Nigeria entered 2017 reeling under the pains of economic recession. Though every index at the time looked discouraging, expert opinion kept hope alive that the country will exit recession in the first quarter. Oil revenue was low and inflation peaked at over 18 percent in January, from as low as 9 percent in same period of 2016. There was significant depreciation of the exchange rate, reaching N520 to US$1 in February, from as low as N155/US$1 in June 2014. There was strain on the financial markets with declines in key money market, capital market and foreign exchange market indicators.
Group Managing Director (GMD), Access Bank Plc Herbert Wigwe, gave a brief insight on the developments in the Banking sector for 2017. He said, “I think we fared quite well in 2017, in spite of the difficulties and the fact that we are just truly coming out of recession. One thing is clear, risk management has gotten a lot better in all the banks and I am talking about all aspect of risks from credit to liquidity.”
According to him, there has been greater collaboration between the regulators and the rest of the industry to ensure that there is system stability.
Specifically, there was weakening resilience of the Nigerian banking sector even though regulators insisted that the industry remained largely robust. Non-Performing Loans (NPLs) deteriorated in line with the difficulties of the macro-economy; and banking system exposure to foreign loans threatened to undermine their health. These and many more were the main discouraging economic indicators that characterized Nigerian economy with attendant transmission effect.
In view of the above, the CBN, which is the apex banking sector regulator, embarked on a number of policy responses that shaped the industry’s landscape this year. As a means to controlling the drain on foreign reserves, the regulator insisted on demand management through the restriction of Foreign Exchange (FX) for imports of goods that can be produced in Nigeria. This in turn, had ripple effect on other sectors.
Development Finance
Aimed at diversifying the economy away from over-dependence on oil revenues for financing the budget, increasing food production and creating sources of FX inflows consistent with the development agenda, the CBN continued its development finance activities. It targeted interventions at specific high-impact sectors like agriculture, including introduction of the Anchor Borrower Programme (ABP). To date, the Bank has committed close to N45.5 billion under the Anchor Borrowers’ Programme with active participation across 30 States of the Federation. The program thus helped in cutting down prices as Nigeria-made rice flooded the market.
Bankers’ Committee resolve to support real sector development
In line with the diversification objective, the Bankers Committee set aside N26 billion equity fund for investment in Agriculture, Small and Medium Enterprises (SMEs). The Bankers committee comprises of the Central Bank of Nigeria and Chief executive of banks in Nigeria. In February, the Committee resolved to contribute five percent of the banking sector’s profit-after-tax towards the funding of eligible and bankable export and import substitution projects in agriculture and non-oil sectors in an effort to facilitate diversification of the economy. According to the resolution, it was estimated that about N25 billion would be realized from banks annual contributions based on their total balance sheet size for the 2016 financial year. Under the financing structure, the funds would not be provided to target small and medium scale businesses as loans, but would be invested as equity contribution to the relevant companies for dividend returns for a maximum of 10 years during which time dividends and not interest income would be earning.
In April, CBN directed all deposit money banks to set aside and remit to the designated account domiciled in the CBN, five per cent of their annual profit after tax for equity investment in permissible activities. The permissible activities include: agricultural investments such as production, storage, processing and logistics; and businesses and services which are backward-integrated into manufacturing, agriculture, mining and modular refineries; and any other such activities as may be determined by the Bankers ‘Committee from time to time. Such equity investments were to be made for a maximum period of 10 years subject to a 3-year lock up period before exit and a maximum investment size of N2 billion per SME with higher amounts subject to approval by CBN.
By the second week of December, the committee adjusted the pricing and disbursement of the special N26.4 billion agric fund it unveiled early this year. While decrying the fact that the fund has not been accessed by eligible SMEs the committee decided that artisans like makeup artists, tillers and hairdressers would benefit from the scheme; and that the tenor and pricing of the loan had been reviewed. The loan, which would now be for a minimum of seven years, would be given to these artisans at five percent.
