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+{"doc_id": "1af945ac174d0ce15c8fee9c370d27e7", "text": "CENTRAL BANK OF NIGERIA\nJUNE 2011\nJUNE 2011\nFINANCIAL \nSTABILITY\nREPORT\nFINANCIAL \nSTABILITY\nREPORT\n CBN FINANCIAL STABILITY REPORT JUNE 2011\niii\nThe Financial Stability Report (FSR) is published semi-annually by \nthe Central Bank of Nigeria (CBN). Copies of this edition may be \nobtained from the Director, Financial Policy and Regulation \nDepartment, Central Bank of Nigeria, Abuja, Nigeria or from the \nCBN website: www.cbn.gov.ng.\nISSN: 2141-9396\nFor comments and feedback, please email us at FSR@cbn.gov.ng\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nDeputy Governor\n(Operations)\nDeputy Governor\n(Corporate Service)\nDeputy Governor\n(Economic Policy)\nDeputy Governor\n(Fin. System Stability)\nThe Board\nDirectorates \nDepartments \nHuman \nResources\nProcurement & \nSupport Services\nFinance\nMedical\nServices\nSecurity \nServices\nLegal \nServices\nMonetary \nPolicy\nFinancial \nMarkets\nTrade & \nExchange\nResearch\nStatistics \nFinancial Policy \n& Regulation\nBanking \nSupervision\nOFI \nSupervision\nDevelopment \nFinance\nBanking & \nPayment System\nCurrency \nOperations\nBranch \nOperations\nInformation\nTechnology\nReserve \nManagement\nGovernor\nCorporate \nSecretariat\nStrategy & \nPerformance Mgt\nGovernors’ \nDepartment\nRisk \nManagement\nInternal \nAudit\nBoard of Directors\niv\nCBN's Organogram\n CBN FINANCIAL STABILITY REPORT JUNE 2011\n \nT a b l e o f C o n t e n t s\nv\nLIST OF FIGURES\nviii\nLIST OF TABLES\nix\nLIST OF BOXES\nx\nAPPENDIX..\nx\nLIST OF ABBREVIATIONS AND ACRONYMS\nxi\nGOVERNOR'S STATEMENT\nxiii\nKEYNOTE REMARKS\nxv\n1.0 \nOVERVIEW\n1\n2.0 \nTHE STRUCTURE OF THE NIGERIAN FINANCIAL SYSTEM\n3\n2.1\nMajor Stakeholders\n5\n2.2\nOther Stakeholders in the Nigerian Financial System..\n5\n2.2.1\nThe Financial Services Regulation Coordinating\nCommittee (FSRCC) ..\n5\n2.2.2\nSelf-Regulatory Organisations (SROs)\n5\n2.2.3\nAdvisory Fora\n5\n3.0 \nMACROECONOMIC AND FINANCIAL DEVELOPMENTS..\n7\n3.1\nGlobal Macroeconomic and Financial Developments..\n7\n3.1.1\nGlobal Output\n8\n3.1.2\nGlobal Inflation\n8\n3.1.3\nGlobal Energy Prices..\n9\n3.1.4\nPolicy Interest Rates\n9\n3.1.5\nExchange Rates\n10\n3.1.6\nStock Markets\n11\n3.2\nDomestic Macroeconomic and Financial Developments\n13\n3.2.1\nThe Real Sector\n14\n3.2.2\nInflation..\n15\n3.2.3\nThe Fiscal Sector..\n15\n3.2.4\nThe Financial Sector\n16\n3.3\nThe External Sector\n23\n3.3.1\nExternal Reserves Management\n23\n3.3.2\nMovements in External Reserves\n24\n3.3.3\nForeign Exchange Flows\n24\n3.3.4 \nDemand for and Supply of Foreign Exchange\n24\n3.3.5\nExchange Rate Movements\n25\n3.4\nKey Risks in the Nigerian Financial System\n26\n3.4.1\nCredit Risk\n26\n3.4.2\nLiquidity Risk\n27\n3.4.3\nMarket Risk\n27\n3.4.4\nOperational Risk\n28\n3.4.5\nReputational Risk\n28\n3.5\nOutlook for the Second Half of 2011\n28\n4.0 \nDEVELOPMENTS IN THE FINANCIAL SECTOR\n31\n4.1\nPromoting Financial System Stability\n31\n4.2\nThe Revised Microfinance Policy, Regulatory and \nSupervisory Framework\n32\n4.3\nInstitutional Capacity Building\n33\n4.4\nInternational Economic Relations and Cooperation\n33\n4.4.1\nThe WAMZ Committee of Experts Deliberated on the \nReport of Financial Sector Assessment and Development\n33\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n \n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nvi\n4.4.2\nAfDB's Cooperation with Nigeria for the Development \nof SMEs\n33\n4.4.3\nCooperation with other African Central Banks\n34\n4.5\nAccess to Finance\n35\n4.5.1\nThe Agricultural Credit Guarantee Scheme \nFund (ACGSF)\n35\n4.5.2\nThe Agricultural Credit Support Scheme (ACSS) ..\n35\n4.5.3\nThe Commercial Agricultural Credit Scheme (CACS)\n35\n4.5.4\nThe Refinancing/Restructuring Small and Medium \nEnterprises Manufacturing Fund\n35\n4.5.5\nThe Small and Medium Enterprises Credit \nGuarantee Scheme (SMECGS)\n36\n4.5.6\nThe Power and Aviation Intervention Fund (PAIF)\n36\n4.5.7\nThe Nigerian Incentive-Based Risk Sharing System \nfor Agricultural Lending (NIRSAL)\n36\n4.5.8\nMicrofinance Banking Activities ..\n36\n4.5.9\nPrimary Mortgage Institutions' Activities\n36\n4.6\nNon-Interest Banking\n37\n4.7\nAnti-Money Laundering/Combating the Financing of \nTerrorism (AML/CFT)\n37\n5.0\nREGULATORY AND SUPERVISORY ACTIVITIES\n39\n5.1\nMacro-Prudential Supervision\n39\n5.1.1\nFinancial Soundness Indicators (FSIs)\n39\n5.1.2\nThe Banking Sector Stress Test\n43\n5.2\nLicensing and Approvals\n44\n5.2.1\nBureaux-de-Change\n44\n5.2.2\nMicrofinance Banks\n44\n5.2.3\nFinance Companies\n44\n5.2.4\nThe New Banking Model Compliance Plan\n44\n5.3\nSupervision of Banks and Other Financial Institutions\n44\n5.3.1\nDeposit Money Banks (DMBs)\n44\n5.3.2\nDiscount Houses\n45\n5.3.3\nOther Financial Institutions\n45\n5.4\nCross-border Supervision\n47\n5.4.1\nClosure of Foreign Subsidiaries\n47\n5.4.3\nThe College of Supervisors of the West African \nMonetary Zone (CSWAMZ)\n47\n5.4.4\nMemoranda of Understanding (MoUs)\n48\n5.5\nThe Financial Services Regulation Coordinating \nCommittee (FSRCC)\n48\n5.6\nSupervisory Challenges\n48\n5.6.1\nTowards Recovery from the Global Economic \nand Financial Crises\n48\n5.6.2\nWeak Corporate Governance\n49\n5.6.3\nInadequate Legal Framework\n49\n5.6.4\nData Integrity\n49\n5.6.5\nInadequate Supervisory Capacity\n49\n5.6.6\nGrowing Complexity in the Operations of \nFinancial Institutions\n50\n5.6.7\nThe Activities of Illegal Finance Operators in the Economy\n50\n5.7\nConsumer Protection\n50\n5.8\nThe Focus of Supervision\n51\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nvii\n6.0 \nTHE NIGERIAN PAYMENTS SYSTEM\n53\n6.1\nThe Payments System Vision 2020 (PSV 2020)\n53\n6.2\nDevelopments in the Payments System\n53\n6.2.1\nThe Real-Time Gross Settlement (RTGS) System\n54\n6.2.2\nCheque Clearing\n55\n6.2.3\nElectronic Card Payments\n55\n6.2.4\nAutomated Teller Machine (ATM) Transactions\n57\n6.2.5\nMobile Banking ..