Author Topic: The financial sector and the economic development challenges  (Read 2431 times)

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The financial sector and the economic development challenges
By Erastus Akingbola

Dr. Erastus AkingbolaI have been advised to centre my talk around banking, insurance and capital market. Therefore I shall be talking on the CBN-driven financial sector development agenda, which has been encapsulated in its Financial System Strategy (FSS) 2020.

I have been told that my speech will only be a discussion guide as this session is purely interactive. I was also told to time myself to just 20 minutes.

Financial System strategy (FSS) 2020
The FSS 2020 is a strategic plan by the Central Bank of Nigeria which is expected to synchronise and integrate with the ongoing economic reforms and harness the gains to ensure that Nigeria becomes Africa?s financial hub and joins the league of top 20 world largest economies by 2020.

The goal of CBN is to position Nigeria as the safest and fastest growing financial system among emerging markets. The objectives of FSS 2020 include, but not limited to, the following:

? Developing financial market structures and strategies that align fully with the strategic intent of the overall economic system;

?Developing a partnership with all key stakeholders for the implementation of the strategy with performance management framework; and

?Establishing a communication and collaboration environment for the development and delivery of the strategy

The CBN is working with the government and private sector in a deliberate and concerted manner to ensure that all elements of the vision are achieved. The CBN is adopting a three-pronged strategy towards achieving the FSS 2020 vision, which are to:

?Strengthen domestic financial markets;

?Enhance integration with external financial markets; and

?Build international financial centre.

The FSS 2020 strategy has the financial sector as its bedrock. The strategy is aimed at enthroning a robust and integrated financial system which will in turn become the catalyst for the ultimate emergence of Nigeria as an international financial centre. The various sectors of the financial market, such as trade finance, real sector and SME finance, mortgage finance, capital market, insurance and foreign exchange market are expected to be the drivers of the evolution of Nigeria into international financial centre.

Some notable progress
It is very easy to see some measurable progress in the strategic agenda of the financial system reforms. These include the following:

?Nigeria is now rated BB- by Standard & Poor?s and BB- by Fitch as a result of increasing confidence of foreign investors in Nigerian banks;

?Many Nigerian banks are now attracting foreign partnerships for Foreign Direct Investment flows to other industries;

?Nigerian industries now have access to more foreign credit facilities through large inflows of confirming lines to banks;

?There has also been an increasing wave of portfolio investment inflows through the banks into the economy;

?The stock market has been deepened as a result of the activities of banks in the primary market;

?Interest rates have gone down considerably, meaning that a lot more money is now available to the economy at cheaper cost; and

?Exchange rate stability have also impacted positively on the inflation rate.

The economy
The Nigerian economy has been tagged sub-Saharan Africa?s locomotive. This description, no doubt, is apt considering that over the past eight years, the economy has witnessed some remarkable growth. From a paltry 0.40per cent in 1999, real GDP growth rate today by official figures is 6.6per cent (6.3per cent on 5-year compounded annual growth). Key drivers of this growth have been the rising oil prices, which recently hit an all-time high of $135; institution of democracy leading to a stable polity; reforms across major sectors, which opened up the economy for foreign participation; transparent and better fiscal management by the government; and the reduction in the country?s debt burden (from $37 billion in 2005 to $4 billion today). The effect of the reforms is that the country now attracts positive ratings from international rating agencies. The confidence this has brought in the economy is reflected in the massive growth witnessed in major industries in the country partly driven by foreign funds.

The banking industry
As I noted earlier, the banking sector has witnessed a period of unprecedented growth in the last three years, following consolidation in the sector. It contributes 10per cent to the GDP and represents 60per cent of the stock market capitalisation.

In specific terms, these are some of the measurable progress that resulted from the banking industry reforms:

* While there was a reduction in the number of banks from 89 to 25, the number of bank branches rose by 33per cent from 3382 in 2004 to 4500 in 2007;

* Total asset base of banks rose by 104per cent from N3.21 trillion in 2004 to N6.56 trillion by mid 2007;

* Capital and reserves rose by 192per cent from N327 billion to N957 billion;

* Capital adequacy ratio rose by 42.6 percentage points from 15.18 per cent to 21.6per cent; and

* Ratio of non-performing loans to total loans improved massively by 51.3 percentage point from 19.5per cent to 9.5per cent.

We are still making progress. The demand for credit will grow as new businesses open and expansion of infrastructure continues. The sector will also benefit from the growth of the middle class and the underserved Nigerian market.

However, we are still in the morning of the creation day. We still need to reach several milestones before 2020 and these include, but not limited to, the following. Convertibility of the naira, at least at the regional level; effective channelling of capital flows to priority sectors; consolidating supervision of the financial system; adequate supply of experienced and qualified manpower; efficient and sound corporate governance and risk management framework; single digit interest rate; underdeveloped mortgage finance market; improved mortgage regulatory environment and reforms; and a robust pension system.

The capital market
The Nigerian capital market reflects the strong GDP growth. Total market capitalisation has grown by over 4000per cent to N12 trillion in March 2008, up from N287 billion in August 1999. Among emerging markets, the Nigerian market remains one of the most viable in terms of returns on equity. Historically, the market has delivered 28per cent returns. It is expected to continue to achieve above-average growth rate in order to reach the 2020 targets.

However, we need a more robust regulatory environment, especially for primary market and Over The Counter (OTC) trades; stable secondary market environment to tame sharp swings and meltdowns; further deepening especially in the second-tier segment; and big ticket listings from upstream oil sector and utilities.

The insurance industry
The insurance industry has recently emerged from the similar recapitalisation and consolidation wave as in the banking industry. Except for a few black spots in the regulatory handlings, the insurance reform was equally successful.

The industry should however be bracing up for another round of capitalisation and consolidation as the experience in the banking industry has shown that until we are internationally competitive, the industry cannot sustain domestic economic growth targets. The recapitalised indigenous companies are not yet capable of taking full advantage of the available opportunities even in the domestic market where foreign operators continue to dominate. Low retention capacity is still a big challenge, especially in the re-insurance sub-sector.

In all, the opportunities for growth in Nigeria are still strong as underlying fundamentals driving the growth are still present. Most commentators have said that the opportunities for business look increasingly rosy in the country. The official economic outlook for the year is 7 per cent growth rate and 13 per cent in the next 12 years. International Monetary Fund (IMF) projected a 9 per cent growth. According to the fund, Nigeria and South Africa got close to 50 per cent of the $53 billion private equity and debt flows to sub-Saharan Africa in 2007. However, a high inflation rate (7.8 per cent by March 2008 ? Nigerian Bureau of Statistics) corruption, weak institutions, particularly the legal system, are likely to hinder growth.

Distinguished ladies and gentlemen, having tried to keep myself within the limited time allotted to me to speak, may I thank you for your kind attention.

Dr. Erastus B O Akingbola, delivered this lecture at The 2008 Financial Sector Evening Organised by The Institute of Directors on MAY 28, 2008 in Lagos


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