An Overview of Current Banking Sector Reforms and the Real Sector

of the Nigerian Economy

Cajetan M. Anyanwu

I. Introduction

A
n economy is usually compartmentalized into four distinct but related
sectors. These are the real, external, fiscal or government and financial
sectors. Real sector activities include agriculture, industry, building and
construction, and services. The sector is strategic for a variety of reasons. First, it
produces and distributes tangible goods and services required to satisfy
aggregate demand in the economy. Its performance is, therefore, a gauge or an
indirect measure of the standard of living of the people. Second, the
performance of the sector can be used to measure the effectiveness of
macroeconomic policies. Government policies can only be adjudged successful
if they impact positively on the production and distribution of goods and services
which raise the welfare of the citizenry. Third, a vibrant real sector, particularly the
agricultural and manufacturing activities, create more linkages in the economy
than any other sector and, thus, reduces the pressures on the external sector.
Fourth, the relevance of the real sector is also manifested in its capacity building
role as well as in its high employment and income generating potentials.

Economic reforms generally refer to the process of getting policy incentives right
and/or restructuring key implementation institutions. As part of economic reforms,
financial sector reforms focus mainly on restructuring financial sector institutions
and markets through various policy measures. As a component of the financial
sector, the reforms in the banking sector seeks to get the incentives right for the
sector to take the lead role in enhancing the intermediation role of the banks
and enable them contribute to economic growth.

As articulated by Omoruyi (1991), CBN (2004) and Balogun (2007), banking sector
reforms in Nigeria have been embarked upon to achieve the following
objectives, among others: market liberalization in order to promote efficiency in
resource allocation, expansion of the savings mobilization base, promotion of
investment and growth through market-based interest rates. Other objectives are:
improvement of the regulatory and surveillance framework, fostering healthy
competition in the provision of services and laying the basis for inflation control
and economic growth.


Mr. C. M. Anyanwu is Deputy Director and Head, Real Sector Division, Research Department, Central
Bank of Nigeria. The views expressed are those of the author and do not necessarily represent the
views of the CBN or its policies.

Central Bank of Nigeria Economic and Financial Review Volume 48/4 December 2010 31
32 Central Bank of Nigeria Economic and Financial Review December 2010

Five distinct phases of banking sector reforms are easily discernible in Nigeria. The
first occurred during 1986 to 1993, when the banking industry was deregulated in
order to allow for substantial private sector participation. Hitherto, the landscape
was dominated by banks which emerged from the indigenization programme of
the 1970s, which left the Federal and state governments with majority stakes. The
second was the re-regulation era of 1993-1998, following the deep financial
distress. The third phase was initiated in 1999 with the return of liberalization and
the adoption of the universal banking model. The fourth phase commenced in
2004 with banking sector consolidation as a major component and was meant to
correct the structural and operational weaknesses that constrained the banks
from efficiently playing the catalytic role of financial intermediation. Following
from the exercise, the aggregate capital of the consolidated banks rose by 439.4
per cent between 2003-2009, while deposit level rose by 241.8 per cent. However,
this was not reflected in the flow of credit to the real economy, as the growth rate
of credit fell during this period, while actual credit did not reflect the
proportionate contribution of the sector to the GDP.

The current and fifth phase, was triggered by the need to address the combined
effects of the global financial and economic crises, as well banks‘ huge
exposures to oil/gas and margin loans, which were largely non-performing;
corporate mis-governance and outright corruption, among operators in the
system. This round of reform, therefore, seeks to substantially improve the banking
infrastructure, strengthen the regulatory and supervisory framework, and address
the issue of impaired capital and provision of structured finance through various
initiatives, so as to provide cheap credit to the real sector, and financial
accommodation for small and medium-scale enterprises (SMEs).

It is against this background that this paper seeks to examine the developments
in the banking industry and the real sector of the Nigerian economy since the
fourth phase of the reforms which began in 2004. Specifically, the paper will
review the reform programms and how they have impacted on the flow of credit
to the real sector. With the realization that the sector is facing challenges well
beyond the realm of finance, other constraints would be identified and,
thereafter, policy interventions recommended with a view to making the banking
sector reforms more effective.

The rest of the paper is organized as follows. Section two provides the theoretical
underpinning in the relationship between the financial industry and the real
sector developments, while section three periscopes the banking sector reforms
since 2004. Section four reviews developments in the real sector since 2005, and
Anyanwu: Overview of Current Banking Sector Reforms and the Real Sector in Nigeria 33

section five identifies some of the binding constraints that would require policy
intervention. Section six concludes the paper.

II. Financial Sector Developments and Economic Growth Nexus

II.1 Theoretical Underpinning
There is ample theoretical evidence reinforced by a number of empirical works,
which supports a positive relationship between financial sector development and
growth. Principally, the financial system functions to mobilize and channel
financial resources through institutions or intermediaries from surplus economic
units to deficit units.

A well-developed financial system enhances investment by identifying and

funding good business opportunities, mobilizing savings, enabling trading,
hedging and diversifying risk, and facilitating the exchange of goods and
services. These functions result in a more efficient allocation of resources, rapid
accumulation of physical and human capital, and faster technological progress,
which in turn result in economic growth and, by extension, the development of
the real sector. An efficient financial system is one of the foundations for building
sustained economic growth and an open, vibrant economic system. In the early
neoclassical growth literature, financial services were thought to play only a
passive role of merely channeling household savings to investors. However, many
later studies have been associated with more positive roles for the financial
sector.

Schumpeter (1912) in his theoretical link between financial development and

economic growth opines that the services provided by financial intermediaries
are the essential drivers for innovation and growth. His argument was later
formalized by McKinnon (1973) and Shaw (1973), and popularized by Fry (1988)
and Pagano (1993). The McKinnon-Shaw paradigm postulates that government
restrictions on the operations of the financial system, such as interest rate ceiling,
direct credit programs and high reserve requirements may hinder financial
deepening, and this may in turn affect the quality and quantity of investments
and, hence, have a significant negative impact on economic growth. Therefore,
the McKinnon-Shaw financial repression paradigm implies that a poorly
functioning financial system may retard economic growth.