\n57\n6.3\nPayments System Challenges\n57\n7.0\nPRESERVING THE INTEGRITY OF THE FINANCIAL SYSTEM\n59\n7.1\nThe Asset Management Corporation of Nigeria (AMCON)\n59\n7.2\nThe Implementation of International Financial Reporting\nStandards (IFRS)\n59\n7.3\nUpdate on Credit Information Bureaux\n59\n7.3.1\nCBN's Credit Risk Management System (CRMS)\n59\n7.3.2\nPrivate Credit Bureaux (PCBs)\n60\n7.4\nThe Financial System Strategy 2020 (FSS 2020)\n61\n8.0 \nCONCLUSION\n63\nGLOSSARY\n65\nAppendix 1: Result of the Banking Sector Stress Test at end-June 2011\n69\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n \n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n CBN FINANCIAL STABILITY REPORT JUNE 2011\n \n \nviii\nL i s t o f F i g u r e s\nFigure 1: Structure of the Nigerian Financial System at end-June 2011\n4\nFigure 2: Percentage Growth Rate of Non-Oil GDP\n14\nFigure 3: Contribution of Oil and Non-oil GDP to Total Output\n14\nFigure 4: Inflationary Trend (Year-on-Year)\n15\nFigure 5: Federal Government's Fiscal Operations\n15\nFigure 6: Trends in Major Monetary Aggregates..\n16\nFigure 7: Trends in Net Domestic Credit\n16\nFigure 8: Distribution of Deposit Money Banks (DMBs) Loans and \n Advances by Maturity\n17\nFigure 9: Distribution of MB's Deposit Structure..\n17\nFigure 10: Market Concentration Ratios of DMBs (Assets)\n18\nFigure 11: Money Market Rates Between First Half of 2008 and First Half of 2011\n19\nFigure 12: Lending and Deposit Rates Between First Half of 2008 and \n First Half of 2011\n19\nFigure 13: FGN Bond Auctions\n21\nFigure 14: OTC Trades in FGN Bonds\n23\nFigure 15: WDAS-SPT Demand and Supply in US$ Million\n25\nFigure 16: WDAS, Inter-Bank and BDC Rates for July 2010 - June 2011\n26\nFigure 17: Selected Credit Ratios, Dec. 2010 June 2011\n27\nFigure 18: Banking Sector Capital Adequacy Ratios, 2010 - 2011\n41\nFigure 19: Banking Industry NPLs to Total Loans, 2010 - 2011\n41\nFigure 20: Selected Profitability Ratios of the Nigerian Banking Industry, \n 2010 - 2011\n42\nFigure 21: Banking Industry Liquidity Ratios\n43\nFigure 22: CBN's RTGS Transactions, July 2010 - June 2011\n55\nFigure 23: Volume and Value of Cheques Cleared, July 2010 - June 2011\n55\nFigure 24: Electronic Card Transactions, July 2010 - July 2011\n56\nFigure 25: Volume of Electronic Card Transactions, January - June 2011\n56\nFigure 26: Value of Electronic Card Transactions, January - June 2011\n57\nFigure 27: Selected CRMS Statistics, 2010 2011\n60\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n...\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n CBN FINANCIAL STABILITY REPORT JUNE 2011\n \nix\n \nL i s t o f T a b l e s\nTable 1: Global Output, Prices and Projections for 2011 and 2012\n9\nTable 2: Monetary Policy Rates for Selected Countries, Jan 2010 - June 2011\n10\nTable 3: End-Period Exchange Rates of Selected Countries \n(Values in currency units to US$)\n11\nTable 4: Global Stock Indices\n13\nTable 5: Transactions on the Nigerian Stock Exchange\n20\nTable 6: NSE Sectoral Performance in the First Half of 2011\n20\nTable 7: FGN Bond Auctions, January - June 2011\n21\nTable 8: Corporate Bonds Issued, January - June 2011\n22\nTable 9: Outstanding Corporate Bonds\n22\nTable 10: Selected Financial Soundness Indicators in the Nigerian Banking Sector\n40\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n..\n CBN FINANCIAL STABILITY REPORT JUNE 2011\n \n \nL i s t o f B o x e s\nBox 1: Summary of Stress Test Result\n43\n..\n..\n..\n..\n..\n..\n \nA p p e n d i x\nAppendix 1: Result of the Banking Sector Stress Test at end-June 2011\n69\n..\n..\nx\n CBN FINANCIAL STABILITY REPORT JUNE 2011\n \nList of Abbreviations and Acronyms\nxi\nAACBs\nAADFIs\nACGSF\nACSS\nAFC\nAGRA \nAIPs\nAMCON\nAML/CFT\nASCE\nASI\nATMs\nAU\nBCEAO\nBDCs\nBOA\nBOFIA\nBOI\nBSE Sensex\nCAC 40\nCACS\nCAR\nCBN\nCIBN\nCIFTS\nCR6\nCRMS\nCSWAMZ\nD-8 \nDAX\nDFIs\nDMBs\nDMO\nEGX CASE 30 \nEBAs\nEMV\nFATF\nFCs\nFCT\nFGN\nFMBN\nFMF\nFSIs\nFSRCC\nFTSE 100\nGDP\nGSE \nHHI\n-\nAssociation of African Central Banks \n-\nAssociation of African Development Finance Institutions\n-\nAgricultural Credit Guarantee Scheme Fund \n-\nAgricultural Credit Support Scheme \n-\nAfrican Finance Corporation \n-\nAlliance for a Green Revolution in Africa \n-\nApproval in Principles\n-\nAsset Management Corporation of Nigeria \n-\nAnti-Money Laundering and Combating the Financing of Terrorism \n-\nAbuja Securities and Commodity Exchange\n-\nAll Share Index (Nigerian Stock Exchange Index)\n-\nAutomated Teller Machines\n-\nThe African Union\n-\nBanque Centrale des Etats de l'Afrique de l'Ouest \n(Central Bank of West African States)\n-\nBureaux de Change\n-\nBank of Agriculture\n-\nBanks and Other Financial Institutions Act 1991 (as amended)\n-\nBank of Industry \n-\nBombay Stock Exchange (Indian Stock Index)\n-\nCotation Assisteé en Continu (French Stock Index)\n-\nCommercial Agricultural Credit Scheme \n-\nCapital Adequacy Ratio\n-\nCentral Bank of Nigeria\n-\nChartered Institute of Bankers of Nigeria\n-\nCBN Interbank Fund Transfer System\n-\nConcentration Ratio (of the six largest banks)\n-\nCredit Risk Management System\n-\nCollege of Supervisors of the West African Monetary Zone\n-\nGroup of Eight Developing Countries \n-\nDeutscherAktien Index (German Stock Index)\n-\nDevelopment Finance Institutions \n-\nDeposit Money Banks\n-\nDebt Management Office\n-\nEgyptian Stock Index (Cairo and Alexandria Stock Exchange)\n-\nEligible Bank Assets\n-\nEuro MasterCard Visa\n-\nFinancial Action Task Force\n-\nFinance Companies\n-\nFederal Capital Territory \n-\nFederal Government of Nigeria \n-\nFederal Mortgage Bank of Nigeria\n-\nFederal Ministry of Finance \n-\nFinancial Soundness Indicators\n-\nFinancial Services Regulation Coordinating Committee\n-\nFinancial Times Stock Exchange Index (UK Stock Index)\n-\nGross Domestic Product\n-\nGhanaian Stock Exchange Index\n-\nHerfindahl-Hirschman Index\nIFC\n-\nIslamic Finance Council \n CBN FINANCIAL STABILITY REPORT JUNE 2011\nIFRS\nIFSB\nIGBC \nIILMC\nIMF\nJSE\nKYC\nL/C\nM1\nM2\nMCP\nMDAs\nMENA\nMFBs\nMFIs\nMICEX\nML/FT\nMoUs\nMPR\nNACRDB\nNAICOM\nNASB\nNDIC\nNEXIM\nNFIU\nNGAAP+\nNikkei 225\nNIBSS\nNIRSAL\nNPLs\nNSE\nNSE 20\nOBB\nOFIs\nPAIF\nPCBs\nPENCOM\nPFAs\nPFCs\nPMIs\nPOS\nPSV 2020\nROSCAs\nRTGS\nS&P \nSEC\nSMEs\nSMECGS\nSROs\nTSX \nWAMZ\nWDAS\nWEO\n-\nInternational Financial Reporting Standards \n-\nIslamic Financial Services Board \n-\nIndice de la Bolsa de Valores de Columbia (Columbian Stock Index)\n-\nInternational Islamic Liquidity Management Corporation\n-\nInternational Monetary Fund\n-\nJohannesburg Stock Exchange (South African Stock Index)\n-\nKnow Your Customer\n-\nLetter of Credit \n-\nNarrow Money Supply\n-\nBroad Money Supply\n-\nMicrofinance Certification Programme\n-\nMinistries, Departments and Agencies\n-\nMiddle East and North African countries\n-\nMicrofinance Banks \n-\nMicrofinance Institutions\n-\nMoscow Inter-Bank Currency Exchange (Russian Stock Index)\n-\nMoney Laundering and