CENTRAL BANK OF NIGERIA 1 THE GLOBAL ECONOMIC CRISIS AND THE NIGERIAN FINANCIAL SYSTEM: THE WAY FORWARD BY CHARLES MORDI DIRECTOR, RESEARCH DEPARTMENT.

CENTRAL BANK OF NIGERIACENTRAL BANK OF NIGERIA 11

THE GLOBAL ECONOMIC CRISIS AND THE GLOBAL ECONOMIC CRISIS AND THE NIGERIAN FINANCIAL SYSTEM: THE NIGERIAN FINANCIAL SYSTEM:

THE WAY FORWARDTHE WAY FORWARD

BYBY

CHARLES MORDICHARLES MORDIDIRECTOR, RESEARCH DEPARTMENTDIRECTOR, RESEARCH DEPARTMENT

BEING A PAPER DELIVERED AT THE 14BEING A PAPER DELIVERED AT THE 14THTH SEMINAR FOR FINANCE SEMINAR FOR FINANCE CORRESPONDENTS AND BUSINESS EDITORS, AT BENUE HOTELS, CORRESPONDENTS AND BUSINESS EDITORS, AT BENUE HOTELS,

MAKURDI, JULY 16, 2009MAKURDI, JULY 16, 2009


OUTLINEOUTLINE

1.01.0 IntroductionIntroduction

2.02.0 Stylized Facts about the Nigeria Stylized Facts about the Nigeria EconomyEconomy

3.03.0 Impacts of the Financial crisis on the Impacts of the Financial crisis on the

Nigerian Nigerian Financial SystemFinancial System

4.04.0 Nigeria’s Response to Stabilize the Financial Nigeria’s Response to Stabilize the Financial SectorSector

5.0 5.0 Way ForwardWay Forward


1.0 Introduction1.0 Introduction

Conceptual Definition of Financial Crisis:Conceptual Definition of Financial Crisis:– A situation where financial institutions or assets suddenly A situation where financial institutions or assets suddenly

lose a large part of their value.lose a large part of their value.

– Types of Financial CrisisTypes of Financial CrisisBanking crisesBanking crises

– Bank run (one Bank)Bank run (one Bank)– Systemic banking crisis (bank run on several banks)Systemic banking crisis (bank run on several banks)– Credit crunch (insufficient funds for borrowing)Credit crunch (insufficient funds for borrowing)

Speculative Bubble and CrashesSpeculative Bubble and Crashes– Bubble (present price has higher value than future income)Bubble (present price has higher value than future income)– Crashes (when there are many sellers and no buyers)Crashes (when there are many sellers and no buyers)


Introduction……Contd.Introduction……Contd.International Financial CrisisInternational Financial Crisis

Balance of payments or currency crisisBalance of payments or currency crisis

Sovereign Debt defaultSovereign Debt default

Sudden stop in capital flows and capital flight.Sudden stop in capital flows and capital flight.

Wider Economic Crisis. Wider Economic Crisis. Low/Negative GDP growthLow/Negative GDP growth

RecessionRecession

Depression-prolonged recessionDepression-prolonged recession


Introduction……ContdIntroduction……Contd Causes of Current Financial CrisisCauses of Current Financial Crisis

The genesis of the current financial crisis could be traced to the The genesis of the current financial crisis could be traced to the default on sub-prime mortgage loans in the United States (US).default on sub-prime mortgage loans in the United States (US).

In the pre-2007 era, the US government encouraged financial In the pre-2007 era, the US government encouraged financial institutions to lend to individuals that would not have otherwise institutions to lend to individuals that would not have otherwise qualified for housing loans. These loans were backed by the qualified for housing loans. These loans were backed by the federal government. federal government.

This resulted in cheap borrowing and an unprecedented boom in This resulted in cheap borrowing and an unprecedented boom in

the US housing marketthe US housing market. .



By 2005, 1 out of 5 mortgages were sub-prime lending in the US. The rates By 2005, 1 out of 5 mortgages were sub-prime lending in the US. The rates for the sub-prime were higher because they had Adjustable Rate for the sub-prime were higher because they had Adjustable Rate Mortgages (ARMs) that were fixed for two years; thereafter the rates were Mortgages (ARMs) that were fixed for two years; thereafter the rates were marked to the Fed interest rates which rose substantially.marked to the Fed interest rates which rose substantially.