Foreign exchange management
In February, the Central Bank reviewed its foreign exchange rate policy in order to increase the availability of Foreign Exchange in the economy. The apex bank stated that it began the supply of direct additional funding to banks to meet forex demand of specified end users at settlement rates not exceeding 20 per cent above the interbank market rate. Furthermore, the apex bank, with effect from Monday, 10 April 2017, also declared intervention measures to supply foreign exchange to SMEs for importation of eligible goods not exceeding US$20,000 per customer per quarter.
The move by CBN to increase forex availability to end users was against the backdrop of the build-up in Nigeria’s foreign exchange reserves amid increased crude oil revenues. It was also influenced by pressure from the fiscal authority for a review of the exchange rate policy in order to ameliorate the harsh macroeconomic headwinds in the country. Areas where CBN increased forex supply include: Travel Allowances (personal travel allowances and business travel allowances); School and Medical Fees; Reduction of Forward Sales Tenor (CBN reduced the tenor of its forward sales from a maximum cycle of 180 days, to no more than 60 days from the date of transaction); and Sales of foreign exchange at major airports (CBN directed all banks to open forex retail outlets at major airports as soon as logistics permit).These measures boosted forex availability in various market windows.
In addition the apex bank moved for Increased Efficiency of Forex Market by: (1) clearing all the unfilled orders in the interbank forex market, (2) ending the imposition of allocation/utilization rules on commercial banks, (3) implementation of an effective intervention programme to support the inter-bank market and ensure adequate liquidity necessary to deliver an efficient FX market, and (4) advising the FMDQ to promptly activate its forex order-book systems and also accelerate the on-boarding of forex clients on the forex relationship systems to ensure total transparency of the FX market.
Investors & Exporters Foreign Exchange Window created
Also in April, CBN, created a special window, the Investors & Exporters Foreign Exchange Window (I&E FXW) to further boost foreign exchange liquidity and to ensure timely execution and settlement for eligible invisible transactions – such as loan repayments, loan interest payments, dividend/income remittances, capital repatriation, management services fees, consultancy fees among others while international airlines ticket sales remittances were excluded. The eligible participants include portfolio investors, exporters, authorized dealers, other parties with foreign exchange to exchange to Naira, and the CBN for promoting liquidity and professional market conduct.
In the new arrangement, foreign exchange rates were determined by market forces which analysts believe will improve investor confidence, particularly foreign portfolio investors as the market-determined rates are expected to result in rates convergence with the alternative market segments. From its Inception in April to June ending, a total of USD3.13 billion came into the foreign exchange market through the I&E FXW.
According to the CBN governor, “We have also seen a significant appreciation of the Naira from over N500/US$1 to about N360/US$1. In addition, we have seen stability in the rate for over six months now. I am glad to note that the exchange rate is not only stable, it is also converging across various windows and segments of the market.”
CBN issues more liberal policies to authorized forex dealers
In furtherance of its liberalization of the interbank foreign exchange market, the CBN issued new rules in order to improve the interbank market liquidity and depth. It permitted authorized dealers to defuse their excess foreign currency trading positions to other authorized dealers without seeking prior approval of the apex bank. Also, the apex bank sanctioned a maximum spread of N1.00 for interbank transactions and directed that funds purchased by an authorized dealer from another authorized dealer shall neither be held in position overnight by the buyer nor sold to another authorized dealer except to its customers for eligible transactions.
Finally, to deepen the market, the bank advised authorized dealers to encourage their corporate clients to on-board the FMDQ-advised forex trading system in order to fast track the migration of the activities of Investors & Exporters Foreign Exchange Window unto to advised foreign exchange trading system.
Foreign Exchange Market Rates converge amid favourable policies
In the review period, the various foreign exchange market segments tended towards convergence on the back of aforementioned foreign exchange policies. Specifically, the introduction of the I&E FX Window, which recorded inflows worth USD3.13 billion between April and June, absorbed some of pressure from the alternative market segments, resulting in the strengthening of the Naira against the US Dollar in those market segments. This is in addition to the apex bank’s daily foreign exchange sales to deposit taking banks and weekly supply interventions for wholesale Secondary Market Intervention Sales (SMIS), Small and Medium Scale Enterprises and for invisibles such as Business Travel Allowance (BTA), Personal Travel Allowance (PTA), School Fees and Medical Fees abroad. Intervention by the CBN was backed by the increase in external reserves position due to stronger global crude oil prices and improved crude oil production.
