NIGERIA: A REVIEW OF CENTRAL BANK GOVERNOR SOLUDO'S

UNCLAS SECTION 01 OF 03 ABUJA 000938 SENSITIVE SIPDIS DEPT PASS TO USTR-AGAMA BAGHDAD FOR DUNDAS MCCULLOUGH TREASURY FOR PETERS, IERONIMO, AND HALL DOC FOR 3317/ITA/OA/KBURRESS AND 3130/USFC/OIO/ANESA/DHARRIS E.O. 12958: N/A TAGS: EFIN ECON PGOV NI SUBJECT: NIGERIA: A REVIEW OF CENTRAL BANK GOVERNOR SOLUDO'S TENURE REF: A. LAGOS 152 ¶B. LAGOS 188 ¶C. ABUJA 614 ¶D. ABUJA 08 2437 ABUJA 00000938 001.3 OF 003 SENITIVE BUT UNCLASSIFIED-HANDLE ACCORDINGLY ¶1. (SBU) Summary. Professor Chukwuma Soludo's first term at the Central Bank ended on May 29. It appears unlikely he will be appointed to a second term (First Bank Group Managing Director Sanusi Lamido Sanusi appears to be the frontrunner at this point, but in Nigeria one can always expect last minute surprises). The Nigerian banking landscape has witnessed several positive changes since 2004 under Soludo's tenure. The 2005-2006 consolidation has ensured that Nigerian banks remain relatively stable (although, out of 24 banks they are 3-4 that may not have enough capitalization to survive) in the face of the current global crisis and bank-provided credit to the economy has increased. Various innovations were introduced such as automated teller machines, debit cards, credit cards, reduction in the check clearing cycle, and improvements in the payments system. Soludo is criticized by some for the recent depreciation of the naira, and the banks' lack of funding for the real sector to some extent. End Summary. ¶2. (U) Chukwuma Soludo was appointed CBN Governor on May 29, 2004 by former president Olusegun Obasanjo. Prior to his appointment he was the Chief Economic Adviser to the president and the architect of the National Economic Empowerment and Development Strategy (NEEDS), Nigeria's homegrown economic reform program which has since faltered since Obasanjo term ended. Soludo's appointment shocked the banking industry as he was an outsider to the private sector as a university professor from the University of Nigeria, Nsukka. Banks Recapitalization to the Rescue -------------- ¶3. (U) Major achievements of Soludo's tenure were the regulator-induced recapitalization and consolidation, and the subsequent market-stimulated recapitalization and consolidation which continues today. The regulator-induced consolidation led to a reduction in the number of banks from 89 to 25 banks. The 13 banks that were unable to meet the capital requirement of 25 billion naira ($170 million) were acquired by larger and more successful banks. The bank consolidation was unprecedented in Nigerian history. Many credit this consolidation for helping most Nigerian banks' ability to steer through the global financial and economic crisis. Increase in Foreign Credit Lines and Foreign Direct Investment -------------- -------------- ¶4. (U) Bank consolidation led to an increase of several billion dollars through public offers, private placements, and Global Depository Receipts in foreign portfolio and direct investments into Nigerian banks. Likewise, foreign credit lines increased significantly. However, both investments and credit lines witnessed sharp declines towards the end of 2008 due to the global crisis. Industry analysts report that credit lines are slowly trickling back into the banking system. Credit Growth and International Subsidiaries -------------- ¶5. (U) Total credit to the economy increased exponentially compared with the period prior to consolidation. Competition among banks resulted in the introduction of more lending products to meet the growing needs of customers, and gradual reduction in lending rates. Total credit to the economy increased from 1.203 trillion naira ($8.2 billion) in 2003 to 8.127 trillion naira ($55.66 billion) by February 2009. Various loan products were introduced such as asset loans to finance the purchase of household items, car loans, and educational loans to finance overseas study. Moreover, Nigerian banks have been able to finance big ticket transactions such as infrastructure projects either solely or as a consortium without requiring the participation of foreign banks, i.e. building the new domestic airport terminal in Lagos. At the same time, industry non-performing loans declined from 24.1% in 2005 to 7.4% by December ¶2008. ¶6. (U) Nigerian banks increased their branch networks domestically, and established subsidiaries within the region and in Europe. United Bank for Africa (UBA) Plc, Intercontinental Bank, Guaranty ABUJA 00000938 002.3 OF 003 Trust Bank (GTB) Plc, Zenith Bank Plc, and Access Bank Plc established wholly owned subsidiaries in London. Prior to consolidation, only First Bank and Union Bank had a presence in London. Nigerian banks are making their presence felt in the West-African sub-region by acquiring existing banking franchises and establishing wholly-owned subsidiaries. Nigerian banks such as UBA, Intercontinental, Access Bank, GTB, FinBank, Zenith, Diamond Bank, First Bank, and Union Bank can now be found in Gambia, Sierra Leone, Liberia, Ghana, Rwanda, and Benin Republic. Improved Rankings -------------- ¶7. (U) Most Nigerian banks received favorable rankings since the consolidation. Sixteen Nigerian banks rank among the top 1000 banks in the world, and five Nigerian banks rank among the top ten in Africa. Likewise in the Forbes Global 2000 listing of the world's top companies, Nigeria's First bank, Intercontinental Bank, and UBA Plc were featured. Exchange Rate and Inflation -------------- ¶8. (U) Two of the principal responsibilities of a Central Bank are to manage the value of the local currency domestically while ensuring low and stable inflation, and to affect stable exchange rates internationally. The CBN under Soludo has been able to maintain a stable exchange rate. The Naira appreciated from 137 naira for $1 in 2003 to 117 naira for $1 in September 2008 and the premium between the official and parallel market exchange rates reduced substantially. However, deliberate depreciation of the naira at the end of 2008 was needed to safeguard foreign reserves in light of reduced inflows resulting from the fall in the price of crude oil (from $147.27 on July 11, 2008 to $33.87 on December 21, 2008),lower remittances from the Nigerian diaspora, call-ins or