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2003-10-17 13:23:00
Consulate Lagos
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171323Z Oct 03
						UNCLAS SECTION 01 OF 02 LAGOS 002144 



E.O. 12958: N/A

1. (U) Summary: Rumors of distress have whispered
through Nigeria's financial sector since mid-August,
fueled in part by the suspension of two banks from the
industry's clearinghouse and in part by investigations
of ten or twelve others said to be facing temporary
liquidity problems. Some banks may indeed be troubled,
but these represent only a small proportion of total
deposits; as such, rumors of widespread distress are
exaggerated. The country's largest banks are healthy,
and industry insiders insist that the sector is set for
continued growth. This may be the case, but growth
will likely be limited unless Nigerian banks begin to
meet the needs of consumers and small and medium
enterprises. End summary.




2. (U) The Central Bank of Nigeria (CBN) suspended two
banks, Societe Generale Bank of Nigeria and African
International Bank, from its clearinghouse in mid-
August for consistently overdrawing their CBN accounts.
Both had long been suspected of having serious
capitalization or liquidity problems, and both are
attempting to re-capitalize and re-enter the
clearinghouse. Another troubled institution, the Bank
of the North, has similar problems, but these have not
been severe enough to warrant suspension from the
industry's clearinghouse. The CBN replaced the bank's
board of governors in mid-August (the new board is
charged with restructuring and re-capitalizing the
bank), and the 19 northern states that own the bank
have since committed to fresh injections of funds.
Given its unique ownership structure and the political
ramifications of failure, the bank will likely remain




3. (U) Ten or twelve other banks are reportedly facing
temporary liquidity problems. Speculation regarding
the nature of a so-called "list" of distressed banks is
rife and made worse by the CBN's reluctance to publicly
identify any banks under investigation. The CBN's
refusal to name names casts a pall of suspicion over
the entire industry and frustrates banks and consumers
alike: the former find their credibility questioned by
foreign partners and investors, and the latter worry
about doing business with banks that could be on the
verge of failing. Even so, consumers continue to make
deposits, and a large-scale run on Nigerian banks is

4. (U) If banks are indeed having liquidity problems,

the CBN may ask them to restructure, re-capitalize or
improve corporate governance practices. Banks with
severe problems could eventually be closed, but this
would not be unprecedented: since 1994, the CBN has
closed or liquidated 35 banks. Industry insiders point
out that the elimination of unhealthy banks is, on the
whole, a good thing and note that the failure of a few
small banks is unlikely to generate widespread
distress, particularly when the banks' deposits account
for only a small proportion of the industry's total.
Bismarck Rewane, Managing Director of Financial
Derivates Company Limited, a leading Lagos-based
economic think tank, points out that Nigeria's top
twenty banks account for approximately 60 percent of
the sector's total assets; the failure of a few small
banks is therefore unlikely to have a significant
impact on the industry as a whole.





5. (U) Many analysts argue, in fact, that Nigeria's
banking sector has too many banks: ninety-odd banks
crowd the field, but twenty or thirty might be
sufficient, particularly when only forty or so conduct
significant operations in the inter-bank market.
Rewane believes that the sector will undergo rapid
consolidation in the near future, predicting that only
thirty banks will survive the next two years; he
expects another ten to disappear shortly thereafter.
The Managing Director of the Nigeria Inter-Bank
Settlement System, Paul Lawal, shares Rewane's
expectations but believes that consolidation will occur
more slowly: he expects to see 65 banks two years from
now. Lawal reports that the management of several
smaller banks may be turned over to larger
institutions, but even with consolidation, he expects
the banking sector's overall capitalization to remain
the same.

6. (U) Consolidation may be driven in part by banks'
competition (perhaps with some foreign participation)
to enter potentially lucrative retail and consumer
markets. Retail expansion would be welcome, as banks
cater almost exclusively to state and local
governments, oil companies, and large, established
clients. Ado Wanka, Executive Director of Corporate
and Investment Banking at First Bank, Nigeria's largest
and oldest bank, reports that nearly 70 percent of the
bank's income is derived from interest on corporate
loans; like its competitors, First Bank concentrates on
securing large corporate clients. According to Wanka,
extending credit to the "common man" is simply not
profitable enough to make it worthwhile - and in
Nigeria's uncertain investment climate, high risks of
default make loans to individuals, entrepreneurs and
small businesses especially unattractive. As it is,
interest rates are so high (at de facto rates of 29 to
30 percent) that none but the largest and most credible
clients can afford loans. Average Nigerians find even
revolving credit largely inaccessible: the inordinately
high risk of fraud makes credit card use unwise, and
revolving credit is not widely offered by banks.

7. (U) Small and medium enterprises find it equally
difficult to obtain credit. The CBN requires Nigerian
banks to set aside ten percent of before-tax profits
for equity investments in industrial enterprises under
its Small and Medium Industries Equity Investment
Scheme, but only a small proportion of available funds
has been distributed. Banks are often reluctant to
loan money to businesses with short track records, and
many claim that entrepreneurs lack "discipline," or the
ability to ensure that funds are used exclusively for
investment purposes. The deputy director of the
Nigeria Deposit Insurance Corporation's bank
examination department argues, in fact, that funds
loaned to small and medium enterprises often end up in
the personal bank accounts of their owners. Added to
these constraints is many entrepreneurs' wariness of
equity financing. Lawal notes that many businessmen
are reluctant to share control of their enterprises and
adds that they fear an eventual take-over by equity

8. (U) Comment: Economic observers generally consider
the financial sector one of the Nigerian economy's
bright spots. Banks have enjoyed sustained growth over
the last few years, and the trend looks set to
continue, assuming, of course, that consumers ignore
rumors of distress and continue to make deposits.
Unfortunately, with so few people having access to
credit, banks are failing to fulfill one of their
primary functions: making sure that money goes to those
who need it. In many cases, banks simply accept
government deposits and use them to purchase treasury
bills or extend loans to federal, state and local
governments and their parastatals. As such, banks make
money but contribute little to productive economic
activity. Until this changes, interest rates come down
and Nigeria's investment climate improves, economic
growth will likely remain less than buoyant. End