Monetary Policy Committee
The monetary authority remained preoccupied with foreign exchange management and the need to curtail cost push inflationary pressure. The Monetary Policy Committee (MPC) retained its policy rates all through first half (H1) 2017. Specifically, the Monetary Policy Rate (MPR) was retained at 14per cent in line with our expectation. In the same vein, Cash Reserve Ratio requirement and liquidity ratio were retained at 22.5 per cent and 30per cent respectively while the Standing Lending Facility (SLFR) Rate and Standing Deposit Facility Rate (SDFR) were maintained at +2per cent and -5per cent respectively.
The Committee noted that money supply (M2) contracted by 11.06 per cent in August 2017 (annualized), in contrast to the provisional growth benchmark of 10.29 per cent for 2017. The development in M2 is largely due to the contraction of 18.42 per cent in other assets net (OAN) in August 2017. Similarly, M1 contracted by 12.25 per cent in August 2017, (annualized to -18.37 per cent). Net domestic credit (NDC) contracted by 0.14 per cent, annualized at -0.20 per cent, driven majorly by net credit to government, which also contracted by 1.05 per cent against the programmed growth of 33.12 per cent. Credit to the private sector, however, grew marginally by 0.07 per cent in August 2017, compared with the provisional benchmark of 14.88 per cent. The MPC also noted the policy constraints in ensuring the flow of credit to the real sector in the face of weak and underperforming monetary aggregates.
Inflationary pressure in the economy continued to moderate with headline inflation (year-on-year) receding for the seventh consecutive month to 16.01 per cent in August 2017, from 16.05 per cent in July 2017.
Decline in money supply, crowding out of the private sector
In the first half of 2017, the Depository Corporations Survey of the CBN recorded sustained mop up of money supply as broad money supply, M2, declined year-to-date by 9.09 per cent to N21.67 trillion as at June following a 7.25per cent decrease in Net Domestic Assets (NDA) to N13.21 trillion and a 9.47 per cent decline in Net foreign assets (NFA) to N8.47 trillion. Decrease in NDA followed an 83.60 per cent rise in other liabilities (net) to N13.71 trillion which more than offset a 1.02 per cent increase in Net domestic credit to N26.92 trillion. Reserve money fell by 5.96 per cent to N5.49 trillion as bank reserves decreased by 1.57 per cent to N3.27 trillion while currency in circulation fell by 14.03 per cent to N1.87 trillion.
Against the backdrop of harsh economic climate, demand deposits declined by 13.33 per cent to N8.41 trillion. Meanwhile, dealers at Cowry Assets Management Limited noted that the public sector continued to crowd out the private sector as credit to the government increased by 7.55 per cent to N4.94 trillion, compared to a 1.77 per cent decline in credit to the private sector to N21.98 trillion.
External Reserves rise in H1 2017
In the first half of the year, Nigeria’s external reserves increased year-to-date by 17.2per cent to USD30.29 billion as at June ending amid boost in average global crude oil prices. On average, crude oil prices grew by 11.17 per cent from USD45.17 a barrel in H2 2016 (and by 38.28% from USD36.31 a barrel in H1 2016) to USD50.21 a barrel in H1 2017. Growth in foreign reserves also followed a 17.57per cent year-to-date increase in crude oil production to 1.73 million barrels per day in June due to a 39.50 per cent year-to-date reduction in pipeline breaks coupled with inflow of foreign portfolio investments. As at December 4 2017, Nigeria’s foreign reserves had peaked at $38.2billion, hitting a 39-month high on the back of rising oil price of crude and the success of the $3billion Eurobond auctioned by the country, as confirmed by the CBN governor, Mr Godwin Emefiele.
“We have seen reserves move up from the $23 billion I talked about in October 2016, but as I speak today, external reserves are $38.2 billion,” he stated.
