tool for ensuring a morerapid economic growth and development ofNigeria and a secure future

FOREIGN INSIGHTSHighlights the negative impact of the ongoingGreek and Eurozone debt crisis, not just onthe European but the global market, withexpert investment advice for investors

DISCOURSEExamines the effectiveness of mortgage assecurity for bank debt, especially in relationto Nigeria’s financial industry peculiarities

FACTS & FIGURESThis contains economic, financial andbusiness indicators with annotations

2 Zenith Economic Quarterly July 2011

T

consistent policy dilemma to governments whether in de-veloped or developing economies.

Over the years, various regimes in diverse jurisdictionshave attempted addressing this fundamental developmen-tal conundrum in creative ways, including the creation ofwhat is now popularly known as sovereign wealth fund. Asovereign wealth fund (SWF) is a state-owned investmentfund (composed of financial assets) that could be investedglobally, and the resultant proceeds applied to drive eco-nomic development. Many developing economies with hugenatural endowment have since taken this route, piling up‘windfalls’ from the sales of their natural resources intotheir SWFs. Nigeria has been one of the few exceptions inthis practice, especially among members of the Organiza-tion of Petroleum Exporting Countries (OPEC).

Indeed, the absence of an institutional framework tomanage the proceeds of crude oil earnings from highlyvolatile income stream has since left Nigeria to the mercyof cycles of ‘booms and busts’. Thus, in our article: “Sov-ereign Wealth Fund: Development Imperative for Nige-ria?” the author says the SWF is an all encompassing fundthat seeks to serve as a stabilizer, a guarantee fund forfuture generations, and a ready fund for infrastructuraldevelopment.

Still on the Nigerian economy, the impending transfor-mation in the payments system is analyzed under the ru-bric: “Nigeria: From Surplus Cash to ‘Cashless’ Economy”.In it, the writer posits that the road ahead could be a longone with twists and turns, and calls for a lot of awarenesscreation for all stakeholders. In the final analysis and inkeeping with global trends, going ‘cashless’ is the directionthe economy must take, the author sums up. And in theunending concern for housing challenge in the land, wehave a piece on “An Appraisal of Mortgage as Security forBank Lending in Nigeria”. The authors hold that the ut-most desirability of mortgage transactions to banks can-not be denied as they yield a huge proportion of bankprofits through interest rates, warning however that thisattractiveness is watered down by the problems identifiedin their study.

On the global scene, the snowballing of the sovereigndebt imbroglio of Greece into a potent threat to the veryexistence of the European Union and its currency, the Euro,is becoming real by the day. Thus, in one article: “Euro-pean Debt Crisis: Beyond the Concerns for Greece”, theauthor states that confronted with the current realities, fi-nancial institutions and governments with huge exposuresto Greece are compelled to make provisions for the worstpossible outcomes. Yet in another discourse titled “Greeceis the World…”, the writer says “the end is inevitable forGreece; it is just a question of how long the life supportmechanism of continuous cash injection from the Euro-pean Central Bank can continue.”

Other articles that make up this edition include thoseon quality and internal control in banks, the take-off ofthe economic management team in Nigeria, microfinanceframework in Nigeria, and figures and charts on theeconomy.

Indeed, you have another full package for the discern-ing mind!

avings and investments have been consideredas two critical macro-economic variables forachieving price stability and promoting em-ployment opportunities thereby contributingto sustainable economic growth of nations.But the challenge of achieving substantialsavings to drive investment has remained aSSSSS

Indeed, the absence of an institu-

tional framework to manage the

proceeds of crude oil earnings

from highly volatile income

stream has since left Nigeria to

the mercy of cycles of ‘booms

and busts’.

4 Zenith Economic Quarterly October 2011

I wish to personally acknowledgewith thanks, your letter of 30 Sep-tember 2011, with which you sent acopy of the July Edition of the Ze-nith Economic Quarterly (ZEQ),which focuses on the “options forimproving the people’s wellbeing”.The informative magazine is a use-ful journal in advancing the fron-tiers of governance, as it providesinvaluable, well researched andthought out perspectives and in-sights on topical economic andsocio-political issues, policies andtrends.Best Regards.Amb. S.S YusufHigh CommissionerHigh Commissioner of theFederal Republic of Nigeria,Pretoria South Africa

I wish to acknowledge the receiptof various editions of your publi-cations, the Zenith Economic Quar-terly (ZEQ) which are as follows:1. Vol. 2/11 July 20072. Vol. July 20083. Vol. 3/4 Oct 20084. Vol. 4/1 Jan 20095. Vol. July 20096. Vol. Oct 20097. Vol. 5/4 Oct 2010

These journals have gone a longway towards enriching our librarycollection with the wealth of infor-mation they contain, particularly inthe area of the Nigerian and globaleconomies. We would appreciate ifthe NIPSS library could be placedpermanently on your distributionlist.

Your donation of these publica-tions are highly appreciated.Florence Adejumo (Mrs.)Head, Acquisitions sectionNational institute (for Policy andStrategic Studies) Kuru, PlateauState

I write to acknowledge with thanksthe receipt of the above documentvia your letter dated 30th Septem-ber, 2011. The ZEQ have been wellwritten and the layout of the jour-nal is excellent. It will indeed con-tribute to knowledge and serve as agood reference and research mate-rial for the University Library andour Departments of Economics,Accounting and Finance. Onceagain, we thank you for your inter-est in the University. With warmregards and best wishes.Yours sincerely,Professor Isaac A. AdeyemiVice-Chancellor, Bells Universityof Technology, Ota, Ogun State

Your letter dated 30th September,

2011 refers. I am directed to acknowl-edge receipt of a copy of the July,2011 edition of the Zenith Eco-nomic Quarterly (ZEQ).

We appreciate the classic exper-tise treatment given on the topic“Option for improving the people’swellbeing”. They are very interest-ing and educative. More grease toyour elbow. We hope to continueto receive more of such quarterlyfrom you.Thanks.L.N. Nzenweokwu (Mrs.)For: Director/Chief Executive,Electronics DevelopmentInstitute (ELDI) Anambra State.

I am directed to acknowledge thereceipt of your letter (with a copyof ZEQ), dated September 30, 2011with thanks. The Zenith EconomicQuarterly Magazine was found tobe very educative and interesting,especially the reports on NigeriaEconomic Growth Indicators;“Guidelines on points of sale (POS);Nigeria Economy: options for im-proving the people’s wellbeing, andtowards energy sufficiency in Ni-geria.”

These articles keep Nigerians inthe diaspora and the Mission’s staffabreast with Nigerian economic de-velopment. Coupled with othermonetary and financial policiesmatters featured in the magazine,readers were fed with relevant in-formation to make projections onthe Nigerian economic terrain. TheMission and Australian businessmenand students will find the magazinea good reference source on the Ni-gerian Economy.

Thanks for including the NigeriaHigh Commission, Canberra amongbeneficiaries of this educative andhandy reference source.Warmest regards,S.K. BadaMinister Political & Information,High Commission of theFederal Republic of Nigeria,Canberra, Australia

We hereby acknowledge receiptof a copy of the July, 2011 editionof the Zenith Economic Quarterly(ZEQ) with thanks.

It is rich, topical and highly infor-mative.

Please accept our compliments.Yours faithfully,For: National Engineering &Technical Co. Ltd.Engr. L. O. Binitie-CassidyManaging DirectorNational Engineering &Technical Co. Ltd, Lagos

We acknowledge with thanks thereceipt of a copy of the July 2011edition off the Zenith EconomicQuarterly (ZEQ).

It is an invaluable addition to ourjournal collection. Please continueto put us in your mailing list.

Once more, thank you very much.Yours faithfullyMrs. M. J. Igben CLNSerials LibrarianFor: University LibrarianOffice of the UniversityLibrarianRivers State University ofScience and Technology, PortHarcourt

I wish to acknowledgewith thanks the receiptof a copy of the July,2011 edition of theZenith EconomicQuarterly (ZEQ).

The President andentire members ofN i g e r i a n

Medical Association (NMA) com-mend your efforts on this publica-tion, which focuses on the Nige-rian and global economy for strate-gic decisions. The contents are veyinteresting and educative.Accept our due regards.Dr. B.M. AuduSecretary-GeneralNigerian Medical Association,Abuja

With reference to your letter datedSeptember, 30th 2011 on the aboveunderlined subject matter. I havebeen directed to write and acknowl-edge the receipt of your quarterlyjournal.

The Journal is very relevant andeducating; we appreciated your ges-ture and hope to continue.Thanks for your usual cooperation,Please.Manga Modi AliyuFor: Hon. CommissionerGovernment of Bauchi State

Ministry of Commerce andIndustry, Bauchi

I am directed to acknowledge withthanks, receipt of your letter dated30th September, 2011, forwarding acopy of the July, 2011 edition ofthe Zenith Economic Quarterly(ZEQ). The High Commissionerfinds the journal quite informativeand is highly appreciative of yourgesture.

Please accept the assurances of theActing High Commissioner’s high-est regards.P.N. Enebeli-NdukubaAdmin AttachéFor: Acting High Commissioner,Nigeria High Commission,

SingaporeI am directed to acknowledge

with thanks, receipt of the July,2011 edition of the Zenith Eco-nomic Quarterly (ZEQ), whichfocuses on the “options for im-proving the people’ wellbeing.Warmest regards.Beatrice Ikeku-Thomas(Mrs.)For: Ambassador/Permanent Representative

I wish to acknowledge,with gratitude, the receipt of

the above mentioned docu-ment forwarded under the coverof your letter dated 30th Sep-tember 2011. Once again, may Icongratulate you for putting to-gether such a historic docu-ment of tremendous value...

Please accept the assurancesof my highest consideration and

esteem.Yours sincerely,Ambassador (Chief) V.N.Chibundu, IOM, FCIS, FNIMFounder/Chairman, Hon. DG(IBC), Nigeria-China FriendshipAssociation, Lagos

I acknowledge with thanks, re-ceipt of complementary copy ofyour Zenith Economic Quarterly(ZEQ) for the month of July, 2011Edition sent to the Economic Ad-viser/Vice Chairman, State PlanningCommission, Calabar.

I am impressed with the eco-nomic analysis and critical informa-tion provided for national and glo-bal policy decisions in your maga-zine. It is a good reference material.Well done!Thank you.Ndem AyaraState Planning CommissionGovernment of Cross River State

October 2011 Zenith Economic Quarterly 5

Periscope

* By Marcel Okeke

*By Marcel Okeke

as its head was a major feature of the third quarter 2011.The high-level committee which draws membership fromtop industrialists, bankers, technocrats, bureaucrats and theacademia is saddled with driving the transformation ofthe Nigerian economy. The quarter under review was alsomarked by tortuous negotiations between the Federal Gov-ernment and the state governors regarding the structureand take-off of the Sovereign Wealth Fund (SWF); de-bates over full deregulation of the downstream oil sector(petroleum subsidy removal); upward review of electricitytariffs as well as the fallout of minimum wage implemen-tation for civil servants in most states of the country.

Efforts at the privatization of the Power Holding Com-pany of Nigeria (PHCN); reforms in the agric, bankingand oil sectors, among others, also continued to be keyfeatures of the economy during the period under review.There was also the volatility in oil prices in the interna-tional market, even as Nigeria’s oil production continuedto improve during the period due, mainly, to the relative

peace in the Niger Delta region of the country. Ironically,the quarter closed with a decline in Nigeria’s crude oil ex-port, from 2.231 million barrels per day (mbpd) in Augustto 2.069 mbpd in September—both levels staying yet be-low the 2011 budget benchmark oil price of 2.30 mbpd.It should also be noted that a substantial part of oil pro-duction (about 40 per cent) has been taking place in thedeep offshore wells; and based on subsisting terms agreedin the 1990s, royalty from oil wells deeper than 1,000 metresis zero per cent. And by extant practice, Nigeria is paidonly 20 per cent of the profit made by oil companies afterdeducting their expenses. As a result of all these, the coun-try has had limited benefits from high oil prices and risingoutput, with most of the gains going to multinational oilcompanies under the existing fiscal arrangement.

All these yielded mixed results in quantitative terms,with available data from the National Bureau of Statistics(NBS) showing that the Nigerian economy, measured byReal Gross Domestic Product (GDP), grew by 7.4 percent in the third quarter 2011, as against 7.72 per centgrowth in the previous quarter. This growth trend, accord-ing to the NBS, was largely driven by activities in agricul-ture, wholesale/retail trade, telecommunications, manufac-turing and finance/insurance sectors. On the other hand,

omposing the economic management team(EMT) of the Federal Government of Ni-geria with the erstwhile Managing Directorof the World Bank Dr. Ngozi Okonjo-Iweala who is also the Minister of Financec


PERISCOPE NIGERIA: EconomicTeam Takes Off, Sustains Stability

oil sector output recorded negativegrowth during the period, due to de-cline in oil production consequent uponsome operational constraints faced byoil producing companies.

In a similar trend, the CompositeConsumer Price Index (CPI) whichmeasures inflation, stood at 10.3 percent year-on-year at end-September2011, up from the 9.3 per cent it at-tained the previous month. This infla-tionary trend had been consistently rec-ognized by the Monetary Policy Com-mittee of the Central Bank of Nigeria(CBN), which blamed it mainly on thepublic sector fiscal profile, particularlythe high levels of recurrent expendi-ture as well as the structural bottle-necks in the Nigerian economy that per-petuate import dependence and makeimport demand highly inelastic.

This scenario of high import-de-pendence also played out so much inthe importation and consumption ofpetroleum products, especially themotor premium spirit (PMS) on whichthe MPC has projected about US$6billion subsidy in 2011 alone. This hastranslated into fast drawdown on thenation’s external reserves. In fact, theMPC at its October 10, 2011 meetingexpressed concerns about the genuine-ness of demand for petroleum imports.This year alone, according to the com-mittee, oil importers have bought overUS$7.0 billion from Wholesale DutchAuctions (wDAS) of the foreign ex-change market, thereby depleting thenation’s external reserves. This de-mand, in the Committee’s view, mighthave been fuelled by rent-seeking andsubsidies.

The upshot of this has been pres-sure on the Naira exchange rate againstthe US dollar and other major curren-cies. In deed, the third quarter 2011witnessed a significant depreciation inthe value of the local currency in allsegments of the foreign exchange mar-ket: official, inter-bank and the paral-lel markets. Again the MPC alluded tothis scenario, when it said in itscommuniqué that the naira has comeunder increasing pressure, and has re-cently traded outside the band of N150+/- 3.0 per cent. In the Committee’sview, the increasing pressure on the

This scenario of high import-dependence alsoplayed out so much in the importation andconsumption of petroleum products, especiallythe motor premium spirit (PMS) on which theMPC has projected about US$6 billion subsidyin 2011 alone.

Source: OPEC



the CBN moved to check speculativebids in the market by lifting restrictionsit earlier placed on dollar purchase byBureaux de Change (BDCs) and soldsome US$10 million to all the banksoperating BDCs. This notwithstanding,the nation’s currency reached its low-est level in more than two years whenit hit N159.42/US$ at the inter-bankmarket. In the parallel market, the

Naira dropped to as low as N165/US$at a point in July and remained in theregion of N160/US$ all through thequarter.

The seemingly unbridled demandand utilization of the dollar impactedthe external reserve such that, althoughit made some accretion of about US$4billion in early August to hit US$35.90billion at the close of the month, it stilldepleted to about US$31.70 billion bythe close of the third quarter. Asidethe huge cost of importation of pe-troleum products, Joint Venture CashCalls (JVCs) and importation of othermotley items also contributed to thedecline in the reserves. But while thestock of external reserves was deplet-ing, Nigeria’s external debt has beeninching up—standing at US$5.6 billionas at end-September 2011, accordingto the Debt Management Office(DMO). In deed, the local debt fol-lowed the same pattern, hitting N5.3trillion, and bringing the nation’s totalpublic debt to US$39.72 billion at theend of the third quarter.

The DMO data indicate that thenation’s external debt stock at end-Sep-tember represents about three per centof the GDP while the domestic com-ponent translates to 18 per cent of theGDP. However, the DMO figuresshow that large portions of Nigeria’sexternal debt are soft loans in the formof World Bank’s International Devel-opment Association (IDA) facilities(about 85 per cent of multilateral bor-rowings). For the CBN however, theFederal Government’s burgeoning debtposses a challenge, because the FGN’sdomestic borrowing tends to crowedout the private sector. Thus, of theN5.3 trillion total domestic debt aboutN3.3 trillion is GFN bond (63 per cent),N1.6 trillion is Treasury Bills (30 percent) and N353 million is TreasuryBonds (seven per cent).

In tune with the FederalGovernment’s renewed interest in ag-riculture, support to the sector was sig-nificant during the period under review.Specifically, credit guarantee under theAgricultural Credit Guarantee Schemeof the CBN jumped up by a whop-ping 190.5 per cent over the level inthe preceding quarter, to stand at

domestic currency has been emanat-ing from a number of sources not allof which can be addressed by purelymonetary interventions.

Available data show that the CBNin the bi-weekly WDAS, offered aboutUS$9 billion and sold about US$9.2billion, against the US$11.6 billion de-manded during the period. Disturbedby the fate of the weakening Naira,

Source: National Bureau of Statistics



N3.553 billion covering 20,830 farm-ers at end-September 2011. Availabledata indicate that, with the exceptionof Bayelsa and Taraba states, all theother 34 states (plus the FCT) benefitedfrom the scheme during the quarter.Report on the CBN’s N200 billion com-mercial agricultural credit scheme alsoshow that the apex bank had releasedthe sum of N136.746 billion for dis-bursement to 173 beneficiaries as atthe close of the third quarter. This ismade up of 146 individuals/privatepromoters and 26 state governmentsthat accessed N1.0 billion each. Thesestate governments took the loans foron-lending to farmers’ unions, co-op-eratives and financing of other areasof agricultural initiatives in their juris-dictions. Overall, 26 state governments

are so far participating in the schemewhich commenced in 2009.

Also during the quarter under re-view, the Economic Management Team(EMT), rolled out an AgriculturalTransformation Action Plan (ATAP)in pursuit of two goals namely employ-ment generation and food sufficiency.The plan seeks to generate over 3.5million jobs, and inject N410 billioninto the economy, and enrich farmerswith over N300 billion in the next fouryears. Further details of the plan showits key components as the developmentof areas of comparative advantage,value chain and cluster farming settle-ments in agricultural research and de-velopment, production, processing andmarketing across the country. Cropsto be given priority attention in theirproduction in line with Nigeria’s com-

parative advantage include rice, cassava,sorghum, cocoa and cotton among oth-ers.

Within the plan period, the policy isexpected to increase rice productionwhich currently stands at 3.4 millionmetric tons to 7.4 million metric tons;cassava production is to rise from 34million metric tons to 51 million met-ric tons; sorghum from 9.3 to 11.3 mil-lion metric tons. Cocoa beans produc-tion is expected to rise from 250,000to 500,000 metric tons; cotton lint from20,000 to 140,000 metric tons whilefertilizer supply is to be increased from550,000 to 20 million metric tons. Priorto the roll out of ATAP, the CBN hadintroduced the Nigeria Incentive-basedRisk Management System for Agricul-tural Lending (NIRSAL)—which is

meant to deal with agric value chainfinancing challenges. Further to this, aframework has also been put in placeto make banks finance the providersof seeds and fertilizers and agro-deal-ers under an ‘interest draw back’ ar-rangement.

THE CAPITAL MARKETThe dismal trend in the capital marketsince this year remained all through thethird quarter 2011, with all market in-dices making heavy losses. The All-share Index (ASI) and market Capitali-zation finished the quarter at 20,373and N6.49 trillion respectively, downfrom 24,980.20 and N7.98 trillion inthe previous quarter. The creation of‘bridge banks’ from the former BankPHB, Spring Bank and Afribank andtheir prompt de-listing from the offi-

cial list of the Nigerian Stock Exchange(NSE), partly aided in dragging the in-dicators downhill. Overall, the volumeand value of traded securities fell by21.5 and 15.5 per cent to 19.11 billionshares and N134.44 billion respectively,in 326,515 deals. This is compared with

Also during

the quarter

under re-

view, the

Economic

Management

Team (EMT),

rolled out an

Agricultural

Transforma-

tion Action

Plan (ATAP)

in pursuit of

two goals

namely em-

ployment

generation

and food

sufficiency.

Source: DMO



24.35 billion shares valued at N159.1billion, in 326,515 deals in the previ-ous quarter.

Further breakdown of availabledata show that even with the delistingof some banks during the period un-der review, the banking sub-sector re-mained the most active on the NSE

with a traded volume of 10.0 billionshares, valued at N74.3 billion, in178,981 deals. This was followed bythe conglomerates sub-sector with atraded volume of 54.7 million, valuedat N2.14 billion in 13,830 deals. Ap-parently due to the prevailing investorsentiment about the market, no newissues were recorded during the period,but about seven supplementary issueswere reported. Some of them includethose of Unity Bank Plc, Smart Prod-ucts Nigeria Plc, Great Nigeria Insur-ance Plc and Oando Plc. Others madebonus issues; they include GuaranteeTrust Bank, Royal Exchange Assur-ance, Niger Insurance, PZ Cussons,Prestige Assurance, Union Ventures andTrans-Nationwide Express. The N50billion Delta State 14 per cent seriesbond of seven years tenor was alsoissued and listed in the market duringthe quarter.

On the other hand, the NSE tooksome disciplinary measures on a num-ber of market players for alleged in-fraction of some market rules. Someof the stocks were placed on partial orfull suspension for failure to submittheir financial statements as at whendue. And at a court-ordered meeting,shareholders of the Nigerian BottlingCompany Plc approved the de-listingof the company from the NSE.

In the face of the generally poorperformance of the market, the man-agement of the Securities and Ex-change Commission (SEC) and theNigerian Stock Exchange (NSE) havebeen tinkering with a number of ini-tiatives to buoy public confidence andimprove patronage of the market. Spe-cifically, during the third quarter 2011,the authorities came up with the ‘mar-ket segmentation initiative’ which willsee the market move from three totwo segments—equities and the bondmarkets. This will also involve shiftingfrom 33 to 12 industry sectors in theequities market, and the reclassifyingof listed companies within the 12 in-dustry sectors. In pursuit of thedemutualization of the NSE, the SECset up technical committee to comewith the modalities for achieving theobjective. Demutualization entails somesort of ‘liberalization’ of the owner-ship/control of the stock exchange.

Crops to be given priorityattention in their production inline with Nigeria’s comparativeadvantage include rice, cas-sava, sorghum, cocoa andcotton among others.

http://womensmeetingplace.files.wordpress.com/2010/02/going-to-the-market1.jpg



BANKING AND FINANCEThe third quarter 2011 saw a numberof landmark developments in thebanking sector of the Nigerianeconomy including the nationalizationof three banks in August when it be-came apparent to the authorities thatthey would not be able to meet the re-capitalization requirements by thestated September 30 deadline. SpringBank, Afribank, and Bank PHB all hadtheir licenses revoked, their nameschanged, and management replaced bythe Asset Management Corporation ofNigeria (AMCON). These new ‘bridgebanks’ are now known as EnterpriseBank, Mainstreet Bank, and KeystoneBank respectively.

About the same time as these policyinitiatives, a flurry of re-licensing, merg-ers and acquisition deals also tookplace: Intercontinental Bank mergingwith Access Bank, Oceanic Bank merg-ing with Econbank, Equitorial TrustBank merging with Sterling Bank, andFinbank merging with First City Monu-ment Bank. Wema Bank had to scaledown its operations to become a re-gional bank, with lower capital require-ment in line with the newly introducedbanking model in the country. UnionBank on its part was granted recapital-ization approval as its shareholdersendorsed the injection of US$750 mil-lion by a group of private equity in-vestors including African Capital Alli-ance. Other major deposit moneybanks in line with their growth strate-gies also acquired a few banks in someAfrican countries and commenced op-eration in several other regions.