Home loans granted to people with questionable ability to pay back i.e. Home loans granted to people with questionable ability to pay back i.e. people with no income, no job and no assets (NINJA) people with no income, no job and no assets (NINJA)

Weaknesses in the application of originate-to-distribute model, leading to Weaknesses in the application of originate-to-distribute model, leading to compromises in underwriting standardscompromises in underwriting standards

As interest rates on mortgage loans increased, the prices of houses fell, As interest rates on mortgage loans increased, the prices of houses fell, consequently the houses were valued less than the mortgage loans, thus consequently the houses were valued less than the mortgage loans, thus default rate on loans increased.default rate on loans increased.



The magnitude of the repossession that followed coupled with The magnitude of the repossession that followed coupled with the mortgage company’s inability to renegotiate loans led to the mortgage company’s inability to renegotiate loans led to the collapse of the government backed mortgagesthe collapse of the government backed mortgages

Owing to the wide spread defaults, house prices began to fall Owing to the wide spread defaults, house prices began to fall due to huge foreclosures.due to huge foreclosures.

Banks and financial institutions repackaged these debts with Banks and financial institutions repackaged these debts with other high risk debts and sold them to worldwide investors other high risk debts and sold them to worldwide investors creating financial instruments called Collateralized Debt creating financial instruments called Collateralized Debt Obligations (CDO)Obligations (CDO)



Financial derivatives called Mortgage-Backed Securities Financial derivatives called Mortgage-Backed Securities (MBS), which derive their value from mortgage loans spread (MBS), which derive their value from mortgage loans spread the risk to financial institutions and investors around the the risk to financial institutions and investors around the world. world.

Major Banks and financial institutions borrowed and invested Major Banks and financial institutions borrowed and invested heavily in MBS and reported losses of approximately US$435 heavily in MBS and reported losses of approximately US$435 billion as of July 17, 2008.billion as of July 17, 2008.



First stageFirst stage - - "liquidity constraints," leading to difficulties in "liquidity constraints," leading to difficulties in raising funds in the US. raising funds in the US.

Second stageSecond stage -"credit contraction." this exerted strong -"credit contraction." this exerted strong downward pressure on the economy. downward pressure on the economy.

Third stageThird stage - - financial contagion arising from inter- financial contagion arising from inter- linkages of the world financial system- linkages of the world financial system-

Economic Economic Recession Recession


Introduction……ContdIntroduction……Contd EffectsEffects

The stock markets capitalization recorded unprecedented The stock markets capitalization recorded unprecedented losses, as at end-December 2008.losses, as at end-December 2008.

– London 31.3% London 31.3% – New York 33.84% New York 33.84% – Frankfurt 40.4% Frankfurt 40.4% – Sydney 41.3%Sydney 41.3%– Tokyo 42.1%Tokyo 42.1%– Paris 42.7% Paris 42.7% – Hong Kong 48.3%Hong Kong 48.3%– Singapore 49.2% Singapore 49.2% – Mumbai 51.9% Mumbai 51.9% – Shanghai 65.2%Shanghai 65.2%– NigeriaNigeria 45.2% 45.2%


2.02.0 Stylized Facts about the Stylized Facts about the Nigeria Economy Nigeria Economy


Stylized Facts about the Nigeria Stylized Facts about the Nigeria EconomyEconomy

Economic growth averaged 6.3 per cent between 2006 and Economic growth averaged 6.3 per cent between 2006 and 2008, projected to fall in 20092008, projected to fall in 2009

Inflation rate fell from 8.5 per cent in 2006 to 6.6 per cent Inflation rate fell from 8.5 per cent in 2006 to 6.6 per cent in 2007, it however increased to 15.1 in 2008 due to in 2007, it however increased to 15.1 in 2008 due to worldwide high food and energy pricesworldwide high food and energy prices

Reduced Foreign exchange inflow due to drop in the price Reduced Foreign exchange inflow due to drop in the price and volume of crude oil soldand volume of crude oil sold