Financing of Terrorism \n-\nMemoranda of Understanding \n-\nMonetary Policy Rate\n-\nNigerian Agricultural Co-operative and Rural Development Bank\n-\nNational Insurance Commission\n- Nigerian Accounting Standards Board\n-\nNigeria Deposit Insurance Corporation\n-\nNigerian Export-Import Bank \n-\nNigeria Financial Intelligence Unit\n-\nNigerian Generally Accepted Accounting Principle\n-\nJapanese Stock Index\n-\nNigerian Interbank Settlement System\n-\nNigerian Incentive-based Risk Sharing System for \nAgricultural Lending \n-\nNon-Performing Loans \n-\nNigerian Stock Exchange\n-\nNairobi Stock Exchange (Kenyan Stock Index)\n-\nOpen Buy Back \n-\nOther Financial Institutions\n-\nPower and Aviation Infrastructure Fund \n-\nPrivate Credit Bureaux\n-\nNational Pension Commission of Nigeria\n-\nPension Fund Administrators \n-\nPension Fund Custodians \n-\nPrimary Mortgage Institutions \n-\nPoint of Sale\n-\nPayments System Vision 2020 \n-\nRotating Savings and Credit Associations \n-\nReal-Time Gross Settlement System\n-\nStandard and Poor's \n-\nSecurities and Exchange Commission\n-\nSmall and Medium Enterprises \n-\nSmall and Medium Enterprises Credit Guarantee Scheme \n-\nSelf- Regulatory Organisations\n-\nToronto Stock Exchange\n-\nWest African Monetary Zone \n-\nWholesale Dutch Auction System \n-\nWorld Economic Outlook\nxii\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nxiii\nGovernor’s Statement\nThe Financial Stability Report (FSR) is a bi-annual publication of the Bank that focuses \non developments in the financial system and highlights measures taken to address \nvulnerabilities. The Bank commenced this publication in June 2010 and this edition is \nthe third in the series. We are encouraged by stakeholder comments on previous editions \nas well as the growing interest in the publication.\nThe global economy is going through a number of challenges in the aftermath of the \nrecent global economic and financial crises. The major concern has been the rising debt \nprofile, especially in the Euro zone, particularly Greece, Ireland, and Portugal; as well as \nuncertainties in Italy and Spain. The earthquake and tsunami in Japan triggered certain \nevents, some of which were of global concern, such as the use of nuclear energy for \npower generation. The crises in the Middle East and North African (MENA) countries \naffected oil supplies and positively impacted Nigeria's/African oil exports.\nOn the domestic front, the country continued to experience numerous challenges, such \nas poor infrastructure, inflationary pressures and unemployment. Also, the over-\ndependence on oil as the major foreign exchange earner and the import-dependent \nnature of the economy exerted significant pressure on foreign reserves. The financial \nsystem also witnessed a number of challenges, arising mainly from weak corporate \ngovernance, undercapitalisation of some banks and low credit growth to the real sector. \nThe global financial crisis also compounded some of these challenges. \nNotwithstanding the above, the smooth conduct of the April 2011 elections instilled \nconfidence in the system, with potential for an improved business environment and \nincreased Foreign Direct Investment (FDI). Also, the newly enacted National Sovereign \nInvestment Authority (NSIA) Act, 2011, is expected to lead to a more efficient \nmanagement of the nation's excess earnings from crude oil. \nDuring the review period, the Bank continued monetary tightening, the implementation \nof risk-based and consolidated supervision, and the new banking model as well as and \nthe International Financial Reporting Standards (IFRS). The Bank also re-introduced \ncross-border and on-site supervision of subsidiaries of Nigerian banks. \n CBN FINANCIAL STABILITY REPORT JUNE 2011\nxiv\n Thus, like the previous editions, this edition of FSR, provides readers with information \non developments in the Nigerian financial system and the measures taken by the Bank \nwith a view to enhancing market discipline, transparency and accountability. I, \ntherefore, commend this Report to all stakeholders in the Nigerian financial system and \nthe general public.\nSanusi Lamido Sanusi (CON)\nGovernor, Central Bank of Nigeria \n CBN FINANCIAL STABILITY REPORT JUNE 2011\nKeynote Remarks\nThe global economic and financial crises, which slowed growth in the global economy in \nthe past few years, also affected the stability of the financial markets. The global \nfinancial system has continued to witness slow recovery from the impact of the crises. \nThe uncoordinated unwinding of the stimulus packages has further slowed the recovery. \nHowever, as the world economy gradually recovers from the effects of the crises, there is \nneed for more proactive and effective supervisory and regulatory measures to strengthen \nthe recovery and safeguard the soundness and stability of the financial system. \nIn this regard, the CBN continued to pursue initiatives and policies aimed at \nstrengthening the financial system. In addition, it continued to provide incentives to \nother sectors of the economy such as agriculture, aviation and power. It is believed that \nthe outcome of these initiatives will result in a more stable financial system and higher \nstandards of living. As the Nigerian banking system recovers from the global economic \nand financial crises, the Bank's focus remains the recapitalisation of the eight rescued \nbanks, ring-fencing all deposit money banks (DMBs) from risky non-banking business, \nand promoting a safe and sound financial system.\nThis edition of Financial Stability Report highlights the Bank's assessment of key risks \nin the financial system and vulnerabilities to financial stability emanating from \ndevelopments in the domestic and international environment, as well as measures taken \nby the Bank to ensure the efficiency and soundness of the financial system. Hence, this \nReport is designed to provide a medium for informed discussion and understanding into \nthe management of the risks inherent in the financial system and the economy at large.\nDr. Kingsley Chiedu Moghalu\nDeputy Governor, Financial System Stability\nxv\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nOVERVIEW\n1.0\nThis edition of CBN's Financial Stability Report (FSR), which covers the period of \nJanuary to June 2011, reviews developments in the global and domestic economic scene \nand their impact on the Nigerian financial system. It discusses the various interventions \nby the Central Bank of Nigeria (CBN) in response to identified and potential challenges.