While all these were going on, theCBN on its part embarked on mea-sures and initiatives to keep improvingthe effectiveness and efficiency of thebanking system. In this regard it pur-sued the ‘financial inclusion’ strategyby licensing eleven mobile paymentcompanies. They include Fortis Money,UBA/Afripay, GTBank MobileMoney, Pagatech, eTransact, Monetise,Eartholeum, Paycom, FET, Ecobankand Kudi. More organizations have alsobeen licensed, including Zenith BankPlc –which has come up with ‘EASYMONEY’ mobile product. And in

Source: EFInA

jumpstarting the mobile payment ini-tiative, a pilot implementation code-named ‘Cashless Lagos’ is to take offon January 1, 2012. In pursuit of thisproject, about 40, 000 Point of Sale(PoS) devices are being deployed withinLagos State to cater for settlement oftransactions, according to the apexbank. This figure is expected to hit 150,000 by end-December 2012, and fur-ther rise to 375, 000 by 2015. Six Pay-ment Terminal Service Providers(PTSPs) have already been licensed bythe CBN to deploy, maintain and sup-port PoSs on behalf of the acquirers.The licensed PTSPs are: ValueCard,ETOP, ITEX, PayMaster, CitiServeand EasyFuel.

Alongside the mobile paymentproject, is the encouragement of thedeployment of Automated Teller Ma-chines (ATMs) to drive more cashlesstransactions—not necessarily for theirtraditional role of cash dispensing. TheATMs are now equipped to facilitateelectronic payments of bills and ac-count to account transfers. In pursuit

Alongside the mobile payment project, is theencouragement of the deployment of AutomatedTeller Machines (ATMs) to drive more cashlesstransactions—not necessarily for their traditionalrole of cash dispensing.



Shave and Gibson Group (South Af-rica), DLRS Group (Ireland), amongothers.

In further encouraging a ‘cashless’environment and electronic paymentsolutions, the CBN also registered twoorganizations: Bankers WarehouseLimited and Integrated Cash Manage-ment Systems Limited to provide cash-in-transit and currency sorting servicesto the banking industry. And to encour-age the banks to patronize these cashmanagement services providers, theCBN ordered that deposits made withthem for sorting will be given off-bal-ance sheet treatment. In other words,the banks will be given value for theapproved period of processing on asame-day basis as if the cash has beendeposited in any CBN branch. Further-more, the CBN will bear the cost oftransportation of ‘unfit’ cash generatedfrom processing as well as the volumeof ‘fit’ notes the deposit money banksare willing to deposit with them.

TelecommunicationsThe third quarter 2011 was dominatedby the feverish pitch of the registra-tion of Subscriber Identity Module(SIM) cards which commenced inMarch throughout the country. Al-though the deadline was September 28,2011, the Nigerian CommunicationsCommission (NCC) eventually madeit open-ended, as it extended the regis-tration ‘indefinitely’ to give room forthe collation and processing of the reg-istration data. The SIM registration is

Source: Nigeria Communications Commission

of all these, especially the mobile pay-ment, the CBN has also forged part-nership with telecoms companies withthe cooperation of the Nigerian Com-munication Commission (NCC).

Also in pursuit of the overall de-velopment of the industry, the CBNand the Bankers’ Committee haveembarked on what they termed the ‘In-dustry Infrastructure TransformationProgramme’ otherwise known as theShard Services Project in the bankingsector. The project seeks to identifyareas of collaboration within the bank-ing industry towards achieving im-proved efficiency that will entail up to30 per cent industry cost reduction.Under the project, five key areas havebeen identified for cost savings, namelycash management, payments systemtransformation, shared IT infrastruc-ture and services, IT standards and in-dustrialization and shared back officeoperations.

Further to all these, the apex bankin collaboration with the MICR Tech-nical Implementation Committee alsoapproved the accreditation and re-ac-creditation of 23 cheque printers un-der the Nigeria Printers AccreditationScheme (NICPAS) for 2011. Some ofthe major printers chosen are NigeriaSecurity Printing and Minting Plc,Kalamozoo Secure Solutions Ltd (En-gland), Security Print Solution(Durham), Smith & Ouzman Ltd (En-gland), Camelot Ghana Ltd (Accra),Superflux International Ltd (Ikeja).Others are De-la Rue (South Africa),



aimed at assisting security agencies inresolving crimes and by extension toenhance the security of the state. It isalso intended to facilitate the collationof data by the Commission aboutphone usage in Nigeria as well as en-able operators to have a predictableprofile about the users in their net-works. NCC could also use the data toeffectively implement other valueadded services like Number Portabil-ity among others

As the registration progressed,most of the telecom companies keyedinto it to boost their marketing andsales—almost all the networks em-barked on incentive providingpromos—offering huge rewards to pro-spective SIM card registrants. Whilesome provided winners of the rewardscheme the opportunity to migrate to‘new value propositions’, others offeredhuge sums of money to the winners,plus adjusted tariff opportunity, offer-ing airtime as low as 15 kobo per sec-ond. Yet others in addition to cash re-wards, offered ‘bonus credit’ allowing

their subscribers to call any networkin the country and/or make free tripsto major cities in various parts of theglobe. All these incentive packagesboosted the tempo of the SIM regis-tration, by sustaining awareness anddrawing existing and prospective SIMcard owners to register.

All these were part of the growthmomentum of the telecom sector dur-ing the quarter under review when to-tal active telephone lines hit93,461,436, up by 3.23 per cent from90,533,178 as at the end of the sec-ond quarter. Also, teledensity rose to66.76 in September 2011 from 64.67as at end-June 2011, according to NCCfigures. With this trend, telephony pen-etration in the country is fast nearingthe 70 per cent mark, and the mobileGSM segment continues to dominatethe entire telecom sector. As at the endof the third quarter, total number ofactive subscribers on the GSM seg-ment was 87,417,508, accounting for93 of the market, while the CodeMultiple Division Access (CDMA) seg-

ment had 5,215,131 active subscrib-ers, representing six per cent marketshare. This was also a drop from the5,558,612 CDMA lines in June 2011.The fixed wired/wireless segment ac-counted for one per cent of the mar-ket with 828,797 in September, downfrom 881,393 as at end-June 2011.

Despite this strong growth recordin the mobile market, poor quality ofservice (QoS) as reflected in networkcoverage continued to hamper cus-tomer growth and service usage dur-ing the period under review. Subscrib-ers continue to be faced with the prob-lems of none delivery of their shortmessage service (SMS), drop calls,outright inability of subscribers to makecalls, among others. It is believed how-ever that much of these issues wouldbe taken care of by mobile numberportability—which will allow mobileusers to change their service providermore easily.(* Marcel Okeke is the Editor, Ze-nith Economic Quarterly)

Despite this strong growth record in the mobile market, poor quality of service (QoS)as reflected in network coverage continued to hamper customer growth and serviceusage during the period under review.

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1.0 INTRODUCTION1.1 In December 2005, the Central Bank of Nigeria (CBN) intro-duced a Microfinance Policy Framework to enhance the access ofmicro- entrepreneurs and low income households to financial ser-vices required to expand and modernize their operations in order tocontribute to rapid economic growth. The rationale was that noinclusive growth can be achieved without improving access of thissegment of the economic strata to factors of production, especiallyfinancial services.

1.2 The basis of this bold initiative in 2005 is still valid. With thebenefit of experience spanning over five years of operating theMicrofinance Policy, the CBN believes that a review of the Policy toreflect lessons from experience, global economic trends and the envi-sioned future for small business development in Nigeria has becomeauspicious.

1.3 Microfinance services refer to loans, deposits, insurance, fundtransfer and other ancillary non-financial products targeted at low-income clients. Three features distinguish microfinance from otherformal financial products: (i) smallness of loans and savings, (ii)absence or reduced emphasis on collateral, and (iii) simplicity ofoperations.

1.4 Before the emergence of Microfinance Banks (MFBs) under theMicrofinance Policy, the people that were unserved or under-servedby formal financial institutions usually found succour in non-govern-mental organization-microfinance institutions (NGO-MFIs), mon-eylenders, friends, relatives, credit unions, etc. These informal sourcesof funds have helped to partially fill a critical void, in spite of thefact that their activities were neither regulated nor supervised by theCBN. This revised policy framework continues to take cognisance ofthis category of institutions, which have now become key players inthe Nigerian microfinance landscape. However, more emphasis wouldbe placed on MFBs because they are under the regulatory and super-visory purview of the CBN.

1.5 The envisioned microfinance sub-sector under the policy regimerecognises the existence of informal institutions and provides fortheir mainstreaming into the national financial system. The policyalso seeks to harmonize operating standards and provide a strategicplatform for the evolution of microfinance institutions particularlyMFBs. Existing non-deposit taking service providers, which con-tinue to operate outside the purview of regulation and supervisionof the CBN, would be encouraged to make periodic returns on theiroperations for statistical purposes to the CBN.

1.6 This document therefore, presents a revised National MicrofinancePolicy Framework for Nigeria that would enhance the provision ofdiversified microfinance services on a sustainable basis for the eco-nomically active poor and low income households. It also providesappropriate machinery for tracking the activities of developmentpartners and other non-bank service providers in the microfinancesub-sector of the Nigerian economy.

1.7 This revised policy is prepared in exercise of the powers con-ferred on the CBN by the provisions of Section 33 (1) (b) of theCBN Act No. 7 of 2007 and in pursuance of the provisions ofSections 56-60 (a) of the Banks and Other Financial Institutions Act[BOFIA] No. 25 of 1991 [as amended]. It should be read in conjunc-tion with the MFB Operating Template and the revised Regulatoryand Supervisory Guidelines for Microfinance Banks (MFBs) in Nige-ria.

2.0 OVERVIEW OF MICROFINANCE ACTIVITIES (2006 –2010)2.1 The microfinance industry in Nigeria had been confronted bynumerous challenges since the launch of the Microfinance PolicyFramework in December, 2005. Coming on the heels of the bankingsector consolidation, many of those adversely affected found theirway into microfinance. Thus, a significant number of the newlylicensed MFBs were established or operated like “mini-commercialbanks”. Also, the erstwhile community banks (CBs) that convertedto MFBs did not fare any better.

2.2 An assessment of the microfinance sub-sector, following thelaunching of the policy however revealed some improvements. Theseinclude increased awareness among stakeholders such as governments,regulatory authorities, investors, development partners, financial in-stitutions and technical assistance providers on microfinance. Spe-cifically, a total of 866 microfinance banks have been licensed,Microfinance Certification Programme (MCP) for operators ofmicrofinance banks put in place and the promotional machinery beefedup. Accordingly, entrepreneurs are taking advantage of the opportu-nities offered by increasingly demanding for financial services such ascredit, savings, payment services, financial advice and non financialservices.

2.3 Despite the above development, a large percentage of Nigeriansare still excluded from financial services. A study carried out byEnhancing Financial Innovation and Access (EFInA) in August, 2010revealed that 39.2 million representing 46.3 per cent of the adults in

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POLICY | CENTRAL BANK OF NIGERIAMICROFINANCE POLICY FRAMEWORK FOR NIGERIA, APRIL 29, 2011

Nigeria, were excluded from financial services. Out of the 53.7 percent that had access, 36.3 per cent derive their financial services fromthe formal financial institutions, while 17.4 per cent exclusively pa-tronized the informal sector. Also, the results of the survey revealedthat Nigeria was lagging behind South Africa, Botswana and Kenyawith 26 per cent, 33 per cent and 32.7 per cent in financial exclusionrate, respectively.

2.4 Several factors have accounted for the persisting gap in access tofinancial services. For instance, the distribution of microfinance banksin Nigeria is not even, as many of the banks are concentrated in aparticular section of the country, which investors perceived to pos-sess high business volume and profitability. Also, many of the bankscarried over the inefficiencies and challenges faced during the com-munity banking era. In addition, the dearth of knowledge and skillsin microfinancing affected the performance of the MFBs. Further-more, there are still inadequate funds for intermediation owing tolack of aggressive savings mobilization, inability to attract commer-cial capital, and the non establishment of the Microfinance Develop-ment Fund.

2.5 In order to redress this unintended development, the Bank com-menced a programme of capacity building, sensitization and aware-ness on the appropriate model for microfinance banking in Decem-ber 2007. Maiden, Routine and Target Examinations, as well as nur-turing and mentoring of the MFBs were also embarked upon duringthe same period to inculcate the microfinance concept and assistthem to stabilize.

2.6 The impact of the global financial crisis of 2007/2008 on MFBswas more severe than anticipated. Credit lines dried up, competitionbecame more intense and credit risk increased to the extent thatmany clients of MFBs were unable to pay back their loans owing tothe hostile economic environment.

2.7 The banking sector reform of 2009 did not leave the MFBsunscathed as many of them experienced panic withdrawals by clientswho were under the notion that if the Deposit Money Banks (DMBs)could have challenges, the MFBs would not fare better. The run onsome of the MFBs was so severe that they had to close shop.

2.8 The combination of these factors significantly weakened themicrofinance sub-sector and its ability to achieve its objectives. It isagainst this background that the 2005 Microfinance Policy was re-viewed.

3.0 JUSTIFICATION FOR MICROFINANCE POLICYThe justifications for the introduction of the Microfinance Policyare as follows:

3.1 Weak Institutional CapacityThe prolonged sub-optimal performance of many erstwhile commu-nity banks, microfinance and development finance institutions is dueto incompetent management, weak internal controls and lack ofdeposit insurance schemes. Other factors are poor corporate gover-nance, lack of well defined operations, restrictive regulatory andsupervisory requirements, among others.

3.2 Absence of Technological PlatformThe absence of appropriate network platform for information com-munication technology (ICT) to drive down cost and achieve econo-mies of scale is a major impediment to profitable operations.

3.3 Weak Capital BaseThe weak capital base of existing microfinance institutions couldnot adequately provide cushion for the risk of lending to microclients.

3.4 The Existence of a Huge Un-Served MarketThe size of the un-served market by the existing financial institu-tions is large. EFInA, in its Access to Finance Survey in Nigeria in2008, alluded to the fact that 79 per cent of the total population inNigeria is unbanked out of which 86 per cent are rural dwellers. Alsoin 2005, the aggregate microcredit facilities in Nigeria accounted forabout 0.2 per cent of Gross Domestic Product (GDP) and less thanone per cent of total credit to the economy. This revealed the exist-ence of a huge gap in the provision of financial services to a largenumber of the economically active poor and low income house-holds. The effect of not addressing this situation appropriately wouldfurther accentuate poverty and slow down growth and develop-ment.

3.5 Poor Banking Culture and Low level of Financial Lit-eracyThe primary aim of the microfinance initiative includes promotinginclusive financial system which entails creating sustained financialawareness. Therefore, the target clients for change are those peoplethat equate microfinance with micro-credit and see banks and otherfund providers not as partners in business, but mere sources of loansand advances.

3.6 Economic Empowerment of the PoorGlobally, micro, small and medium enterprises (MSMEs) are knownto contribute to poverty alleviation through their employment gen-erating potentials. In Nigeria, however, the employment generationpotentials of small businesses have been seriously constrained by lackof access to finance, either to start, expand or modernise their presentscope of economic activities. Delivering on employment generationand poverty alleviation by MSMEs, would require multiple channelsof financial services, which an improved Microfinance frameworkshould provide.

3.7 The Need for Increased Savings OpportunityPoor people can and do save, contrary to generally held notions.However, owing to the inadequacy of appropriate savings opportu-nities and products, savings have continued to grow at a very lowrate, particularly in the rural areas of Nigeria. The microfinancepolicy provides the window of opportunity and promotes the devel-opment of appropriate (safe, less costly and easily accessible) savingsproducts that would be attractive to rural clients and improve thesavings level in the economy.

3.8 The Increasing Interest of Local and International In-vestors in MicrofinanceMany local and international investors have expressed interest ininvesting in the country’s microfinance sub-sector. Thus, the estab-lishment of a Microfinance Policy Framework for Nigeria providesan opportunity for them to participate in financing the economic



activities of low income households and the economically activepoor.

3.9 Urban Bias in Banking ServicesMost of the existing banks are located in urban centres, and severalattempts in the past at encouraging them to open branches in therural areas did not produce the desired results. With a high propor-tion of the Nigerian population still living in the rural areas, it hasbecome imperative to develop an institutional framework to reachthe hitherto unserved population with banking services.

4.0 THE MICROFINANCE POLICY4.1 Policy ObjectivesThe Microfinance policy provides a platform to achieve the follow-ing specific objectives:i. Provision of timely, diversified, affordable and dependable fi-

nancial services to the economically active poor;ii. Creation of employment opportunities and increase the pro-

ductivity and household income of the active poor in the coun-try, thereby enhancing their standard of living;

iii. Promotion of synergy and mainstreaming of the informalMicrofinance sub-sector into the formal financial system;

iv. Enhancement of service delivery to micro, small and mediumenterprises (MSMEs);

v. Mobilisation of savings for intermediation and rural transfor-mation;

vi. Promotion of linkage programmes between microfinance institu-tions (MFIs), Deposit Money Banks (DMBs), DevelopmentFinance Institutions (DFIs) and specialized funding institutions;

vii. Provision of dependable avenues for the administration of themicrocredit programmes of government and high net worthindividuals on a non-recourse basis; and

viii. Promotion of a platform for microfinance service providers tonetwork and exchange views and share experiences.

4.2 Policy TargetsBased on the objectives listed above, the targets of the microfinancepolicy are as follows:i. To increase access to financial services of the economically ac-

tive poor by 10 per cent annually;ii. To increase the share of microcredit as percentage of total

credit to the economy from 0.9 per cent in 2005 to at least 20per cent in 2020; and the share of microcredit as percentage ofGDP from 0.2 per cent in 2005 to at least 5 per cent in 2020;

iii. To ensure the participation of all States and the FCT as well as atleast two-thirds of all the Local Government Areas (LGAs) inmicrofinance activities by 2015; and

iv. To eliminate gender disparity by ensuring that womens access tofinancial services increase by 15 per cent annually, that is 5 percent above the stipulated minimum of 10 per cent across theboard.

4.3 Policy StrategiesA number of strategies were derived from the stated objectives andtargets. They include:

4.3.1 Licensing and SupervisionThe Bank shall license, regulate and supervise the activities of pro-moters and microfinance service providers that wish to become MFBs.In the light of experiences from the system thus far, the Bank shall

ensure that all such licensed MFBs are adequately capitalised andoperated in a safe and sound manner.

4.3.2 Continuous Professional DevelopmentProfessionalism, transparency and good governance shall be the bed-rock of the microfinance sub-sector. Therefore, efforts shall be madeto strengthen the skills of regulators, operators and directors ofmicrofinance institutions. The establishment of institutions that sup-port the development and growth of microfinance service providersand clients would be encouraged.

4.3.3 Savings MobilisationAttention will be paid to the promotion of savings and bankingculture among low-income households, through Financial Literacyand Consumer Protection Programmes.

4.3.4 Government ParticipationThe participation of Federal, State and Local Governments in thesystem shall be promoted. This is by encouraging the three-tier ofgovernment to devote at least one (1) per cent of their annual bud-gets to microcredit initiatives, through a combination of moral sua-sion, advocacy and enlightenment, to be administered largely throughMFBs.

4.3.5 NGO-based Microfinance InstitutionsNon-deposit taking microfinance institutions shall continue theirsupport to micro-enterprises and will be encouraged to render regu-lar returns on their operations to the Bank primarily for statisticalpurposes. Those that attain the minimum regulatory capital require-ments and clientele shall be encouraged and incentivised to trans-form to licensed MFBs.

4.3.6 Collaboration with Development PartnersThere shall be collaboration and close monitoring of donors’ assis-tance in the area of microfinance, in line with the provisions of thispolicy.

4.3.7 Definition of Stakeholders’ RoleThe roles of stakeholders in the development of the microfinancesub-sector are clearly defined in Section 8 of the Policy and effortstowards proper harmonization of these roles would be ensured.

4.3.8 Submission of Disaggregated DataMFBs will be required to include disaggregated data in their periodicreturns on the level of patronage of their products and services.

4.3.9 Institutional LinkagesThe linkages among DMBs, DFIs, NGO-MFIs and MFBs as well asother micro-enterprise finance institutions would be institutional-ized and strengthened to increase the flow of funds to clients.

4.4 Microfinance Policy MeasuresAs stated in Section 4.3.9, this Policy document recognises that thereare various players in the microfinance sub-sector of the Nigerianeconomy. However, for deposit-taking institutions, there are strictprudential and regulatory requirements that must be complied within order to be granted banking licence to operate as MFB.These requirements are as follows:



4.4.1 Microfinance Bank CategorizationMicrofinance Banks shall be required to be adequately capitalized,technically sound, and oriented towards lending based on cash flowand the character of clients. There shall be three categories ofMicrofinance Banks (MFBs).

4.4.1.1 Category 1: Unit Microfinance BankA Unit Microfinance Bank is authorized to operate in one location. Itshall be required to have a minimum paid up capital of N20 million(twenty million Naira) and is prohibited from having branches andcash centres.

4.4.1.2 Category 2: State Microfinance BankA State Microfinance Bank is authorized to operate in one State orthe Federal Capital Territory (FCT). It shall be required to have aminimum paid up capital of N100 million (one hundred millionNaira) and is allowed to open branches within the same State or theFCT, subject to prior written approval by the CBN for each newbranch.

4.4.1.3 Category 3: National Microfinance BankA National Microfinance Bank is authorized to operate in more thanone State including the FCT. It shall be required to have a minimumpaid up capital of N2 billion (two billion Naira), and is allowed toopen branches in all States of the Federation and the FCT, subject toprior written approval by the CBN.

4.4.1.4 Transformation Pathi. A Unit MFB that intends to transform to a State MFB shall be

required to surrender its licence and obtain a State MFB licence,subject to fulfilling stipulated requirements.

ii. A State MFB that intends to transform to a National MFB musthave at least 5 branches which are spread across the Local Gov-ernment Areas in the State. This is to ensure that the MFB hasgained experience necessary to manage a National MFB. It shallalso be required to surrender its license and fulfill other stipu-lated requirements.

The prescribed minimum capital requirement for each Category ofMFB may be reviewed from time to time by the Central Bank ofNigeria.

4.4.2 Ownership of Microfinance Banksi. Microfinance Banks can be established by individuals, groups of

individuals, community development associations, private cor-porate entities, NGO-MFIs, or foreign investors.

ii. No individual, group of individuals, their proxies or corporateentities, and/or their subsidiaries, shall own controlling interestin more than one MFB, except as approved by the Central Bankof Nigeria.

5.0 PARTICIPATION OF EXISTING FINANCIAL INSTI-TUTIONS IN MICROFINANCE ACTIVITIES5.1 Deposit Money Banks:Deposit Money Bank (DMB) wishing to engage in microfinance ser-vices can continue to do so through a designated Department/Unitand/or offer microfinance as a financial product. Nothing preventsthe Holding Company having a DMB as a subsidiary from investing inor owning an MFB.

5.2 Non-Governmental Organization-Micro Finance Insti-tutions (NGO-MFIs):This policy recognizes the existence of credit-only, membership-basedmicrofinance institutions, which are not required to come under theregulatory and supervisory purview of the CBN. They are howeversupervised by the appropriate Ministry. Such institutions shall engagein the provision of microcredit to their targeted population but shallnot mobilize deposits from the general public.The registered NGO-MFIs shall be required to forward periodicreturns on their activities to the CBN primarily for statistical pur-poses. NGO-MFIs wishing to obtain operating licences asMicrofinance Banks shall be required to meet the stipulated provi-sions in the Regulatory and Supervisory Guidelines for MFBs inNigeria.

5.3 Apex Associations of Microfinance Banks and Institu-tionsThe CBN shall support apex associations of microfinance banks andinstitutions to promote self-regulation, uniform standards, transpar-ency and good corporate practices. The associations shall also serve asplatform for capacity building, product development and marketing,as well as resource sharing.