Economy dependent on a crude oil as a major source of Economy dependent on a crude oil as a major source of foreign exchangeforeign exchange– Crude oil accounts for

about 90% foreign exchange earned65% of government revenue



Import dependent Import dependent

A Emerging financial sectorA Emerging financial sector– 2 domestic banks among the top 500 banks in the world2 domestic banks among the top 500 banks in the world

Susceptible to oil shocks– International crude prices

Low non-oil exports

Decrease in volume of oil exports mainly due to restiveness at the Niger Delta



Poor and dilapidating infrastructure

Low level of financial sector integration into the global economy

Central Bank of Nigeria remain the major source of FX in the official market

Wide margin between lending and saving rates

Exchange rate Depreciation


Overview of the Nigeria Economy Cont.Overview of the Nigeria Economy Cont.Macro-Economic Indicators Macro-Economic Indicators

IndicatorIndicator 20062006 20072007 20082008GDP Growth Rate (%)GDP Growth Rate (%) 6.06.0 6.56.5 6.46.4Inflation Rate (%)Inflation Rate (%) 8.58.5 6.66.6 15.115.1MM2 2 Growth Rate (%)Growth Rate (%) 30.630.6 44.244.2 58.058.0Current Account BalanceCurrent Account Balance 18.518.5 11.811.8 17.517.5FDI FDI 13.913.9 5.65.6 5.85.8

External Reserves External Reserves (US$ billion)(US$ billion)

42.342.3 51.351.3 53.053.0

Exchange Rate End-PeriodExchange Rate End-Period 128.2128.2 117.9117.9 132.5132.5

External Debt (US$ billion)External Debt (US$ billion)3.53.5 3.63.6 3.73.7


3.0 Impact of the Crisis on the 3.0 Impact of the Crisis on the Financial Sector of the Financial Sector of the

Nigerian EconomyNigerian Economy


Nigeria Financial Market Comprises:Nigeria Financial Market Comprises:

Financial Sector RegulatorsFinancial Sector Regulators– The Central Bank of NigeriaThe Central Bank of Nigeria– The Nigerian Deposit Insurance Corporation (NDIC)The Nigerian Deposit Insurance Corporation (NDIC)– The Security and Exchange Commission (SEC)The Security and Exchange Commission (SEC)– The National Pension Commission (PENCOM)The National Pension Commission (PENCOM)– The National insurance Commission (NAICOM)The National insurance Commission (NAICOM)– The Federal Mortgage bankThe Federal Mortgage bank

Deposit Money BanksDeposit Money BanksDiscount HousesDiscount HousesMicrofinance BanksMicrofinance BanksFinance CompaniesFinance CompaniesBureaux de changeBureaux de changeNigeria Stock Exchange (NSE)Nigeria Stock Exchange (NSE)Primary Mortgage InstitutionsPrimary Mortgage InstitutionsDevelopment Finance Institutions Development Finance Institutions Insurance CompaniesInsurance Companies


Impact of the Crisis on the Financial Sector of Impact of the Crisis on the Financial Sector of the Nigerian Economythe Nigerian Economy

The Capital MarketThe Capital Market

Capital market downturn caused by foreign investors’ Capital market downturn caused by foreign investors’ divestment and panic sales by local investorsdivestment and panic sales by local investors

Stock market crash of All-Share Index (ASI) and Market Stock market crash of All-Share Index (ASI) and Market Capitalization (MC) by 67.2 and 61.7 per cent, respectively, Capitalization (MC) by 67.2 and 61.7 per cent, respectively, between April 2008 and March 2009between April 2008 and March 2009

Reduced capitalization of companies predisposing them to Reduced capitalization of companies predisposing them to takeoverstakeovers

Weak source of financing to listed companiesWeak source of financing to listed companies


Banking SectorBanking SectorLimited foreign trade finances for banks drying-up of credit lines for Limited foreign trade finances for banks drying-up of credit lines for some bankssome banks

Liquidity & Credit crunch in the domestic economyLiquidity & Credit crunch in the domestic economy

Tightness in the balance sheet of banks and counter party risks vis-à-vis Tightness in the balance sheet of banks and counter party risks vis-à-vis external reservesexternal reserves

Higher provision for loss by banks could reduce profitability and lending.Higher provision for loss by banks could reduce profitability and lending.