\nSection 2 presents the structure of the Nigerian financial system. The section identifies \nthe major stakeholders and highlights the reporting relationships in the system. Section 3 \ncontains reviews of the global and domestic macroeconomic and financial \ndevelopments. This section notes that the debt crisis in the Euro Zone, the escalating \ncrisis in the MENA countries, and rising commodity prices affected the rate of global \neconomic recovery across regions. While growth was largely subdued in the industrial \ncountries, the emerging and developing economies recorded a high growth performance. \nThe depreciation of the US dollar led to currency appreciation in most countries, while \nthe performance of global stock markets remained largely mixed, with the Nigerian \nStock Market recording a marginal rise in the All-Share Index. The domestic economy \ngrew by 7.93 per cent, driven by the non-oil sector. Tight monetary policy moderated \nexpansion in money supply and aggregate credit and constrained inflationary pressures, \nespecially in the second quarter. Domestic interest rates, generally, trended upwards \nwhile the Naira exchange rate was under severe pressure from heightened demand for \nforeign exchange. \nSection 4 of the report discusses the actions taken by the DMBs in compliance with the \nrequirements of the new banking model with respect to a new operating structure and \nminimum capitalization levels. Furthermore, developments encompassing the adoption \nof new policy frameworks for MFBs and non-interest (Islamic) banking, and the \nimplementation of the IFRS, are also analysed. The Bank's engagement with \ninternational financial and regional institutions is also discussed here. \nSection 5 presents highlights of the regulatory and supervisory activities in the Nigerian \nfinancial system. The Nigerian banking sector was relatively sound during the review \nperiod, as most of the financial soundness indicators revealed an improvement over the \nlevels at end-December 2010, with the exception of earnings and profitability which \ndropped sharply. The improved capital adequacy level, which stood at 9.9 per cent, was \n1\n CBN FINANCIAL STABILITY REPORT JUNE 2011\n1.9 percentage points higher than the Basel II minimum requirement. The ratio of non-\nperforming loans to total risk assets also improved significantly.\nIn order to identify and measure the vulnerabilities and resilience of the banking sector to \nshocks, a stress test was conducted during the period. The result revealed that credit risk \nwas the most significant, followed by exchange rate risk. The Bank also conducted an \nexamination/special examination of 5 discount houses, 119 microfinance banks and 101 \nPMIs to determine their financial health and capital adequacy. The outcomes of these \nexercises are also analysed in this section.\nSection 6 contains discussion on the developments in the implementation of the \nPayments System Vision 2020 (PSV 2020) initiative whose overarching objective is to \nensure a payments system that is nationally utilized and internationally recognized. \nEmphasis was on encouraging the usage of electronic payments channels as against \ncash-based transactions, in order to enhance efficiency, reliability and availability, as \nwell as facilitate transactions at minimal cost and risk.\nSection 7 presents highlights of some on-going initiatives aimed at safeguarding \nstability of the financial system. These include AMCON, IFRS, CRMS, PCBs and FSS \n2020. \nSection 8 concludes the Report and reiterates the point that promotion of a sound and \nstable financial system remained a core mandate of the CBN, given the critical role of \nfinancial stability in the achievement of government's macroeconomic objectives. This \nsection recapitulates the various measures taken by the Bank during the review period \npursuant to that mandate, the challenges faced, and the focus of macro-prudential \nactivities in the second half of 2011. \n2\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nSTRUCTURE OF THE NIGERIAN FINANCIAL \nSYSTEM\n2.0\n2.1\nMajor Stakeholders\nThere were no significant changes in the structure of the Nigerian financial system \nduring the reporting period. At end-June 2011, the regulatory/supervisory institutions in \nthe financial system were the Central Bank of Nigeria, the Nigeria Deposit Insurance \nCorporation, the Securities and Exchange Commission, the National Insurance \nCommission and the National Pension Commission. The operators were 24 deposit \nmoney banks (DMBs), five (5) discount houses (DHs), 866 Microfinance Banks \n(MFBs), 108 finance companies (FCs), 101 primary mortgage institutions (PMIs), 31 \npension fund administrators (PFAs) - including seven (7) closed PFAs, - five (5) pension \nfund custodians (PFCs), one (1) Stock Exchange, one (1) Securities and Commodities \nExchange, 1,997 bureaux de change (BDCs), 690 securities brokerage firms, five (5) \ndevelopment finance institutions (DFIs), 1 public credit bureau, 3 private credit bureaux, \n49 registered insurance companies and the Asset Management Corporation of Nigeria \n(Figure 1).\nIn addition to these formal institutions, a number of informal institutions continued to \nplay a vital role in the financial system. These include NGO-MFIs, community-based \norganisations, such as financial cooperatives, rotating savings and credit associations \n(ROSCAS), and self-help groups. \nThe Presidency and the National Assembly exercise statutory oversight over the Federal \nMinistry of Finance (FMF) and the CBN, while the FMF supervises the NDIC, SEC and \nNAICOM.\n3\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nFigure 1: Structure of the Nigerian Financial System at end-June 2011\n \n \n \nPresidency/National Assembly\n \nFederal Ministry of \nFinance\n \nCentral Bank of Nigeria\n \nNAICOM\nNDIC\n \nSEC\n \nDMO\nAMCON\n \nASCE\n \nNSE\n \nFederal MortgageBank of Nigeria\nUrban Development Bank\nNigeria Export-Import Bank\nBank of Agriculture\nBankof Industry\nPension Fund Custodians\nInsurance Brokers & Adjusters\nReinsurance Companies\nInsurance Companies\nRegistrars\nSecurities Brokerage Firms\nIssuing Houses\nMicrofinance Banks\nDeposit Money Banks\nDiscount Houses\nFinance Companies\nPrimary Mortgage Institutions\nBureaux–de-Change\nPension Fund Administrators\n \nPENCOM\n \n4\n CBN FINANCIAL STABILITY REPORT JUNE 2011\n2.2\nOther Stakeholders in the Nigerian Financial System\n2.2.1\nThe Financial Services Regulation Coordinating Committee (FSRCC)\n2.2.2\nSelf-Regulatory Organisations (SROs)\n2.2.3\nAdvisory Fora\nThe FSRCC coordinates and harmonises regulatory activities in the Nigerian financial \nsystem. The Committee is chaired by the CBN with the FMF, the NDIC, SEC, \nNAICOM, and CAC as members, while PENCOM, the NSE, Abuja Securities and \nCommodities Exchange and the Federal Inland Revenue Service (FIRS) are observer-\nmembers.