Transformation of the Existing NGO-MFIs and FinancialCooperatives:An existing NGO-MFI or Financial Cooperative which intend tooperate as MFB can either incorporate a subsidiary MFB while stillcarrying out its NGO operations or transform to a MFB. Such insti-tutions must obtain operating licence and shall be required to meetthe stipulated provisions in the revised Regulatory and SupervisoryGuidelines for MFBs.

6.0 FRAMEWORK FOR THE SUPERVISION OFMICROFINANCE SUB-SECTOR6.1 Licensing and Supervision of Microfinance BanksThe licensing of Microfinance Banks shall be the responsibility ofthe Central Bank of Nigeria. A licensed institution shall be requiredto add “Microfinance Bank” after its name. All such names shall beregistered with the Corporate Affairs Commission (CAC), in compli-ance with the Companies and Allied Matters Act (CAMA) 1990. Thelicence issued by the CBN will indicate whether it is a Unit, State orNational MFB.

6.2 Revised Regulatory and Supervisory Guidelines forMicrofinance BanksThe Bank has produced a revised Regulatory and Supervisory Guide-lines for the operations of Microfinance Banks in Nigeria. All opera-tors and practitioners are expected to familiarize themselves withthis document and comply with its provisions accordingly.

6.3 Minimum Operational Standards/Template forMicrofinance BanksThe CBN has prepared a Template to guide the operators of theMFBs. This document provides guidance on corporate governance,business planning, products, services and risk management.

6.4 Establishment of the National Microfinance Policy Con-sultative CommitteeThe National Microfinance Policy Consultative Committee(NMFPCC) has been constituted by the CBN to give direction for



the implementation and monitoring of this policy. Membership ofthe Committee shall be determined from time to time by the CBN.The Development Finance Department of the CBN shall serve as theSecretariat to the Committee.

6.5 Credit Reference BureauIn view of the peculiarities of microfinance practice, operators shallbe required to provide and obtain credit information from CreditReference Bureau(x) to aid decision making and minimise credit risk.

6.6 Rating AgencyThe CBN shall encourage the establishment of private rating agen-cies to rate microfinance institutions.

6.7 Deposit Insurance SchemeAs a means of protecting depositors funds and reinforcing publicconfidence, MFBs shall qualify for the deposit insurance scheme ofthe Nigeria Deposit Insurance Corporation (NDIC).

6.8 Capacity Building Programmes6.8.1 Microfinance Certification ProgrammeIn order to bridge the technical skills gap, especially among operatorsand the directors of MFBs, the policy recognizes the need to set upan appropriate capacity building programme. In this regard, the CBNhas put in place the Microfinance Certification Programme (MCP) toensure the acquisition of appropriate microfinance operational skillsby staff and management of MFIs in general and MFBs in particular.

In addition, provisions shall be made for Mandatory Continuing Pro-fessional Education (MCPE) to update relevant skills of the staff ofeach MFB in microfinance banking.

6.8.2 Staff Development ProgrammeEach MFB shall be required to make annual budgetary provision forstaff development and capacity building.

6.8.3 Microfinance Development Fund and CapacityBuildingThe Microfinance Development Fund, when established, shall pro-vide funds to support capacity building for the sub-sector on an on-going basis.

6.8.4 Apex Associations and Capacity BuildingEfforts shall be made to promote capacity building through the apexassociations of the microfinance banks and institutions in collabora-tion with development partners.

6.9 Linkage ProgrammeThe policy recognizes the importance of wholesale funds tomicrofinance institutions to enable them expand their outreach. Pur-suant to this, the CBN shall work out the modalities for fosteringlinkages between DMBs, DFIs, specialized finance institutions, Do-nor Agencies and the MFIs in general and MFBs in particular, toenable the MFBs and MFIs source for wholesale funds and refinanc-ing facilities for on-lending to their clients. Furthermore, MFBs andMFIs are charged, under this policy, to foster close linkages withEntrepreneurship Development Centres (EDCs) and micro-enter-prises that operate as Self-Help Groups (SHGs).

6.10 Establishment of Microfinance Development Fund(MDF)In order to promote the development of the sub-sector and providefor the wholesale funding requirements of MFBs and MFIs, aMicrofinance Development Fund (MDF) shall be set up by the CBN.

The Fund, which shall be professionally managed to guarantee itssustainability, will provide necessary support for the development ofthe sub-sector in terms of refinancing/guarantee facility, capacitybuilding, financial education, and other promotional activities. TheFund shall be established with a seed fund to be provided by theFederal Government and the CBN and operating fund through softfacilities from international development financing institutions, aswell as multilateral and bilateral institutions.

6.11 Prudential RequirementsThe CBN recognizes the peculiarities of microfinance practice andshall accordingly implement appropriate regulatory and prudentialregime to

guide the operations and activities of the MFBs. Some of the pru-dential requirements are, compulsory investment in treasury bills,liquidity ratio, capital adequacy ratio, fixed assets/long-term invest-ments, branch expansion, maintenance of capital funds, limit oflending to a single borrower and related party, maximum equity in-vestment holding ratio, provision for classified assets, and unsecuredlending limits, amongst others. The details are contained in the re-vised Regulatory and Supervisory Guidelines for MFBs in Nigeria.

6.12 Disclosure of Sources of FundsMFBs shall disclose their sources of funds in compliance with theMoney Laundering Prohibition Act 2004.

6.13 Corporate Governance for Microfinance InstitutionsAll MFIs shall adhere to basic corporate governance principles. TheBoard of Directors of MFBs shall be primarily responsible for thecorporate governance of the bank by establishing strategic objec-tives, policies and procedures that would guide and direct the activi-ties and the means to attain same, as well as the mechanism formonitoring Management s compliance.

6.14 Apex Associations of Microfinance Banks and Institu-tionsThe CBN shall support apex associations of microfinance banks andinstitutions to promote self-regulation, uniform standards, transpar-ency and good corporate practices. The associations shall also serve asplatform for capacity building, product development and marketing,as well as resource sharing.

7.0 INCENTIVES FOR MFBsThe new window of opportunity to bring financial services to theunder-served and un-banked in the rural areas shall require the sup-port of government and the regulatory authorities.

7.1 Microfinance Development Fund will be established by the Gov-ernment, CBN and other stakeholders to support the MFBs in ren-dering financial services to their clients on a sustainable basis. TheFund shall comprise two windows - Commercial and Social.



7.2 Subsidized training/capacity building programmes would be madeavailable to staff of the MFBs.

7.3 The Interest Drawback Programme (IDP) of the CBN would beextended to the MFBs clients in agriculture and allied businesses.

7.4 The CBN in collaboration with relevant Ministries, Departmentsand Agencies (MDAs) as well as other stakeholders would provideenabling environment for MFBs/MFIs to operate.

8.0 THE ROLES AND RESPONSIBILITIES OF STAKE-HOLDERSThe roles and responsibilities of respective stakeholders shall in-clude, but not limited to, the following:

8.1 GovernmentGovernment shall be responsible for:i. Ensuring a stable macro-economic environment, providing basic

infrastructure (electricity, water, roads, telecommunications, etc),political and social stability;

ii. Creating an efficient land administration system to facilitate easeof transfer of land titles and other property rights to serve thecollateral needs of borrowers and financial institutions;

iii. Promoting policy in support of consumer protection and finan-cial literacy for microfinance clients;

iv. Setting aside an amount not less than one (1) per cent of itsannual budgets at Federal, State and Local Governments levelsfor microcredit initiatives.

8.2 Central Bank of Nigeria (CBN)The CBN shall:i. Continue to oversees the operations of the National Microfinance

Policy Consultative Committee;ii. Ensure the implementation of the Microfinance Policy Frame-

work to achieve the stated objectives, targets and strategies;iii. Ensure the emergence of a sustainable microfinance sub-sector

through appropriate institutional and regulatory and supervisoryframework;

iv. Establish the Microfinance Development to provide wholesalefunding for on-lending activities of Microfinance Institutions;

v. Develop and support appropriate capacity building programmesfor regulators, directors, operators and practitioners in the sub-sector, in collaboration with other stakeholders;

vi. Promote financial literacy and consumer protection in partner-ship with relevant public and private sector development institu-tions as well as Civil Society Organisations (CSOs); and

vii. Undertake periodic reviews of the Microfinance Policy and theRegulatory Guidelines to address emerging issues.

8.3 Apex Associations of Microfinance Banks and Institu-tionsThe Apex Associations of MFBs and MFIs shall:i. Promote self-regulation;ii. Ensure uniform standards, transparency and good corporate gov-

ernance practices among their members;iii. Provide platform for peer review, capacity building, generic prod-

uct development and marketing, as well as resource sharing;iv. Ensure that members render returns on their operations to the

CBN; and

v. Work with other stakeholders for the promotion of financialliteracy and consumer protection.

8.4 Public Sector Poverty Alleviation AgenciesThis Microfinance policy framework recognises the roles of publicsector MFIs and poverty alleviation agencies such as the NationalPoverty Eradication Programme (NAPEP), Small and Medium En-terprises Development Agency of Nigeria (SMEDAN), NationalDirectorate of Employment (NDE) etc. in the development of thesub-sector. They shall be encouraged to play the following roles:i. Provide non-commercial (social security) resources targeted at

difficult-to-reach clients and the vulnerable group;ii. Support capacity building for stakeholders;iii. Nurture new MFIs to sustainable levels; andiv. Collaborate or partner with other relevant stakeholders to achieve

the objectives of this policy.

8.5 Donor Agencies and Development PartnersDonor Agencies and Development Partners that provide capital andsupport for the development of the microfinance industry in Nigeriashall be required to operate within the relevant provisions of thispolicy.

9.0 CONCLUSION9.1 There exists a huge untapped potential for financial services atthe micro level of the Nigerian economy. Attempts by Governmentin the past to fill this gap did not achieve the desired result.

9.2 The Microfinance Policy was therefore developed in 2005 tofurther address the observed gaps. The policy provides for the estab-lishment of a private sector driven microfinance banks.

9.3 Achievements recorded in the microfinance sub-sector since 2005have been mixed. While outreach by formal financial institutionsincreased from 35.0 per cent to 36.3 per cent, occasioned by thecoming on stream of MFBs, the institutions have been confrontedwith numerous challenges, including, poor corporate governance andasset quality, weak internal control and risk management, amongstothers. It is against this background, that the revision of the 2005microfinance policy was undertaken.

9.4 The revised microfinance policy framework provides that MFBsshall be required to be adequately capitalized, better managed, run onlow cost structure and be operated in a safe and sound manner.

9.5 The CBN shall continue to monitor and ensure a conducivepolicy environment for the conduct of microfinance activities andbusinesses in Nigeria.

29th April, 2011


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ready precarious situation. Beyond theproblems in Greece, these are the newglobal fears as 2011 draws to a close.

The Greek debacle: stillunresolvedDespite bailout efforts from eurozoneleaders and the International MonetaryFund (IMF) since May 2010, the ghostof the Greek crisis is yet to rest. Mar-kets around the world still quiverat any breaking

Tthis constitutes just 4% of total sover-eign debt in the region. But the pros-pect of a spill over to Italy and Spainwhich together control 32% of theeurozone government debt is an en-tirely different issue.

With more investors expressingtheir pessimism that an Italian andSpanish bailout is inevitable, global eco-nomic growth prospects hang in thebalance. The situation in the UnitedStates which still struggles with recordunemployment, indebtedness and fis-cal deficits further compli-cates an al-

contagion in the eurozone which to-day seems more real than ever before.

The debt crisis in Greece has causedhavoc in financial markets since newsabout it first broke in 2009. As 2011sets to exit, market sentiments remainfragile, even though Greece’ creditorsare now better placed to make a fairestimate of the degree of loss they faceshould the debt default happen. Con-fronted with current stark realities, fi-nancial institutions and governmentswith huge exposures to Greece arecompelled to make provisions for theworse possible outcomes.

But the dangerous dimension to thecrisis is the contagion in other econo-mies, notably Italy and Spain. Theeurozone economy may be able to with-stand a bad Greek debt; especially since

wo years on, the Greekdebt crisis remains per-haps the most topicalissue in the globaleconomy, more so forthe concern about a

By EUNICE SAMPSON

Confronted with current stark realities,

financial institutions and governments with

huge exposures to Greece are compelled to

make provisions for the worse possible

outcomes.


news on Athens. The latest being a ma-jor tumble on Tuesday November 1,after a Greek call for a referendumon the rescue package agreed by the17 member eurozone leaders five daysearlier.

Eurozone leadersmeeting in Brussels onOctober 27 agreed apackage of measures de-signed not just to tacklethe Greek crisis but toavert an escalating debtburden in the monetaryzone. In the terms of thedeal, Greece would re-ceive a new €130 billionrescue loan. In addition,50% of the country’s debtowed private creditorswill be written off. Theeurozone bailout fund willbe increased to about €1trillion (around $1.4 tril-

lion); while European banks will be re-quired to recapitalize by up to 9% tocushion the effect of the crisis in thezone.

In an unexpected twist, GreecePrime Minister George Papandreou onOctober 31 announced that the Greek

people will be allowed to approve orreject the deal in a referendum expectedto hold around January 2012. Themove is seen as an attempt by theembattled Prime Minister to calmstrained political nerves and appease aGreek people already nervous aboutthe additional austerity burdens that arepreconditions for the new deal. But itturned out to be a wrongly calculatedmove.

Despite all the noise about it, notmany believe in the efficacy of theGreek bailout plan. For one thing, thesevere austerity package that comeswith it is throwing Athens deeper intorecession. Short of helping to ward offdefault, the bailouts have not in anyway improved the economic conditionin Greece. While the EU leaders striveto ensure that Greece keeps servicingits loans, the country’s low economicproductivity and capacity, coupled withstringent fiscal tightening, all workagainst achieving any quick recovery.

Source: Reuters


GLOBAL WATCH | European Debt Crisis:Beyond the concerns for GREECE

From all indications, it could take another decade or morebefore Greece is able to completely shake off the debthangover, even with massive international and regional sup-port.

Greece’ total debt burden is now put at around $500billion, with over half held by private creditors, includingbanks, (especially German and French banks), insurers,mutual funds, pension funds, etc.

Who’s next?While the crisis in Greece remains unresolved, the pros-pects of similar predicaments in the bigger economies ofItaly and Spain, not to mention threats also coming fromIreland and Portugal, are proving to be a handful foreurozone leaders. One troubling sign is the borrowing costsfor Italy and Spain which have hit new highs, a signal thatinvestors remain apprehensive about the countries’ abilityto pay. Analysts put the combined debt of Italy and Spainat over $3 trillions, at least five times more than what Greeceowes.

Perhaps the major cause for worry currently is Italy. Asmarket fears mount over its dwindling financial situation,Italian bond yields have hit the roofs, with the 10-year bondnow attracting over 7%. The high cost of insuring thecountry’s debt has further eroded market confidence. Ascost of credit rises, so does the probability that the economymay default, since this constrains it from borrowing moreto service existing debts.

With growth at a near standstill; September unemploy-ment figure at 8.3%; and series of austerity measures be-ing introduced to build market confidence and address hugedeficits, there is really not much to cheer about in Romeright now.

As shown in the graph above, several European bankshave enormous exposure to Italy, and a full blown finan-cial crisis here would come with major consequences forfinancial services players. According to reports by Reuters,French banks are exposed to Italy up to $416.4 billion;Germany, $161.8 billion; UK, $74 billion; Netherlands, $52.1billion; USA, $46.9 billion; Japan, $44.2 billion; Spain, $39.8billion; Switzerland, $26.7 billion.

There are also growing fears of a credit crunch in Italyas banks struggle to meet higher capital ratios set by EUleaders following credit rating downgrades and higher in-terest rates. These have intensified pressure on Rome toact fast to address a deteriorating situation. In October,Italian leaders agreed to allow the IMF to monitor its poli-cies and progress in this regard.

Spain also remains under close observation in the glo-bal financial market. With a 15-year high unemploymentrate of 22% as at third quarter 2011, the highest amongmajor economies; and with overall queue of the unem-ployed nearing the 5 million mark out of a 46 million popu-lation, Madrid is generating as much global concerns asRome.

Considering the interdependence of the global finan-cial system, the possibility of the feared contagion spread-

ing beyond the common currency zone cannot also beruled out. The United Kingdom, despite a decade ofshunning the euro currency is also vulnerable. Datafrom the July 2011 stress test on European banks puttotal exposure of UK’s three biggest banks to thetroubled eurozone economies (Greece, Ireland, Italy,Portugal and Spain) at about €204 billion, a whopping19 per cent of UK’s GDP. The Royal Bank of Scotlandalone is owed a total of €103.3 billion by these econo-mies; Barclays’s total exposure is €87.1 billion; and HSBCis exposed up to €14 billion. Should the financial crisisget out of hand, UK banks and the larger economycould be in serious danger. It is pertinent to note thatthe total exposure of these three banks far exceeds theirtotal Tier 1 capital of €192 billion.

Source: Reuters

http://www.worldcitypics.com/spain-malaga-castillo-gibralfaro/



The pilling casualtiesIn the political front, two major casualties have emergedfrom the eurozone debt crisis – Prime Minister GeorgePapandreou of Greece and President Sylvio Berlusconi ofItaly.

On November 8, 2011, Greek Prime MinisterPapandreou was forced to resign over his alleged unsatis-factory handling of the recent bailout plans. While mostGreeks would vote any day against the harsh austerity mea-sures that are preconditions for the bailouts, majority areunwilling for their country to exit the eurozone. The voteof no confidence passed on Prime Minister Papandreouon November 4 was the result of a perception that his call

for a referendum was a threat to Greece’s eurozone mem-bership. Prime Minister Papandreou’s announcement thathe would bring the bailout decision up for a referendumruffled feathers not just among Greek politicians and policymakers but also among EU leaders who 4 days before hadreached what they believed was a winning deal for Athens.A new Prime Minister, Lucas Papademos, a former Euro-pean Central Bank Vice President, has been appointed toreplace him.

In Italy, President Sylvio Berlusconi resigned on No-vember 12 after new austerity measures designed to cutpublic debt and government deficit were passed by ItalianMPs. Berlusconi had been under pressure to resign firstfor his series of personal scandals and for an alleged mis-

Source: Reuters

Spain MalagaCastillo Gibralfaro



management of the economy. A re-placement for him, Mario Monti, aformer EU Commissioner has as-sumed office.

In the financial services sector,Dexia bank of Belgium on October10, 2011 became the first bank to gounder as a result of the Greek debtcrisis. With assets in excess of $700billion, far bigger than the GDP of itshome country, it is the biggest finan-cial services failure since the 2008-2009 multiple banks’ collapse. Dexiacaved in under the weight of huge ex-posures to European sovereign debt,notably Greek bonds.

The failure and eventual bailout ofDexia bank by French and Belgiangovernments have raised questionsabout the credibility of the July stresstest in Europe which gave the bank aclean bill of health and rated it the 12thhealthiest bank in the EU.

Two days earlier, Denmark’s MaxBank was nationalized after it claimedinsolvency owing to huge exposures tothe region’s sovereign debt.

There are also growing concernsabout the fate of regional banking ti-tans including France’s BNP Paribaswith $2.7 trillion in assets, CreditAgricole with $2.1 trillion, SocieteGenerale with $1.5 trillion; and Italy’sUniCredit with assets in excess of €929billion; and several others. Though thesebanks had passed the stress test barelythree months earlier, they are alreadyshowing signs of impending troubleowing to massive toxic assets from theprolonged eurozone crisis.

With five of its banks failing thestress test in July, if this counts foranything, Spain’s financial services in-dustry is also highly vulnerable. Span-ish banks still struggling with the mort-gage crisis and another possible roundof credit crunch would be lucky toescape major failures during this crisis.

Outside the eurozone, on October31, United States’ MF Global Inc filedfor bankruptcy citing over $6.3 billionof eurozone sovereign debt exposure.MF Global, a major financial deriva-tives broker had earlier shocked inves-tors by reporting a $186 million lossfor second quarter 2011. Fitch andMoody’s quickly downgraded the

Source: Reuters

http://upload.wikimedia.org/wikipedia/en/4/4f/Berlaymont_building_european_commission.jpg

Picture of Berlaymontbuilding, headquarters ofthe European commission



Eurozone: Outlookfor 2012With the monetary zone’s unemploy-ment figures reaching 10.2% in Sep-tember, the highest level since the in-troduction of the common currency,the outlook for 2012 seems bleak.There are fears that the zone might beheading for a recession or at best ananemic growth this year and next.

The Organization for EconomicCooperation and Development(OECD) recently slashed its 2012growth forecast for the eurozone, witha warning that the debt crisis meansmany members of the currency union

company’s debt to “junk” status.The bankruptcy filed by MF Glo-

bal adds another twist to the wholeeurozone saga, which now threatens toengulf other non - European financialinstitutions. MF Global is a leadingbroker of commodities and listed de-rivatives and one of 22 primary deal-ers authorized to trade U.S. governmentsecurities with the Federal ReserveBank of New York. Its collapse sig-nals the first serious US victim of theeurozone debt crisis, with implicationsfor arms of the company around theworld. The London office of MF glo-bal sent home about 700 employeesof the firm following the announce-

ment of the insolvency.The failure of MF Global also has

far-reaching implications for other fi-nancial services institutions in the USand Europe. The list of MF Global’s50 biggest creditors published alongwith the bankruptcy notice revealsUnited States’ JPMorgan Chase Bankas its largest creditor, owed over $1.2billion. Germany’s Deutsche Bank alsomade the list, owed a total of $1.015billion.

The eurozone debt crisis thatstarted in Greece is not only claimingwider European casualties but victimsoutside the European continent.

Source: Reuters

Source: Reuters



will shrink this year and next. The OECD now expects the zone togrow by a meager 0.3% in 2012, down from the 2% earlier fore-cast in May.

The OECD has proposed that the European Central Bank cutrates and increase lending and liquidity in the zone to halt a conta-gion in Spain and Italy.

With the outcome of the October 27 meeting in Brussels, it isclear that EU leaders are determined to keep Greece in the euroand prevent a contagion. But the darkening economic clouds inItaly and Spain threaten to put a clog in the wheel of this plan.Even if a contagion is averted in the short to mid term, severaleconomies in the zone would be faced with a difficult 2012.

The World Bank and IMF have warned that not just Europebut the major developed and developing economies face the riskof a slower growth in 2012 owing to this crisis.

Implications for the global economyMarket developments since the eurozone crisis have once againreiterated the strong interconnectedness of the modern day globaleconomy. Many investors believe that Italy, and perhaps Spain,would eventually require a bailout just as Greece, Ireland and Por-tugal. If this happens, global economic growth will suffer a down-ward risk. And experts have warned that no country is immune,no matter how developed or otherwise.

Even with the dreaded contagion yet to be full blown, theeurozone debt crisis is already taking its toll on economies aroundthe world. Massive governments and financial institutions’ expo-sure means that several heads could spin should the crisis deterio-rate.

Germany, the economic powerhouse and about the most stableeconomy in the eurozone, is not immune. In fact Berlin standsthe risk of becoming the biggest casualty of the crisis consideringits high level of exposure to the debtor countries. Its financialservices institutions are also threatened with bad debts arising fromthe crisis. As the biggest exporter in the zone, a widespread conta-gion would have devastating effect on the economy; and an out-right recession could be looming.

In far away Asia, Chinese and Japanese economies owing totheir export dependency will suffer should the crisis spread tomajor export destinations. The eurozone and the United States arethe biggest markets for Asian products.

Japan is already struggling with its own share of the crisis.Market traders running away from other troubled currencies (Euro,British pound sterling and the US Dollar) have settled for theJapanese yen as a safe investment haven. This has pushed up thevalue of the yen against other major currencies, reducing the com-petitiveness of Japanese exports. Japan’s central bank on October31 waded into the currency markets, selling yen and buying USdollars as the yen reached record high levels against the dollar.The intervention brought down the value of the yen by about5%, from a record 75.35 yen to the dollar to 79.51. To avert asituation where local manufacturing firms relocate their opera-tions to more export friendly destinations, Japanese policy makersmay be forced to keep repeating this exercise for as long as theeurozone crisis lingers.