The endogenous growth literature also supports this argument that financial
development has a positive impact on the steady-state growth (Bencivenga and
Smith, 1991; Bencivenga, et al., 1995; and Greenwood and Jovanovic, 1990,
among others). Well-functioning financial systems are able to mobilize household
34 Central Bank of Nigeria Economic and Financial Review December 2010

savings, allocate resources efficiently, diversify risks, induce liquidity, reduce

information and transaction costs and provide an alternative to raising funds
through individual savings and retained earnings. These functions suggest that
financial development has a positive impact on growth. McKinnon (1973) and
Shaw (1973) are the most influential works that underpin this hypothesis and
suggest that better functioning financial systems lead to more robust economic
growth. McKinnon (1973) considered an outside money model in which all firms
are confined to self-finance. Hence, physical capital has a lumpy nature where
firms must accumulate sufficient savings in the form of monetary assets to finance
the investment projects. In this sense, money and capital are viewed as
complementary assets where money serves as the channel for capital formation
‗complementarity hypothesis‘.

The ‗debt-intermediation‘ view proposed by Shaw (1973) is based on an inside

money model. He argues that high interest rates are essential in attracting more
savings. With more supply of credit, financial intermediaries promote investment
and raise output growth through borrowing and lending. Also, King and Levine
(1993a) find that higher levels of financial development are associated with faster
economic growth and conclude that finance seems to lead growth. Neusser and
Kugler (1998) and Choe and Moosa (1999) reach the same conclusion.

More specifically, the roles of stock markets and banks have been extensively
discussed in both theoretical and empirical studies (See Levine (2003) for a survey
of the literature). The key findings of studies are that countries with well-
developed financial institutions tend to grow faster; particularly the size of the
banking system and the liquidity of the stock markets tend to have strong positive
impact on economic growth.

II.2 Empirical Literature

A substantial body of empirical work on finance and growth assesses the impact
of the operations of the financial system on economic growth, whether the
impact is economically large, and whether certain components of the financial
system, e.g. banks and stock markets, play a particularly important role in
fostering growth at certain stages of economic development.

Patrick (1966), in his work postulates a bi-directional relationship between

financial development and economic growth. Ever since, a large empirical
literature has emerged to test this hypothesis (see Levine, 1997 for survey). Two
trends in this respect have emerged in the literature. The first tests the relationship
between economic growth and financial development, adopting a single
Anyanwu: Overview of Current Banking Sector Reforms and the Real Sector in Nigeria 35

measure of financial development and testing the hypothesis on a number of

countries using either cross-section or panel data techniques (Erdal, et. al, 2007
for survey). The second trend examined the hypothesis for a particular country
using time series data/technique, as done by Murinde and Eng (1994) for
Singapore; Lyons and Murinde (1994) for Ghana; Odedokun (1998) for Nigeria;
Agung and Ford (1998) for Indonesia; Wood (1993) for Barbados, and James and
Warwick (2005) for Malaysia.

Other works by King and Levine (1993a, 1993b); Demetriades and Hussein (1996)
and DemirgüçKunt and Maksimovic (1998), structured on the works of Bagehot
(1873), Schumpeter (1912), Gurley and Shaw (1955), Goldsmith (1969), and
McKinnon (1973), employed different econometric methodologies and data sets
to assess the role of the financial sector in stimulating economic growth.

The mounting empirical research, using different statistical methods and data
have produced remarkable results. First, the results have shown that countries with
well-developed financial systems tend to grow faster, especially those with (i)
large, privately owned banks that channel credit to the private sector, and (ii)
liquid stock exchanges. The level of banking development and stock market
liquidity exert positive influence on economic growth. Second, well-functioning
financial systems ease external financing constraints that obstruct firms and
industrial expansion. Thus, access to external capital is one channel through
which financial development matters for growth because it allows financially-
constrained firms to expand. The endogenous growth literature supports the fact
that financial development positively affects economic growth in the steady
state (Greenwood and Jovanovic (1990); Bencivenga and Smith (1991); Roubini
and Sala-I-Martin (1992); Pagano (1993); King and Levine (1993b); Berthelemy
and Varoudakis (1996); and Greenwood and Smith (1997)).

Over the last two decades, the literature has shown a growing body of new
empirical approaches to treating the causality pattern based on time series
techniques Gupta (1984); Jung (1986); Murinde and Eng (1994); Demetriades and
Hussein (1996); Arestis and Demetriades (1997); and Kul and Khan (1999). In these
studies, the focus is on the long-run relationship between financial sector
development and real sector growth, using frameworks of bivariate and
multivariate vector auto-regressive (VAR) models for different country samples.
The outcome was that the causality pattern varies across countries according to
the success of financial liberalization policies implemented in each country and
the level of development of the financial sector.
36 Central Bank of Nigeria Economic and Financial Review December 2010

The Nigerian economy has from the mid-1980s been moving towards increased
liberalization, greater openness to world trade and higher degree of financial
integration. This policy stance and other reform measures, particularly the
banking sector consolidation exercise of 2004/05 have led to enormous build-up
of capital from both domestic and cross-border sources. Nigeria is, therefore, a
veritable case for investigating the link between finance and growth for at least
two reasons. First, there has been considerable increase in the activities of the
financial markets prior to the recent global financial crisis, particularly with regard
to private sector credit and stock market capitalization. Credit to the private
sector, stock market capitalization and the all-share value index were all on the
upswing up until the onset of the crisis. Second, Nigeria has an interesting history
of financial sector reforms. However, this proposal is not an agenda for this
paper, given that this is only an overview of developments in the two sectors –
financial and real.