\nThe SROs provide training and advocacy and enforce codes of ethics and standards for \nmembers. They include: the Association of Corporate Trustees, the Association of \nBureaux-de-Change Operators of Nigeria, the Association of Stock-broking Houses of \nNigeria, the Association of Issuing Houses of Nigeria, the Bankers Committee, the \nCapital Market Solicitors Association, the Financial Markets Dealers Association, the \nFinance Houses Association of Nigeria, the Equipment Leasing Association of Nigeria, \nthe Mortgage Banking Association of Nigeria, and the National Association of \nMicrofinance Banks. \nOther self-regulatory professional bodies also operate in the financial system. These \ninclude the Association of National Accountants of Nigeria (ANAN), the Chartered \nInstitute of Bankers of Nigeria (CIBN), the Chartered Institute of Stockbrokers (CIS), \nand the Institute of Chartered Accountants of Nigeria (ICAN).\nDifferent fora exist where regulators in the financial system formally meet with \noperators in the various segments of the financial system. These include the Bankers \nCommittee, the Committee of Microfinance Banks of Nigeria, the Committee of \nMortgage Institutions of Nigeria, the Clearing House Committee, the Institute of Capital \nMarket Registrars, and the National Payments System Committee.\n5\n CBN FINANCIAL STABILITY REPORT JUNE 2011\n3.0\nMACROECONOMIC AND FINANCIAL \nDEVELOPMENTS \n3.1\nGlobal Macroeconomic and Financial Developments\n3.1.1\nGlobal Output\nThe pace of global economic recovery in the first half of 2011 slowed as downside risks \ngrew amidst weaknesses in the US economy, heightened concerns over the sovereign \ndebt crisis in the Euro zone and the devastating effect of the tsunami in Japanese. These \ndevelopments increased the risks associated with economic recovery and kept the global \nfinancial system fragile. The IMF World Economic Outlook (WEO) Update, June 2011, \nindicated that the advanced economies recorded weak growth owing to low aggregate \ndemand, while the emerging and developing economies had strong growth arising from \nhigh commodity prices and strong domestic demand. Consequently, global output grew \nat an annualized rate of 4.3 per cent in the first quarter of 2011, and was projected to \nremain at that level in June 2011.\nGrowth in global output decelerated in the first half of 2011 to 4.3 per cent, from 4.7 per \ncent in the second half of 2010. In the advanced economies, output grew by 2.2 per cent, \ncompared with the projection of 2.7 per cent. The subdued growth was attributed to \nsupply disruptions owing to the earthquake in Japan and increases in global oil prices, \nwhich reduced household real incomes and private consumption. This trend was \nprojected to be reversed and growth to improve to 2.5 per cent in the second half of 2011. \nIn the US, real GDP grew at an average of 2.3 per cent in the first half of 2011. This was \nprojected to improve to 2.5 per cent in the second half of 2011 due to expected strong \ngrowth in household domestic demand and a declining unemployment rate as a result of \nthe positive impact of the fiscal stimulus packages implemented in 2010. \nIn the emerging and developing economies, output growth averaged 6.5 per cent in the \nfirst half of 2011 and was projected to improve to 6.6 per cent in the second half of 2011, \nlargely due to increased demand for primary commodities by the emerging economies in \nAsia. In Developing Asia and Latin America, and the Caribbean, growth decelerated \nfrom 9.6 and 6.1per cent in the second half of 2010 to 8.4 and 4.6 per cent, respectively, \nin the first half of 2011 (Table 1). \n1IMF, World Economic Outlook, January 25, 2011\n7\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nOutput growth in the Middle East and North African (MENA) countries dwindled \nduring the first quarter of 2011 as economic activities were hampered by political and \nsocial unrest. However, estimates for the second quarter of 2011 indicated \nimprovements, as some of the oil and mineral producing states in the region were \nexpected to resume full operations. Consequently, growth in the MENA countries in the \nfirst half of 2011 was projected to average 4.0 per cent, compared with 5.5 per cent in \nSub-Saharan Africa where growth continued to strengthen, with robust domestic \ndemand and exporters benefiting from rising commodity prices.\nGlobal inflation accelerated in the first half of 2011 arising from the more-than-expected \nincreases in commodity prices. According to the WEO June 2011Update, inflation in \nadvanced economies averaged 2.6 per cent in the first half of 2011, indicating an upward \nchange from the 1.5 per cent in the second half of 2010. Similarly, US inflation rose to a \nmonthly average of 2.4 per cent in the first half of 2011, from 1.0 per cent during the \nsecond half of 2010. \nInflation in the emerging and developing economies declined to an estimated 6.0 per cent \nin June 2011, from the 6.3 per cent recorded in the second half of 2010. On the other \nhand, inflationary pressure in Sub-Saharan Africa persisted during the first half of 2011 \nowing to strong domestic demand and exchange rate misalignment. Overall, inflation is \nlikely to remain high for the rest of 2011.\nWorld crude oil prices averaged US$116.90 per barrel in the first half of 2011, \nrepresenting an increase of 46.50 per cent over the average price of US$79.80 per barrel \nrecorded in the second half of 2010. Oil prices were estimated to remain above US$100 \nper barrel for the rest of 2011 in anticipation of a rebound in Japan's output and a sluggish \nsupply response. The lingering political crisis in the MENA countries is also expected to \nsustain prices at that level.