NIGERIA: EX-IM BANK ABUJA VISIT

UNCLAS SECTION 01 OF 02 ABUJA 001262 SIPDIS SIPDIS DEPARTMENT FOR AF/W (SILSKI) AND AF/EPS (POTASH) DEPARTMENT PASS TO USTR TREASURY FOR LUKAS KOHLER/DAN PETERS USDOC FOR 3317/ITA/OA/KBURRESS USDOC FOR 3130/USFC/OIO/ANESA/DHARRIS REF: 06 LAGOS 432 LAGOS 32 E.O. 12598: N/A TAGS: EFIN ECON PGOV NI SUBJECT: NIGERIA: EX-IM BANK ABUJA VISIT ABUJA 00001262 001.2 OF 002 ¶1. Summary. ExIm Bank officials visited Abuja June 11, 2007 to assess the banking sector and country risk. They visited the Ministry of Finance (MOF),Central Bank of Nigeria (CBN),Economic and Financial Crimes Commission (EFCC),and the Debt Management Office (DMO). They had further meetings in Lagos. Nigeria's banking sector continued to witness tremendous changes after the regulator-induced consolidation exercise that ended on December 31, 2005, according to CBN staff. The number of banks fell from 89 to 25, and a new wave of market-induced consolidation was taking place. The new banking environment posed challenges to operators and the regulators. The CBN introduced Risk Based Supervision (RBS) in place of prudential guidelines supervision that was used before the recapitalization/consolidation exercise. CBN was impressed with the performance of the banks. The Economic and Financial Crimes Commission (EFCC) claimed those that had been proven to have committed crimes in the past would no longer be able to hold senior board positions because of a new mandatory vetting process. End summary. ¶2. United States Export Import Bank's (ExIm) Thomas Matthias and Cheryl Moriarty were in Abuja on June 11 to meet with working level staff at the Ministry of Finance (MOF),Central Bank of Nigeria (CBN),Economic and Financial Crimes Commission (EFCC) and the Debt Management Office (DMO).. Mr Matthias, a credit officer, focused on the banking sector because ExIm had increased the number of banks from 14 to 17 and its loan facility from $300 million to over $400 million in Nigeria. Cheryl Moriarity, an economist, was here to get an overview of the financial, economic, political and business environment to develop the country risk assessment for Nigeria. (Note: ExIm acts as the Secretariat of the Inter-Agency Country Risk Assessment (ICRAS). End Note). . Ministry of Finance -------------- . ¶3. Mr. C.D. Gali, Director of Expenditure at the Ministry of Finance explained the government budget process, the sources of government revenues, and how they were shared with the federal, state and local governments. Thirteen percent is taken off the top for the oil producing states in the Delta region. The National Planning Commission had completed a draft of the next Nigerian Economic Empowerment and Development Strategy (NEEDS-2) that would set the medium-term strategy for 2008-2011. NEEDS-2 sets out to achieve employment generation, poverty reduction, wealth creation, and value orientation. When completed, NEEDS-2 main aim is to diversify the economy away from the dependence on oil by developing such sectors as manufacturing and agriculture that will create 2.5 million jobs per year and new business opportunities. . Meeting with CBN -------------- . ¶4. Mr. O.I Imala, Director, CBN Banking Supervision Department and his staff confirmed that the industry ratio of delinquent loans to total risk assets had declined from about 30% to 8.76% as at end-December 2006. The supervisors confirmed that the percentage of delinquent loans was high immediately after the consolidation exercise because of the aggregation of the loan portfolios as stronger banks absorbed weaker ones. Since then the picture was increasingly positive. The ratio of delinquent loans had consistently fallen due to several factors. The CBN introduced a new code of corporate governance and RBS. The new banks embarked on a vigorous drive to recover the loans inherited from consolidation. The broader ownership of the 25 consolidated banks had reduced the incidence of insider lending. More experienced staff now handled the credit process. Credit committees of banks were now allowed to work without undue interference. Banks had introduced a more rigorous credit approval and write-off process. ¶5. The CBN supervisors said implementation of the RBS had improved its bank supervision. The RBS approach ensured that supervisors focused on the risks and on the institutions that might threaten supervisory objectives and devised appropriate risk