III. Recent Banking Sector Reforms in Nigeria

III.1 Bank Consolidation 2004-2009
There has been a wave of restructuring and consolidation of the banking sector
around the globe, particularly in the developed and the emerging market
economies. This has been driven mainly by globalization, structural and
technological changes, as well as the integration of financial markets. Banking
sector consolidation has become prominent in most of the emerging markets, as
financial institutions strive to become more competitive and resilient to shocks. It is
also promoted by the desire to reposition corporate operations to cope with the
challenges of an increasingly globalized banking system. It was based on the
above premise that banking sector consolidation, through mergers and
acquisitions, was embarked upon in Nigeria from 2004.

The Bank consolidation was focused on further liberalization of banking business;

ensuring competition and safety of the system; and proactively positioning the
industry to perform the role of intermediation and playing a catalytic role in
economic development. The reform was designed to ensure a diversified, strong
and reliable banking sector which will ensure the safety of depositors‘ money,
play active developmental roles in the Nigerian economy, and be competent
and competitive players in the African, regional and global financial system.

Following the banking sector consolidation, notable achievements were

recorded in the financial sector among which was the emergence of 25 well-
capitalized banks from the former 89 banks. The banks raised N406.4 billion from
the capital market. In addition, the process attracted foreign capital inflow of
Anyanwu: Overview of Current Banking Sector Reforms and the Real Sector in Nigeria 37

US$652 million and £162,000 pound sterling. The liquidity engendered by the inflow
of funds into the banks induced interest rate to fall significantly, while an
unprecedented 30.8 per cent increase was recorded in lending to the real sector
in 2005.

With a higher single obligor limit, Nigerian banks now had a greater potential to
finance large value transactions. More banks now have access to credit from
foreign banks, while the capital market deepened and consciousness about it
increased significantly among the populace. The market became active and
total market capitalization increased markedly. Ownership structure has been
positively affected such that the problems of insider abuse and corporate
governance have been reduced. Depositor confidence has improved due to
―safety in bigness‖ perception by depositors. With virtually all banks now publicly
quoted, there is wider regulatory oversight. With the inclusion of the Securities and
Exchange Commission and the Nigerian Stock Exchange in the regulatory team,
resources have been committed to the regulation of few and more stable banks
in an efficient and effective manner. The banks have begun to enjoy economies
of scale and, consequently, are passing on the benefit in the form of reduced
cost of banking transactions. In general, the reform efforts had engendered
stable macroeconomic environment evidenced by low inflation and relative
stable exchange rates.

However, not long after, the global financial and economic crises came in 2007,
leading to the collapse of many financial institutions across the globe. The
financial crisis reduced the gains made in the Nigerian financial services sector
from the banking sector consolidation exercise. The experience in the industry
however, followed global trends. Following from the impact of the global
financial crises, a section of the banking industry was badly affected as some
banks were in grave condition and faced liquidity problems, owing to their
significant exposure to the capital market in the form of margin trading loans,
which stood at about N900.0 billion as at end-December 2008. The amount
represented about 12.0 per cent of the aggregate credit of the industry or 31.9
per cent of shareholders‘ funds. Furthermore, in the wake of the high oil prices, a
section of the industry that was excessively exposed to the oil and gas sector was
also badly affected. As at end-December 2008, banks‘ total exposure to the oil
industry stood at over N754.0 billion, representing over 10.0 per cent of the
industry total and over 27.0 per cent of the shareholders‘ funds.

The excessive exposures resulted in serious liquidity problems exhibited by some of

the banks towards the end of 2008. As part of its liquidity support, the CBN
38 Central Bank of Nigeria Economic and Financial Review December 2010

Discount Window was expanded in October 2008 to accommodate money

market instrument, such as Bankers‘ Acceptances and Commercial Papers. As at
June 2009, the banks‘ total commitment under the Expanded Discount Window
(EDW) was over N2,688.84 billion, while the outstanding commitments was over
N256.0 billion, most of which was owed by less than half of the banks in operation.
When the CBN closed down the EDW and, in its place, guaranteed inter-bank
placements, it was observed that the same banks were the main net-takers under
the guarantee arrangement, indicating that they had deep-rooted liquidity
problems. Further investigation by the CBN identified eight interdependent factors
as the main origin of the crisis in the banking sector.

These include:

 Sudden capital inflows and macro-economic instability

 Poor corporate governance and character failure
 Lack of investor and consumer sophistication
 Inadequate disclosure and lack of transparency
 Critical gaps in regulatory framework and regulation
 Uneven supervision and enforcement
 Weaknesses within the CBN
 Weaknesses in the business environment

III.2 On-going Banking Sector Reform

It was against this background that the CBN moved decisively to strengthen the
industry, protect depositors‘ and creditors‘ funds, safeguard the integrity of the
industry and restore public confidence.

In that regard, the CBN replaced the chief executives/executives directors of the
banks identified as the source of instability in the industry and injected the sum of
N620.0 billion into the banks in an effort to prevent a systemic crisis.
Arrangements were also made to recover non-performing loans from banks‘
debtors, while guaranteeing all foreign credits and correspondent banking
commitments of the affected banks. Furthermore, the Bank proposed the
establishment of the Asset Management Corporation of Nigerian (AMCON). The
AMCON Bill has already been passed by the National Assembly and signed into
law by the President. The AMCON as a resolution vehicle is expected to soak the
toxic assets of troubled banks. Members of the Board of Directors of AMCON
have also been cleared by the Senate and inaugurated.
Anyanwu: Overview of Current Banking Sector Reforms and the Real Sector in Nigeria 39

The CBN is also collaborating with the Securities and Exchange Commission (SEC)
and the Nigerian Stock Exchange (NSE) to reduce the cost of transactions
particularly bond issuance so as to diversity funding sources away from banks, as
well as attract more foreign portfolio investors into the sector. Efforts are also
being intensified towards strengthening regulatory and supervisory framework
and enhancing the monitoring of the operations of the Deposit Money Banks
(DMBs) to ensure that they remain safe, sound and healthy.