\n3.1.2\nGlobal Inflation\n3.1.3\nGlobal Energy Prices\n8\n CBN FINANCIAL STABILITY REPORT JUNE 2011\n   \n2009 2010 2011\n2012\n2011\n2012\n2010 2011 2012\nWorld output\n1 \n-0.6 5.1\n4.3\n4.5\n-0.1\n0.0\n4.7\n4.3\n4.4\nAdvanced economies -3.4 3.0\n2.2\n2.6\n-0.2\n0.0\n2.7\n2.3 2.6\n  United States \n-2.6\n2.9\n2.5\n2.7\n-0.3\n-0.2\n2.8\n2.6\n2.5\n  Euro area \n-4.1\n1.8\n2.0\n1.7\n0.4\n-0.1\n1.2\n1.8\n2.0\n    Germany \n-4.7\n3.5\n3.2\n2.0\n0.7\n-0.4\n3.8\n2.6\n2.4\n    France \n-2.6\n1.4\n2.1\n1.9\n0.5\n0.1\n1.4\n2.0\n2.1\n    Italy \n-6.2\n1.3\n1.0\n1.3\n-0.1\n0.0\n1.5\n1.3\n1.2\nJapan \n-6.3\n4.0\n-0.7\n2.9\n-2.1\n0.8\n2.4\n0.8\n2.2\nUnited Kingdom \n-4.9\n1.3\n1.5\n2.3\n-0.2\n0.0\n1.5\n2.0\n2.4\n2.8\n7.4\n6.6\n6.4\n0.1\n-0.1\n7.5\n6.9 6.6\nDeveloping Asia\n7.2\n9.6\n8.4\n8.4\n0.0\n0.0\n9.2\n8.4\n8.6\n    China \n9.2\n10.3\n9.6\n9.5\n0.0\n0.0\n9.8\n9.4\n9.5\n    India \n6.8\n10.4\n8.2\n9.5\n0.0\n0.0\n9.7\n7.7\n8.0\nLatin America and Carribean -1.7\n6.1\n4.5\n9.5\n-0.1\n-0.1\n5.4\n4.3\n4.0\n    Brazil \n-0.8\n7.5\n4.1\n9.5\n-0.4\n-0.5\n5.0\n4.3\n3.7\n    Mexico \n-6.1\n5.5\n4.7\n9.5\n0.1\n0.0\n4.4\n4.4\n1.7\nMiddle East and North Africa 2.5\n4.4\n4.2\n9.5\n0.1\n0.2\nNA\nNA\nNA\n    Sub-Sahara Africa\n2.8\n5.1\n5.5\n9.5\n0.0\n0.0\nNA\nNA\nNA\nConsumer prices \nAdvanced economies \n0.1\n1.6\n2.6\n1.7\n0.4\n0.0\n1.6\n2.6\n1.6\nEmerging and Developing \n3 \nEconomies\n5.2\n6.1\n6.9\n5.6\n0.0\n0.3\n6.2\n5.8\n5.0\n3The quarterly estimates and projections account for approximately 76 percent of the emerging and developing economies. \n  \nSource: World Economic Outlook Update June 2011\nNote: Country weights used to construct aggregate growth rates for groups of countries were revised. \n1The quarterly estimates and projections account for 90 percent of the world purchasing-power-parity weights. \n2The quarterly estimates and projections account for approximately 77 percent of the emerging and developing economies. \nTable 1: Global Output, Prices Projections for 2011 and 2012\n3.1.4\nPolicy Interest Rates\nIn most advanced and emerging economies, policy interest rates remained largely \nunchanged. In the US, the Federal Funds rate was left at 0.25 per cent, while Japan \nmaintained its zero interest rate policy. In China, the monetary authorities favoured \nmonetary tightening in the first quarter of 2011. In April 2011, the rate was further \ntightened to 6.31 per cent, from 6.06 per cent in March, and remained unchanged \nthroughout the second quarter (Table 2). In the UK and South Africa, the Bank of \n9\nEmerging and Developing \n2 \nEconomies\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nEngland and the Reserve Bank of South Africa retained their rates at 0.5 and 5.5 per cent, \nrespectively, during the first half of 2011. \nAlthough the Euro Zone was faced with a debt crisis, the primary concern of the \nEuropean Central Bank (ECB) remained the maintenance of price stability. \nConsequently, the ECB policy rate remained unchanged at 1.0 per cent during the first \nquarter of 2011, but was raised to 1.25 per cent in the second quarter. \nOn the other hand, Nigeria, Brazil, Chile, Kenya, and India adopted a tight monetary \npolicy stance during the period under review (Table 2).\n \nSource: From their Respective Central Bank Websites\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n0.1\n \n0.1\n \n0.1\n \n0.5\n \n0.5\n \n0.5\n \n3.1.5\nExchange Rates\nThe U.S. Dollar depreciated against most major currencies in the period under review. \nIn North America, the Canadian Dollar and Mexican Peso appreciated against the U.S. \nDollar by 0.59 and 1.51 per cent, respectively. Similarly, in South America, the Brazilian \nReal and Colombian Peso appreciated against the U.S. Dollar by 4.27 and 6.22 per cent, \nrespectively, while the Argentine Peso depreciated against the U.S. Dollar by 1.42 per \ncent (Table 3).\nIn Europe, the British Pound depreciated against the U.S Dollar by 0.48 per cent, while \nthe Euro and Russian Ruble appreciated against the U.S. Dollar by 2.96 and 2.01 per \nTable 2: Monetary Policy Rates for Selected Countries, Jan 2010 - June 2011\n10\n CBN FINANCIAL STABILITY REPORT JUNE 2011\ncent, respectively. In Asia, the Japanese Yen and Chinese Renminbi appreciated against \nthe U.S. Dollar by 3.26 and 1.33 per cent, respectively, while the Indian Rupee \ndepreciated against the U.S Dollar by 0.51 per cent.\nIn Africa, the Nigerian Naira and the Kenyan Shilling depreciated against the U.S. \nDollar by 0.17 and 6.97 per cent, respectively, while the South African Rand, Egyptian \nPound and Ghanaian Cedi appreciated against the U.S. Dollar by 0.01, 0.04 and 0.08 per \ncent, respectively. \nCurrency\n2010:Q1\n2010:Q2\n2010:Q3\n2010:Q4\n2011:Q1\n2011:Q2\n2011Q1 and \nQ2 % Change\nYTD % Change\nAFRICA \nNigeria \nNaira\n149.783\n149.985\n151.35\n150.66\n153.04\n153.31\n-0.17\nSouth Africa \nRand\n7.285\n7.671\n6.96\n6.63\n6.77\n6.77\n0.01\nKenya \nShilling\n77.31\n81.63\n80.75\n80.70\n83.10\n89.33\n-6.97\nEgypt \nPound\n5.5045\n5.6955\n5.75\n5.80\n5.97\n5.97\n0.04\nGhana\nCedi\n1.4208\n1.4425\n1.42\n1.49\n1.52\n1.52\n0.08\nNORTH \nAMERICA \nCanada \nDollar\n1.0153\n1.0639\n1.03\n1.00\n0.97\n0.96\n0.59\nMexico \nPeso\n12.365\n12.9409\n12.59\n12.34\n11.89\n11.71\n1.51\nSOUTH \nAMERICA \nBrazil \nReal\n1.7813\n1.8047\n1.69\n1.66\n1.63\n1.56\n4.27\nArgentina \nPeso\n3.8788\n3.9305\n3.96\n3.98\n4.05\n4.11\n-1.42\nColombia \nPeso\n1920.35\n1900.11\n1802.18\n1907.70\n1880.87\n1770.78\n6.22\nEUROPE \nUK \nPound \nSterling\n0.6586\n0.6691\n0.64\n0.64\n0.62\n0.62\n-0.48\nEuro Area \nEuro\n0.7402\n0.8172\n0.73\n0.75\n0.71\n0.69\n2.96\nRussia \nRuble\n29.4205\n31.2095\n30.54\n30.54\n28.43\n27.87\n2.01\nASIA \nJapan \nYen\n93.47\n88.43\n83.53\n81.12\n83.19\n80.56\n3.26\nChina \nRemnibi\n6.8259\n6.7818\n6.69\n6.61\n6.55\n6.46\n1.33\nIndia \nRupee\n44.9175\n46.45\n44.95\n44.71\n44.47\n44.70\n-0.51\nSource: Bloomberg \n-2.73\n-3.16\n6.27\n9.57\n2.81\n7.73\n5.35\n0.70\n2.21\n8.34\nYTD = Year to Date\n-1.73\n-9.66\n3.49\n-2.07\n0.02\n-1.97\nTable 3: End-Period Exchange Rates of Selected Countries \n(Values in currency units to US$)\n3.1.6\nStock Markets\nStock markets across the world recorded mixed performance in the first half of 2011, \narising from an uneven economic recovery, persistent high levels of unemployment, the \nsovereign debt crisis, rising commodity prices and geopolitical tensions.