Overview of inflow and outflow of liquidity
Between January and June this year, the money market witnessed strain in financial system liquidity as financial system outflows exceeded inflows. This was partly attributed to efforts by the apex bank to rein in inflationary pressures, which was mainly due to structural factors. The apex bank aggressively mopped up liquidity as total outflows increased year-on-year by 5.50per cent to N4.91 trillion as T-bill sales via Open Market Operations increased by 29.56 per cent to N2.80 trillion. On the other hand, total inflows declined year-on-year by 16.20per cent to N3.51 trillion as T-bill maturities via Open Market Operation (OMO) declined by 46.95 per cent to N1.07 trillion. The CBN in September set the nation’s monetary policy environs agog in the fourth quarter (Q4), with N815 billion Treasury Bills issuance programme. While the said amount was to be the total value of the 91, 182 and 364 days maturing bills for the last quarter of the year, the apex bank would be rolling the same amount over on maturity.
The development was in contrast to a total of N966 billion worth of 91, 182 and 364 days maturing bills, with N874 billion of the amount rolled over in the period.
Treasury Bills Yields
Treasury bills sales by the Central Bank, which were greater in H1 2017 relative to the corresponding period of the preceding year came at higher cost as the short term debt instruments were auctioned at double the stop rates in the review period (relatively to H1 2016) amid surging inflationary trends occurring alongside a contracting economy. Average stop rates for the 91-day, 182-day and 364-day bills increased to 13.64 per cent (from 6.40% in H1 2016), 17.28 per cent (from 8.51% in H1 2016) and 18.67 per cent (from 10.25% in H1 2016) respectively. The 182-day and 364-day bills yielded positive real returns as inflation rate average averaged 17.23 per cent. Commercial banks’ depositors took higher deposit rates in H1 2017 compared to H1 2016 in line with general funds market trend. This was however eroded by rising inflation rates, resulting in significantly negative real returns. 30 days bank deposit rates averaged 8.61% in the review period (higher than 6.71% in H1 2015); interest rates on 3 month deposits averaged 9.17 per cent in the review period (higher than 6.86% in the corresponding period of 2016); while interest rates on 12 months deposits averaged 10.76 per cent in the review period (compared to 5.24% in same period of 2016).
Maximum, prime lending rates movement
Maximum lending rates to borrowers increased much higher than the increase in prime lending rates in the first half of the year. On average, maximum lending rate rose to 30.05per cent in H1 2017 (higher than 26.83% in in the corresponding period of 2016). Indicative of sustained risk aversion tendencies, prime lending rates however only moderately increased compared to rates in the corresponding period of 2016.
On average, prime lending rates rose to 17.35per cent in H1 2017 (compared to 16.36% in the corresponding period of 2016). Hence, the gap between prime lending rates and maximum lending rates widened further Sovereign Yield Curve Inverts in H1 2017 amid Recession.
In the review period, the sovereign yield curve was inverted as yields on the shorter end of the curve were higher than yields on the longer end. The inverted yield curve was mainly due to the prevailing economic recession, aggravated by relatively higher inflation rate (cost push), that was mainly due to structural factors. This was a sharp contrast from the corresponding period of 2016 when the yield curve was normal.
Federal Government issues more bonds at greater cost
In the review period, the federal government issued more FGN bonds at higher stop rates. Specifically, government issued FGN bonds worth N1.21 trillion in H1 2017, 0.90 per cent higher than N1.01 trillion issued in H1 2016. Federal government bonds also dominated the bond market in the absence of both subnational and domestic corporate bond issues.
Meanwhile, yields (stop rates) of issued FGN bonds were significantly higher in the review period compared to the corresponding period of 2016 in line with the rising inflationary trend occurring amid an economic recession. Stop rates averaged 16.44per cent in H1 2017, higher than 12.56 per cent recorded in H1 2016.
