The Nigerian Financial System: Challenges and Prospects

By Adebola O. Ogutuga

Outline


Introduction Overview of the Nigerian Financial Sector Problems of the Nigerian Banks Banking Consolidation Outcome of the Banking Consolidation

Outline Contd.


Impact of the Banking consolidation Exercise

-- Impact on the Banking Sector -- Impact on International Portfolio Investment

Challenges Ahead Prospects of the Nigerian Financial sector Financial System Strategy (FSS) 2020

Introduction


The role of the financial sector is to mobilize and allocate resources to investment ventures It moves scarce resources form those who save to those who borrow This is required to spur economic growth and development. An efficient financial sector is needed for longterm economic growth and poverty alleviation in developing countries.

Overview of the Nigerian Financial Sector

 

The Nigerian Financial sector is one of the largest in sub-Saharan Africa It consists of a diverse array of banks and non-banking financial institution


-- Nigerian Deposit Insurance Corporation (NDIC) -- Securities and Exchange Commission (SEC) -- National Insurance Commission (NAICOM) -- 25 Commercial banks --1000 other financial institutions which include community banks, primary mortgage institutions and bureau de change,

Overview of the Nigerian Financial Sector Contd.



There also exist rudimentary money and capital markets The Capital market has witnessed unprecedented growth in the recent past Over all assessment of the sector is that its growth in its role and operations, however, has not been a major force in propelling economic growth It needs to improve on its intermediation role to effectively support the private sector.

Overview of the Nigerian Financial Sector Contd.



The system is undergoing major reform Banking sector consolidation is one of the major policies of the reform The reform process is to have a positive impact on the financial sector and on economic growth of the country

Problems of the Banks Before the Banking Consolidation



There were 89 commercial banks with 10 of them controlling approximately 50% of total industry assets/liabilities Most have a capital base of less than $100 million, thus, they were engaging in self surviving policies The banks sort deposits from government and high net worth depositors and developed apathy towards small savers

Problems of the Banks Before the Banking Consolidation



Since government deposits accounted on average for about 20% of the bank deposits, the resource base of the banks were weak and volatile due to swings in government revenue The implication is that access to cheap and reliable source of credit at affordable rate is scarce Banking consolidation was to tackle the challenges of the banks in view of revitalizing the private sector

The Banking Consolidation Exercise



The case for Banking consolidation was initiated under the premise that a strong and viable banking system is good for economic growth The consolidation exercise was to position Nigerian banks as an active player in the global financial market and meet developmental needs at home.

The Banking Consolidation Exercise Contd.



The broad objectives were:

1)

Develop a banking sector that could effectively support real sector growth in the economy

2) 3) 4)


Position Nigeria as Africas Financial center Facilitate evolution of a strong and safe banking system Improve transparency and accountability in the sector

These objectives were to be achieved through recapitalization, stricter enforcement of corporate governance principles, zero tolerance for misreporting and infractions

Impact of the Banking Consolidation Exercise



Impact of the Banking Sector -- Stronger and more efficient banks -- Introduction of consumer credit facility to the public -- increased branch network of banks -- Increased credit to the private sector -- Adoption of international banking standard, e.g. Online Banking, ATMs.

Impact of the Banking Consolidation Exercise Contd.



Impact on International Portfolio Investment

-- A stronger banking system boosted confidence in the Nigerian Financial System. Increasing the level of international portfolio investment in the country -- Nigeria and South Africa are now looked on as the destination for foreign investment in the African continent

Challenges Ahead


While things seem to be moving in the right direction, the ability of the system to sustain the current tempo of activities will be based on the following:
-- Political stability of the country -- Development and training of the right mix of skilled human capital

Prospects for the Nigerian Financial System



The outlook is very bright and it promises to be among the 20 strongest economy by 2020. Increased level of foreign investment in longterm ventures in the country is an indication that the world is taking notice of Nigerias role in the global financial arena. There seems to be political stability and the government is committed to the reform process

Financial System Strategy (FSS) 2020



The initiative aims to elevate the Nigerian financial system to the most capitalized and most sophisticated financial hub in Africa To build the best pool of financial system workforce among the emerging markets by 2020 To develop a financial sector with the highest penetration and density in African and emerging economies

Conclusion


Based on all these developments, there is no doubt that the Nigerian financial sector is laying the necessary ground work to becoming a reckoning force in the global financial arena in no distance future.

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