\nIn Africa, the stock markets followed the global trend during the period under review. \nThe Nigerian Stock Exchange (NSE) All-Share Index (ASI) and the Ghanaian GSE All-\nShare Index rose by 0.85 and 18.89 per cent to 24,980.20 and 1,188.91 respectively at \nend-June 2011, from 24,770.50 and 1,000.00, at end-December 2010, respectively. The \n11\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nNSE ASI rose owing to improved liquidity, while the rise in the GSE All-Share index was \nlargely attributable to rising commodity prices which boosted share prices of mining \ncompanies. However, the South African JSE, the Kenyan NSE 20 and the Egyptian EGX \nCASE 30 indices declined by 0.79, 9.34 and 24.77 per cent to 31,864.54, 70.50 and \n5,373.00 at end-June 2011, from 32,118.89, 77.76 and 7,142.14, at end-December 2010, \nrespectively. The South African JSE, declined, despite rising commodity prices, \nfollowing investors' divestment as a result of speculation that South African stocks were \novervalued. On the other hand, the Kenyan NSE 20 declined owing to uncertainty driven \nby political concerns, high inflation, rising interest rates and a depreciating Kenyan \nshilling, while Egypt's EGX CASE 30 decline was attributed to political crisis which \neroded investor confidence. \nIn North America, positive economic indicators in the US and the bail-out loan to Greece \nby the ECB and the IMF, which temporarily restored confidence in the Euro zone, \nboosted the U.S index, as the S&P 500 rose by 5.01 per cent to 1,320.64 at end-June \n2011, from 1,257.64 at end-December 2010. However, the Canadian S&P/TSX \nComposite and Mexican Bolsa indices declined by 1.06 and 5.17 per cent to 13,300.87 \nand 36,558.07 at end-June 2011, from 13,443.22 and 38,550.79, respectively at end-\nDecember 2010. \nIn South America, the equities market declined in the first half of 2011 amid speculations \nthat a number of countries in the region would introduce measures aimed at curbing \ninflation, thus limiting economic growth. Consequently, the Brazilian Bovespa, the \nArgentine Merval and the Columbian IGBC indices declined by 9.95, 4.62 and 9.22 per \ncent, to 62,403.64, 3,360.64 and 14,067.73 at end-June 2011, from 69,304.81, 3,523.59 \nand 15,496.77, respectively at end-December 2010. \nIn Europe, stock market indices trended upwards in the first half of 2011, except the \nRussian MICEX which declined. The United Kingdom's FTSE 100, the French CAC 40 \nand the German M-DAX rose by 0.78, 4.66 and 6.68 per cent to 5,945.71, 3,982.21 and \n7,376.24 at end-June 2011, from 5,899.94, 3,804.78 and 6,914.19, respectively at end-\nDecember 2010. The Russian MICEX declined by 4.12 per cent to 100.06 at end-June \n2011, from 104.36 at end-December 2010. Rising crude oil prices were not sufficient to \nsupport growth on the MICEX as the decline in domestic growth and the credit \nenvironment dragged the index down. \n12\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nAll the indices in the Asian market declined. The Japanese Nikkei 225, the Chinese \nShanghai A and the Indian BSE Sensex declined by 4.04, 1.64 and 8.11 per cent to \n9,816.09, 2,762.08 and 18,845.87 at end-June 2011, from 10,228.92, 2,808.08 and \n20,509.09, respectively at end-December 2010. The development was attributed to the \nfall in manufacturing output in China resulting from sluggish recovery in industrialized \ncountries. The decline in the Japanese index, on the other hand, was attributed to the \ncombined effects of the Tsunami and nuclear crises which impacted adversely on \nmanufacturing output (Table 4). \n% Change\nCountry\nIndex\n30-Jun-11\n31-Mar-11\n31-Dec-10\n30-Jun-10\n31-Dec-10 \nto 30-June-\n11\n30-Jun-10 to \n31-Dec-10\nAfrica\nNigeria\nAll Share Index\n24,980.20\n \n24,621.21\n \n24,770.52\n \n25,409.00\n \n0.85%\n-2.51%\nSouth Africa\nJSE African ASI\n31,864.54\n \n32,204.06\n \n32,118.89\n \n26,258.82\n \n-0.79%\n22.32%\nKenya\nNairobi NSE 20\n70.50\n \n72.56\n \n77.76\n \n74.40\n \n-9.34%\n4.52%\nEgypt\nEGX CASE 30\n5,373.00\n \n5,463.72\n \n7,142.14\n \n6,033.09\n \n-24.77%\n18.38%\nGhana\nGSE All Share\n1,188.91\n \n1,071.50\n \n1,000.00\n \n1,162.78\n \n18.89%\n-14.00%\nNorth America\nUS\nS&P 500\n1,320.64\n \n1,325.83\n \n1,257.64\n \n1,030.71\n \n5.01%\n22.02%\nCanada\nS&P/TSX Comp.\n13,300.87\n \n14,116.10\n \n13,443.22\n \n11,294.42\n \n-1.06%\n19.03%\nMexico\nBolsa\n36,558.07\n \n37,440.51\n \n38,550.79\n \n31,156.97\n \n-5.17%\n23.73%\nSouth America\nBrazil\nBovespa Stock \n62,403.64\n \n68,586.70\n \n69,304.81\n \n60,935.90\n \n-9.96%\n13.73%\nArgentina\nMerval \n3,360.64\n \n3,388.03\n \n3,523.59\n \n2,185.01\n \n-4.62%\n61.26%\nColumbia\nIGBC General \n14,067.73\n \n14,469.66\n \n15,496.77\n \n12,449.90\n \n-9.22%\n24.47%\nEurope\nUK\nFTSE 100\n5,945.71\n \n5,908.76\n \n5,899.94\n \n4,916.87\n \n0.78%\n19.99%\nFrance\nCAC 40\n3,982.21\n \n3,989.18\n \n3,804.78\n \n3,442.89\n \n4.66%\n10.51%\nGermany\nDAX \n7,376.24\n \n7,041.31\n \n6,914.19\n \n5,965.52\n \n6.68%\n15.90%\nRussia\nMICEX\n100.06\n \n106.79\n \n104.36\n \n76.68\n \n-4.12%\n36.10%\nAsia\nJapan\nNIKKEI 225\n9,816.09\n \n9,755.10\n \n10,228.92\n \n9,382.64\n \n-4.04%\n9.02%\nChina\nShanghai SE A \n2,762.08\n2,928.11\n2,808.08\n2,398.37\n-1.64%\n17.08%\n3.2\nDomestic Macroeconomic and Financial Developments\nDomestic macroeconomic performance was strong in the first half of 2011. Gross \nDomestic Product (GDP) growth rate was 7.3 per cent in the first half of 2011, driven \nlargely by the non-oil sector. Money supply grew moderately during the review period. \nHeadline year-on-year inflation moderated to 10.20 per cent at end-June 2011, from \n11.80 per cent at end-December 2010. Interest rates rose consistently with the upward \nreview of the monetary policy rate during the review period. However, the effects of the \n13\nTable 4: Global Stock Indices\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nrise in interest rates were cushioned by CBN's interventions, which enhanced the flow of \ncredit to the real sector, particularly agriculture, SMEs and infrastructure. The exchange \nrate was relatively stable, although it marginally depreciated in all segments of the \nmarket. At the WDAS, interbank and BDC segments, it depreciated by 2.1, 2.4 and 2.7 \nper cent, respectively, when compared with the levels in the first half of 2010. External \nreserves declined to US$31.89 billion at end-June 2011, from US$32.34 billion at end-\nDecember 2010, but remained above the international minimum benchmark of three \nmonths import cover. \nGDP growth was projected at 7.98 per cent for 2011, which is 0.13 percentage point \nabove the actual growth rate of 7.85 per cent recorded in 2010. The growth rate in the \nsecond quarter of 2011 was estimated at 7.93 per cent, compared with 7.43 per cent in the \nfirst quarter of the year and 8.29 per cent in the fourth quarter of 2010. The outcome was \ndriven mainly by the non-oil sector, particularly agriculture, which grew, respectively, \nby 5.39 and 5.79 per cent in the first and second quarters of 2011, and constituted 35.0 \nand 41.48 per cent, respectively of the total GDP. Oil GDP grewby 2.9 and 3.4 per cent in \nthe first and second quarters of 2011, respectively.