To further engender public confidence in the banking system and enhance

customer protection, the CBN established the Consumer and Financial Protection
Division to provide a platform through which consumers can seek redress. In the
first three months of its operation, about 600 consumer complaints were received
by the Division which was a manifestation of the absence of an effective
consumer complaints resolution mechanism in banks. The CBN has also issued a
directive to banks to establish Customer Help Desks at their head offices and
branches. In addition, the CBN has commenced a comprehensive review of the
Guide to Bank Charges with a view to making the charges realistic and
consumer-friendly. Furthermore, the Consumer and Financial Protection Division is
expected to commence a programme of consumer education and
enlightenment and is also collaborating with the Consumer Protection Council on
the review of the Consumer Protection Council Act No. 66 of 1992, to regulate
and enforce discipline in the market.

The CBN has taken steps to integrate the banking system into the global best
practices in financial reporting and disclosure through the adoption of the
international Financial reporting Standards (IFRS) in the Nigerian Banking Sector
by end-2010. This is expected to enhance market discipline and reduce
uncertainties, which limit the risk of unwarranted contagion. The CBN is also
closely collaborating with other stakeholders like the Nigerian Accounting
Standard Board (NASB), Federal Ministry of Finance (FMF), NDIC, SEC, NAICOM,
PENCOM, Federal Inland Revenue Service (FIRS), and the Institute of Chartered
Accountant of Nigerian (ICAN), among others, towards ensuring a seamless
adoption of IFRS in the Nigerian banking sector by 2012. These efforts are being
pursued under the aegis of the Roadmap Committee of Stakeholders on the
Adoption of IFRS in Nigeria inaugurated by the NASB and facilitated by the World
Bank.

The universal banking (UB) model adopted in 2001, allowed banks to diversify into
non-bank financial businesses. Following the consolidation programme, banks
became awash with capital, which was deployed to multiples of financial
40 Central Bank of Nigeria Economic and Financial Review December 2010

services. In effect, the laudable objectives of the UB Model were abused by

operators, with banks operating as financial supermarkets to the detriment of
core banking practices. To address the observed challenges, the CBN is
reviewing the UB Model with a view to refocusing banks to their core mandate.
Under the new model, banks would not be allowed to invest in non-bank
subsidiaries, while banks with such investments would be required to either divest
or spin-off the businesses to holding companies that will be licensed by the CBN
as other financial institutions. The three classes of deposit money banks being
proposed are: International banks, National banks and Regional banks.

III.3 Real Sector Financial Initiatives under the Current Banking Sector Reforms
Pursuant to the objectives outlined under the fourth pillar of the reforms and as
part of its developmental function, the CBN has introduced new initiatives to
enhance the flow of credit to the productive sectors of the economy.

III.3.1 N200 Billion Commercial Agricultural Credit Scheme (CACS)

The Scheme was established in 2009 by the CBN in collaboration with the Federal
Ministry of Agriculture and Water Resources (FMA&WR). It is being funded
through the issuance of FGN Bond worth N200 billion, by the Debt Management
Office (DMO) in two tranches. The first tranche of N100 billion has been raised
and passed on to participating banks for on-lending to farmers. Loans made
under this scheme are at single digit interest rate subject to a maximum of 9.0 per
cent while the CBN bears the interest subsidy at maturity. The scheme was initially
to promote commercial agricultural enterprises but was later amended to
accommodate small-scale farmers through the on-lending scheme of the state
governments. All the 24 banks in the country would participate in the
administration of the scheme, but only 7 banks are involved, thus far. As at end-
October 2010 a total of about N90.36 billion has been disbursed to eleven banks
including 15 state governments for financing 94 projects. Other developmental
functions of the CBN that have impacted on the agricultural sector are the
Agricultural Credit Guarantee Scheme and its Trust Fund Model, Interest
Drawback Programme and the establishment of the Microfinance Banks.

III.3.2 N500 Billion Development Bond

As part of the efforts by the CBN to show the way towards enhanced financing of
the real sector and infrastructure projects, and improve credit flow to the sector,
a N500.0 billion fund was established out of which N300 billion is earmarked for
Power/Infrastructure projects and Airlines, and N200.0 billion for the
Refinancing/Restructuring of banks‘ existing loan portfolios to manufacturers/
small and medium enterprises (SMEs).
Anyanwu: Overview of Current Banking Sector Reforms and the Real Sector in Nigeria 41

III.3.3. N200 Billion Small and Medium-Scale Enterprises Guarantee Scheme

(SMECGS)
The N200 billion Small and Medium-Scale Enterprises Guarantee Scheme
(SMECGS) established by the CBN in 2010 aims at promoting access to credit by
SMEs in Nigeria. The scheme provides guarantees on loans by banks to the sector
in order to absorb the risk element that inhibit banks from lending to the real
sector. The activities covered under the scheme include manufacturing and
agricultural value-chain; SMEs with assets not exceeding N300 million and labour
force of 11 to 300 staff; and processing, packaging and distribution of primary
products.

The main objectives of the Scheme are to: fast-track the development of
SME/manufacturing sector of the Nigerian Economy by providing guarantees; set
the pace for industrialization of the Nigerian economy; and increase the access
to credit by promoters of SMEs and manufacturers. The maximum amount to be
guaranteed under the scheme is N100 million which can be in the form of
working capital, term loans for refurbishment, equipment upgrade, expansion
and overdraft. The guarantee covers 80 per cent of the borrowed amount and is
valid up to the maturity date of the loans, with maximum tenure of 5 years.

