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Nigeria: Nigeria Finance Profile


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Nigeria is Africa's most populous nation, biggest oil producer, and largest recipient of foreign direct investment (FDI). Oil and gas production dominate the economy, accounting for 28 percent of GDP, 90 percent of exports, and over 80 percent of government revenues. Agriculture is also a pillar of the Nigerian economy, accounting for 30 percent of GDP and employing two thirds of the labor force.

Despite growth rates hovering around the 10 percent mark for the past decade, the unequal distribution of revenues has been the cause of social unrest and has resulted in frequent disruptions of the country’s oil production.

The Nigerian government has shown a strong commitment to reform through its national development plan, Vision 2020 . The plan aims at promoting diversification of the economy away from oil and gas, with the objective of Nigeria becoming one of the world’s top 20 economies by 2020. Progress has thus far been mixed: even tough non-oil growth has averaged 9 percent during the last five years, political violence and social and religious tensions continue to disrupt economic activity and reform efforts.

Nigeria has been severely impacted by the global financial crisis: oil prices collapsed, the stock exchange crashed and bank default rates rose. GDP growth weakened to 2.9 percent in 2009, although growth is expected rise again up to 5 percent in 2010.

Nigeria’s financial sector has undergone significant changes in recent years. In 2005-2006, the banking sector went through major consolidation, which reduced the number of banks from 89 to 24 and considerably increased capitalization. As a result of consolidation, financial intermediation levels increased significantly: the number of bank branches almost doubled to about 5,500 in 2009, and banks engaged in a range of new activities, including the financing of infrastructure and oil projects, which has previously been out of their reach. The rapid expansion of banks’ private sector credit portfolio (from 21 percent to 50 percent of non-oil GDP by the end of 2008), in addition to their considerable cross-border activities (with subsidiaries and branches in the ECOWAS region, Southern Africa, Central Africa, Europe and North America), has exposed the need for a strengthened supervisory role for the Central Bank, which has developed a plan for consolidated and risk-based supervision. In addition, banks have been required to adopt the International Financial Reporting Standards (IFRS) as of the beginning of 2010.

The global financial crisis posed substantial challenges to Nigerian bank reform efforts. While the initial effects were contained due to low levels of exposure to complex financial instruments, the large swings in oil prices, combined with the resulting depreciation of the naira and a drop in investor confidence led to growing pressures on the sector’s health. Market speculation about the quality of some bank balance sheets was evident in the breakdown of the naira interbank market as well as perceptions that some banks were using the central bank discount window as an ongoing source of funding. Some banks were involved heavily in margin lending for investments in the equity, which subsequently crashed by 70 percent reflecting both domestic and global market developments.In addition, some banks had high exposure to the importers of fuel products, who had high foreign currency obligations owing to the high fuel prices of earlier in 2008 and were then hit when oil prices plus the naira fell, sharply thereby cutting their naira earnings.

Special examinations of bank balance sheets by the central bank and deposit insurance corporation were launched, resulting in the central bank intervening in five banks in August 2009 to address inadequate capital and liquidity ratios and nonperforming loans ratios that reached highs of 40 percent. Management was replaced and funds were injected to forestall insolvency.

Nigerian capital markets are not fully developed, but the country’s stock exchange is increasingly active. The Nigerian equity market boomed in 2007 and early 2008 with average return rates of 75 percent, well above those of South Africa and Ghana, but then plunged in the second half of 2008 as oil prices fell and the global financial crisis spread.

Although the profitability of Nigerian banks is making an impressive recovery, the absence of top line growth is a clear sign of malaise. In the absence of more traditional intermediation, banks' margins will come under increasing pressure - to the detriment of shareholders and the economy at large. As Nigerian banks begin publishing results for the first half of 2010, the problems plaguing the sector are becoming ever more obvious. Although profits are recovering, this is mainly the result of lower write- downs compared to previous quarters, while top line earnings are contracting, with few exceptions.

The main reason for falling revenues is that traditional loans are not being extended, which reduces the amount of interest income being generated. Operating expenses are on the rise and banks continue to take on new deposits, all of which is reducing the final return to shareholders. Although some major banks have not released H110 results at the time of writing, the impression gleaned from the results that are available is fairly consistent. Looking first at the balance sheet, the most salient trend among the banks we examined - UBA , FirstBank , Zenith Bank and Diamond Bank - was the modest growth in assets, driven primarily by invest ment securities and other, unidentified assets. While loans to customers were marginally higher than in the previous six-month period, there was a simultaneous contraction in 'dues from other banks', which raises the question of whether assets are simply being reclassified by banks. Whatever the cas e, it is clear that traditional intermediation is not growing at a pace that is ad equate to support the economy.