China’s export data also show an uncharacteristic downturn asits new orders index fell to 50.5 in October from 51.3 the month

Source: Reuters



before. Since the world is banking onChina and other fast growing develop-ing economies to drive global growthin the near term, any major slowdownin these countries would have negativeimplications. The IMF has advised chinato change its policy of over dependenceon export by boosting local demandand allowing its Yuan to appreciate invalue.

The United States has even morereasons to be worried about theeurozone crisis. According to reportsfrom Reuters, Fitch Ratings has warnedthat should the crisis persist, it may re-duce its “stable” rating outlook for U.S.banks with large capital market deal-ings and exposures to European mar-kets. The OECD also recently slashedits growth forecast for the US to 1.8%next year, down from 3.1% earlier.

In a recent address delivered be-fore a Congress Subcommittee (‘TheEurozone Debt Crisis and Implicationsfor the United States’), the U.S. Assis-tant Secretary for International Fi-nance Charles Collyns reiterated thatit was in the best interest of the USfor the European crisis to be resolvedswiftly: “The United States has no big-ger, no more important economic re-lationship than it does with Europe”.According to him, Europe accountsfor over 20 percent of U.S goods ex-ports and over 35 percent of U.S. ser-vice exports. The total stock of Euro-pean FDI in the US, put at $1.6 tril-lion, accounts for 70 percent of allFDI in the United States.

If the example of the recent fail-ure of MF Global is anything to goby, American banks are also highly sus-

ceptible, with their exposure to Portu-gal, Ireland, Italy, Greece and Spain putat nearly five percent of total US bank-ing assets. If the eurozone fails, theUS financial services industry wouldbe at risk.

Even for the developing economies,especially the commodity-dependentones, a crisis in Europe, a major com-modity consumer, could spell doom fortheir export earnings.

The IMF has warned that the over-all global economy is at risk of anotherdownturn owing to the eurozone debtcrisis. Among other threats, global de-mand and export could weaken as in-vestors and consumer confidence aredampened by uncertainties aroundthem.


Source: independent.co.UK

Source: Reuters



Should the eurozone call it quits?Some analysts have speculated that the current debt cri-sis marks the beginning of the end of the common cur-rency zone and that some major economies would becompelled to revert to their original national currencies.

Speculations are also rife that Germany may alreadybe working on a contingency plan just in case the Greekdebt bailout fails, a contagion erupts in the zone and theeuro currency crumbles. Other reports suggest that Ger-many is planning to readopt its former currency; the Deut-schemarks; and that Berlin is currently building a reserveof it for a possible rainy day. Germany is by far thebiggest economy in the zone and the force that holds thecurrency together. Without it, the end of the euro is nearinevitable.

The sovereign debt crisis, especially that of Greecehas also raised debates about the ‘economic’ sense insandwiching into a single currency zone, economies thatare as diverse in size, productivity, technological advance-ment and industrial base as Germany and Greece, forinstance. Analysts have argued that Germany had nobusiness going into a common currency union with smalleconomies like Greece in the first place. They opine thatsuch level of monetary unity perhaps works with equalpartners; but not with partners as wide apart in size andcapacity, yet working under common rules.

But the prospect of a disintegration of the eurozoneor a possible German exit from the union, whether har-monious or otherwise would come with its own setbacks.In July 2010, Dimitri B. Papadimitriou, President of theJerome Levy Economics Institute opined that an ami-cable, coordinated divorce in the eurozone is a possibil-ity. He however identified the challenges with this to in-clude higher transaction costs and tariffs and limitationsto the current mobility of labor and capital within thezone. This would result in an inefficient, fractured sys-tem that necessitated the creation of the eurozone in thefirst instance. It would also reinforce the preeminence

of the US dollar in global commerce and affairs,leaving China as the only credible rival to Ameri-can economic power.

While stakeholders express their diverse opin-ions on the likely disintegration or otherwise ofthe common currency concept, realities on groundso far, as evidenced in the policy decisions andactions of eurozone and other global leaders, donot reflect any immediate plan to dissolve theunion. Since the Greek debt crisis broke out,European leaders have displayed sufficient po-litical and financial will, even though most oftentainted with individual national interests, to en-sure that the future of the euro is preserved.Whether their efforts yield the desired results atthe end of the day is an issue for another discus-sion.

Source: Reuters

Source: Reuters



What way forward?As was the case during the recent glo-bal financial crisis, experts around theworld have come to the table with di-verse opinions on the way out of theEuropean debt crisis.

The US Assistant Secretary for In-ternational Finance Charles Collyns hasadvised eurozone leaders on a four-pronged comprehensive strategy toaddress the crisis. First, to ad-dress the contagion concerns,a convincing firewall needs tobe established to ensure thatgovernments can borrow atsustainable interest rates, asthey implement policies tobring down debt andstrengthen the foundations forgrowth. Second, steps must betaken to ensure that Europeanbanks have sufficient fundingand build capital cushions tomaintain the full confidenceof depositors and the availabil-ity of credit, and to ensure thatbanks have access to a capitalbackstop when needed. Third,a sustainable program will beneeded for Greece as it imple-ments its fiscal and structuralreforms. Fourth, ongoing workto strengthen governance inthe monetary union should besustained so as to address theroot causes of the crisis, whichin the case of Greece was acase of flagrant imprudenceand fiscal irresponsibility.

Dimitri B. Papadimitriou’s viewsare not any different from that ofCollyns. In July 2010, Papadimitriousuggested that short of calling it quits,the only other option open to eurozoneleaders is to strive to achieve a moreperfect union. According to him, thiswill entail the European Central Bankproviding sufficient financial succor tothe eurozone economies by distribut-ing as much as €1 trillion across allnations on a per capita basis. Each na-tion would be allowed to use this emer-gency relief as it deems fit, with highlyindebted economies like Greece, forexample, choosing to use their own life-line to purchase their outstanding pub-

lic debts; and with others using theirsas fiscal stimulus. This could be fol-lowed by the setting up of a more cen-trally controlled fiscal monitoring sys-tem within the zone; and a more per-manent vehicle through which the cen-tral eurozone authorities could distrib-ute funds to member states. Thisshould be overseen by the equivalentof a national treasury responsible toan elected body of representatives,

perhaps the European Parliament. Inthe opinion of Papadimitriou, “thisarrangement would relieve pressuresto adopt austerity measures, and limitthe necessity of borrowing from finan-cial markets in order to finance defi-cits.”

These recommendations summa-rize the general opinion of experts onthe way out of the debt mess; exceptof course for those that have suggestedan outright pulling down of the com-mon currency structure to givetroubled member countries more con-trol over their monetary policies.

The Breton Woods institutions havealso advised export dependent Asian

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and other economies including China,Japan, Germany, etc, to strengthendomestic demands and reduce theirexposure to demand fluctuations ineconomies directly affected by the on-going crisis. The World Bank and IMFare also calling on China to adopt amore flexible currency regime to helpother export economies that are cur-rently struggling with financial crisis.

The United States and European

leaders are lobbying the BRIC econo-mies (Brazil, Russia, India and China),especially China, to, through the IMF,throw some financial lifeline to thecash-trapped Eurozone. This, it ishoped would help ameliorate liquiditychallenges and current account imbal-ances that have made economies likeChina to swim in surplus while someof the biggest economies in the worldwallow in massive deficits.(* Eunice Sampson is the DeputyEditor, Zenith Economic Quar-terly)



* By ‘Bisola Olu-Akindeinde

Issues (

I)

resolved that where a bank allowed athird party cheque encashment in vio-lation of the stipulated regulation, sucha bank would be made to pay higherthan the sanctions between 10 per centof the face value of the cheque andN100,000 fine. It advised customersto engage the services of the cash-in-transit (CIT) companies already li-censed to assist with cash transfer toand from their banks at mutually agreedterms and conditions, stating that con-

With the recent Central Bank ofNigeria’s (CBN) policy and guide-lines on Nigeria’s transition froma cash-based economy to a ‘cash-less’ society, the stage is set for anew phase of banking in the coun-try. Specifically, on April 20, 2011,CBN issued a memo to all banks,Cash-in-Transit (CIT) operating firms,and payments system service provid-ers, limiting daily cash withdrawals toN150,000 for individuals and N1 mil-lion for corporate entities effectiveJune 1, 2012. The memo signed by theDirector, Currency Operations Depart-ment of the apex bank also warnedthat any transaction above the thresh-old would attract a fine of five timesthe amount that the bank waives as afirst offender, while the bank shall, sub-sequently, pay 10 times the chargeswaived.

The apex bank had sequel to ameeting with the Bankers’ Committee,


travention of the policy would attracta fine of N1 million per movement.

In pursuit of the new policy, theapex bank has also come up with whatit termed “cashless Lagos”, meaningthat Lagos State will serve as the pilotfor the new innovation—beginningfrom June 2012. Other locations, in-cluding the Federal Capital Territory(FCT) Abuja, Rivers State, Kano Stateand Abia State will come on subse-quently. Extension to other parts ofthe country will be carried out at a time

to be determined by the Bankers’ Com-mittee, according to the CBN.

The Case for acashless societyA cashless society is one in which physi-cal cash as a transaction medium isreduced to the barest minimum. Sub-stituted in the place of cash would bean electronic payment system, in oneform or another. Many economies ofthe world today are either ‘cashless’ or

are in the process of doing so. ForNigeria the push for a ‘cashless’economy, according to the CBN, hasbecome imperative owing to the con-tinued dominance of cash with its im-plication for cost of cash managementto the banking industry, security, moneylaundering, among others. This asser-tion is underpinned by a World Bankstudy which showed that the cash trans-actions that move between Cotonou,Ghana and Nigeria is in the region of$10 billion. These transactions have norecords in any of Nigeria’s systems andthe government can’t even plan withthese figures in mind and this allowsfor tax evasion, the study further re-vealed. Also, by its own record, theCBN spends about N150 billion an-nually to produce, store, transport anddestroy naira notes and this is expectedto increase to the tune of N192 billionby 2012.

Recently, Visa also published a re-port on the cost of cash to the society,as it affects the European region. Thereport by Visa cited various papers bygovernments and individual consultantsto make a compelling case for a re-gime of ‘cashless’ economy. The re-port by Visa stated that “the EuropeanCommission has calculated that thetotal cost to society of all paymentsmethods, including cash, cheques andpayment cards, equates to two to threeper cent of Gross Domestic Product

For Nigeria the push for

a ‘cashless’ economy,

according to the CBN,

has become imperative

owing to the continued

dominance of cash with

its implication for cost of

cash management to the

banking industry, secu-

rity, money laundering,

among others.


ISSUES (I) | Nigerian Economy: Options forIMPROVING THE PEOPLE’S WELLBEING

(GDP).” It continued: “to put thisfigure in context, it should be re-membered that the entire Euro-pean Union’s (EU) agricultural sec-tor equates to 2.1per cent of GDP,which means we spend more onpayment than we do on food.” Visaalso argues that because cards areless risky and encourages spend-ing, they are more efficient andoffer more value.

A similar report was publishedby the Dutch central bank in whichit was estimated that the annualcost of cash to each family was€300 per annum. It is expected thatthe cost of card transaction willdrop with some countries in Eu-rope already issuing free debit cardservices to retailers.

Mobile Paymentin NigeriaAccording to the CBN, mobilepayments have very exciting po-tentials within Nigeria given thelow infrastructure requirementsand rapidly increasing mobilephone penetration. The apexbank issued approval-in-prin-ciples to about 16 mobile pay-ments schemes last year. Thisis to enable them to commencepilot run in preparation for themass roll out of their live runin 2012.

To bring this home, CBNhas listed the achievements itseeks to make from this exer-cise. CBN is seeking to balancethe objective of meeting genu-ine customer transaction needsand combating speculative

market behaviors that mayhave negative effects on theeconomy. The apex bank alsobelieves the new cash with-drawal policy (which will en-courage e-payment) will ensurethat a large proportion of cur-rency in circulation will be cap-tured within the banking systemand as a result develop the ef-ficacy of monetary policy op-erations and economic stabili-zation measures. This drive to-wards a cashless society will alsoassist the CBN and the Bank-ers’ Committee to keep in linewith global trends.

Attention to the possibilityof a cashless society has in-creased and intensified over thepast several years. Proponentsand enthusiasts of the prospectof eliminating cash as a trans-action medium believe that theimmediate benefits would beprofound and fundamental.These benefits go to the threemain stakeholders: the govern-ment, the banks & merchantsand the customers.

To the banks and mer-chants the benefits are largercustomer coverage, a reductionin operational costs, availabil-ity of international productsand services promotion andbranding; increased customersatisfaction and personalisedrelationship with customers,and easier documentation andtransaction tracking.

To the customers, the ben-efits are that it improves con-venience, as it is available 24hours a day and seven days ofthe week. It also helps reducetransfer costs and processingfees. It reduces processing andtransaction time, supports mul-tiple payment options (such asremote payment for goods andservices) and also facilitatesimmediate notification of alltransactions on customer’s ac-count. With reduced use ofcash, there is a heightened senseof safety as the sale of illegal

According to

the CBN,

mobile pay-

ments have

very exciting

potentials

within Nige-

ria given the

low infra-

structure

requirements

and rapidly

increasing

mobile phone

penetration.


ISSUES (I) | Nigeria: From SurplusCash to ‘Cashless’ Economy

drugs and related violentcrime levels would reduce.

For the government thebenefits are that there is re-duced money laundering be-cause electronic moneyleaves an audit trail all thetime. It aids adequate bud-geting and taxation and im-proves regulatory services.It also improves administra-tive processes, and reducescost of currency administra-tion and management. Allthese benefits may result inthe national debt being re-duced.

There is however theother side of the coin; thedisadvantages of a cashlesssociety must not be ignored.One key disadvantage is thata cashless society graduallyrobs people of their privacy.There is also the added costof transaction, which thenresults in an increase in thecost of goods and services.There is the risk of identityfraud once fraudsters canfind a way to override abank’s security system. Hav-ing to spend electronicmoney reduces the controland it can leave one spiral-ling into debt. The irony ofit all is that, in spite of allthese drawbacks, the banksstill stand to gain from thesociety going cashless.

Steps to carrying out

an e-transactionCarrying out an electronictransaction is very straight-forward and is valid unlessthe cardholder disputes thetransaction at a later date.The steps are highlightedbelow:

Making a purchase: indoing this, the customer’scard is inserted in the PointOf Sale (POS) terminal orhis card details are keyed in,if making an online order.The salesperson keys in the

transaction sum or thewebsite displays the totalcost to be paid by thecardholder if making onlineorder. In the case of Nige-rian issued cards, the cus-tomer usually has to enter aPIN (personal identificationnumber) to verify the pur-chase and that he is enteringinto the transaction. This isa crucial step in preventingfraud, as the cardholder can-not claim that he did notmake PIN-verified transac-tions.

Checking for card va-lidity: in a number of cases,the POS terminal sends de-tails of the transaction toacquirer-bank which checkswith the issuing customer’sbank to ensure that funds

are available to complete thetransaction and that the cardhas not been reported as lostor stolen. If the card is ap-proved, then the transactionis authorised.

Authorizing Transac-tion: once a transaction isauthorised the POS termi-nal prints out two copies ofthe receipt; the first copy isfor the customer and thesecond copy is for the busi-ness for safekeeping. It isvital that the business ownerkeeps a copy of the receiptin case the customer refutesthe payment. The only evi-dence that the transactionwas genuine and successfulwould depend on the busi-ness owner’s ability to pro-vide his copy of the receipt.

There is howeverthe other side of thecoin; the disadvan-tages of a cashlesssociety must not beignored. One keydisadvantage is thata cashless societygradually robspeople of theirprivacy. There isalso the added costof transaction, whichthen results in anincrease in the costof goods and ser-vices. There is therisk of identity fraudonce fraudsters canfind a way to over-ride a bank’s secu-rity system.



One must however bear in mind thatauthorisation does not guarantee thata transaction is not fraudulent or thatit will not be charged back at a laterdate.

According to International Fi-nance Corporation (IFC), approxi-mately 3.5 billion people worldwidecurrently lack access to financial ser-vices. The major reason for this isthat financial institutions face hightransaction costs and complex logis-tics to reach the remote areas, due tothe cumbersome nature of securelytransporting and distributing cash.Providers of other goods and servicesthat require distribution infrastruc-ture and payment mechanisms totransact in remote locations equallyface these challenges. However, elec-tronic transaction platforms are be-ginning to address these challenges,creating opportunities to serve low-income customers and move themtoward a cashless society. Cashlesstransactions bring these customersbenefits spanning convenience, effi-ciency, security, access, and integra-tion into the formal financial system.

Given all these, the IFC is invest-ing in a number of companies withdiverse technology skills to help cre-ate a complex infrastructure for thecashless society to function effectively.For example, there is YellowPepper—a value added mobile services com-pany in Latin America that offers mo-bile phone-based “electronic wallets”for unbanked customers to pay forgoods and services. In India,Suvidhaa enables customers to pur-chase virtual goods like train ticketsand airtime across over 40,000 retailpoints. FiNO, also India based has avariety of offerings, which includebiometric smart card-based electronicwallets for 23 million customers toreceive and spend social benefits dis-tributed by the government of In-dia.

The E-Transaction ModelThe e-Transaction Platforms modeluses technology to provide unbankedand under-banked customers with themeans to use money in electronicform, a convenient, low-cost, secure,

and transparent alternative to cash. Electronic (or e-money) technology includes front-end devices like mo-bile phones, smartcards, and point-of-sale terminalsused to access stores of e-money, as well as back-endswitching and processing infrastructure that moves e-money and keeps records. With electronic transactions,individual customers save time (previously spent trav-elling great distances or waiting in long lines) and money(in the form of travel costs and forgone income). Theyare also less vulnerable to robbery and corruption.

For institutional customers like banks and busi-nesses, e-transaction platforms reduce the cost of serv-ing low-income customers because shared technologyplatforms, distribution channels, and even brands of-fer economies of scale. This, will in turn, expand con-sumer choice, offering access to products and servicesthat can now be distributed virtually but were previ-ously unavailable or difficult to obtain. These includeloans, remittances, savings products, insurance, mo-bile airtime and transportation tickets.

For institutionalcustomers likebanks and busi-nesses, e-transac-tion platformsreduce the cost ofserving low-income customersbecause sharedtechnologyplatforms, distri-bution channels,and even brandsoffer economiesof scale.

Figure: Representation of a cashless society

E-payment platforms, Challenges and Solutions



Expanding reach: The e-TransactionPlatforms model is high-volume, low-margin and requires a critical mass ofcustomers. As a result, the model in-volves a number of solutions for get-ting to critical mass quickly and cost-effectively. One such solution is lever-aging established retail networks to de-velop large footprints of agents—people or businesses contracted to signup customers and facilitate theirtransactions. YellowPepper, for ex-ample, leverages existing networks ofmobile phone airtime distributors. IFCclient Suvidhaa, an e-transactions pro-vider in India, leverages e-governmentcentres. Where established networks donot exist or do not provide enoughreach, companies also leverage exist-ing independent retail outlets ratherthan building their own store fronts.

Another solution for reaching criti-cal mass quickly is to target large insti-tutions with signicant constituent net-works of customers, employees, or citi-zens. YellowPepper, for example, tar-gets corporations like Coca-Cola andSABMiller with large numbers of smallbusinesses and customers in their valuechains. IFC client FiNO, is workingwith the Indian government to trans-fer health insurance and rural employ-

ment benefits to mil-lions of low-incomebeneficiaries.

Capacity-building :During the shift fromcash to e-money, agentcapacity-building is es-sential since they are theface of the e-transac-tion service to the cus-tomer, playing the vitalroles of customer edu-cation, enrolment,transaction support,and exchange betweencash and e-money. Acustomer’s interactionwith an agent createsthe trust that is criticalto adoption and use ofe-transactions. Themodel therefore relieson training in the actualservice being offered,in customer acquisition,and in general businessand finance—which iscritical to maintainingthe liquidity necessary tohelp customers ex-change cash for elec-

tronic value and vice versa,whenever they need to. Severalcompanies using this model—such as Suvidhaa and FiNO—also provide one-on-one coach-ing to help agents manage theiroperations.

Communicating value: Suc-cessful e-Transaction Platformsbusinesses depend on a keymessage that expresses thevalue proposition in a way cus-tomers can easily identify with.YellowPepper’s ad campaign of-fers customers “more time foryourself.” E-transaction provid-ers also use incentives to encour-age customers try out the newservice. YellowPepper encour-ages customer buy-in bypreloading an amount of airtimeequivalent to the registrationfee. However, customers whohave no experience with formalfinancial services need to be en-gaged by more than advertisingand incentives.

Raising customer awarenessis key. Agents play a critical rolein teaching customers the ben-efits of shifting from cash to e-

During the shiftfrom cash to e-money, agentcapacity-building isessential sincethey are theface of the e-transactionservice to thecustomer,playing thevital roles ofcustomereducation,enrolment,transactionsupport, andexchangebetween cashand e-money.

E-Payment Challenges and Solutions

Figure: Challenges and Solutions’ Matrix


ISSUES (I) | Nigeria: From Surplus

Cash to ‘Cashless’ Economy

money, and sometimes broader andmore intensive customer education isrequired. FiNO, for example, holds fi-nancial literacy workshops in villagesto teach customers about the bankingsystem and financial services in gen-eral—and e-banking in particular.

After-sales support: Over time, e-money will become universal. In theshort-term, while cash and e-money co-exist, companies in this space need toensure that customers have continu-ous access to cash. Otherwise, the sys-tem loses utility and customers losetrust. When FiNO first started, newcustomers would deposit 100 rupeesand withdraw 99 five minutes later tosee if they could get their money back.A successful customer experience inthis regard ensures customer retentionand positive word of mouth, helpingto get the next generation of users onboard.

E-payment ExternalSuccess FactorsGovernment Regulation: Regulatoryframeworks determine whether non-financial institutions like mobile net-work operators and technology com-panies may provide e-transactions andfinancial services. In most cases, theyrequire such companies to partner withbanks. Proportional regulations enablefinancial inclusion by permitting e-transactions providers to acquireBOPcustomers at lower cost. For ex-ample, “know your customer” require-ments can be relaxed. On one hand, itis costly or impossible to meet themfor BOP customers who may lack for-mal identification cards with proof ofaddress. At the same time, such cus-tomers maintain small stores of e-money and make mall transactions,posing little risk to the financial sys-tem.

Willing Partners: Corporations andgovernments must be willing to adopte-transactions within their networks forproviders to achieve a critical mass ofusers quickly. Such partners provideaccess to large numbers of retailers,customers, employees, and other citi-

zens. Also, and especiallywhen required by law, e-transactions providers needto find partner banks thatnot only want to target BOPcustomers, but are open tousing non-traditional distribu-tion channels to do so.

High penetration ofmobile phones: Most e-transactions providers usemobile phones as front-end,user access devices. Mobilephones will continue to bepopular: by 2012, an esti-mated 1.7 billion people indeveloping countries willhave mobile phones, but noaccess to financial services.

CriticalConsiderationsfor NigeriaPower: Power must be im-proved dramatically to ac-commodate smooth opera-tions of financial activities.Due to the nature of powersupply in Nigeria, there mustbe efficient and reliable backup system as power outagescan wreak unimaginablehavoc to a cashless economy’sinfrastructure.

Infrastructure: At present,the financial infrastructure inNigeria may not be adequateto carry the load of a cash-less society. ATM’s, Point ofSales system, mobile banking

Corpora-tions andgovern-ments mustbe willing toadopt e-transactionswithin theirnetworks forproviders toachieve acritical massof usersquickly.



and other mediums have to dramati-cally expand to touch at least 40 percent of the whole economy before anymeaningful effect can be achieved.There must also be robust businesscontinuity and disaster recovery plansin place.