All deposit money and development banks are eligible to participate in the
scheme and the lending rate under the scheme should be the prime lending rate
of the banks since the CBN is sharing the credit risk with the banks by providing
guarantee.

III.3.4 Nigerian Incentive-based Risk Sharing System for Agricultural Lending

(NIRSAL)
Despite the plethora of financing schemes, the issue of adequate, affordable
and timely access to credit by Nigerian farmers remains a major challenge. For
example, between 2006 and 2009, the agricultural sector attracted on average
2.1 per cent of the total credit to the economy in contrast to its average
contribution of 42.2 per cent to the GDP over the same period. The low credit to
the sector by the banking industry could be attributed to a number of reasons,
notable among which are the high risk inherent in the sector and the perception
of the sector as non-strategic to their business models. Hence, as long as these
concerns linger, the issue of financing agriculture in Nigeria would require more
than just providing funds to the sector. It is against this background that a new
financing framework, the Nigerian Incentive-based Risk Sharing System for
Agricultural Lending (NIRSAL) is being introduced.
42 Central Bank of Nigeria Economic and Financial Review December 2010

This model of financing agriculture is different in many ways from the current
financing models which have not yielded the desired impact of making
adequate credit available to the sector. NIRSAL is a demand-driven credit facility
rather than the current supply-driven funding. It would adopt a value-chain
approach to lending as banks would be free to choose which part of the value
chain they would be interested in lending to. It would build the capacity of the
banks to engage and deliver loan; reduce counterpart risks facing banks through
innovative crop insurance products; reward performance in agricultural lending;
and would be managed with performance-based incentives.

NIRSAL would be tailored along the already developed model of the Impact
Investing Fund for African Agriculture (IIFAA) based on Nigerian‘s financial and
agricultural development requirements. It would pool together the current
resources in CBN‘s agricultural financing schemes and other investors‘ funds and
transfer these into the five components of the programme but managed outside
of the CBN. In other works, existing agricultural support frameworks like CACS,
ACGS, ACSS and NAIC, etc, would be assessed, modified and integrated into five
components.

The scheme aims at reversing the trend of low credit to the agricultural sector by
encouraging more banks to lend to the sector through an incentive based
system. The programme would ensure that hitherto unproductive public capital
will translate to more productive output by using it to create incentives for banks
to be more involved in agricultural lending, increase market absorptive capacity,
reduce lending risk as well as help banks to understand the sector better.
Furthermore, it would help banks build capacity to develop sustainable term
financing and affordable loan products to promote commercially oriented
agriculture for small holder farmers and businesses. It will also develop efficient
financial delivery system that would serve the need of medium and large scale
farmers. The programme set out to stimulate a new form of strategic partnership
and alliance between banks to increase lending, reduce the transaction cost
and establish a sustainable financial delivery platform into rural areas.

Specifically, the objectives of the programme include:

 Stimulate innovations in agricultural lending
 Encourage banks that are lending to the sector
 Eliminate state dependency by banks for deploying loanable funds to
agriculture
 Leverage DMBs balance sheet for lending into Agriculture; and
Anyanwu: Overview of Current Banking Sector Reforms and the Real Sector in Nigeria 43

 Ensure risk-sharing approach that will build a business approach where

banks share in the risk of lending to the sector

In achieving these objectives, there would be five integrating components to

ensure increased bank credit to the agricultural sector, ensure systemic change
and reward performance based on evidence using market-driven incentives.
These five pillars would work together in an integrative way to change the way
banks lend to agricultural sector. The five major components of this programme
are: Risk Sharing Facility (RSF), Insurance Components (IC), Technical Assistance
Facility (TAF), Bank Incentive Mechanism (BIM) and Agricultural Bank Rating
System (ABRS). These components are further explained below:

The Risk Sharing Facility (RSF) is a risk-tool box that would serve as a framework for
negotiation between the programme and the participating banks. It would be
used to deploy different risk sharing instruments to reduce the risk of lending to
the agricultural sector. This would comprise first loss and share loss arrangements,
the volume of lending, the part of value-chain that the bank would be willing to
lend to, the term of lending and the type of bank as well as experience and
capacity for agricultural lending.

The Insurance Component (IC) would identify existing insurable risks and solution
coverage, assist in developing such solutions and link such products to the loan
provided by the banks to the beneficiaries.

The Technical Assistance Facility (TAF) would be used to assist banks that have
demonstrated interest and commitment to lending to small-holding agriculture. It
would help to build capacity of the banks to lend and develop delivery platform
in support of agricultural lending. It would also assist in building capacity of small-
holder farmers and help them in managing markets and financial activities.

The Bank Incentive Mechanism (BIM) would motivate banks to lend to the
agricultural sector. The BIM would define appropriate incentive mechanism to
encourage banks to lend to the sector without creating moral hazard. This would
be done through lower guarantee fees for use of services under the scheme.

The Agriculture Bank Rating System (ABRS) would rate banks according to their
level of engagement in agricultural development. The rating would be based on
banks performance in lending to the agricultural sector and the impact of the
lending on food security, rural development and income. Banks with higher rating
would be given more incentive through BIM to encourage more lending to the
44 Central Bank of Nigeria Economic and Financial Review December 2010

sector. Provisional estimates for funding the various components are currently put
as follows: RSF (US$300 million – with a goal of leveraging up to US$3 billion), TAF
(US$90 million), BIM (US$100 million) and ABRS (US$10 million). The CBN as a
founding and strategic investor would play a crucial role in creating long term
systemic change in agriculture financing.

The blueprint for the current reforms is built around four pillars namely; enhancing
the quality of banks, establishing financial stability, enabling healthy financial
sector evolution and ensuring that the financial sector contributes to the real
economy. Each of these pillars is discussed in detail as follows.