Increase unemployment rate as a result of low profitIncrease unemployment rate as a result of low profit


Banking SectorBanking Sector

Exchange rate exposure

Counterparty exposure

Interest rate spread on the increase – Prime lending – 16.08% end 2008

– 18.95% Feb 2009


MoneyMoney Market MarketIncrease in Interest RateIncrease in Interest Rate– As funds dry up, Liquidity squeeze sets in, the financial market, interest rates As funds dry up, Liquidity squeeze sets in, the financial market, interest rates

resets higher in the money market:resets higher in the money market:

– Higher interest on deposits as investors move from the stock Higher interest on deposits as investors move from the stock marketmarket

– Higher lending rates to cover risk in economic downturnHigher lending rates to cover risk in economic downturn

Increased demand pressure in the foreign exchange marketIncreased demand pressure in the foreign exchange market

Depreciation of the Foreign Exchange rateDepreciation of the Foreign Exchange rate– Exchange rate depreciated from N117 to N135 per US dollar as at end of Dec 2008Exchange rate depreciated from N117 to N135 per US dollar as at end of Dec 2008

Wide supply and Demand gapsWide supply and Demand gaps

High outflows and low inflows of foreign exchange into the economyHigh outflows and low inflows of foreign exchange into the economy



Exchange Rate (2001-2008)Exchange Rate (2001-2008)

End-Period Exchange Rate (2001-20091)

100.0

110.0

120.0

130.0

140.0

150.0

2001

2002

2003

2004

2005

2006

2007

2008

2009

May

Years

(US

$/N

) R

ate

N121/$

N146/$


Bond MarketBond Market

Increased preference to use bonds for Increased preference to use bonds for fund raisingfund raising

Increase patronage in fixed income Increase patronage in fixed income securities by investorssecurities by investors

Higher rates on bondsHigher rates on bonds


4.04.0 Nigeria’s Response to Nigeria’s Response to Stabilize the Financial Sector Stabilize the Financial Sector


Responses by the Monetary AuthorityResponses by the Monetary Authority

Reduce MPR by 50.0 basis points from 10.25 to 9.75 per cent Reduce MPR by 50.0 basis points from 10.25 to 9.75 per cent and later to 8.0 per centand later to 8.0 per cent

Reduce CRR from 4.0 to 2.0 per cent and liquidity ratio from Reduce CRR from 4.0 to 2.0 per cent and liquidity ratio from 40.0 to 30.0 per cent currently 25 per cent40.0 to 30.0 per cent currently 25 per cent

Expanded discount window facility from overnight to 360 Expanded discount window facility from overnight to 360 days, interest rate not exceeding 500 basis point above the days, interest rate not exceeding 500 basis point above the MPRMPR

Buying and selling of securities through the two-way quote by Buying and selling of securities through the two-way quote by the CBNthe CBN


Aggressive mop up suspended as monetary authority embraced relaxed Aggressive mop up suspended as monetary authority embraced relaxed monetary policy.monetary policy.

Adoption of a +or -3 per cent band for exchange rate movementAdoption of a +or -3 per cent band for exchange rate movement

Reduced banks’ foreign exchange net open position from 20.0 to 10.0 per Reduced banks’ foreign exchange net open position from 20.0 to 10.0 per and later to 1.0 per cent of shareholders’ fundsand later to 1.0 per cent of shareholders’ funds

Reintroduction of the Retail Dutch Auction System (RDAS)Reintroduction of the Retail Dutch Auction System (RDAS)

CBN suspended daily inter-bank foreign exchange market to ward off CBN suspended daily inter-bank foreign exchange market to ward off speculative attacks on the domestic currency speculative attacks on the domestic currency

Responses by the Monetary AuthorityResponses by the Monetary Authority


Responses the Security and Exchange Responses the Security and Exchange Rate Commission.Rate Commission.