non-renewal of foreign credit lines, and decreasing FDI. The naira is currently trading at the rate of 147 naira for one dollar. ¶9. (U) Inflation also reduced significantly from double digits of 23.8% in 2003 to 6.6% at the end of 2007. Though inflation climbed to double digits again by late 2008 due to the global food, financial and economic crisis, it recorded a marginal decline from 14.6% in February 2009 to 13.3% in April 2009. Credit Bureau -------------- ¶10. (U) Soludo approved the licensing of a credit bureau to provide credit information on users of bank credit. This information is available to banks in order to make their lending decisions. The first credit bureau, the Credit Reference Company, was licensed during the first quarter of 2009. It is owned by a consortium of banks (UBA, First Bank, IBTC Chartered Bank Plc, GTB, Diamond Bank, Intercontinental Bank, Access Bank, Standard Chartered Bank, and First City Monument Bank) in partnership with credit reference company Dunn and Bradstreet. The private sector arm of the World Bank, the International Finance Corporation, and international consulting company, Accenture, are providing technical and advisory support. More credit bureaus are expected to be licensed in the course of the year. The Payments System -------------- ¶11. (U) Soludo reformed the payments system by introducing electronic payments. In addition, the check clearing cycle has improved from five to two days within the check origin clearing zone, and from ten to two days outside the clearing zone. The banking reforms also saw the introduction of many card products such as debit cards, credit cards, and the use of ATMs. International cards such as Visa and Mastercard are now used in Nigeria mostly in internationally-linked hotels or institutions in partnership with Nigerian banks. Currency Management -------------- ¶12. (U) The CBN, under Soludo's tenure, took over the management of the Nigerian Security Printing and Minting Corporation (NSPMC),"The Mint". Before acquisition, the Mint was extremely inefficient, overstaffed and heavily in debt. It did not print even a billion ABUJA 00000938 003.3 OF 003 notes in ten years. At the same time, the Nigerian government was massively importing notes and other security documents from abroad. In 2008, the Mint was able to print 2.6 billion notes without having to import a single note from abroad. Criticisms -------------- ¶13. (SBU) Some industry analysts and members of the public charge that the recapitalization has not led to a substantial increase of credit to the real sector. The CBN continues to receive condemnation over the recent depreciation of the naira. Manufacturers complain that the depreciation of the naira has made for significant foreign exchange losses through raw material imports. Foreign currency denominated loans lost their value and adversely affected competitiveness with foreign imports. The depreciation of the naira was dictated by the global financial crisis which in turn resulted in decreasing foreign exchange inflows from the sale of crude oil, non-renewal of foreign credit lines, lower inflow of foreign investment, and lower remittances from Nigerians abroad. Some commentators dispute the phenomenal growth of the banks and the profits they declare as misleading in a country where majority of the citizens remain very poor. ¶14. (SBU) Some critics fail to recognize the role of an accommodating fiscal policy to drive the economy towards a desired goal. In the Nigerian context, where fiscal policy continues to be expansionary and the lower tiers of government continue to run fiscal deficits, it will be difficult for the CBN's monetary policy to be effective in achieving stable interest, exchange and inflation rates. (Note: The lower tiers of government receive 50% of all government revenues. During the higher oil prices era (from 2003-2008),revenue increased markedly. End Note). Challenges -------------- ¶15. (SBU) Bank industry analysts complain about the poor supervisory capability of the CBN. This is due to allegations that the banks do not present a true and fair view of their financial earnings by understating losses and rendering false returns. Notably, Soludo drew back from enforcing a common accounting year for the banks, though there are plans for this now to take affect at the end of 2009. After the 2005-2006 bank consolidation, CBN introduced risk-based supervision in place of using prudential guidelines for supervising the banks. (Note: Risk Based Supervision monitors management system processes on an ongoing basis, and is able to quickly determine any signs of deterioration. Prudential Guidelines are compliance based supervision which focuses only on complying with regulatory guidelines and rendering only periodic reports. End Note). Also, the CBN recently introduced daily on-site supervision of banks through the resident examiners. The CBN admits that its supervisory capability needs to be enhanced through continuous training of its staff. Comment -------------- ¶16. (SBU) There is no doubt that Soludo changed Nigeria's banking industry for the good because of some of his initiatives and reforms. The industry is on much more solid footing because of his policies and actions. Credit to the economy has increased significantly, though mostly to the privileged formal sector. But almost all of the steps he took towards these ends were in the first two years of his term. In the second half of his present tenure, the CBN Governor's performance has been mostly flat. Despite past progress, challenges remain, such as incorporating the informal sector into the credit arena and maintaining stable interest, exchange, and inflation rates. There have been some concerns about his 2008-2009 policies being sporadic, inconsistent and favoring certain banks over others. Moreover, Nigeria's huge infrastructure challenges significantly increase the cost of doing business which puts pressure on interest rates, inflation rate, and foreign exchange inflows. And, while the real economy cries out for broader availability of credit and greater efficiency, concerns persist regarding financial sector transparency and accountability. End comment. ¶17. (U) This message was coordinated with Consulate Lagos. SANDERS