Enhancing the Quality of Banks

Under this pillar, the CBN has initiated a five-part programme that would enhance
the operations and the quality of banks in Nigeria. It consists of industry remedial
programmes to tackle the fundamental causes of the banking sector crises,
implement risk-based supervision, reform the regulatory framework, as well as
enhance provision for consumer protection and internal transformation of the
CBN. This initiative would go a long way in enhancing credit to the real sector of
the economy. In order to address the failure of corporate governance in the
industry, the CBN will also establish a specialist function centered on governance
issues to ensure that governance best practices are imbibed in the industry.

Establishing Financial Stability

This pillar focuses at strengthening the Financial Stability Committee within the
CBN as well as establishing a hybrid monetary policy and macro-prudential rules.
It also includes the development of directional economic policy and counter-
cyclical fiscal policies by the government and the further development of the
capital market as alternative to bank funding. When financial stability is
established, the banking sector would be the major driver of economic activities
and a significant channel for capital flows into the real economy.

Enabling Healthy Financial Sector Evolution

Under this pillar, attention would be given to creating an appropriate banking
industry structure, the cost structure of banks, the role of the informal economy
and providing banking infrastructure such as credit bureau and registrars. The
CBN would review the basic one-size-fits-all model of banking in addition to
reviewing the universal banking model, which would be replaced by the
specialized banking model, where three licence types would be issued. The first is
the commercial banking licence issued to organizations for the purpose of
regional, national or international banking. The second is the specialized banking
licence for microfinance banks and mortgage banks. The third licence is for
Anyanwu: Overview of Current Banking Sector Reforms and the Real Sector in Nigeria 45

investment banking, which extends to development banking. These

developments in the near-term would make it possible to have international,
national, regional, mono-line and specialized banks, with different capital
requirements proportionate to the depth of their activities.

Ensuring the Financial Sector Contributes to the Real Economy

The rapid growth experienced in the financial sector in Nigeria has not impacted
positively on the real economy as much as anticipated. Development finance
institutions set up for specific purposes, such as agricultural finance, housing
finance, trade finance, urban development, did not achieve their stated
mandates. Also, credit flow from the deposit money banks to the real economy
has been grossly inadequate. Thus, the need for creating financial
accommodation for economic growth through initiatives such as development
finance, foreign direct investment, venture capital and public-private
partnerships has become very imperative.

Under this pillar, the CBN has outlined measures to ensure that the financial sector
contributes meaningfully to the development of the real sector. These include:

(i) Leverage on the role of the Bank as adviser to the government on

economic matters, to ensure that the financial sector impacts on the real
economy;

(ii) Take the lead in measuring more accurately, the relationship between
the real sector and financial sector, as well as the transmission
mechanism;

(iii) Evaluate continually the effectiveness of existing development finance

initiatives such as agricultural credit and import-export guarantees;

(iv) Take the lead in encouraging examination of critical issues for real sector
developments;

(v) Encourage further studies on the potential of venture capital and private-
public partnership initiative for Nigeria in the real sector; and

(vi) Cooperate with state governments to run pilot programmes in positively

re-directing the financial sector‘s contribution to the real sector.
46 Central Bank of Nigeria Economic and Financial Review December 2010

With the above mentioned initiatives, the current banking sector reforms of the
CBN is expected to contribute significantly to the development of the real sector
of the economy.

III.5 Financing Initiatives under the Current Reforms

Pursuant to the objectives outlined under the fourth pillar and as part of its
developmental function, the CBN has introduced new initiatives to enhance the
flow of credit to the productive sectors of the economy.
The new incentives include:

III.5.1 N200 Billion Restructuring/Refinancing to the Manufacturing Sector/SMEs

In a bid to unlock the credit market, the CBN provided N500 billion out of which
N200 billion is for re-financing/re-structuring of banks‘ existing loan portfolios to the
manufacturing sector and SMEs. The investment is in the form of debenture stock
to be issued by the Bank of Industry (BOI). The main objective of the fund is to
fast-track the development of the manufacturing sector by improving access to
credit by manufacturers as well as improving the financial position of the DMBs.
The category of facilities under the fund include long-term loans for acquisition of
plant and machinery, refinancing of existing loans, resuscitation of ailing
industries, working capital and refinancing of existing lease. The loan amount for
a single obligor is the maximum of N1 billion in respect of re-financing/re-
structuring with an interest rate of 7.0 per cent payable on quarterly basis. All the
24 banks in the country as well as Development Finance Institutions (DFIs)
excluding the Bank of Industry (BOI) are to participate in the fund. Thus far, the
sum of N130.2 billion has been disbursed from the fund with N117.7 as term loan
while the balance of N12.5 billion was disbursed as working capital.

IV. Developments in the Real Sector (2005-2009)

Table 1 below shows credit by the banking sector to selected sub-sectors in the
real sector. For the period 2006–2009, total credit to the economy from the
banking sector rose from N2,535.4 billion in 2006 to N8,769 billion in 2009 and
averaged N5,830.7 billion during the period. Credit to real sector activities,
agriculture, solid minerals, manufacturing, real estate, public utilities and
communication on the average, accounted for 41.8 per cent of total credit,
while general commerce, services and government received the balance of 58.2
per cent. The share of manufacturing in total credit to the economy fell sharply,
from 16.9 per cent in 2006 to 10.6 per cent in 2007, before rising to 12.6 per cent in
both 2008 and 2009 (table 2). Manufacturing average share was 13.2 per cent
and had the highest credit allocation. It was followed by solid minerals and
communication, the shares of which averaged 11.1 and 7.7 per cent,
respectively. The average for agriculture was abysmal at 2.1 per cent.
Anyanwu: Overview of Current Banking Sector Reforms and the Real Sector in Nigeria 47