In the middle of the year, Federal Government Eurobonds appreciated (and yields decreased) amid recovery in global crude oil prices as well as improvement in Nigeria’s macroeconomic environment. On a year-to-date basis, the 10-year, 6.38 per cent JUL 12, 2023 paper appreciated the most by N15.47 (yield fell to 5.78%) while the 5-year, 5.13 per cent JUL 12, 2018 debt strengthened by N6.54 (yield fell to 3.50%).
BVN for other financial institutions
A circular referenced: OFI/DIR/CIR/GEN/17/139, dated April 21, 2017, from Other Financial Institutions Supervision Department (OFID) of CBN directed financial institutions to conspicuously display notices sensitizing customers on Bank Verification Number (BVN) in their banking halls and ensure that all new customers of Microfinance Banks (MFBs) and Primary Mortgage Institutions (PMIs) enroll their customers on, before July 31. This was in a bid to “support the achievement of the zero default credit targets set for the participating financial institutions in the Micro, Small and Medium Enterprises Development Fund (MSMEDF).” However, a new directive indicated that by December 31, 2017, all customers of financial institutions operating in the country are expected to have had their BVN. By virtue of this, customers of Microfinance Banks (MfBs) and Other Financial Institutions (OFIs) without the Bank Verification Number (BVN) will be unable to make withdrawals from their accounts from January 1, 2018, the Central Bank of Nigeria (CBN) disclosed.
BVN requirement for mobile money wallet
In September this year, the Banking sector regulator sort to enhance access to financial services through the Mobile Money Services. It reviewed the daily transaction limit and balance limit on mobile money wallets to afford users of Mobile Money Services, more flexibility in the use of their wallet. The revised limits on transaction and balances are as follows: Daily transaction limit of N50,000 for number one category with a cumulative balance of N300,000;Daily transaction limit of N200,000 for number two category with a cumulative balance of N500,000; Daily transaction limit of N5,000,000 for number three category with unlimited cumulative balance as provided in the three-tiered KYC requirement.
Furthermore, the Bank clarifies that the Mobile Money wallet holders on Tiered Know Your Customer (KYC) Level 1 are not required to provide Bank Verification Number as part of the KYC documentation, while BVN is mandatory for Mobile Money wallet holders on KYC levels 2 and 3.
Framework for BVN, Watch-list
In the cause of the year, the CBN released a regulatory framework for BVN operations and watch-lists for Nigerian financial system. This was in the quest to develop and enhance security of electronic payment systems in the country. The framework was communicated by the apex bank, in a circular dated October 18, 2017 to all deposit money banks (DMBs), switches, mobile money operators (MMOs), payment terminal service providers, payment solution service providers, microfinance banks and others. It was titled: “Regulatory framework for BVN operations and watch-list for Nigerian Banking Industry”. In the circular which takes immediate effect, CBN’s Director, Banking and Payments system department, Mr. DipoFatokun stated: “The Watch-list comprises a database of bank customers’ identified by their BVNs, who have been involved in confirmed fraudulent activities in the Nigerian banking industry.”
Two new Non-Interest Bank products introduced
In a bid to aid liquidity management and deepen the financial system, the CBN introduced two new financial instruments known as – Funding for Liquidity Facility (FfLF) and Intra-day Facility (IDF), at its window, for access by non-interest financial institutions (NIFIs) under its regulation. This central bank in August, listed some of the features of the FfLF to include that it would provide liquidity facility on overnight basis only and to be terminated on next business day. Some other features include: “Authorized non-interest financial institutions to provide eligible securities to the CBN as collateral for the facility. The value of the collateral will be maximum of 110 per cent of the value of the facility.
As the year ends, confidence across that financial services industry is being renewed and there are expectations that re-doubling of strong policy coordination, collaboration and cooperation which flourished during the difficult times will translate to a healthier sector in 2016. According to Emefiele at the 2017 bankers’ dinner:
“To sustain our recovery, the need is greater now than ever for robust policy coordination between the key aspects of economic policymaking space.
“In Nigeria, this would include fiscal, monetary, exchange, and trade policies, which must be targeted at protecting farmers to boost agricultural outputs, support local companies and enhance manufacturing and industrial capacities, with a view to diversifying the economy away from oil and fossil fuels.”
and then