mitigation programs to address them. This marked a departure from the prudential approach which was the norm before the consolidation exercise. The CBN supervisors claimed that with the RBS they were in a much better position to detect fraud and corporate governance problems early, avoiding systemic crises. As an example, they ABUJA 00001262 002.2 OF 002 offered the recent firing of the board of Spring Bank on June 6. The supervisors said they had discovered problems and discussed them with the Spring Bank board. CBN set time lines for certain actions to be taken. When the board of Spring Bank did not meet the timelines, the CBN sacked the bank board. ¶6. The supervisors were not concerned by the sudden increase in the loans granted by banks in the post-consolidation period, especially syndicated loans to companies in the telecom and oil and gas sector. They argued that since such loans are granted in growth sectors to companies with experienced management there was no cause for concern. ¶7. There was now more collaboration between the CBN and the Nigerian Deposit Insurance Corporation (NDIC). Examination of banks was now done by teams that comprised both the CBN and NDIC. On-site examination of banks was done about four times a year by the joint examination team, unlike in the past when each agency would conduct on-site examination of the banks only twice yearly. ¶8. To improve credit risk management practices in the banks, CBN was funding the training of credit officers at the Financial Institutions Training Center in Lagos. International experts on risk management trained the first batch of trainees on risk management best practices during the first quarter of 2007, while another batch would be trained in June 2007. . Meeting with EFCC -------------- . ¶9. ExIm officials met with Mr. Emmanuel Akomaye, Secretary of the board of the EFCC, Mr. Dapo Dolorunyomi, Chief of Staff, EFCC, and Mr. Modibbo Hamman Tukur, Head, International Relations and Strategic Partnership of the Nigeria Financial Intelligence Unit (NFIU) in the EFCC. The bank recapitalization/consolidation exercise occurred simultaneously with the GON's effort to ensure that Nigeria was delisted from the Financial Action Task Force's (FATF) list of Non-Cooperating Countries and Territories (NCCT). According to the EFCC officials a joint CBN/NFIU team was established to investigate the sources of capital raised by the banks during the recapitalization exercise and to ensure that the banks complied strictly with the Money Laundering Act. A new mechanism was established for appointing directors of banks. The directors now had to be cleared by the security agencies, including the EFCC. They noted the case that led to the arrest and prosecution of Mr. Emmanuel Nwude, a director of one of the top Nigerian banks, when it was discovered that he was involved in money laundering and had defrauded a Brazilian bank of millions of dollars. ¶10. The NFIU and CBN were currently working on improving the anti-money laundering and coombating the financing of terrorism (AML/CFT) processes of the banks, with emphasis on the "Know Your Customer" (KYC) requirement and going a step further to "Know Your Customer and his Business" (KYCB). Some banks were already linked on-line to the NFIU for the purpose of AML/CFT reporting and mechanisms had been put in place to ensure that all banks would be linked to the NFIU in the future . Comment -------------- . ¶16. Recapitalization has brought with it new and diverse challenges for the management of banks. Competition and shareholders demands are pushing the management of banks to seek increased revenues through greater lending. Despite the confidence of bank supervisors credit quality remains a problematic issue. Nigeria is awash in petrodollars, but if and when those dry up trouble could follow. Further, domestic banks have made huge loans for privatized entities to a small number of private sector players, who do not in fact have strong management track records in these new sectors. For example, a consortium of domestic banks lent $500 million to Transcorp for its purchase of the state telecom provider NITEL. Since the sale, NITEL has gone through more than a dozen chief executives, the most recent of who just resigned after a mere four days. The CBN and other regulatory agencies must continue to build capacity both internally and in the banking sector. End comment. CAMPBELL