As part of the robust business con-tinuity and disaster recovery plan theauthorised must ensure that there is aminimum of 99.999% (five nines)availability. The Meantime Time Be-tween Failures (MTBF) should be atthe barest minimum. Transaction datashould be stored real time with mir-rored back up carried out at a remotelocation.

Availability of real data: Proper andaccurate identification of account hold-ers must be maintained and sharedwhen necessary by all financial institu-

tions; Know Your Customer (KYC)and Anti Money laundering (AML)policies must be put in place. The CBNmust collaborate with all other govern-ment and private agencies responsiblefor collection of identification of in-dividuals in Nigeria for reconciliationof any data.

Investments: The CBN must beready to invest heavily to make thistransition possible. Technology is notcheap and keeps changing at a veryfast pace. Investments in billions ofdollars have to be made in infrastruc-ture, training, marketing, security, andmaintaining IT networks. This will bethe case on a yearly basis for years tocome and should be a collaboration ofefforts by all concerned parties.

Security: As it relates to laws that areneeded to enforce new methods oftransactions and a changing culture, theCBN must partner and work with theNational Assembly to ensure the rightlegislation is being formulated. TheCBN and all other executive arms thatare empowered such as the Economicand Financial Crimes Commission(EFCC) would carry out the enforce-ment of new legislation to the letter.They must commit to the training ofpersonnel and the judiciary must beprudent and up to the task.

The CBN must also work in con-junction with the office of the NationalSecurity Agency (NSA) to proactivelycombat cybercrimes.

Time: Another major concern wouldbe the risk involved, because if theprocess is rushed and the economylosses confidence in the system due tohigh level of fraudulent activities, theeffects will be devastating and possiblyirredeemable to the national economy.

Global Standards: Financial institu-tions must comply with the PaymentCard Industry Data Security Standards(PCI DSS). An addendum to this is thatfinancial institutions while complyingwith these standards, must take intocognizance the nuances of oureconomy and as such adopt and adaptsome of these standards to suit the localclime.

The road ahead is a long one withvarious twists and turns. Keeping withglobal trends by going cashless is thedirection the economy must go. To beadequately equipped for this as a na-tion, there needs to be a lot of aware-ness creation. The caveat however isthat all precautionary measures mustbe put in place so that Nigeria gets itright in the first instance.(Bisola Olu-Akindeinde is a privateconsultant with Peniel AdvisoryServices limited, Lagos. She hasalso worked with Royal Bank ofScotland, Deutsche Bank andSantander Bank respectively.)

The road ahead is a long one with various

twists and turns. Keeping with global

trends by going cashless is the direction

the economy must go. To be adequately

equipped for this as a nation, there needs

to be a lot of awareness creation.


Issues (

II)

* By Chuks Nwaze

n the last edition of this serial, we correctly pre-dicted the imminent loss of investment by share-holders through the nationalization of those banksearlier rescued by the regulatory authorities whowere not showing visible signs of recovery, re-capitalization or acquisition by other strong insti-tutions. Although the deadline of September 30th

2011 previously announced in that regard had notexpired, which created the impression that theCBN was subverting its own due process, none-theless, it was clear enough that based on the in-telligence reports at the disposal of the regula-tors, something needed to be done to pre-emptfurther slide in the fortunes of the endangeredinstitutions.

THE IMPORTANCE OF CONTROLCHARTER AND DUE PROCESSAt the micro level of the individual banks, theimportance of due process and the need to buildstrong internal control regimes to check opera-tional and managerial abuses constitute the cruxof this edition. There is no doubt whatsoever,that the absence of internal control charter and

the palpable disregard for due process are re-sponsible for the obvious lapses in the gover-nance process of many financial institutions.Needless to add that even the regulatory au-thorities themselves can also benefit from theseinternationally approved benchmarks on inter-nal control and due process in order not to opentheir flanks to criticisms bordering on unduehaste, victimization or hidden agenda as werebeing insinuated in some quarters on the heelsof their intervention few months ago.

THE INTERNAL CONTROLCHARTERThe following is a suggested summary of gen-eral and specific standards for the professionalpractice of internal control, otherwise calledinternal auditing:• Independence:- Internal auditing should beindependent of the activities they audit.• Organisational Status:- The organizationstatus of the internal auditing department shouldbe sufficient to permit the accomplishment ofits audit responsibilities

I


• Objectivity:- Internal auditors shouldbe objective in performing audits.• Professional Proficiency:- internalaudit be performed with proficiencyand due professional care.

The Internal Control Department• Staffing:- The internal auditing de-partment should provide assurance thatthe technical proficiency and educa-tional background of internal audi-tors are appropriate for the audits tobe performed.• Knowledge, Skill and Disci-plines:- The internal auditing depart-ment should posses or should obtainthe knowledge, skill and disciplinesneeded to carry out its audit responsi-bilities• Supervision:- The internal auditingdepartment should provide assurancethat internal audits are properly super-vised

The Internal Control Officer (or Au-ditor)• Compliance with Standards ofConduct:- Internal auditors shouldcomply with professional standards ofconduct.• Knowledge, Skill and Disci-plines:- Internal auditors should pos-ses the knowledge, skill and disciplinesessential to the performance of inter-nal audits.• Human Relations and Commu-nications:- Internal auditors should beskilled in dealing with people and incommunicating effectively.• Continuing Education:- Internalauditors should maintain their techni-cal competence through continuingeducation.• Due Professional Care-:- Internalauditors should exercise due profes-sional care in performing internal au-diting.• Scope of Work:- The scope of theinternal audit should encompass theexamination and evaluation of the ad-equacy and effectiveness of theorganisation’s systems of internal con-trol and the quality of performance incarrying out assigned responsibilities.• Reliability and Integrity of In-formation:- Internal auditors shouldreview the reliability and integrity of

financial and operating information andthe means used to identify, measure,classify, and report such information.• Compliance with Policies, Plans,Procedures, Laws and Regula-tions:- Internal auditors should reviewthe systems established to ensure com-pliance with those policies, plans, pro-cedures, laws and regulations whichcould have a significant impact on op-erations and reports and should deter-mine whether the organization is incompliance• Safeguarding of Assets:- Internalauditors should review the means ofsafeguarding assets and, as appropri-ate, verify the existence of such as-sets.• Economical and Efficient Use ofResources:-- Internal auditors shouldappraise the economy and efficiencywith which resources are employed.• Accomplishment of EstablishedObjectives and Goals for Opera-tions or Programmes:- Internal au-ditors should review operations or

programmes to ascertain whether re-sults are consistent with establishedobjectives and goals and whether theoperations or programmes are beingcarried out as planned.• Performance of Audit work:- Au-dit work should include planning theaudit, examining and evaluating infor-mation, communicating results, andfollowing up.• Planning the Audit:- Internal au-ditors should plan each audit• Examining and Evaluating Infor-mation:- Internal auditors should col-lect, analyse, interpret and documentinformation to support audit results.• Communicating Results:- Internalauditors should report the results oftheir audit work• Following Up:- Internal auditorsshould follow up to ascertain that ap-propriate action is taken on reportedaudit findings.• Management of the Internal Au-diting Department:- The chief in-ternal auditor should properly manage


ISSUES (II) | Quality & Internal Control in Banks:Control Charter and Due Process

the internal auditing department.• Purpose, Authority and Respon-sibility:- The chief internal auditorshould have a statement of purpose,authority and responsibility for theinternal auditing department.• Planning:- The chief internal audi-tor should establish plans to carry outthe responsibilities of the internal au-diting department.• Policies and Procedures:- Thechief internal auditor should providewritten policies and procedures toguide the audit staff.• Personnel Management and De-velopment:- The chief internal audi-tor should establish a programme forselecting and developing the staff ofthe internal auditing department.• External Auditors:- The chief in-ternal auditor should ensure that inter-nal and external audit efforts are prop-erly co-ordinated.• Quality Assurance:- The chief in-ternal auditor should establish andmaintain a quality assurance programmeto evaluate the operations of the in-ternal auditing department.

DUE PROCESS CHARTER INRELATION TO DISCIPLINARYRULES AND PROCEDURES INA BANKING ENVIRONMENTSince human resources constitute themost important asset in an organisation,It is generally agreed that discipline isessential to all organizations so as toenable them accomplish their goals.Financial institutions and their regula-tors should, therefore, maintain a posi-tive posture to discipline and avoid ar-bitrariness by adopting the followingsuggested approach viz:- To correct improper conduct and re-habilitate offenders- To promote fairness and order inthe treatment of individuals.

1. RULESThe following basic rules are there-fore suggested for the employees ofbanks while others (such as high de-gree of integrity and honesty) are im-plicit for all employees in a bankingindustry. All branch managers/sectionalheads must ensure that employeesknow the rules and standards expected

of them. Generally, therefore, all em-ployees of banks are required to con-form to certain minimum standards.Specifically, employees are forbiddenfrom the following:(i) Issuing post-dated cheques or over

drawing their accounts withoutmaking prior written arrangementto this effect.

(ii) Maintaining an account in anybranch other than where they areposted

(iii) Standing as a guarantor (whatso-ever) either individually or sever-ally/jointly

(iv) Accepting any office or gainfulemployment while still in servicewithout Management’s consent.

(v) Accepting gratuities or commissionfor performing their duties. More-over, gambling, betting, lending, orborrowing are prohibited.

(vi) Performing any act prejudicial tothe general business of the bankand the interest of its customer’ssecurity.

(vii) Additionally, employees shall notbe interested whether directly ornot, in any advance, loan or creditfacility and if interested, he mustdeclare the nature of interest to

the bank.(viii) Grant any unauthorized loan or

credit facility. He should also notbenefit from such facility.

(ix) Disclose anything about the bank’sbusiness or that of the bank’s cus-tomers either during or after em-ployment

(x) Use abusive or insulting languageon any person of authority overthem or their colleagues.

(xi) Disobey reasonable instructions oftheir immediate supervisors, sec-tional heads and other membersof management of the bank.

(xii) Enter into any form of contractor carry out any transaction on be-half of the bank without receiv-ing express authority.

2. PROCEDUREStage I(i) All complaints against an em-

ployee for any breach of rulesshall in the first instance, be in-vestigated by the sectional head.

(ii) The employee shall be given aquery to explain the circumstancesthat led to the breach of rules

(iii) For minor offences like latenessto work etc, the sectional head

Since human resourcesconstitute the most

important asset in anorganisation, It is

generally agreed thatdiscipline is essential toall organizations so asto enable them accom-

plish their goals.


may, with the approval of thebranch manager/head of depart-ment issue verbal or written cau-tion. A copy of this caution lettershall be placed in the employee’sfile.

Stage IIIf the sectional head is not satisfiedwith the employee’s explanation and/or for serious offences, the case willbe referred through the branch man-ager/head of department to the headoffice human resources departmentfor further investigation and decision.Both the sectional head and branchmanager/head of department are re-quired to add their comments to suchexplanations before forwarding it tohead office.

Stage IIIHead office human resources depart-ment shall forward the reports andcomments to the head of audit depart-ment for further investigation, if con-sidered to be with fraudulent intent.The recommendations of the audit de-partment will be returned to humanresources department.

Stage IVHuman resources de-partment shall take nec-essary disciplinary actionrelating to non-fraudu-lent cases involving jun-ior employee.

Stage VHead office humanreources departmentshall send case reports/recommendations in-volving supervisors andabove to the staff com-mittee and executivemanagement committeeas applicable. For thiscategory of staff (i.e. se-nior staff) breaches ofbank’s rules and regula-tions and other cases ofindiscipline shall bedealt with as follows:

A. CAUTIONMinor offences shall withoutlimitation include lateness towork without adequate cause,unsatisfactory attendance orany other improper behaviourof a minor nature. These of-fences will attract a verbal orwritten caution which is just areminder to the employee thathe is stepping out of line orthat his behaviour is unsatis-factory to the bank.

B. WARNINGFor serious offences involv-ing proven unsatisfactorybehaviour, the employee willbe given letter of warning;without limitation, such ma-jor offences will include thefollowing:

(i) Absenting himself at anytime from the place properand appointed for the perfor-

Accepting

gratuities or

commission

for perform-

ing their

duties. More-

over, gam-

bling, bet-

ting, lending,

or borrowing

are prohib-

ited.

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mance of his work without leave orother legitimate cause.

(ii) Unfitting himself for the properperformance of his work duringworking hours, for example by becom-ing intoxicated

(iii) Neglecting to perform any workwhich it was his duty to have per-formed, or carelessly or improperlyperforming any work which from itsnature was his duty to perform care-fully and properly.

(iv) Using any abusive or insulting lan-guage or becoming guilty of insultingbehaviour to any person placed in au-thority over him;

(v) Refusing to obey any proper in-struction of any person placed in au-thority over him whose instruction itwas his duty to obey; and

(vi) Any other offences as set out bymanagement. Generally, before a warn-ing is issued, the employee shall firstbe given a written query and opportu-nity of stating his case in writing. Allwarnings issued to an employee shallbe kept in his personal file for recordpurposes and such employee shall notbe entitled to an annual increment forthat year.

C. SUSPENSION(i) If an employee is suspected of dis-honesty or any other serious miscon-duct, he will be suspended from dutyfor a period not exceeding six monthsduring which investigations shall beconcluded.

However, if the investigations are notconcluded within six months, the em-ployee shall remain suspended untilsuch a time that the investigations areconcluded. During the period of suchsuspension, the employee shall be paidhalf of his basic salary and full trans-port and housing allowances. If aftersuch investigations he is exonerated, heshall be recalled and the balance of hisbasic salary shall be made good to himfrom the date of suspension. If how-ever, the employee is found guilty he

will be dealt with in accor-dance with the appropriatesection of the disciplinaryprocedure.

(ii) If an employee is sus-pected of a criminal of-fence by the police, he maybe suspended and paid halfof his basic salary from thedate of suspension for amaximum period of eigh-teen (18) months. If he isexonerated within that eigh-teen (18) months, he shallbe recalled and the balanceof his basic salary and anyother entitlements due tohim will be made good tohim from the date of his

suspension. If however thecase has not been disposedof, his appointment shall bereviewed provided that thematter is not in a court oflaw.

(iii) An employee on sus-pension may, where prac-ticable, be required to re-port each working day(morning or afternoon) fortwo hours to an office des-ignated by the employer.

D. TERMINATION(i) An employee’s servicemay be terminated if,within any period of 12(twelve) months, he had

However, if theinvestigationsare not con-cluded withinsix months, theemployee shallremain sus-pended untilsuch a time thatthe investiga-tions are con-cluded. Duringthe period ofsuch suspen-sion, the em-ployee shall bepaid half of hisbasic salary andfull transportand housingallowances.



been guilty on two occasions of com-mitting any offence for which warn-ing letters have been issued. Termina-tion may only be effected on the sec-ond occasion provided warning hasbeen given to the employee in respectof the previous offence within the pre-ceding 12 (twelve) months. Persistentoffenders, however, will be treated inaccordance with their previous recordseven though they may have becomeineffective after 12 (twelve) monthsfrom the date of warning.

(ii) An employee whose services havebeen terminated under the provisionsof this paragraph shall nevertheless beentitled to one month’s notice in thecase of the probation or salary in lieu.

E. SUMMARY DISMISSALAn employee may be summarily dis-missed for certain offences covered bythe broad heading of gross miscon-duct; such offences include provencases of:

(i) Theft, fraud, dishonesty, defalcationand irregular practice in respect ofcash, vouchers, records returns orcustomer’s account and foreign ex-change transactions:

(ii) Willful disobedience of a lawful or-der or serious negligence:

(iii) Drunkenness or taking drugs otherthan for medical reasons rendering theemployee unfit to carry out his or herduties;

(iv) Intentionally divulging confidentialinformation in breach of any “Decla-ration of Secrecy”

(v) Conviction for a criminal offence;

(vi) Prolonged and/or frequent ab-sence from work without leave or rea-sonable cause;

(vii) Fighting and assault or engagingin disorderly behaviour during work-ing hours on the office premises orwithin its immediate surroundings:

(viii) Deriving any benefit in the courseof his official duties which places himin such a position that his personal in-terest and his duty to the employer orto any customer of the employer arein conflict;

(ix) Failure to report promptly any ir-regularity on the part of any otheremployee after having knowledge ofsuch irregularity

(x) Abusive or insulting language orbehaviour to any client which is preju-dicial to the business interest of theemployer;and(xi) Any other offences which may beset out by management of the bank.

F. GENERALWhere an offence has been commit-ted which merits summary dismissal butwhere the bank does not exercise itsprerogative of dismissal through miti-gation, a “first and last” or a “secondand last” warning letter may be issuedand the fact that the warning is a finalone will be made clear in the letter

Before either summary dismissal orwarning letter is effected the employeeshall be given a written query and af-forded the opportunity of defendinghimself in writing except where theemployee has absconded.(* Chuks Nwaze is the MD/CEO,Control & Surveillance AssociatesLtd.)


Issues (

III)

Expectedly, since the President assented to the Nigerian Sovereign Investment Authority (NSIA) Act in May2011, there has been heightened debate about its desirability and legality within the context of the nation’sconstitution, considering the federal system of government; and whether SWF is the magic wand that willkick start Nigeria’s development.

Interest in sovereign wealth fund was rekindled in the wake of the economic crisis that engulfed theglobal economy from 2007 when SWFs somewhat became “lenders of last resort”. As many financialinstitutions sought new money to shore up their capital bases, sovereign wealth funds provided cash to firmsthat were on the brink of insolvency. For instance, the Chinese SWF – China Investment Corporationinjected $5 billion into Morgan Stanley. The United Arab Emirates’ SWF – Abu Dhabi Investment Authorityacquired 4.9 percent equity share in Citibank, while Merrill Lynch received $5 billion from Singapore’sTemasek Holdings. In all, sovereign wealth funds injected well over $50 billion into financial institutions thatwere in dire need of liquidity in the United States and Europe. SWFs were pivotal actors in the provision ofliquidity to minimise the solvency dilemma across the global banking system. They were handy veritableinstruments for economic stabilisation that helped mitigate to a large extent the full impact of the crisis.These high-profile investments in developed countries’ financial institutions made SWFs the cynosure of all

fter several years of boom-bust cycles due to near total dependence on a highly volatile incomestream – oil revenue, the establishment of a Sovereign Wealth Fund (SWF) is perhaps one of themost profound economic decisions the Nigerian government has made in recent times. From allindications, the sovereign wealth fund appears to be one of the major instruments for achievingthe transformation agenda of the present administration, hence, it has somewhat occupied aprime position in recent economic and political discourses within and outside the country.A

*By Sunday Enebeli-Uzor


ISSUES (III) | Sovereign Wealth Fund: Development Imperative for Nigeria?

eyes and have also heightened theirscrutiny.

With well over $4.7 trillion in as-sets, sovereign wealth funds haverevolutionised the global financial ser-vices industry, with influences on in-ternational capital flows. SWFs are nowat the heart of international politicaleconomy, wielding enormous politicalinfluence internationally – at the inter-section of financial and political diplo-macy. Their growth has been tremen-dous in the recent past, and they areexpected to grow further in the nearfuture (some estimates have it thatSWFs assets will hit $12 trillion in 2015).Their increasing importance for globalfinancial markets has fuelled a debateon their nature and has sometimes elic-ited criticisms. There is currently a shiftof financial power from multi-nationalorganisations such as the World Bank,International Finance Corporation(IFC) and others to sovereign wealthfunds. Africa is expected to becomehome to one of the largest pools ofsovereign wealth funds in the world inthe not too distant future. With enor-mous natural resources in the conti-nent and the current trend where natu-ral resource rich countries are enam-ored with SWFs, the continent couldwell be on track to become home toone of the largest pools of sovereignwealth funds.

What is a Sovereign WealthFund (SWF)?Sovereign Wealth Funds (SWFs) areessentially separated pools of financialassets (primarily but not exclusivelyinternationally invested) owned by gov-ernments to achieve economic, finan-cial, and other strategic objectives.SWFs are usually distinct from acountry’s foreign exchange reserves.Whilst there are well-established normsfor investing foreign exchange reserves,same is not so for sovereign wealthfunds. They are also separated fromgovernment financial and non-finan-cial corporations, purely domestic as-sets, and assets owned and controlledby sub-national governments. SWFs areusually composed of financial assetssuch as stocks, bonds, real estate, orother financial instruments funded by

foreign exchange assets.They can be structuredas a fund or as a reserveinvestment corporation.Some funds also investindirectly in domesticstate-owned enterprises.

The InternationalMonetary Fund (IMF)identified five classes ofsovereign wealth fundswith potentially overlap-ping functions. These are:Stabilization Funds (thisis primarily designed toinsulate the budget andthe economy againstcommodity price swings).Savings Funds for Fu-ture Generations (thisenables the conversionof non-renewable assetsinto a more diversifiedportfolio of assets tomitigate the effects ofDutch disease). ReserveInvestment Corporations(these assets are stillcounted as reserve assetsand are established to in-

crease the return on reserves,though at a higher risk). Devel-opment Funds (designed to helpfund socio-economic projectsand infrastructure, and usuallyhave large domestic compo-nent). Contingent Pension Re-serve (particularly to financesocial security and health expen-ditures for rapidly ageing popu-lations). Like other investors,sovereign wealth funds seek toachieve their goals by using fi-nancial markets to diversify risk,transfer funds through time, andto maximise returns.

A new phenomenon?Sovereign Wealth Funds havebeen in existence in the interna-tional financial system for sev-eral decades. Kuwait establishedthe first modern SWF in 1953,eight years prior to its indepen-dence in 1961. They are also notalien to the advancedindustrialised economies.Norway’s central bank has con-trol over the second-largest sov-ereign wealth fund. What is how-

The nextgroup ofsovereignwealth fundswas estab-lished duringthe oil boomera of the1970s whenoil exportingcountriessuch as theUnited ArabEmirates,Saudi Arabia,and AlbertaestablishedSWFs toabsorb ex-cess liquiditythat couldpotentiallyhave adverseeffects ontheir econo-mies.

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ever new about SWFs is their size, recent investmenttrends, countries of origin, and growth rate. The struc-ture, mandates, and objectives of SWFs however varyfrom country to country and in recent times, theyhave become important symbols of state capitalism.The earliest sovereign wealth funds were establishedin the Persian Gulf states in the 1950s following thediscovery of crude oil. The Kuwait Investment Au-thority that was set up in 1953 for the purpose ofmanaging its excess oil revenues is the oldest sover-eign wealth fund. The source of seed capital for theseSWFs derives from recurring foreign exchange re-ceipts from natural resource exploitation and they aresometimes called commodity funds.

The next group of sovereign wealth funds wasestablished during the oil boom era of the 1970s whenoil exporting countries such as the United Arab Emir-ates, Saudi Arabia, and Alberta established SWFs toabsorb excess liquidity that could potentially have ad-verse effects on their economies. More recently, an-other round of oil and natural resources boom, andenormous accumulation of foreign exchange reservesamongst non-commodity exporters have thrown upnew entrants in the comity of nations with sovereignwealth funds. Countries in this later group are moreeconomically and geographically diverse than theirearlier counterparts. They include China, South Ko-rea, Venezuela, Iran, and Algeria. Some of the newerSWFs are from countries that are not commodity ex-porters and are not necessarily awash with excess fi-nancial liquidity.

Source: Sovereign Wealth Fund Institute


ISSUES (III) | Sovereign Wealth Fund:Development Imperative for Nigeria?

