Nigerian Enterprise Development and Revolution - An Eye on Banking and the Financial Sector
In August this year, the Nigerian government was forced to pump $2.
6 billion into five troubled banks after realising their base capitals had plummeted to levels that threatened the entire financial system.
The move has awakened deep concerns about the state of affairs in Africa's second largest economy where banking is strategic to financial stability.
While it may be too early still to speculate on how this affects investor attitudes, the government is confident in its intervention based on the sheer potential of the economy.
Financial sector reforms were first brought about in 1987 as part of the government's Structural Adjustment Programme, aimed at correcting repressive policies, high reserve requirements and entry restrictions to the banking industry.
The first measures were targeted at the capital market and included the deregulation of interest rates, a move to indirect monetary controls and licensing of new banks.
The objectives of this round of reforms centred on promoting more efficient systems of credit allocation, promoting competitiveness in the financial system and fortifying regulatory mechanisms.
However, despite the considerable anticipation surrounding the process, the net results of the first reforms were disappointing.
Even though interest rates reacted positively to the financial liberalisation, actual rates remained negative during the reform years, averaging -13% against an earlier -7.
6%2.
Further, the banking sector that was created as a result of these reforms turned out to be risky and undercapitalised and brought in lower returns than in the pre-reforms era.
It was not until 1991 that Nigeria spelt out another phase of guidelines for bank regulation, by which time banks had become immune to the imbalances plaguing the system.
Nigeria's erstwhile agricultural economy was transformed almost overnight during the oil boom of the '70s, when the discovery of huge crude and gas reserves prompted extraordinary growth.
Oil revenues boosted per capita GDP up from $220 in 1971 to $1,100 in 1980.
The dramatic change in fortunes, however, was accompanied by negligent and grossly ineffective administering that eventually destabilised the economy and devastated non-oil sectors.
Growth indicators plunged as the country descended into social and political chaos amid rising inflation, unemployment and poverty.
The collapse of oil prices in the early '80s finally sealed Nigeria's fate and confirmed its position among the poorest nations of the world.
More than 54% of Nigeria's 148 million people currently live in abject poverty on an income of less than $1 per day3.
The country faces large-scale macroeconomic imbalances and massive infrastructure deficits that hinder inclusive growth and create threatening levels of unemployment and inflation.
Corruption and legislative emasculation are further causes behind the "Nigerian Paradox" of acute economic underachievement despite a mammoth capital of natural and human resources.
Although Nigeria is the second largest economy in the continent after South Africa, its present per capita GDP of $1,418 ranks it among the smallest.
National ambitions for rapid and sustainable growth were revived only with the return of political stability at the end of the last century.
Abuja signed the UN Millennial Declaration for universal human rights and adopted the ambitious Vision 2020 goal as part of efforts to emerge as a competitive player in both regional and global financial systems.
Since then, successive governments have concentrated on driving explosive enterprise development in the SME sector to propel the economy along high growth curves.
In the context of this objective, the following are some of major obstacles facing the Nigerian banking industry: * Unprofitable operations due to liquidity constraints and poor asset qualities.
* Disregard for small and medium savings in favour of large public sector deposits.
* Inept corporate governance, proliferation of unethical practices and non-compliance with regulatory mechanisms.
* Meagre capital base, even for banks that qualify the revised minimum requirement of $15 million for new banks.
* Insolvency, often forced by operating losses that wipe out shareholder investments.
The final phase of Nigerian reforms introduced since 2001 have been responsible for several positive developments, including an impressive 7% growth in the non-oil sector between 2001 and 20073.
A bank consolidation programme was implemented in 2004 to enhance credit availability to the private sector, especially small businesses.
The degree of success attending these policies is perhaps reflected only in comparisons.
As of 2004, there were 89 banks operational in Nigeria, the large majority with a capital base of less than $10 million.
South Africa, on the other end, had one bank with more branches and assets than all 89 put together4.
Nigeria's quest for economic resurgence is inherently tied to the health of its banks.
The following are some of the key measures necessary for this sector to help bring about a much-needed enterprise revolution: * Significant enhancement in the minimum capitalisation for banks, together with phased withdrawal of public sector funds from commercial bank deposits.
* Establishment of a competent regulatory and oversight authority to prevent insider trading and ethical malpractices and optimise banking efficiency.
* Strengthening of applicable legal frameworks and better enforcement of existing banking laws to avoid fiscal mismanagement and failures.
* Enhanced cooperation between banks and the Economic and Financial Crimes Commission of Nigeria to prevent misconducts and promote transparency.
* Consolidation of banks through mergers and acquisitions to increase availability of finance for long-term infrastructure development projects.
Repositioning the banking sector to promote rapid development remains a formidable task for Nigeria - one that is certain to determine the outcome of its long-term goals.
Government reforms and regulation alone are patently unequal to meeting this critical challenge, and if the SMIEIS programme is any indication, a lot depends on innovations that are eventually driven from within Nigeria's banking sector.