Table 1: Credit to Selected Sectors in the Real Sector by the Banking Sector
(N‘ Billion)
Credit By Sector 2006 2007 2008 2009 Average
Total Credit to the
Economy 2,535.37 4,606.56 7,411.43 8,769.34 5,830.68
Agriculture 56.50 149.58 106.35 136.89 112.33
Manufacturing 427.28 487.58 932.80 1,109.86 739.38
Solid Minerals 255.01 490.71 846.94 1,083.99 669.16
Real Estate 148.49 285.82 466.80 756.06 414.29
Public Utilities 23.71 26.03 45.84 40.51 34.02
Communications 191.49 321.01 539.15 817.90 465.14
General Commerce 601.45 735.80 1,229.66 1,006.31 893.31
Finance & Insurance 116.02 432.36 714.47 995.40 564.56
General 600.23 1,516.23 2,384.53 2,529.20 1,757.55
Government 115.19 170.43 144.88 293.14 180.91
Source: Central Bank Nigeria

Table 2: Percentage Share of Credit to Selected Sectors of the Real Sector

Sectors 2006 2007 2008 2009 Average

Agriculture 2.23 3.25 1.43 1.56 2.12
Manufacturing 16.85 10.58 12.59 12.66 13.17
Solid Minerals 10.06 10.65 11.43 12.36 11.12
Real Estate 5.86 6.20 6.30 8.62 6.75
Public Utilities 0.94 0.57 0.62 0.46 0.65
Communications 7.55 6.77 7.27 9.33 7.73
General Commerce 23.72 15.97 16.59 11.48 16.94
Finance & Insurance 4.58 9.39 9.64 11.35 8.74
General 23.67 32.91 32.17 28.84 29.40
Government 4.54 3.70 1.95 3.34 3.39

A study by the CBN in 2010 on ―Enhancing Bank Credit flow to the Real Sector of
the Nigerian Economy‖ showed that 24.03 per cent of the total fund requirement
of firms came from bank loans and advances.
48 Central Bank of Nigeria Economic and Financial Review December 2010

Table 3: Company Sources of Fund

Company Equity Loans & Others Total

Fund Advances
2006 3,167.09 632.00 1,936.78 7,741.87 13,477.74
2007 3,235.50 632.00 2,745.17 13,951.35 20,564.02
2008 4,338.65 1,268.00 5,652.45 18,965.60 30,224.70
2009 6,150.42 1,318.00 2,004,967.50 2,022,230.57 4,034,666.49
(As % of (As % of (As % of (As % of
Total) Total) Total) Total)
2006 23.50 4.69 14.37 57.44
2007 15.73 3.07 13.35 67.84
2008 14.35 4.20 18.70 62.75
2009 0.15 0.03 49.69 50.12
Average 13.43 3.00 24.03 59.54

Table 4: Criteria For Considering Loan Applications ( per cent)

Value of Project Development Repayment Managerial Character Risk
Collateral Viability Potential Period Capability of Borrowers
Borrower Sector
1 30.0 5.0 40.0 0.0 5.0 10.0 5.0
2 20.0 10.0 25.0 10.0 10.0 5.0 15.0
3 5.0 5.0 10.0 5.0 55.0 5.0 15.0
4 5.0 30.0 0.0 10.0 25.0 15.0 20.0
5 20.0 25.0 5.0 20.0 0.0 5.0 35.0
6 15.0 20.0 0.0 45.0 5.0 10.0 5.0
7 5.0 10.0 20.0 10.0 0.0 50.0 5.0

Table 5: Demand and Supply of Credit to Firms (Number)

No of Firms that No of Firms Firms that Firms that

demanded that received Demanded Loan Received Loan
loans loans as( per cent) of as (per cent) of
Total Total
2006 4 3 21.05 15.79
2007 8 3 42.11 15.79
2008 9 5 47.37 26.32
2009 5 5 26.32 26.32
Number of 19
Firms Covered
Anyanwu: Overview of Current Banking Sector Reforms and the Real Sector in Nigeria 49

Further analysis shows that funding from the banks accounted for only 14.4 per
cent of total funds in 2006, 13.4 per cent in 2007, 18.7 per cent in 2008 and 49.7
per cent in 2009. The result of the survey also gave indications of how real sector
enterprises faired in terms of attracting bank credits. The survey showed that
banks satisfied an average of only 15.8 per cent of the number of loan requests
made by real sector firms in 2006 and 2007, and 26.3 in 2008 and 2009.

Furthermore, the study tried to establish the credit gap and explain why banks are
reluctant to lend to the real sector in Nigeria and found that, in credit packaging,
bank treasurers evaluate the safety of their funds, the liquidity of the balance
sheets and the profitability of proposed ventures. Safety has more weight the
smaller the asset base, while the need to ensure liquidity depends on the
customer base and the frequency of transactions. Profitability compensates
shareholders and guarantees going concern for the bank. Since the liberalization
of the credit market in Nigeria under the Structural Adjustment Programme, the
status of Preferred Sector was stripped off the real sectors and so the compulsory
funding from banks dried up. Moreso, the market-determined interest rates have
tended to exclude the real sectors, especially, agriculture, from the credit market.
An assessment of the National Accounts of Nigeria indicates that the real sector
contributes over 60.0 per cent to the gross domestic product (GDP), but attracts
only about 40.0 per cent of total credit. Worse still is the case of agriculture which
contributes over 40.0 per cent of the GDP (Table 6) but attracts less than 2.0 per
cent of total credit. Banks were reluctant to lend for real sector activities for
reasons such as poor managerial ability, ability to repay, unfavourable growth
prospects in the sub-sector, inherent risk and insufficient collateral, etc.