Sovereign wealth funds are fundedfrom three major sources. The firstsource is revenue from commodityexports and this is common amongstnatural resource-exporting countries.Examples of SWFs held by naturalresource-exporting countries includeKuwait Investment Authority, Norway’sGovernment Pension Fund and theUnited Arab Emirates’ Abu Dhabi In-vestment Authority. The second modeof financing SWFs is through thetransfer of assets from a country’s for-eign exchange reserves and this is com-mon amongst non-natural resourceexporting countries such as China,Singapore, and South Korea. The thirdfinancing strategy is disbursement fromsovereign debt on international mar-kets. When a country does not utiliseall the capital it raised from interna-tional sources, the remaining funds areoften transferred to either its foreignreserve or sovereign wealth fund hold-ings.

Why countries establishSovereign Wealth FundsSovereign Wealth Funds are establishedby different countries for a numberof reasons. Those owned by naturalresource endowed countries act asintergenerational transfer mechanisms,where today’s export earnings are usedto guarantee future government pen-sions, asset liquidity, and fiscal revenues.In these countries, SWFs also serve thepurpose of stabilising government bud-gets and export revenues which wouldotherwise mirror the volatility of com-

modity prices. Countries establishSWFs as a means of diversifying theirincome sources in order to be able toabsorb shocks arising from revenuefluctuations. Most crude oil endowedcountries set up commoditystabilisation funds during periods ofoil price boom to mitigate the impactof crude oil price volatility on govern-ment spending. With continuous risein crude oil prices, the commoditystabilisation funds metamorphose intosovereign wealth funds as the fundsbecome too large for just stabilisation.

Another reason why natural re-source-endowed countries establishSWFs is the accumulation of savingsfor future generations as natural re-sources are non-renewable and areanticipated to be exhausted at sometime in future. It is believed that set-ting aside a proportion of today’s earn-ings from natural resources will guar-antee future generations some level ofprosperity. This genre of SWF isprevalent in the Middle East – hometo the largest concentration of sover-eign wealth fund money in the world.The region has over thirteen majorfunds. The main objectives of SWFsin the Middle East region are to se-cure long term wealth for future gen-erations, generate funds necessary forfuture pension and healthcare liabili-ties, and minimise their countries’ reli-ance on oil revenue.

Another group of countries thathave established SWFs are those thathave accumulated reserves in excessof what may be required for interven-tion or balance-of-payment purposes.

The source of reserve accumulationfor these countries is mostly not linkedto primary commodities. This is mostlyprevalent in Asia where some coun-tries are experiencing rapid accumula-tion of reserves and huge current-ac-count surpluses. In the wake of theharrowing regional financial crisis of1997-98, a number of Asian countrieshave built up large war chests of for-eign exchange reserves in order to guar-antee that they would never again bevulnerable to international financialmarkets and international creditors.

These countries resorted to reserveaccumulation as a means of protect-ing domestic policy autonomy in placeof, or in combination with capital con-trols. Over time, the immensity ofthese foreign reserves exceeds the typi-cal buffer that a country requires.There was therefore the need to usesome of the reserves to make strate-

Source: Sovereign Wealth Fund Institute



gic investments by purchasing criticalforeign assets hence these countries es-tablished SWFs to manage a segmentof the reserves. These SWFs aredriven by self-insurance and mercan-tilist motivations. Prominent amongstthese countries is China which set aside$200 billion of its record high $1.6 tril-lion foreign exchange reserves to es-tablish the China Investment Corpo-ration (CIC) in 2007. South Korea alsoestablished a SWF in 2005 with hold-ings today of approximately $30 bil-lion. Another notable Asian countrywith substantial SWF is Singapore whichhas SWFs – Temasek (established in1974 and with assets of $110 billion)and the Singapore Investment Corpo-ration (established in 1981 with assetsestimated to be between $200 and $330billion).

The Nigerian SovereignWealth FundFollowing the President’s assent of theNigerian Sovereign Investment Author-ity (NSIA) Act in May 2011, and thetransfer of a seed capital of $1 billionfrom the Excess Crude Account (ECA)to the NSIA in October 2011, Nigeriaeffectively established a SovereignWealth Fund (SWF). The Nigerian Sov-ereign Wealth Fund is composed ofthree separate ring-fenced portfoliosnamely: the Nigeria InfrastructureFund, the Future Generations Fundand the Economic Stabilisation Fund.Each component represents at least 20percent of the total. The Nigeria In-frastructure Fund is a ring-fencedportfolio of investments specially re-lated to and with the object of assist-ing the development of critical infra-structure that will attract and support

foreign investment, economic diversi-fication and growth. Infrastructure thatthis Fund is expected to focus on in-clude: power generation, distributionand transmission, agriculture, dams,water and sewage treatment and deliv-ery, roads, port, rail, airport facilities,and similar assets that will stimulate thegrowth and diversification of the Ni-gerian economy. The Fund is expectedto act as a lead investor for domesticand international partners seeking toinvest in the development of infrastruc-ture in the country.

The Future Generations Fund is aring-fenced diversified portfolio ofappropriate growth investments for thebenefit of future generations. ThisFund is targeted at providing futuregenerations with a solid savings basefor such a time, when the hydrocar-bon reserves of Nigeria are exhausted,with due regard to macroeconomicfactors. The Fund will build anintergenerational savings base by invest-ing in longer term assets that generatereturns to accumulate wealth for thenext generations of Nigerians. The Eco-nomic Stabilisation Fund is also a ring-fenced portfolio investment to providesupplemental stabilisation fundingbased upon specific criteria and at sucha time when other funds available tothe Federation for stabilisation needsto be supplemented. This will act as alast-resort source of finance duringperiods of fiscal deficit to protect theintegrity of the budget. Thisstabilisation function will ensure thesmooth functioning of governmentand delivery of key services duringperiods where revenues from petro-leum sales are less than the level an-ticipated and approved by the NationalAssembly.

The Nigerian Sovereign WealthFund has replaced the Excess CrudeAccount (ECA) which had acted mainlyas a stabilisation fund. The ExcessCrude Account (ECA) was establishedin 2004, with the main thrust of pro-tecting planned budgets against short-falls due to volatility of crude oil prices.The account was used to save crudeoil revenues above a base amount de-rived from a defined benchmark pricestipulated in the federal budget. The



ECA somewhat delinked government expendituresfrom oil revenues and insulated the economy fromexternal shocks especially during the global economiccrisis. Nigeria’s ability to weather the storm of thecrisis has been attributed to the ECA and the robustexternal reserves that were built prior to the impactof the economic downturn on crude oil prices. Surg-ing crude oil prices saw the ECA rise almost four-fold, from $5.1 billion in 2005 to over $20 billion byNovember 2008, accounting for more than one-thirdof Nigeria’s external reserves at that time.

Mitigating Natural Resource CurseThe discovery of a natural resource (especially in adeveloping country) is potentially beneficial and, si-multaneously, potentially calamitous. This is so be-cause it has been established that countries endowedwith natural resources paradoxically experience lack-luster economic growth. This occurrence has beenattributed to a variety of factors, amongst which isthe concentration of economic activities in the natu-ral resource sector. Over time, the natural resourcesector crowd out economic activities in other sectorsby pulling away labour and capital and reducing thecompetitiveness of non-resource exports. Nigeria likemost crude oil producing countries have been plaguedwith this malaise often referred to as resource curse,paradox of plenty or Dutch disease. This argumenthas been advanced as the reason why some naturalresource endowed countries have development chal-lenges. This is so because there is also the tendencyof unrestricted spending of revenue from naturalresources which culminates in the disruption of ba-sic economic fundamentals that are sine qua non forthe growth and development of the economy.

As countries continue to tinker with measures tomitigate the resource curse dilemma, the option of asovereign wealth fund is possibly a viable antidote tothe malaise. By establishing an infrastructure fund todevelop critical infrastructure in the country, Nigeriamay well be on track to discovering the missing puzzlein the quest for accelerated economic growth anddevelopment. The Infrastructure Fund componentof the sovereign wealth fund seeks to assist the de-velopment of critical infrastructure in the country,thereby bridging the existing gaps. It will act as a leadinvestor for domestic and international partners seek-ing to make investments in the development of in-frastructure in the country. By attracting and sup-porting foreign investment, economic diversificationand growth, the fund could provide some of themost basic fundamentals that will kick start produc-tivity in other sectors of the economy.

Potential benefits from SovereignWealth FundSovereign wealth funds have grown in popu-larity amongst natural resource endowed coun-tries and also foreign reserve rich countries.Crude oil being a non-renewable resource willsomeday become history and it will only be fairto future generations to ensure intergenerationaltransfer of proceeds from current crude oilexploitation. Nigeria’s mono-product economyno doubt exposes it to the vagaries of crude oilprice volatility in the international commoditiesmarket. The SWF is expected to act as a fiscalstabiliser and buffer. With a SWF in place, gov-ernment budget funding is expected to be moreguaranteed as fluctuations in earnings can besmoothened from the economic stabilisationcomponent of SWF. This will engender stabil-ity in the funding of government long termprojects that would otherwise have suffered thenegative impact of revenue fluctuation. TheFund is also expected to facilitate a more effi-

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cient allocation of earnings from crudeoil by diversifying the country’s eco-nomic base. This will enable other sec-tors of the economy to grow as eco-nomic activities will no longer be con-centrated in the petroleum sector. TheSWF symbolizes prudent fiscal disci-pline and potentially will enable the di-versification of the country’s assets.

By joining the league of countrieswith SWFs albeit belatedly, Nigeria’sstanding in the comity of nations willreceive enormous boost as the coun-try will be better placed to negotiateeffectively in the comity of nations.SWFs have become veritable tools forinternational diplomacy and relevance,as countries with substantial SWF aretreated courteously since withdrawal oftheir investments could have disastrousconsequences on the economies ofsome powerful nations. Countries that

have been able to use their SWFs asinstruments of international diplomacyinclude China and Russia especiallysince the global economic downturn.Powerful countries have become some-what subservient to the whims andcaprices of these countries due to theirability to direct the flow of finance inthe global economy. Nigeria as Africa’slargest crude oil exporter stands to ben-efit from its SWF as the African conti-nent is expected to become home toone of the largest pools of sovereignwealth funds in the world. As a naturalresource rich continent, the era of for-eign aid may be over sooner than ex-pected as most aid giving nations arecurrently grappling with austere eco-nomic conditions.

Issues with SovereignWealth FundsSovereign wealth funds have comeunder intense scrutiny and have ac-quired much notoriety in public de-bates in recent years as a result of theirgrowing role in global financial mar-kets and finance. These criticisms aremyriad but bother mostly on their ef-fects on individual firms, capital mar-kets, national politics, and their effi-ciency. SWFs have been criticised fortheir tendency to be secretive and po-litical in investment decisions. Theyhowever justify their covertness forfear of protectionist response to theirinvestment propositions. There are alsonational security concerns as SWFscould be used to secure control of stra-tegically important industries for po-litical rather than financial gain. Thishas raised concerns about the invasivetendencies of SWFs and their abilityto meddle in the domestic affairs offoreign countries who are recipients oftheir investments. This fear could po-tentially culminate in investment pro-tectionism which could be antitheticalto the free flow of investment in theglobal economy.

Another concern about SWFs isthat some countries may not be fullyprepared before establishing such funds.Some analysts argue that the mere factthat a country has foreign exchangesurpluses does not mean it should es-

tablish a sovereign wealth fund. Oftentimes, those countries are still facedwith basic economic challenges suchas poverty, unemployment and currentaccount deficits. It is argued that inmany instances, the foreign exchangereserves are not really earned reservesbut are borrowed reserves and as such,the SWF may not be sustainable in thelong-run.

Sovereign wealth funds have alsobeen criticised for their ineffectivenessin acting as stabilisers and buffers whenthe need arises. A study by the Inter-national Monetary Fund (IMF) onSWFs in natural resource-exportingcountries concluded that there is littleevidence to show that sovereign wealthfunds have achieved the goal ofsmoothening out liquidity and govern-ment expenditures between times ofstrong and weak natural resourceprices. The study concluded that coun-tries that have SWFs had difficulty inharmonizing fund operations with fis-cal policy. It is argued that there is thetendency of conflict between opera-tions of SWF and other economic poli-cies of the government. If both arenot properly aligned, the overall objec-tive of government policies may beundermined. The IMF study also dis-covered a paradox in the relation be-tween SWFs and their home countries– the more reliant a country is on onecommodity, the less effective its SWFis in achieving set goals. Another perti-nent finding of the study is that onlyfew countries have drawn down fromtheir SWFs holdings for the greaternational well being.

The Santiago PrinciplesDue to the numerous criticisms ofsovereign wealth funds and the needto streamline their activities to conformto global best practices, the Interna-tional Working Group of SovereignWealth Funds (IWG-SWF) and the In-ternational Monetary Fund (IMF) pro-posed a set of 24 principles/practices(now known as the Santiago Principles)that assign best practices for the op-erations of SWFs. The purposes of theSantiago Principles are threefold. Firstly,to identify a framework of generallyaccepted principles and practices that



would properly reflect appropriate governanceand accountability arrangements as well as theconduct of investment practices by sovereignwealth funds on a prudent and sound basis. Sec-ondly, to enable home and recipient countries andthe international financial markets to gain a bet-ter understanding of SWFs; and thirdly, to en-sure that, through the pursuit of these principlesand practices, SWFs would bring economic andfinancial benefits to home countries, recipientcountries, and the international financial system.

The Santiago Principles are a voluntary setof principles and practices that the members ofthe IWG/IFSWF support and either have imple-mented or aspire to implement. The principlesseek to support the institutional framework, gov-ernance, and investment operations of sovereignwealth funds that are guided by their policy pur-poses and objectives, and consistent with a soundmacroeconomic policy framework. The publica-tion of the Santiago Principles was intended tohelp improve understanding of SWFs as eco-nomically and financially oriented entities in boththe home and recipient countries. It is believedthat this understanding would contribute to thestability of the global financial system, reduceprotectionist pressures, and help maintain an openand stable investment climate. The Santiago Prin-ciples are also intended to enable sovereign wealthfunds, especially newly established ones, to de-velop, review, and strengthen their organisation,policies, and investment practices. The principleswere drafted taking into cognizance the diversityof sovereign wealth funds; and not all principleswere intended to be applicable for all SWFs. Since2008 when the Santiago Principles were drafted,25 nations have signed onto the principles.

An Economic Imperative?Nigeria is believed to have the potential of be-coming one of the world’s largest economies. AGoldman Sachs report suggested that Nigeriawill overtake South Africa and Egypt to becomeAfrica’s strongest economy, and that by 2025could become one of the 20 largest economiesin the world and 11th in 2050. Although thesepredictions may appear ambitious, evidence fromthe East Asian Economic Miracle gives impetusto the possibility of a dramatic turnaround inthe fortunes of a country if fundamental eco-nomic principles are backed by political will, andprudent fiscal regime. It has been variously ar-gued that one of the banes of the Nigerianeconomy is its near complete reliance on crudeoil earnings as revenue source. This scenario hascontinued to thrive due largely to the dearth ofinfrastructure to support other productive sec-tors of the economy especially agriculture andmanufacturing. By establishing an infrastructurefund to develop critical infrastructure in thecountry, Nigeria may well be on track to discov-ering the missing puzzle in the quest for acceler-ated economic growth and development.

The absence of an institutional frameworkto manage the proceeds of crude oil earningsfrom a highly volatile income stream has exposedthe country to cycles of booms and busts. Thereis therefore the need to de-link government ex-penditure from the fluctuating price of crudeoil. Prior to the commencement of its sovereignwealth fund, Nigeria was one of the three mem-ber countries of the Organisation of PetroleumExporting Countries (OPEC) that do not have asovereign wealth fund. The other two countriesare Iraq and Ecuador. Nigeria’s best attempt atmanaging its excess earnings during periods ofhigh crude oil price was the creation of an Ex-cess Crude Account (ECA). The ECA was how-ever lacking in the requisite legality thus makingit vulnerable to political exigencies. Another ma-jor shortcoming of the ECA is that it was merelya stabilisation fund that warehoused excess li-quidity that was used to augment governmentrevenue when it falls below a specified thresh-old. The sovereign wealth fund however is an allencompassing fund that seeks to serve as astabiliser, a guarantee fund for future genera-tions, and will also address the dire infrastruc-ture needs of the country. The sovereign wealthfund could be the catalyst the economy requiresto jumpstart a holistic growth and development.(* Sunday Enebeli-Uzor is an Analyst, Ze-nith Economic Quarterly)

The absence of

an institutional

framework to

manage the

proceeds of

crude oil earn-

ings from a highly

volatile income

stream has

exposed the

country to cycles

of booms and

busts. There is

therefore the

need to de-link

government

expenditure from

the fluctuating

price of crude oil.

Prior to the

commencement

of its sovereign

wealth fund,

Nigeria was one

of the three

member coun-

tries of the

Organisation of

Petroleum

Exporting

Countries (OPEC)

that do not have a

sovereign wealth

fund.



Fore

ign In

sig

hts

* By Neil Hitchens

possibly tear the Euro apart, the various and seemingly neverending bail outs required to keep Greece solvent and how thisimpacts both the Euro zone and the entire Western Europeanbanking system. In many respects there has not really beenmuch actual progress since early summer in formulating adefinitive answer to Greece’s woes. Solutions, when proposed,have tended to be short term, stop-gap measures to preventGreece from defaulting on its near term debt payments, aprocess which usually involves the transfer of further billionsof Euros from German voters’ pockets into the bottomlesspit of the Greek economy, combined with further seeminglyincreasingly desperate and sometimes bizarre economic mea-sures to try and cut the Greek deficit - one of which was thesuggestion that the Greek government should employ an armyof German tax collectors to try something novel and make allGreeks pay all their taxes.

The “talks about talks” about Greece have taken a heavytoll on equity markets, injecting further nervousness about thestate of the global economy and whether a double dip reces-sion is on the cards. Certainly growth worldwide has sloweddramatically as the Greek crisis has escalated, but it is tooearly to tell if this is a precursor to a renewed period of nega-tive growth or whether consumers and house buyers are merelypausing for breath ahead of an upsurge in economic activity.

The continuing hope that the economy of the United Statesof America will act as one of the engines of growth for 2012and beyond has, yet again, been called into question. Growththough is still there, it is just lower than many had hoped forand as such, irrational trend lines are being drawn showing adesperate economic tale. Yes, GDP has slowed from an an-nual rate of +2.2% at the end of the 1st Quarter of 2011 to+1.6% at the end of the second. However, some economists

he recent period to the end of October has beenone where global equity markets continue to be fix-ated in real time on the almost daily emergency dis-cussions between the 17 members of the Euro aboutthe fortunes of Greece, how the Greek crisis might

T


are re-examining their over-pes-simistic forecasts and starting tosee a slightly more positive trendfor the rest of 2011 given recentmoves by the Federal Reserve(Fed) to stimulate the economy.However economists still remainintensely divided about the actualGDP numbers to come over thenext 18 months. While the graphbelow shows an average of+1.70% for 2011, +2.05% for2012 and +2.45% for 2013 theestimates vary widly.

2011 forecasts range betweenan almost static +0.8% (but notethis is still positive “g-r-o-w-t-h”)

to a racier +2.50%; 2012 estimates arebetween +0.40% and +3.90% and for2013, +1.00% to +4.50%. The prob-lem is that the distraction of the Euro-pean crisis has put a negative stanceon all economies. Our feeling thoughis that the US will eventually surpriseon the upside and that in 2012 it willend up growing nearer +3% with aprobable over +3% figure for 2013.

However the US hasn’t exactlybeen helping itself on the world stage.The showdown in Congress betweenthe Tea Party Republicans and theDemocrats in August merely delayedthe inevitable downgrading of US Gov-ernment debt from AAA to AA+ -AAA being the highest possible gradeof debt and something that manycountries will do almost anything tomaintain. While it was never actuallygoing to be a question of the US beingunable to pay its debt bill, the Republi-cans managed to take it to the wire inan attempt to prove a rather odd po-litical point.

However, as has been seen in thepast when Japan’s debt was similarlydowngraded, there has been no actualaversion to holding US Debt at thislower credit level. The US remains thelargest debt issuing nation on earth andas such irrespective of its ratings willalways maintain a proportionately largeweighting in any bond index. The UShas also been fortunate this quarterwhere with the highly volatile equitymarkets, debt has become the safe

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The problem isthat the distrac-tion of theEuropean crisishas put a nega-tive stance on alleconomies. Ourfeeling though isthat the US willeventuallysurprise on theupside and that in2012 it will endup growingnearer +3% witha probable over+3% figure for2013.

Athens, Greece


FOREIGN INSIGHT | Greece is the word...

haven commodity of choice formany investors.

The US and the FederalReserve - Stick or“Twist”?The Fed changed its plan of at-tack in September in its effortsto breathe new life into a flabby,but not dead, economy. Insteadof further rounds of quantitativeeasing, which has longer termnegative impacts on the USeconomy in terms of higher po-tential inflation, they instead initi-ated ‘Operation Twist’, an openmarket move whereby the sup-ply of shorter term debt (3 yearsor under) was increased and asimilar amount of longer termdebt was simultaneously retiredfrom the market. This has theimpact of flattening the yieldcurve and promoting capital in-flows while at the same timestrengthening the US Dollar. Thiswas first tried in 1961 at the heightof the Cuban Missile Crisis andit worked well in reducing thespread (difference) between longand short term rates. It was,though, considered a failure at thetime, but historical re-evaluationof this process has shown that itwasn’t allowed to continue forlong enough to be truly effective.

In 2011, though, this time it isboth different and not so differ-ent.

This year and next around US$400 billion of bonds with maturi-ties of between 6 and 30 yearswill be purchased and issuance ofthe same amount of bonds witha maturity of 3 years or less willbegin. This is an attempt to dowhat Quantitative Easing (QE)tries to do but without printingmore money and expanding theFed’s own balance sheet which inturn actually avoids the inflation-ary pressure that QE brings.

I for one, think that the Fedare actually thinking ‘with theirheads on’ for once and it is arather shrewd move even if mar-

kets had further immedi-ate jitters at this announce-ment with the Dow Jonesfalling 284 points on Sep-tember 21st, the day ofthe announcement, 391points the next day onlyto recover the 20th Sep-tembers’ close by Septem-ber 29th.

The impact can bebest illustrated by viewingthe changes in the USGovernment Yield curvefor the year to date. The30 year yield has shrunkfrom 4.336% to 3.133%which has lead to theprice of the 30 Year Noterising from $98.58 to$126.53 a capital gain of$27.95 or + 28.35%.Similar but less dramaticprice rises are also to befound along the curve.The 10 Year Bond yield

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Greece is the word... | FOREIGN INSIGHTS

fell from a 3.37% yield to 2.115% and the price rose from$94.39 to $107.01, +$12.62 / +13.37% and even the 2year note saw its yield more than halved from 0.65% to0.242%.

As the yield curve has shifted along its entire length thespreads between the Long/30 year bond and other maturi-ties has actually stayed reasonably constant. The 30 Year-20 Year spread has drifted this year ever so slightly from0.20% to 0.28%, the 30 Year - 10 Year has stayed constantat 1.03% and the 30 Year-5 Year spread has hardly movedfrom 2.33% to 2.17%.

This should, normally, be an unprecedented move inmodern times. It is unlikely to be repeated in the near termunless there is an unparalleled flight to safety due to somecrisis as yet unimagined. This event might happen if therewas a full-blown repeat of the 2008 banking crisis whenthe 30 year yield plunged that year from 4.357% on 13thNovember 2008 to bottom out at 2.522% on 18th De-cember 2008. A price move for the 30 Year Bond in thisperiod was one from $102.36 to $140.91, an eye wateringrise of 37.66% in 5 weeks while the financial world nearlycollapsed around us. As they say, ‘Never say Never’, butunless the probable Greek default comes as a totally com-plete and utter shock, it is unlikely that we will see such amove in the near term.

It is hoped that this slightly odd method of financialand economic stimulation from the Fed will help stabiliseand then reinvigorate the US Housing market as lower longerterm interest rates will have a positive impact on overallmortgage rates by pushing them lower and keeping them atthese levels for longer. This in turn should help boost hous-ing sales and new housing construction which in turn willstimulate other areas of the economy and hopefully startbringing down the overall unemployment rate from over9% back to its 30 year average of around 6.3%, hopefullyeven lower in time.