Five market makers to provide continuous liquidity and stabilize stock Five market makers to provide continuous liquidity and stabilize stock prices, prices,

Strict enforcement of listing requirements with zero tolerance for Strict enforcement of listing requirements with zero tolerance for infractionsinfractions

Downward movement of share prices pegged at 1%, upward movement Downward movement of share prices pegged at 1%, upward movement remains at before it was restored to 5% either wayremains at before it was restored to 5% either way

Recapitalizations of security companiesRecapitalizations of security companies

Reduction in transaction feesReduction in transaction fees

De-listed moribund companies; & released rules on share buy-back with De-listed moribund companies; & released rules on share buy-back with limit of 15.0% limit of 15.0%


Responses by the Federal GovernmentResponses by the Federal Government

A Presidential Advisory Team on capital market was set up to A Presidential Advisory Team on capital market was set up to reverse the declining fortunes of the Nigerian capital marketreverse the declining fortunes of the Nigerian capital market

2009 Budget Review:2009 Budget Review:– Oil price benchmark reduced from US$59.00 to US$45.00 per barrelOil price benchmark reduced from US$59.00 to US$45.00 per barrel

– Allocation to state governments reviewedAllocation to state governments reviewed

– Projects prioritizedProjects prioritized

Economic Management Team mandated to come up with Economic Management Team mandated to come up with measures to curb the contagion effect of the global financial measures to curb the contagion effect of the global financial meltdown on the domestic economymeltdown on the domestic economy


5.05.0 The Way ForwardThe Way Forward


The Way ForwardThe Way Forward

Priority areas for domestic financial Priority areas for domestic financial institutionsinstitutions– Ensure access to liquidityEnsure access to liquidity

– Recapitalizing weak but viable institutionsRecapitalizing weak but viable institutionsAssessment of the quality of assets and robustness of the funding, Assessment of the quality of assets and robustness of the funding,

Funding may be from government and private sourcesFunding may be from government and private sources

Establishment of viable business plan and risk management processEstablishment of viable business plan and risk management process– Help to reduce uncertainty and public skepticismHelp to reduce uncertainty and public skepticism

– Resolving failed institutionsResolving failed institutionsOrderly closure or mergersOrderly closure or mergers

– Identifying and dealing with distressed assets Identifying and dealing with distressed assets Establishment of a standardized methodology for the valuation of Establishment of a standardized methodology for the valuation of illiquid securitized credit instrumentsilliquid securitized credit instruments


Way ForwardWay Forward

Tightening of regulation and supervisionTightening of regulation and supervision– Keep vigilance on early warning signals through vigorous examinationsKeep vigilance on early warning signals through vigorous examinations– Encourage banks to strengthen and reduce bank specific contingency plansEncourage banks to strengthen and reduce bank specific contingency plans– Greater coordination between the regulatory and supervisory agenciesGreater coordination between the regulatory and supervisory agencies– Appropriate corrective actionsAppropriate corrective actions

Collective action required to reduce overall risk in the banking Collective action required to reduce overall risk in the banking system.system.– Greater domestic cooperation between regulatorsGreater domestic cooperation between regulators– Greater international cooperation required to avoid the exacerbating cross-Greater international cooperation required to avoid the exacerbating cross-

border strainsborder strains

Need for financial institutions to embrace transparency on Need for financial institutions to embrace transparency on activities and productsactivities and products– Full and transparent disclosure of impairment in bank’s balance sheetFull and transparent disclosure of impairment in bank’s balance sheet


Way ForwardWay Forward

Adoption of the International Financial Reporting Adoption of the International Financial Reporting

Standards (IFRSStandards (IFRS))

Review of all relevant laws relating to the financial sector to strengthen regulatory capacity

Greater emphasis on e-FASS as a tool for banks’ returns analysis for speedy identification of early warning signals


Way Forward Cont.Way Forward Cont.

Capacity Building for Financial System staff professionalism (Knowledge, skills)

Greater emphasis on enforcement of Code of Corporate Greater emphasis on enforcement of Code of Corporate GovernanceGovernance

Introduction of Asset Management Companies (bad banks)Introduction of Asset Management Companies (bad banks)– To clean out the balance sheet of financial institutionsTo clean out the balance sheet of financial institutions

Restoring confidence based on clarity, consistency and reliability of policy responses


I Thank You

All ForListening!

CENTRAL BANK OF NIGERIA 1 THE GLOBAL ECONOMIC CRISIS AND THE NIGERIAN FINANCIAL SYSTEM: THE WAY FORWARD BY CHARLES MORDI DIRECTOR, RESEARCH DEPARTMENT.

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