Table 6: Percentage Share of Selected Sectors of the Real Sector in GDP

Sectors 2005 2006 2007 2008 2009

Agriculture 41.19 41.72 42.01 42.13 41.85
Manufacturing 3.79 3.91 4.03 4.14 4.20
Solid Minerals 0.27 0.28 0.30 0.32 0.33
Real Estate 1.52 1.59 1.67 1.75 1.82
Public Utilities 3.58 3.54 3.49 3.42 3.31
Communications 1.53 1.91 2.38 3.00 3.74
50 Central Bank of Nigeria Economic and Financial Review December 2010

Table 7: Selected Real Sector Indicators

2005 2006 2007 2008 2009 Average

2005-2009
Real GDP Growth Rate 6.51 6.03 6.45 5.98 6.90 6.37
Non-oil GDP Growth Rate 8.59 9.41 9.52 8.95 8.61 9.02
Agricultural Sector 7.07 7.40 7.19 6.27 6.21 6.83
Growth Rate
Industrial Sector Growth 1.71 -2.51 -2.23 -3.41 0.83 -1.12
Rate
Manufacturing Growth 9.61 9.39 9.57 8.89 8.58 9.21
Rate
Inflation Rate (per cent) 11.6 8.5 6.6 15.1 13.9 11.14
Year-on-Year
Capacity Utilization (per 54.8 53.3 53.5 52.6 55.01 53.84
cent)
Crude oil Price (US$) 55.43 66.38 74.96 101.15 62.08 72.00

Source: CBN Statistical Bulletin and Annual Report and Statement of Accounts, Various
Issues

A review of some selected real sector indicators provides a picture of the

performance of the real sector in the face of the banking sector reforms. Real
output growth has been modest over the review period, averaging 6.37 per cent.
Growth rates of the agriculture and manufacturing sectors have been relatively
stable. Inflationary pressures moderated between 2005 and 2006, before
assuming an upward trend for the rest of the period. Average capacity utilization
in the manufacturing sector averaged 53.84 per cent for the period.

V. Challenges of Real Sector Lending

The major challenges to real sector financing from banks have been identified as
unfavorable macroeconomic environment, cumbersome documentation
process, inadequate long-term finance, lack of data base on borrowers and
poor infrastructure.

Addressing the Challenges of Lending to the Real Sector

(i) A stable macroeconomic environment encourages lending. Thus, the
Bank should ensure minimal price and exchange rate fluctuations which
are proxies for macroeconomic stability. Related to macroeconomic
stability is the need for effective coordination of monetary and fiscal
Anyanwu: Overview of Current Banking Sector Reforms and the Real Sector in Nigeria 51

policies which could be assured through regular liaison with the Debt
Management Office, Budget Office and the Accountant General‘s
Office. Frequent and focused meetings of the fiscal and monetary
authorities would ensure consistency in government pronouncements and
economic policy measures, and this would build confidence among
industrialists who say that frequent policy reversals scare them from
borrowing.

(ii) Most business people opine that the documentation process for obtaining
loans in Nigeria is too cumbersome and discourage prospective
borrowers. The Bank could through the mounting of workshops on
documentation requirements encourage DMBs to reduce the
documentation processes for loans. The issue of borrower identification
which gives rise to multiple documentation requirements could also be
solved by the Bank partnering with relevant agencies to create a
database for all industrialists.

(iii) The various financing scheme established by the CBN should be

monitored and evaluated on half-yearly basis to ensure their efficient and
effective implementation.

(iv) Borrower identification is also a major consideration for banks. The CBN
should encourage and help equip the credit bureau which will warehouse
data concerning firms and their credit portfolios. The bureau‘s data base
should be electronic and remotely accessible to all stakeholders.

(v) In addition to iv above, to be able to assign unique identification to all

Nigerians, the Bank should partner with the agency responsible for the
National Identity Cards Scheme to complete the project. It has to be
emphasized that the new cards should be chip-based and consolidated
in a database that all authorized persons and corporates could access as
and when needed.

(vi) The Bank should increase communication with the populace, especially
as it affects the various schemes which are available for industries and
small borrowers.

(vii) Management should consider re-evaluating the funding schemes, like the
ACGSF, SMEEIS, CACS, etc to ascertain the reasons why they are not
effective and take steps to improve on their service delivery. In particular,
52 Central Bank of Nigeria Economic and Financial Review December 2010

SMEEIS should return to being mandatory to the banks as it performed

relatively well before it was made optional.

(viii) Government should take urgent steps to fix the infrastructural facilities in
the economy to reduce the burden of providing them by the private
sector, reduce their operational costs and make them competitive. An
approach that could help is to raise development bonds earmarked for
infrastructure in the energy and transport sectors, in particular. For
electricity, the national grid could be dismantled and regional electricity
boards set up to manage the transmission and distribution operations, as
generation is largely privatized. This will engender competition and
efficiency. A complementary approach is to encourage the promotion of
the cluster system in which infrastructures are provided at designated sites
for the benefit of industrialists.

(ix) Lack of managerial expertise is echoed by both banks and firms as

impediment to lending/borrowing. The government, through the Ministry
of Labour and Productivity, should institute more skill acquisition
programmes for entrepreneurs, to inculcate in them corporate
governance and managerial skills.

(x) With regard to collaterals, the government should fast-track its land
reforms to ensure that land owners are enabled to secure Certificate of
Occupancy from governments which will make the banks more confident
in granting loans to the firms.

VI. Conclusion
The current priority attention being accorded the real sector is well deserved. This
is because the sector has great potentials to be the engine of growth in Nigeria.
In the face of rising unemployment and high poverty levels, growth generated
from this sector, particularly agriculture, is pro-poor and most desired. It is capable
of lifting the greatest number of people above the poverty level. While efforts are
being made to address the credit bottlenecks are very commendable, there is
the need for complementary reforms to provide the other critical elements. These
include improving power, transportation, water, and all other ancillary issues
which account for under-performance in the sector.
Anyanwu: Overview of Current Banking Sector Reforms and the Real Sector in Nigeria 53

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