6 billion into five troubled banks after realising their base capitals had plummeted to levels that threatened the entire financial system.
The move has awakened deep concerns about the state of affairs in Africa's second largest economy where banking is strategic to financial stability.
While it may be too early still to speculate on how this affects investor attitudes, the government is confident in its intervention based on the sheer potential of the economy.
Financial sector reforms were first brought about in 1987 as part of the government's Structural Adjustment Programme, aimed at correcting repressive policies, high reserve requirements and entry restrictions to the banking industry.
The first measures were targeted at the capital market and included the deregulation of interest rates, a move to indirect monetary controls and licensing of new banks.
The objectives of this round of reforms centred on promoting more efficient systems of credit allocation, promoting competitiveness in the financial system and fortifying regulatory mechanisms.
However, despite the considerable anticipation surrounding the process, the net results of the first reforms were disappointing.
Even though interest rates reacted positively to the financial liberalisation, actual rates remained negative during the reform years, averaging -13% against an earlier -7.
6%2.
Further, the banking sector that was created as a result of these reforms turned out to be risky and undercapitalised and brought in lower returns than in the pre-reforms era.
It was not until 1991 that Nigeria spelt out another phase of guidelines for bank regulation, by which time banks had become immune to the imbalances plaguing the system.
Nigeria's erstwhile agricultural economy was transformed almost overnight during the oil boom of the '70s, when the discovery of huge crude and gas reserves prompted extraordinary growth.
Oil revenues boosted per capita GDP up from $220 in 1971 to $1,100 in 1980.
The dramatic change in fortunes, however, was accompanied by negligent and grossly ineffective administering that eventually destabilised the economy and devastated non-oil sectors.
Growth indicators plunged as the country descended into social and political chaos amid rising inflation, unemployment and poverty.
The collapse of oil prices in the early '80s finally sealed Nigeria's fate and confirmed its position among the poorest nations of the world.
More than 54% of Nigeria's 148 million people currently live in abject poverty on an income of less than $1 per day3.
The country faces large-scale macroeconomic imbalances and massive infrastructure deficits that hinder inclusive growth and create threatening levels of unemployment and inflation.
Corruption and legislative emasculation are further causes behind the "Nigerian Paradox" of acute economic underachievement despite a mammoth capital of natural and human resources.
Although Nigeria is the second largest economy in the continent after South Africa, its present per capita GDP of $1,418 ranks it among the smallest.
National ambitions for rapid and sustainable growth were revived only with the return of political stability at the end of the last century.
Abuja signed the UN Millennial Declaration for universal human rights and adopted the ambitious Vision 2020 goal as part of efforts to emerge as a competitive player in both regional and global financial systems.
Since then, successive governments have concentrated on driving explosive enterprise development in the SME sector to propel the economy along high growth curves.
In the context of this objective, the following are some of major obstacles facing the Nigerian banking industry: * Unprofitable operations due to liquidity constraints and poor asset qualities.
* Disregard for small and medium savings in favour of large public sector deposits.
* Inept corporate governance, proliferation of unethical practices and non-compliance with regulatory mechanisms.
* Meagre capital base, even for banks that qualify the revised minimum requirement of $15 million for new banks.
* Insolvency, often forced by operating losses that wipe out shareholder investments.
The final phase of Nigerian reforms introduced since 2001 have been responsible for several positive developments, including an impressive 7% growth in the non-oil sector between 2001 and 20073.
A bank consolidation programme was implemented in 2004 to enhance credit availability to the private sector, especially small businesses.
The degree of success attending these policies is perhaps reflected only in comparisons.
As of 2004, there were 89 banks operational in Nigeria, the large majority with a capital base of less than $10 million.
South Africa, on the other end, had one bank with more branches and assets than all 89 put together4.
Nigeria's quest for economic resurgence is inherently tied to the health of its banks.
The following are some of the key measures necessary for this sector to help bring about a much-needed enterprise revolution: * Significant enhancement in the minimum capitalisation for banks, together with phased withdrawal of public sector funds from commercial bank deposits.
* Establishment of a competent regulatory and oversight authority to prevent insider trading and ethical malpractices and optimise banking efficiency.
* Strengthening of applicable legal frameworks and better enforcement of existing banking laws to avoid fiscal mismanagement and failures.
* Enhanced cooperation between banks and the Economic and Financial Crimes Commission of Nigeria to prevent misconducts and promote transparency.
* Consolidation of banks through mergers and acquisitions to increase availability of finance for long-term infrastructure development projects.
Repositioning the banking sector to promote rapid development remains a formidable task for Nigeria - one that is certain to determine the outcome of its long-term goals.
Government reforms and regulation alone are patently unequal to meeting this critical challenge, and if the SMIEIS programme is any indication, a lot depends on innovations that are eventually driven from within Nigeria's banking sector.
Source...