IF positive momentum does start appearing sooner thanexpected in the distressed housing sector then it will beworth re-examining some sector specific plays in the S&P500.

The worst performing sector year to date has been theHousehold Appliances Sector which has a single member -Whirlpool (WHR) - the manufacturer of washing machines,fridges and air conditioning equipment. Despite yielding3.88% with further dividend growth to come, priced atend of October at $50.81 it is still some -54% off its re-cent peak of $112.42.

Other less distressed but still underperforming housingplays include the Constructions Materials Sector, -29.46%as at 31st October, again a single stock play in VulcanMaterials (VMC - Price $31.29) which produces construc-tion aggregates, at multi year lows but one to watch.

The Home and Office Furnishing Sector is also start-ing to throw up some interesting situations - stocks such asLa-Z-Boy (LZB, Price $10.16), Knoll Inc. (KNL, $15.25)or Kimball Inc. (KBALB, $5.625) are seeing the first tenta-tive signs of being possible ‘Buys’. While all these stocks



are probably not quite ready enoughfor the moment they are worth hav-ing on your scratch pad for furtherinvestigation.

Unfortunately we will not knowexactly when Operation Twist willwork its way fully through the USeconomy. It is most likely that de-finitive signs of a full blown US re-covery will not be visible until mid2012 - something that presidentObama must be acutely aware of.It is going to be nip and tuck to seeif the US recovers in time for himto be successful in his re-electionbid. Election Day 2012, Novem-ber 6th, is a mere 372 days away.Obama had better start worryingnow.

Equities - is it really timeto go back into the mar-ket?The past few months, it must beadmitted, has not been a great timeto hold equities in any sort of indextracking portfolio.

But after probably the worstsummer for equity markets in a gen-eration, October returned some ofthe best results seen in this monthin nearly ten years. Yet, similar tothose school reports we all intermit-tently feared, the final verdict wasone of ‘Could have done better’.

Yet again, as we have alreadynoted, the centre of the equitystorm was Europe with theepicentre continuing to be Greece.Just as we all thought that after aseemingly daily diet of emergencymeetings between the EuropeanCentral Bank (ECB), Germany,France and the other members ofthe Euro Zone, there was a defini-tive solution to the Greek problems,Premier Papandreou decided thatturkeys really can vote for Christ-mas and attempted to put the Greekbailout to a plebiscite. The GreekPremier decided, 5 days afterGreece received the bailout terms,that this was not only an opportu-nity for all Greeks to vote on theterms of the second (official) res-cue package but is an opportune

moment to use this as a confidence votein his own leadership. This was a doomedgamble on his part, buoyed, seemingly, bya single opinion poll at the end of Octo-ber that showed more than 70% of vot-ers want Greece to stay in the Euro. Thismove is something that both France andGermany have, basically, refused to al-low and as such the pressure likely to beexerted on Greece going forward will beeven more strong, hard and painful.

Sometimes words fail us about themagnitude of such a high risk move. Eq-uity markets certainly took complete andutter fright at this move, reversing in 48hours what had been a rally of over twoweeks length.

However during this most recent re-



porting period several ‘known knowns’ resolved themselves.Most importantly the Libyan crisis was finally resolved onOctober 20th with the death of Colonel Qadaffi, admit-tedly under somewhat dubious circumstances. But this isone more conflict resolution that as we write, appears to behaving a positive effect on Libya. Those loyal to the previ-ous regime have laid down their arms, oil production is inthe process of being cranked back to previous levels, Westerncountries have unfrozen the assets of the country and anArabian version of democracy is being actively touted.

So far, so good. However, let us revisit this country in 6months time when daily life has gone back to what passesfor normal and the new democracy has had time to bed inproperly.

The UK and Ireland - time to think theunthinkable?The reintroduction of such uncertainty that, it had beenhoped, had dissipated out of the equity markets has beenviewed with an element of strong dismay. It has also re-opened old fissures in the Italian and Spanish bond andequity markets. Strangely though, there was not quite sucha bad reaction from either the Portuguese or Irish markets,which may mean we have reached some sort of low watermark here.

Irish markets especially seem to have shrugged off ear-lier fears of a default, but that could most probably beexplained away in the short term because all Irish Bankshave effectively been nationalised and the hard pressedIrish tax payer can see some light at the end of this particu-lar tunnel. It is perhaps time to dust off those Irish andUK Equity buy lists and prepare to go back into the mar-kets. As we have cautioned before AVOID financial stocksin their entirety as this is the great unknown with many UKbanks at risk of some 3rd party contagion in the futureeven if they themselves do not directly hold Greek, Italian

or Spanish Government Debt.However the UK and Irish economies - historically in-

tertwined - both seem to be weathering the tornado rippingthrough mainland Europe. Irish GDP was most recentlymeasured as growing +2.3% a great change from the -8.3% reading in March 2009. The UK, despite being thelarger and more sluggish economy had a higher than ex-pected Q2 reading of +0.5% to give an overall reading ofabout +2.0% for 2011. While of course, such predictionscan be blown off course by external events there is grow-ing evidence that despite the economic hardships beingthrown at the the Irish and British consumer, they are stillspending; retail stocks are not collapsing and while the over-all picture does remain uncertain there are pockets of spo-radic growth to be found.

In London, the FTSE 100 share Index is now showinga serious level of mismatching performances between fi-nancial stocks and overall indices.

The basic performances show a net underperformanceof -21.73%.

Also, as Financials are part of the All Share Index aswell, stripping out their actual point contribution to the FTSEbrings into stark focus the damage done to the index.

The Points deductions for the past year are:

Bank FTSE points Equity Performance

HSBC -78.0 -16.05%Lloyds -54.7 -52.86%Barclays -38.8 -27.36%Royal Bank of Scotland -13.7 -45.68%Standard Chartered -33.0 -19.19%

The FTSE in this time went from 5,675.16 to 5,544.22= -2.31% or -130.94 points

If you add back in the points ‘lost’ of -218.20 pointsthe FTSE would haverisen 87.26 points or+1.54%.

Over the same periodof time there have beensolid performances frommany constituents of theFTSE 100; Burberry, thefashion retailer, is +31.6%, Unilever,+15.95%, Legal & Gen-eral, +10.06% or Bunzl,+9.07%. There have alsobeen some non-bank di-sasters such asKazakhmys Mines, -29.52%, Cairn Energy, -23.66%, Rio Tinto, -16.13% and CarnivalCruise Lines, -15.13%.

While we do not rec-

It is perhaps time to dustoff those Irish and UKEquity buy lists andprepare to go back intothe markets. As we havecautioned before AVOIDfinancial stocks in theirentirety as this is thegreat unknown withmany UK banks at risk ofsome 3rd party contagionin the future even if theythemselves do notdirectly hold Greek,Italian or Spanish Gov-ernment Debt.

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ommend clients buying new equitypositions at the moment, it is certainlyNOT the time to be selling. On a tech-nical basis the FTSE 100 has found anew floor around 5,400 which was untila few weeks ago a major resistance tothe Index as it climbed from a level ofaround 5,000. In Ireland the ISEQ(Irish Stock Exchange Quotient) hasalso performed in a similar fashion.Previous upside resistance at 2,600 isnow downside support. Both indicesare showing signs of moving higher inthe near term. While we do not advo-cate finite predictions the possibility ofthe FTSE topping out at around 5,900and the ISEQ at around 2,900 - some7% or so from current levels, this au-gurs well for a possible New Year rally.

Equity markets in both Europe andthe US tell the same picture of the di-saster wrought by banking stocks andthe perils of being in them merely be-cause ‘They are in the Index’ - never agood reason to hold something that isso obviously a drag on any portfolio.

In Europe, where indices have gen-erally been more widely affected by theEuro crisis the bank have

underperformed the EuroFirst Indexby -16.36%.

Globally, again the same story isevident with a net unchanged perfor-mance for the year for the main indexbut a -12.43% underperformance forthe bank.

This is why careful stock selectionin the hands of a practiced manager -what is called ‘activist’ asset manage-ment - will bring enhanced results forinvestors. Merely because a stock or asector is in an index is a bad way tojustify its inclusion in an equity portfo-lio. Each and every stock has to be in aportfolio for a reason. If it starts tounderperform or move erraticallyagainst the market then the stockshould first be watched closely and ifthe trend is downwards you should notbe afraid to close this position, at a smallloss if necessary, rather than hang onfor grim death and take a hit of 40%,50% or more, as investors in a widevariety of bank stocks have this year.Stop losses are there for a reason - toStop you Losing Money if a stock falls.

That said I believe that now is thetime to start looking at what stocks tobuy globally.

If Greece does explode there willbe plenty of bargains to be had for theinvestor who has kept his cash in thebank. Even if Greece does not go tothe wall, indices may well start building

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longer term strong support levels justaround where we are now to possiblyspring a surprise in 2012 and 2013 withoverall index rises in low double digitspossible for both years. If the globaleconomy behaves and shows signs oflife, then hang on to your hats! Equi-ties should rally fast into such goodnews.

Even if you are not buying at thebottom, buying into a trend is a sen-sible thing to do as the “Trend is Al-ways your Friend”. As we continuallyadvise investment clients the difficultthing is to buy rising stocks in risingmarkets - however it is both possibleand probable with the right investmentmanager to guide you.

Commodities near termvolatility but what next?The frothy global macroeconomic situ-ation has started to overspill into com-modities. Having reaped the benefitsof emerging market demand and aweaker US Dollar, commodity pricesoverall remained at higher levels dur-ing July and August this year, despiteoverwhelming economic evidence ofslowing global growth - slowing mindyou, not contracting. Over the pastweeks, in certain areas, what was ini-tially a series of small retreats hasturned into a headlong flight from the

more risky assets - something we pre-viously noted might happen.

Oil has been quite volatile thismonth with a drop of West Texas to$75.87 on the 4th October on Eurosovereign default jitters. However re-cent price moves which saw WTI closeat $93.19, a +22.83% rise from thelows, show that oil at present is mov-ing more in line with equity marketsthan with underlying fundamentals. Theresolution of the Libyan ‘crisis’ withthe death of Qaddafi on October 20th,should under normal circumstanceshave led to a fall in oil as Libyan SweetCrude supplies are due to resume prop-erly under the new regime. Howeverit is probable over the next couple ofmonths that WTI will trade between$90 - $100 and Brent will hover be-tween $105 and $115 as macro fac-tors such as what is looking like a coldNorthern Winter are partially offset byincreased global oil production.

It is in base metals that we are see-

ing inventory build up combined withslowing demand - a combination thatis usually toxic for the price of anysuch commodity. Aluminium climbedto $2,600 a tonne in July before re-suming an almost continuous down-ward path to end this month at$2,200=. The potential for any con-certed recovery looks dim as despitethe new lower price making a signifi-cant number of smelters unprofitable,production slowdown in China is be-ing seen - a distinctly negative perspec-tive.

Copper - the darling of the mar-kets earlier in 2011, stalled badly afterhitting $9,000 a tonne and above onthe fears of a slowing in the growth ofmining output. The 25% correction inSeptember to $6,800 is the reality bitthat demand was a fairly obvious call.However even though the price hasstabilised around $7,500 or so inven-tories of the metal as tracked by theLondon Metal Exchange (LME) are

It is possibleChina coulduse this weak-ness as achance toboost itsoverall copperinventories forwhen indus-trial productionpicks up, butthis is a longshot call.Prices arelikely toremain aroundcurrent levels.



now some 25% higher than a year ago. It ispossible China could use this weakness as achance to boost its overall copper invento-ries for when industrial production picks up,but this is a long shot call. Prices are likely toremain around current levels.

Cereal prices are also in somewhat of amixed mood. Softening wheat prices lastspring were justified on the back of Russiaand the Ukraine re-starting exports. How-ever when panic peaks on financial markets,speculative factors go out of the windowand grains prices have seen a near 20% fallsince September. Add into the equation abetter than expected US harvest and what islikely to stay around its depressed 625 centsa bushel for some time to come.

In precious metals the story continues tolook more positive for investors.

Unlike other commodities, precious met-als first gained on the negative economicnews as investors sought safe havens. Thesharp correction in September was, as cannow be seen, caused by fears of a short termliquidity crisis, where investors would havehad to cash in their investments in preciousmetals merely to survive. However, currentvolatility aside Gold, Platinum and Palladiumprices should remain positive going into yearend. Interest rates are still at ultra-low lev-els, and concerns about sovereign debt andthe general health of the global financial sys-tem will continue to support investor de-mand. We remain confident that gold priceswill remain at current or higher levels forthe near term while the possibility of a re-test of the recent all time high of $1,900cannot be ruled out in the next three months.BUY on dips.

Greece - the imponderablequestion rumbles onGreece has increasingly fewer moves leftahead of what looks like a probable com-plete and utter capitulation within the nextfew months. The near term debt repaymentschedule just for its Euro denominated debtmakes for grim reading.

While the first two repayments (whichwill have to be counterbalanced by the issu-ance of new debt to replace them) on De-cember 19th, of the 4.4% Greek Republic(Current Yield 100%), or on 22nd Decem-ber of some Zero coupon paper (Yield196%) should be manageable, the real prob-lems begin with the 29th December 0%’s

(Yield 99.5%) where some € 5.2 billionneeds to be refinanced. If by some miraclethis passes without a hitch then we run intomore problems when the 4.3% of March2012 matures.

Much as it pains me to say, the onlyreason all this is being allowed to happen isbecause the Euro is anything but a pureand simple currency - from the outset ithas been a political creation by the Frenchand Germans but has always lacked thefiscal stability and budgetary unity requiredto ensure it works perfectly.

A transfer of total economic sovereigntyby the 17 Euro members to the Germansis not going to happen easily, if at all. Inthe past, single European currencies haveworked, most notably under the RomanEmpire some 2,000 years ago - but herewe had not only fiscal unity, but legal, eco-nomic, cultural and linguistic as well. Assuch it is highly likely that we will limp onfor many more months in a similar vein

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Cereal prices arealso in somewhatof a mixed mood.Softening wheatprices last springwere justified onthe back of Russiaand the Ukraine re-starting exports.However whenpanic peaks onfinancial markets,speculative factorsgo out of thewindow and grainsprices have seen anear 20% fall sinceSeptember.



with economic momentum slowing andthe political will of the EU Elite mostlikely being thwarted by that demo-cratic barometer of good sense, theEuropean voter.

Realistically though, Greece hasreached the end of the road.

While the charade about the cur-rent situation will continue for a manymore months Greece will eventuallyhave to accept the inevitable. If youlook at the explosion of the GreekYield curve this year it will be obviousto anyone who isn’t a French or Ger-man leader that the markets have‘sussed’ the Greek economy for whatit is - a complete and utter shambles.The end is inevitable; it is just a ques-tion of how long the life supportmechanism of continuous cash injec-tions from the European Central Bankcan continue.

The recent seismic shifts in the yield

curve, especially at the shorter endwhere 1 year rates have exploded thisyear from 12% to 160% tells the realtale of how markets perceive thechances of Greece being able to res-cue itself.

NONE. Greece is a complete andutter AVOID.

And you wondered whytrying to understand Eu-rope was so compli-cated...?The above official EU Organisationalchart shows the highly convoluted‘logic’ of how the EU itself “works”.

Right at the centre are the 17 mem-bers of the Eurozone surrounded bythe other members of the EuropeanUnion itself.

Surrounding all of this is the EUCustoms Union which includes four

micro states, the Vatican, Monaco, SanMarino and Andorra but also Turkey.

However overlapping this is theEuropean Economic Area which addi-tionally includes Norway, Iceland andLiechtenstein. Switzerland votedagainst joining this but is included aspart of the European Free Trade As-sociation.

To cloud matters further there arealso a series of other European andnot so European Countries who haveobserver status at the Council of Eu-rope- countries such as Albania,Kazakhstan, Macedonia Ukraine andRussia.

In Short...... “Confused - You willbe!”(* By Neil Hitchens, Senior Rela-tionship Manager, Zenith Bank(UK)



money lent out. Security is highly emphasized in Nigeria becauseof the volatile economic climate, inconsistent government policiesand the paucity of credit information on borrowers which makethe granting of credit more risky than it is in more developed econo-mies.

As shall be discussed subsequently, mortgage provides the bestoption for such security if the mortgage transaction is entered intowith the right premises confirmed. It is however an admission ofreality that mortgage transactions do not always secure the recoup-ing of the money lent out due to certain defects in the transactionwhich shall be dealt with.

This work shall appraise mortgage as a security for bank lend-ing in Nigeria. This appraisal shall involve a definition of key terms;types of mortgages; advantages of mortgage over similar transac-tions; the investigation of title to the mortgage property; problemsmilitating against mortgage as an effective security for bank lend-ing; and requisite solutions thereto.

B

Dis

cours

e

y virtue of the financial intermediation role of banks, bank-ing is the very foundation upon which the fabrics of anyeconomy are built. This all-important role of financial in-termediation is most effectively discharged through banklending. Given this fact, bank lending will not be possibleunless it is hinged upon an assurance of recouping the

* By Deji Olanrewaju & Seun Oke


Discourse: An Appraisal of Mortgage AsA Security for Bank Lending in Nigeria

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CONCEPTUALCLARIFICATIONSMortgageThe Court of Appeal in Suberu v.A.I.S.L. Ltd1, adopting the definitionin Strouds Judicial Dictionary2 defined amortgage thus:

“A mortgage is a conveyance ofland or an assignment of chattels as asecurity for the payment of a debt orthe discharge of some other obligationfor which it is given. The security isredeemable on the payment of dis-charge of such debt or obligation, anyprovision to the contrary notwithstand-ing.”

The conveying party is called themortgage; the lender is called themortgagee while the debt for whichthe security is created is called theMortgage debt.

In Stanley v. Wilde, Lord Lindley

M.R. defines a mortgage as; “a legalor equitable conveyance of title as asecurity for the payment of debt orthe discharge of some other obligationfor which it is given subject to a condi-tion that the title shall be reconveyedif the mortgage debt is liquidated”.

It is, therefore clear from the fore-going definitions that a mortgage is aconveyance of title to property that isgiven as security for the payment of adebt or performance of duty, the claimover which will be extinguished uponrepayment and at which time the titleconveyed will be conveyed back.

From the foregoing elucidations,the following features of a mortgagecan be identified:

Conveyance of interest in land orsome other properties by the mortgagor(this could be legal or equitable inter-est depending on the mode of creat-ing the mortgage). The legal incident

of the transaction,(1) therefore, is that the owner of

the mortgaged property becomes di-vested of the right to dispose of it untilhe has secured a release of the prop-erty from the mortgagee.

(2) The conveyance or the trans-fer is not absolute as it is subject toredemption upon repayment of thesum advanced;

(3) Consideration (loan i.e.money) must flow from the mortgageeto the mortgagor; and

(4) As a legal consequence,thereof, the mortgagor and the mort-gagee have mutual rights of action andduties arising from such transaction.

Some transactions are similar to amortgage in certain respects, it there-fore, becomes imperative at this junc-ture to identify the distinctions whichmake the mortgage transaction standout from these other transactions.



SecuritySecurity is something pledged to guar-antee fulfillment of an obligation, es-pecially an asset guaranteeing repay-ment of a loan that becomes the prop-erty of the creditor if the loan is notrepaid1. Security is therefore an insur-ance against unforeseen developmentsas it provides the banker with a cush-ion to fall on if every other avenuefails.

From the bankers’ perspective,there are basically two types of secu-rity namely: real and personal security.Real security involves interest in sometangible property (such as land, goods,or chattels of different kinds) or in-tangible property (such as chooses inaction) as security for loan or advances.

Personal security on the other handinvolves a guarantor. It entails either ageneral contract of underwriting, to be

primarily liable for the debt or defaultof another person as an indemnity con-tracts or an accessory – contract bywhich the promisor undertakes to beliable only on the inability of the prin-cipal debtor or insufficiency of his as-sets to meet his obligation as in con-tract of guarantee.

Characteristics of BankSecuritiesSome essential characteristics of banksecurities include:

a) Sufficiency: The value of thebank security must be adequate tocover the bank’s entire exposure. Inorder not to be stung by possible down-ward fluctuations in value, it is neces-sary to leave sufficient margin betweenthe value of the security and theamount advanced as loan.

b) Valuation: A good banking secu-rity must be capable of being valuedobjectively. Besides, its valuation mustbe free from any form of sentiments.

c) Good Title: The efficacy of amortgage transaction depends on thesecurity of title. The title of the cus-tomer to the property must not bequestionable and the land must havebeen registered and must be free fromany encumbrances in order to have agood title also a search at the land reg-istry should reveal that the land mort-gaged to the bank actually belongs tothe customer. So also share certificatedeposited by the customer must bearhis name.

d) Enforceability: The security con-tract once legally perfected should re-main legally binding and enforceable.If the customer defaults, and any prob-lem arises, the bank should not find itdifficult to seek legal assistance and thesecurity should not be capable of be-ing invalidated. The bank should en-sure that it takes all necessary steps inperfecting its security; also the secu-rity will be invalidated due to lapses orlacunas.

e) Easy Transfer of Title: The titleof the property used as security mustbe easily transferable from the deposi-tor to the bank. Similarly after paymentof debt the title to the property mustbe easily re-assignable to the depositorwithout much problem. For this pur-

pose, the transfer of title in a legalcharge is much easier than transfer oftitle in a legal mortgage on a landedproperty.

In general, the type of security de-manded by a bank depends on the fol-lowing:1) The amount of the loan2) The nature of the facility being

sought3) The duration of the loan4) The integrity and financial strength

of the borrower.

BankSection 66 of BOFIA (Banks and OtherFinancial Institutions Act, 2004) definesa bank as any bank that is licensedpursuant to the provisions of the Act.This definition is not helpful for thepurpose of this discourse.

A bank, as far as this work is con-cerned, is an institution charged withthe responsibility, inter alia, of financialintermediation in a particular society.Financial intermediation is the processof channeling funds from those whohave money to those in need of money,often in the form of loan and othercredit facilities.

TYPES OF MORTGAGEThere are two types of mortgagesnamely: legal mortgage and equitablemortgage.

Legal Mortgage: A legal mortgageinvolves the transfer of legal interestin land, whether leasehold or freehold,to the creditor (mortgagee) on condi-tion that the legal title will beretransferred if the secured debt isrepaid as at when due (subject to theequitable rights of the mortgagor).Legal mortgage is the best form ofsecurity because it offers certain andeffective remedies on default withoutburdening the creditor with actual pos-session of the property before defaultsoccur. For example, a legal mortgagorcan foreclose unlike an equitable mort-gagor who has to resort to the court toexercise his right of sale.A legal mortgage creates a superior in-terest and gives priority over all credi-tors, with respect to prior or subsequentnon-registered mortgage. Priority is de-



termined according to the date by whicheach mortgage was registered.

Creation of Legal Mortgage: Thecreation of legal mortgage in Nigeria isdependent on where the property is situ-ated. Three jurisdictions can be identi-fied for this purpose, namely: under theRegistration of Title Conveyancing Law(1959) States; the Conveyancing ActStates (1882); and the Registration ofTitle Law (1994).

1) Conveyancing Act StatesNo statutory provision governs themode of creation of legal mortgagesin these states; the applicable law istherefore still the common law subjectto modifications introduced by theLand Use Act, 1978. Stemming fromthe effect of the Land Use Act whichis to extinguish the concept of freeholdinterests in land2, the relevant principlesare those relating to a legal mortgageof leasehold interest at common law.Two ways of creating a legal mortgageof leasehold interest at common laware:

a) Assignment of the entire lease-hold interest of the mortgagee subjectto a provision for cesser on redemp-tion.

b) Sub-demise with a provision forredemption when the loan is redeemed.

