By Babajide Komolafe
After the banking crisis triggered by the global financial crisis in 2008, and the meaures to arrest the effect of the crisis and sanitise the financial sector in 2009, year 2010 witnessed the roll-out of policy measures to consolidate on the gains of the previous year and also lay the foundation for a new banking era.
During the year, financial sector stability, inflation risk, reviving credit to private sector, stable exchange rate, enhanced risk management practices as well as need to improved corporate governance influenced monetary policy and other activities of the regulatory authorities. Quest for cheap funds via promotions and branch expansion, issuance of licenses for mobile payment and exit of three longest serving banks’chief executives were the most notable development in the banking industry.
Monetary policy during the year was largely influenced by two factors: Financial sector stability and Inflation risk. The need to stabilise the Financial sector vis-a-vis the impact of the global financicla crises and the intervention measures adopted in 2009, dominated monetary policy from January to September. The Central Bank of Nigeria (CBN) adopted accomodative monetary policy and hence maintained the Monetary Policy Rate (MPR) at 6.0 per cent till September.
The lower band of the MPR which is the interest rate on the standing deposit facility of the apex bank was maintained at 1.0 per cent. To complement this, the CBN extended the guarantee on interbank placement initially till December 31st 2010 and later to June 30th 2011.
But from ending of September, inflation risk dominated monetary policy. The apex bank resumed targetted liquidity mop-up through open market operations (OMO), raised the MPR by 25 basis points, and adjusted the upper and lower band of the MPR to 200 basis points above and 300 basis points below the MPR for the Standing Lending Facility and Standing Deposit, respectively. In November, it further reduced the lower band to 200 basis points and hence raised the interest rate on the standing deposit to 4.25 per cent.
Inter Bank Interest rate
Cost of funds in the interbank money market reflected the two regimes of monetary policy stance during the year. During the regime of cheap accommodative monetary policy (cheap money) i.e. from January to September, cost of funds was relative stable. But cost of funds rose sharply in October following the change to monetary tightening by the apex bank.
Consequently average interest Average interest rate on Call, Seven Days and 30 Days lending rose from 2.92, 4.91 and 8.38 per cent respectively in the first nine months to 7.62, 8.74 and 10.77 per cent in the last quarter of the year.
Exchange rates were largely stable during the year courtesy of the apex bank stance to keep the official exchange rate at N150 per dollar with a view to defend the naira. As a result the official exchange rate, the interbank rate and the parallel market rate remained within the -/+3 % band during the year except for December. However due to demand pressure, exchange rate peaked in September and December.
In September, official rate closed at N149.95 per dollar, Interbank at N154.54 per dollar, and parallel market at N155.5 per dollar. In December, official rate closed at N149.17, Interbank at N154.81 and parallel market at N157 per dollar.
Intervention to Revival Credit to Private Sector
One of the fallouts of the banking crisis and the intervention of the CBN was a sharp decline in credit to the private sector. This persisted till the first quarter of the year. As at end of February, the annualized growth rate of private sector credit was still negative at -16.20 per cent, and significantly below the provisional benchmark of 31.54 per cent, indicating that the private sector particularly, small and medium enterprises, were being starved of the much-needed credit.
Worried by this trend, the MPC decided to rollout a N500 billion intervention fund to jump start credit to the real sector. Consequently the CBN provided N300 billion facility for investment in debentures to be issued by the Bank of Industry (BOI for investment in power and aviation projects. The funds are to be channelled through the BOI for on-lending to the Deposit Money Banks at a maximum interest rate of 1.0 per cent for disbursement at concessionary interest rate of not more than 7.0 per cent and a tenor of 10 – 15 years. To compliment this and facilitate access to credit by SMEs in the apex bank rolled-out a N200 billion SME Credit Guarantee Fund.
New Prudential Guidelines: During the year, specifically in May, The apex bank issued new Prudential Guidelines aimed at enhancing risk management practices and strengthen corporate governance in the industry.
Term Limit for Non-E.Ds and External Auditors: To compliment the term limit imposed on banks’ chief executives introduced in 2009, the apex bank introduced term limit for non-executive directors of banks and external auditors. As stipulated in the Code of Corporate Governance for banks, the apex bank imposed maximum of two term of two years each on non-executive directors, and imposed ten year service engagement limit on banks’ external auditors.
Exit of Banks’chief executives: In compliance with the two term of five years each limit imposed on banks’ chief executives, three chief executives retired in July. They were Mr. Tony Elumelu of UBA PLC, Mr. Jim Ovia of Zenith Bank PLC and Mr. Akinsola Akinfehinwa of Skye Bank PLC.
Asset Management Company of Nigeria (AMCON)
Seven years after it was initiated by the Soludo led CBN, the Asset Management Corporation of Nigeria (AMCON) took off during the year, following the passage of the enabling Act by the National Assembly and Assent by the President.
The company set up to acquire the bad debt of banks is expected to help inject the much needed liquidity into the banks and thereby facilitating resumption lending by banks. Realising the urgency of the operations of the company vis-a-vis expectation by financial sector operators, the board of the company at its first meeting issued the valuation criteria, considered fair by industry operators, for buying debt of banks.
Also the company will issue N3 trillion worth of bonds which would be exchanged for the bad debts. In the first phase, which has a deadline of December 30th 2010, the company will issue N1 trillion worth of bond, to purchase all margin loans and other non-performing loans of the rescued banks.
New banking model
During the year the CBN introduced a new banking model to replace the Universal Banking model. The new model categories banks into three namely regional, national and international banks with capital base of N10 billion, N25 billion and…. respectively. It also brings bank the commercial bank and merchant bank dichotomy. It also mandate banks to be stand alone businesses and banned from owning subsidiaries.
It however allowed banks to belong to a Holding Company which can own subsidiaries in other segments of the financial sectors. Although some banks have announced their decision with respect to the new model, most of them are still strategising to determine their status under the new dispensation.
Mobile Banking Licenses
In the last quarter of the year, the CBN issued mobile banking licenses to to six banks and 14 companies for provision of mobile money services The six banks are First Bank, UBA, GTBank, Equitorial Trust Bank, Stanbic IBTC and Ecobank. The fourteen companies include Corporati Services, Hendomac Limited, Vagatech Limited and Monitise. Others are Pagatech Fortis Bank, Mobinatrics, and Etholeum Networks.
Banks quest for cheap funds
To mitigate the impact of the global financial crises on the balance sheet and profitability, banks embarked on aggressive pursuit of cheap deposits through savings promotions. Consequently, the was preponderance of such promotions during the year.
Also, some banks especially Stanbic IBTC rolled new branches in a bid to increase market share of retail customers.
Banks return to Profitability
Finally, after a year of monumental and unprecedented lose, the industry returned to profitability in 2010 courtesy of write-back resulting from aggressive loan recovery efforts of the banks.