While a legal mortgage created byassignment transfers to the mortgageethe mortgagor’s unexpired interest therebeing no reversionary interest in themortgagor, that created by sub-demisedoes not remove the mortgagor’s re-versionary interest.

2) Property and Conveyancing LawStatesFor properties situate in these areas,Section 109 of the Property and Conveyanc-ing Law, 1959 provides for two waysof creating a legal mortgage over lease-hold interest in land, namely:a) A sub-demise for a term of years

absolute, less at least one day thanthe term vested in the mortgagor,and subject to a provision for cesseron redemption;

b) Charge by way of legal mortgage:where the mortgagor has a right ofoccupancy or a sublease, he may

decide to create a charge by deedexpressed to be by way of legalmortgage.

3) Registration of Title LawThe Lagos State Registration of Title Law,section 18 provides that; the registeredowner of land may in prescribed man-ner charge the land or lease with thepayment of money to the like extent asif the land was not registered land. Thecharge is completed by entry in the reg-ister of the particulars of the mortgageand the registration of the charge inthe land registry Form 5.

Equitable MortgageAn equitable mortgage is one which thecreditor or the mortgagee receives onlyan equitable interest in the property. Anyform of agreement involving transferof equitable interest in land or prop-erty as security for loan is essentially anequitable mortgage. Equitable mort-gages are the preferred method of cre-ating security for a short-term loan; but

it is not as secured as the legal mort-gage as it is susceptible to fraud.

Creation of Equitable MortgageAn equitable mortgage can be createdby;1) Deposit of title deeds.2) An agreement to create a legal mort-

gage and3) Equitable charge of the mortgagor’s

property4) Equitable Mortgage of Registered

Land

Equitable mortgage can be used in thefollowing circumstances:a) Where the mortgage sum is smallb) Where the time for repayment is

short; andc) Where there is urgency in the trans-

action or the mortgagor is in urgentneed of the fund which cannot waitfor the long process of perfectionof title such as securing thegovernor’s consent.



Advantages of Legal Mortgage overEquitable Mortgage

1) Enforcement: It is easier to en-force a legal mortgage unlike an equi-table mortgage which cannot be en-forced unless by court order.

2) Priority: Where there is a legalmortgage and equitable mortgage cre-ated over the same property, the legalmortgage will have priority of interestbecause where there is equity, the law pre-vails.

3) Fraud: Fraud is more prevalentwith equitable mortgage than with legalmortgage, since the documents are reg-istered under the latter.

ADVANTAGES OFMORTGAGE OVERSIMILAR TRANSACTIONSMortgage is not the only option opento banks in their lending operations.Other forms of security exist outsidemortgage to which they may turn. How-ever, the use of mortgage is pervasiveover other forms of transactions. It is

therefore pertinent to examine theuniqueness of mortgage as a securityfor bank lending and its preferablityover other options.

Advantages over Pledge1) From the perspective of the cus-tomer, a pledge involves the deliveryof possession as security for the keep-ing of a promise or the payment of adebt. This means that the pledgor willbe deprived of the opportunity to makeuse of his property until he repays theloan. This makes a pledge less attrac-tive compared with a mortgage.

2) From the perspective of the bank,since the pledgee has no interest in thepledged land other than possession, thepledgee cannot ordinarily sell the landwithout a court order on the principleof nemo dat quod non habet3 and once apledge is always a pledge4. A legal mort-gage on the other hand offers the powerof sale to the bank should the customerdefault in payment.

Advantages over Lien1) A mortgage can be created by a bankwith the agreement of a customer un-like a lien which only arises by opera-tion of law. For this reason, a mortgageis a more attractive option for banklending.

2) A possessory lien usually confers onthe lienee a right of retention so thatexcept in some special cases the lieneecannot obtain his interest in the prop-erty by sale, so also he possesses no rightof foreclosure either by law or equity.A mortgage on the other hand, offersthe bank with the power of sale andforeclosure.

Advantages over a ChargeA charge unlike a mortgage is a mereappropriation of specific property forthe discharge of an obligation withouttransfer of title or possession to theobligee. The charge obtains no estateat all in the land, but has merely a rightof payment out of the property. Anequitable chargee cannot foreclose be-cause he acquires no title under thecharge and therefore has nothing whichcan be made absolute, although his in-terest in the security can be realized byobtaining the appointment of a receiverof the rent and profits and, if it be-comes necessary, by a judicial sale.

Advantages over a Conditional SaleA conditional sale refers to a transac-tion where a property or land is sold toa person with right reserved for thevendor to repurchase it upon the oc-currence or non-occurrence of certainconditions. A mortgage may be prefer-able to a conditional sale because ofthe mutual remedy it vests in the mort-gagee and mortgagor.

INVESTIGATION OF TITLEThe efficacy of a mortgage dependson the security of title. For this reasontherefore, it is pertinent to briefly ex-amine the steps involved in the investi-gation of title for a mortgage security.There are two issues that the mortgageeshould be concerned with before ad-vancing a loan on security:

a) The title of the borrower; and

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b) The value of the propertyThe essence of investigation is to

ensure that the mortgagor is in fact theowner of the property he is giving assecurity to the bank; that he has notalready charged the property in favourof another bank or creditor and thatthere are no encumbrances against themortgage property.

The practice is for the legal depart-ment of the bank to instruct externalsolicitors to conduct searches on themortgage property. The solicitor shouldbe thorough in establishing the worthof the title documents using knownconveyancing techniques prescribed bylaw. After the search, the solicitor writesa report that is sent to the bank forconsideration.

The following should be coveredin a search report:

1) Date of search2) Name of borrower3) Name of person giving security,

if different from borrower4) Description of property5) Title of the borrower or person

giving the security6) Encumbrances, registration and

other adverse facts as may be observedfrom;(a) Physical inspection of the land or

building(b) The register at the land registry(c) Register at the Corporate Affairs

Commission(d) The memorandum and articles of

association of the borrower (if acompany) in respect of land hold-ing

(e) Government acquisition: whetherthe property is within the areacompulsorily acquired by govern-ment or proposed to be so ac-quired.

7) Conclusion, stating in unequivocalterms that the borrower or person giving the security has a good title (or otherwise) to the property and has an unencumbered power to charge it to thebank as security for a loan5.

The mortgagee may at any timewithdraw from the transaction if notsatisfied with the mortgagor’s title.

PROBLEMS MILITATINGAGAINST MORTGAGE ASAN EFFECTIVE SECURITYFOR BANK LENDING INNIGERIANotwithstanding the preferability ofmortgage over other transactions as asecurity for bank lending in Nigeria,certain problems which bedevil thetransaction make it less attractive thanit should be. These problems shall nowbe discussed seriatim.

1) Defects in Title: A fundamentaltruism about mortgage is that the effi-cacy of mortgage transactions dependson the security of title. Since the secu-rity of the mortgage property is theassurance that the mortgagee reliesupon it as a cushion in the event thatthe mortgagor defaults, it wouldamount to business suicide if that titleturns out defective. A mortgagor witha bad title cannot give a good securitysince he cannot give what he does nothave in line with the maxim, nemo datquod non habet. The reason for this prob-lem is that many of the titles to land inNigeria are defective and banks, some-times through their negligence in in-vestigating title, have lost mortgagesecurity to defective titles.

2) Valuation: This is another prob-lem which stems from improper inves-tigation of the mortgage security.Sometimes, insufficient margin is leftbetween the value of the mortgageproperty and the amount of the ad-vance. Also, due to lack of a thoroughand objective valuation of the mort-gage property, many banks are not ableto recover a portion of the loan ad-vanced.

3) Governor’s Consent: Section 22of the Land Use Act requires thegovernor’s consent to be obtained forthe alienation of any interest in land.The consequence of a failure to ob-tain this consent is that the conveyancewill be rendered void by virtue of sec-tion 26 of the Act. This provision costSavannah Bank a fortune in Savan-nah BANK Ltd. v. Ajilo6 were theSupreme Court held that failure toobtain governor’s consent is at the det-riment of the mortgagor. Although, the

court relaxed its stance inAwojugbagbe Light Industries Ltd.v. Chinukwe and Anor7, this does nottotally absolve banks of this problem.

4) Limitation Statute: Section12(1)(a) of the Limitation Law of LagosState limits a mortgagee’s right of ac-tion to enforce a mortgage to 12 yearsfrom the date when the right of actionaccrued which is the date for repay-ment with regard to the principal sumand interest. In Lewis v. Plunket8, itwas held that once the right of the mort-gagee is statute barred, the mortgagoris entitled to have the title deed backwithout paying money due under themortgage. Thus, banks which do notenforce their mortgage security within12 years run the risk of losing themoney advance as loan.

5) Equitable Rights of a Mort-gagor: The mortgagor’s equitablerights, namely: the equity of redemp-tion and the equitable right to redeem,also constitute a problem for banks inusing mortgage security. The equity of



redemption is the right of the mort-gagor to recover the security by dis-charging his obligations under the mort-gage within the duration of the mort-gage contract. The equitable right toredeem on the other hand is the rightof a mortgagor to redeem notwith-standing that the date for repaymenthas elapsed. These rights are benefi-cial to the mortgagor but often createproblems for the bank (mortgagee). Forexample, where the mortgagor is un-able to redeem on the legal due date,he may still redeem by virtue of hisequitable right to redeem before theproperty is finally auctioned9. More-over, these rights cannot be waived byagreement as held in Seton v. Slade.Any agreement, term or conditionwhich purports to restrict or suspendredemption till a certain date will beperceived by the court as a clog on themortgagor’s equity of redemption10.

6) Bad Loans: Some banks, perhapsin ignorance of the importance ofmortgage security, advance loans with-

out the requisite collateral security orwith insufficient security. The recentincidence in Nigeria whereby the Cen-tral Bank of Nigeria (CBN) discov-ered that some commercial banksgranted loans not backed up with ad-equate security illustrates this problem.In furtherance of this discovery, theCBN Governor sacked the ManagingDirectors of Oceanic Bank and Inter-continental Bank, Cecilia Ibru andErastus Akingbola respectively.

7) Government Acquisition: Al-though the title to property may be inorder, there may be a problem withregard to the compulsory acquisitionof property by the government. Sincethe Governor is the custodian of alllands within the state, he may acquiresuch lands for public purposes in whichcase compensation should be paid.Compensation is however not payablewhere the property, for example is notbacked up by building approval or sur-vey plan. Banks who accept such de-fective mortgage security run the risk

of losing their money as they will beunable to receive compensation fromthe government to realize the mort-gage security.

8) Macro-Economic Instability:Macro-economic instability may alsoconstitute a problem in the bank useof mortgage as security for lending.Economic instability may affect thevalue of the mortgage property. Thisis especially where the property usedas security is personal property or achose in action. The recent crash in thevalue of shares in Nigeria illustratesthis point. Land is, however, a relativelybetter security as it is less prone to de-preciation in value.

9) High Interest Rates: Banks areoften moved by economic conditionsto increase their interest rates. This inturn scares away potential mortgagorswho do not see the feasibility of col-lecting loan facilities with exorbitantinterest rates.

10) Capacity: Capacity is an impor-tant element of the mortgage transac-tion. Mortgages to infants, for example,are void and unenforceable under theProperty and Conveyancing Law, 1959. Therisk, here is that loans advanced to in-fants under a mortgage transaction willnot be recoverable by the bank. Thisproblem stems from the negligence ofthe bank in investigating the capacityof the mortgagor.

11) Fraud: Fraud is another prob-lem bedeviling mortgage as a securityfor bank lending in Nigeria. Unsuspect-ing banks sometimes fall prey to dubi-ous and fraudulent mortgagors whooffer defective titles as security. It ispertinent to add that equitable mort-gages are more susceptible to fraudthan legal mortgages.

PROPOSED SOLUTIONSTO THE PROBLEMSThe above problems water-down theattractiveness of mortgage as a secu-rity for bank lending. These problemsmay however, be averted or at leastameliorated by adopting the followingrecommendations:

With regard to the problem ofdefective title, valuation, capacityand fraud, banks should in order toavoid falling prey to the problem of

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END NOTES1 Microsoft Encarta 2009. 1993– 2008 Microsoft Corporation.2 It is noteworthy that an assignment by the mortgagor ofthe totality of his interest in the mortgaged property in anyof the states governed by the property and conveyancinglegislations is not void, but takes effect as a conversion ofthe interest or estate so assured to the mortgagee into aterm of years as held by the Nigerian Supreme Court inNigeria Housing Development Society Ltd. v. Ogundepo,per Coker J.S.C. 3 Adjei v. Dabanka (1930) WACA 63.4 Okoiko v. Esadalue5 Imhanobe, S.O, Legal Drafting and Conveyancing, Sec-ond Edition (Sylvester Imhanobe Legal Research Ltd, 2007)p 370 – 372.6 (1989) 1 N.W.L.R. )Pt. 97) 305.7 (1995) 4 S.C.N.J. 162.8 (1937) Ch. 3069 See Federal Administrator General & Ors v. Cardozo &Ors (1973) 1 ANLR (Pt. 2) 154.10 Howard v. Harris11 Suit No. CA/E/131/87 (1995) 2 NWLR.12 See Reeve v. Lisle.

defective title, carry out proper inves-tigations should be conducted into thetitle of the mortgagor and the valua-tion of the mortgage property. In or-der not to be stung by possible down-ward fluctuations in value, it is neces-sary to leave sufficient margin of safetybetween the value of the security andthe amount advanced as loan. This isalso to avoid being stung by macro-economic instability. The capacity ofa prospective mortgagor should be thor-oughly investigated in the light of theconsequence of advancing loan to aninfant. Banks should endeavour to optfor legal mortgage over equitable mort-gage.

To avert the problem ofgovernor’s consent, banks shouldendeavour to incorporate into themortgage, a requirement for obtaininggovernor’s consent. They should alsonot advance any loan facility withoutthe fulfillment of this condition.

With respect to limitation stat-utes, banks should not delay in enforc-ing their rights of sale and foreclosure.Like the maxim goes, vigilantibus et nondormientibus, jura subvienent, equity aidsthe vigilant and not those who sleepon their rights. Banks should forecloseor exercise their right of sale withoutdelay or apply to the court for the ap-pointment of a receiver depending onthe nature of the mortgage. This alsoapplies with regard to the problem ofthe mortgagor’s equitable rights.Banks are advised not to insert anyterm which may act as a clog on themortgagor’s rights mentioned above.This is in the light of the courts atti-tude to such terms as stated byMuntka-Coomasie J.C.A in Ahanekuv. Iheaturu11 “in view of equity, the essen-tial object of mortgage is to afford security tothe lender, and as long as security remainsintact there is no justification for expropriat-ing the propery of the mortgagor merely be-cause of his failure to make prompt pay-ment”. Thus, imposing a penalty of ad-ditional interest rate upon default ofpayment will be void12.

With regard to the problems ofgovernment acquisition and badloans, proper and thorough investiga-tions should be conducted by banksbefore advancing loans. The property

should be properly investigated to con-firm that the building plans and otherdocuments are in place to entitle thebank to government compensation inthe event of a compulsory acquisitionof the property. Also, banks should notbe swayed by the good reputation ofthe mortgagor in bypassing the require-ment of good collateral security. TheCentral Bank should also ensure thatcorporate governance is effective andstrict, and uncompromising in banksto avoid a repeat of the bad debt his-tory in the Nigerian banking sector.

CONCLUSIONIn conclusion, the utmost desirabilityof mortgage transactions to banks can-not be denied as they yield a huge pro-portion of bank profits through inter-est rates. However, this attractivenessis watered down by the problems iden-tified above. Banks should adopt thesolutions proposed to ensure that thescale of pros and cons is tilted in theirfavour, rather than against them.

(*Deji Olanrewaju & Seun Oke)are both lecturers of the departmentof International Law, School ofLaw & Security Studies, BabcockUniversity, Ilisan, Ogun State.)


Discourse: Deposit Insurance Systems:How Effective Are They in Protecting Depositors


MACROECONOMIC ENVIRONMENTThe Nigerian economy in the third quarter 2011 recorded some major improvements. While some of theindictors got off to a solid start but stalled somewhat along the line, others maintained a strong momentumall through. Inflation figure, for instance, inched up slightly despite hitting the authority’s single digit target ata point. Gross Domestic Product (GDP) contracted slightly but ended higher than expected. The nation’scurrency, the naira, lost grounds against other major currencies. The foreign exchange reserves shrank slightlyduring the quarter. The Monetary Policy Rate (MPR) was raised in efforts to keep the lid on inflation. In thecapital market, bearish sentiments dominated activities once again. However, in the international crude oilmarket, prices remained relatively strong despite some major fluctuations.

GROSS DOMESTIC PRODUCTGrowth in Nigeria’s Gross Do-mestic Product (GDP) was esti-mated at 7.4 percent in the thirdquarter 2011 as against the 7.8percent recorded in the same pe-riod in 2010. Real GDP growthwas mainly driven by the non-oil sector. Despite being the peakflood period in the Southernparts of the country, good rainsand early harvests in the north-ern region continued to boostagriculture as a major contribu-tor to GDP. For the oil sector,the dividends of the Amnesty Deal with the Niger Delta militants continued to yield positive resultsdespite a slight drop in production due to operational constraints experienced by some of the oil produc-ing companies. Real GDP growth rate in 2011 is projected at 7.85 per cent which is slightly lower than the7.87 percent recorded in 2010.


INFLATIONThe Year-on-Year inflation rate endedthe third quarter where it left off de-spite decelerating for much of the pe-riod. Inflation rate ended the quarterat 10.3 percent in September. How-ever, against expectations, the head-line rate was brought down to a singledigit figure of 9.4 percent in July and9.3 percent in August, the lowest levelsince May 2008. Inflationary pressuremoderated significantly due to theharvest of early maturing crops suchas maize, tomatoes, vegetables, po-

tatoes and fruits. Despite the positive signs however, higher prices of household items such as buildingmaterials, diesel, kerosene and electricity charges resurfaced in September. In the months ahead, inflationarythreats remain due to anticipated capital budget releases running up to year end; increased government borrow-ing to finance the fiscal deficit in the 2011 budget; the recent upward revision of electricity tariff and theanticipated deregulation of petroleum product prices, among others.



EXTERNAL RESERVESThe nation’s external reservesshrank marginally in the thirdquarter 2011 despite a sharppick up in output and crude oilreceipts. External reserves re-corded impressive gains earlierin August, gaining about $4.1bil-lion to $35.9billion. The buildupwas due to inflows of royaltiesinto the federation account aswell as foreign capital injection.

Leakages however remained as the surge was short-lived. Unable to plug the holes, external reservestumbled back to $31.8billion as at end September 2011, capable of financing up to 14 months ofimports. The authorities attributed the development to huge costs of refined petroleum productssubsidy; Joint Venture Cash Call (JVC) as well as high import bills. In the near to medium term, theauthorities project improvements in the stock of external reserves as a result of higher crude oilprices and output.

INTEREST RATE

In a move widely anticipated, the

CBN maintained its hawkish

stance and raised its key interest

rate twice during the third quar-

ter. The first hike came a bit higher

than expected in July when the

apex bank lifted its Monetary

Policy Rate (MPR) by 75 basis

points to 8.75 percent. The sec-

ond increase in September, com-

ing earlier than anticipated, lifted

the MPR by 50 basis points to

9.25 percent, in bid to hold back

inflation.

The average interbank rate

witnessed significant swings

during the quarter. For instance,

rates on the call and 7 Day ten-

ors dropped as low as 7 and 7.9

percent, respectively in August,

despite the upward review of the

MPR in July. The market was

awash with liquidity coming from a total of N1.3trillion FAAC allocations shared among the three tiers of

government. Rates however picked up in August as a result of aggressive mop up operations by the apex

bank. The upswing was nevertheless short-lived as about N616billion trickled down the system in August.

Source: Central Bank of Nigeria

Source: Financial Markets Dealers Association of Nigeria (FMDA)



Despite the inflows, rates inched

back up in September due to huge

NNPC remittances and WDAs

funding.

In terms of cost of borrow-

ing, the average Prime Lending Rate

(PLR) inched up slightly due to risk

aversion. Despite lending rates re-

maining at elevated levels (hover-

ing around 17 percent), it neverthe-

less eased in September due to ex-

tension of guarantees to some rescued banks in August.

Returns on the average deposit rate remained relatively stable across most investment horizons, with

volatility higher on the longer term tenors.


EXCHANGE RATE

The nation’s currency, the

naira, depreciated close to

record low levels in the third

quarter 2011, losing

grounds against major

world currencies, but clos-

ing around CBN’s target. It

finished the period within

whiskers of its weakest tar-

get limit at about N154/

US$. The naira witnessed volatile movements against the US dollar, reaching record low levels in the interbank

market. Stronger demand for the greenback resurfaced earlier in August with the nation’s currency coming

under severe pressure from downstream oil companies; foreign investors and multinationals repatriating

dividends. In its twice weekly auctions, the CBN offered about $9billion and sold $9.2billion against the

$11.6billion demanded during the period. The gap was nevertheless filled by inflows from oil majors and

telecoms companies. To check speculative bids, the CBN lifted restrictions placed on dollar purchases by

Bureaux de Change (BDCs) and sold $10million to all banks operating BDCs. The nation’s currency neverthe-

less, reached its lowest level in more than two years when it reached N157.92/US$ at the interbank market,

trading outside the weakest edge of its target (+/-3 percent). The premium between the official and the

interbank rate widened to 3.2 percent as at end September 2011, compared to 1.2 percent in June. In the

months ahead, pressure on the naira is expected to moderate as foreign investors take advantage of higher

rates of return.

Source: Central Bank of Nigeria


CAPITAL MARKET

The capital market ended the

third quarter with heavy losses

retreating to earlier low levels

despite slight gains in June. It

was a grim end to the quarter

as the All-Share Index (ASI)

and market capitalization fin-

ished disappointingly lower at

20,373.00 and N6.49trillion,

respectively, down from

24,980.20 and N7.98trillion in

the preceding quarter. The ASI

suffered its biggest drop for

more than 21 months, slash-

ing about 18 percent compared

to 9 percent in the same period

in 2010. With the market at a

crossroad, risk aversion crept in

as some investors positioned

themselves to withstand a pos-

sible further market depression.

The nationalization of three

deposit money banks sent the market into a free fall in August with investors losing about N591billion as their

stocks were delisted from the market. With the absence of positive news, funds were transferred to the money

market and cash holdings rather than to equities. Investors waited nervously for the outcome of the September

30th recapitalization exercise. Despite the uncertainties however, a glimpse of colour in an otherwise dull quarter

came with the submission of Transaction Implementation Agreements (TIA) to the Securities and Exchange

Commission by five of the rescued banks and their new investors/partners. Confidence was further boosted as

a number of quoted companies such as Flour Mills of Nigeria; PZ Cussons and Seven-Up Bottling Company

paid impressive dividends of N2.00; 86kobo and N2.00, respectively. Market fundamentals remained strong as

the NSE admitted N25billion Edo State Infrastructural Development Bond on the daily list.

Source: Nigeria Stock Exchange

Source: Nigeria Stock Exchange


OIL & GAS

Crude oil prices declined in the third quarter of 2011, back to the levels a year earlier. Oil prices tumbled more

than 17 percent, the biggest percentage loss since the second quarter of 2010. Prices were last witnessed that

low in September 2010. Oil prices which hit about $114 a barrel in May this year has since slumped 31 percent,

owing to worries about the prospect of the global economy. Nigeria’s brand of crude oil, bonny light, shed

$16, its weakest quarterly performance in five quarters. It traded within a band of $79-$95 per barrel. Industry

analysts attribute the slump in crude oil prices to several factors such as the Euro zone’s debt crisis; slowdown

in China’s manufacturing output; weaker demand in the United States despite the summer driving season as

well as expected return of oil exports from Libya. At the end of the joint EU-OPEC Energy Dialogue in

Vienna, Austria, both parties identified threats to price stability coming from lower economic growths,

consumer country policies, discriminatory taxation, industry costs, technology as well as human resources.

Documents

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