\n3.2.1\nThe Real Sector\nFigure 2: Percentage Growth Rate of Non-Oil GDP\nFigure 3: Contribution of Oil and Non-oil GDP to Total Output\n14\n CBN FINANCIAL STABILITY REPORT JUNE 2011\n3.2.2\nInflation\nDomestic inflation moderated slightly in the first half of 2011, but remained at a double-\ndigit level in the period. Headline inflation stood at 10.2 per cent at end-June 2011, \ncompared with 11.8 per cent at end-December 2010, representing a 1.6 percentage points \ndecline. The decline was due largely to the stability in the supply of petroleum products. \n3.2.3\nThe Fiscal Sector\nFiscal Operations\nThe retained revenue and aggregate expenditure of the Federal Government stood at \nN1,307.33 billion and N1,997.85 billion, respectively, at end-June 2011 (Figures 6). At \nthat level, Federal Government-retained revenue fell by 22.46 per cent below the level at \nend-December 2010. Consequently, the fiscal operations of the Federal Government \nresulted in an overall deficit of N690.52 billion at end-June 2011, compared with the \nactual deficit of N427.93 billion recorded in the second half of 2010. \nFigure 5: Federal Government's Fiscal Operations\nFigure4: Inflationary Trend (Year-on-Year)\n15\n CBN FINANCIAL STABILITY REPORT JUNE 2011\n3.2.4\nThe Financial Sector\n3.2.4.1 Monetary and Credit Developments\nGrowth in money supply was modest in the first half of 2011. Broad money supply (M2), \nrose by 5.7 per cent to N12,177.4 billion at end-June 2011, compared with 6.9 per cent or \nN11,488.7 billion at end-December 2010 and the indicative benchmark of 13.75 per \ncent, or N17,710.00 billion, for fiscal 2011. The development reflected the respective \n13.7 and 2.3 per cent growth in other assets (net) and domestic credit (net) of the banking \nsystem. \nAggregate bank credit to the domestic economy (net) rose by 2.3 per cent to N8,908.5 \nbillion at end-June 2011, compared with the revised 8.8 per cent growth recorded at end-\nJune 2010. The development reflected the respective 5.1 and 1.5 per cent growth in credit \nto the Federal Government and the private sector. \nReserve money grew by 11.9 per cent to N2,065.1 billion at end-June 2011, from 11.6 per \ncent or N1,845.7 billion at end-December 2010. At that level, reserve money was 16.6 \nper cent higher than the indicative benchmark of N1,771.4 billion for 2011fiscal year.\nFigure6: Trends in Major Monetary Aggregates\nFigure 7: Trends in Net Domestic Credit\n16\n CBN FINANCIAL STABILITY REPORT JUNE 2011\n3.2.4.2 The Maturity Structure of DMBs' Loans &Advances and Deposits\nAnalysis of the structure of DMBs' outstanding credits at end-June 2011 indicated that \nshort-term maturities remained dominant in the credit market. Outstanding loans and \nadvances maturing one year and below accounted for 62.2 per cent of the total, which \nwas a slight improvement over the 65.3 per cent at end-December 2010. The medium-\nterm (≥1yr and < 3yrs) and long-term maturities (3yrs and above) stood at 14.6 and 23.2 \nper cent, respectively, compared with 12.6 and 14.1 per cent, respectively at end-June \n2010, (Figure 9). Deposits of below one year constituted 96.6 per cent of the total. \nFurther analysis showed that 73.3 per cent of the deposits had a maturity of less than 30 \ndays, while long-term deposits of more than three (3) years constituted only 1.0 per cent \nat end-June 2011 (Figure 10).\nFigure 3: Distribution of Deposit Money Banks (DMBs) \nLoans and Advances by Maturity\nFigure 4: Distribution of DMB's Deposit Structure\n17\n CBN FINANCIAL STABILITY REPORT JUNE 2011\n3.2.4.3 The Market Structure of the Banking Industry\nThe oligopolistic structure of the banking industry persisted in the first half of 2011. \nBased on total assets and market share of total deposits, the concentration ratios of the \nlargest six banks stood at 55.22 and 53.85 per cent, respectively, compared with 52.36 \nand 53.90 per cent at end-December 2010. The market share of the largest bank, with \nrespect to assets and deposits, stood at 13.79 and 14.31 per cent, respectively, at end-June \n2011. The oligopolistic structure of the banking sector was further confirmed by the \nrespective Herfindahl-Hirschman Index (HHI) of 699.1 and 690.1 for total deposits and \nassets respectively (Figure 11).\nFigure 10: Market Concentration Ratios of DMBs (Assets)\n3.2.4.4 Interest Rates\nRates at all segments of the money market rose in tandem with the upward reviews of the \nMPR in March and May 2011. Consequently, the average inter-bank call rate stood at \n9.21 per cent for the first half of 2011, compared with 2.52 per cent in the second half of \n2010. At the Open-Buy-Back (OBB) segment, the average rate rose to 8.24 per cent at \nend-June 2011, from 2.29 per cent in the second half of 2010. The OBB 7- and 30-day \nNIBOR rates also moved in tandem with the inter-bank call rates. The symmetric \ncorridor of +/- 200 basis points around the MPR for lending and deposit facilities was \nmaintained during the review period. \nAvailable data showed that the average term deposit rate rose marginally by 0.06 \npercentage point to 4.40 per cent in the first half of 2011. The maximum lending rate rose \nby 0.16 percentage point to 22.00 per cent, while the average prime lending rate declined \nby 0.96 percentage point to 15.77 per cent. Consequently, the spread between the \naverage term deposit and maximum lending rates narrowed by 0.92 percentage points to \n17.40 per cent in the first half of 2011, from 18.32 per cent in the second half of 2010. \n18 \n CBN FINANCIAL STABILITY REPORT JUNE 2011\nFigure 11: Money Market Rates Between \nFirst Half of 2008 and First Half of 2011\nFigure 12: Lending and Deposit Rates Between \nFirst Half of 2008 and First Half of 2011\n3.2.4.5 The Capital Market\n3.2.4.5.1 The Nigerian Stock Market\nActivities in the stock market were influenced by improved liquidity and the successful \nconduct of the 2011 general elections. Consequently, ASI rose by 0.85 per cent to close \nat 24,980.20 at end-June 2011, from 24,770.52 at end-December 2010. Market \ncapitalization also rose by 1.01 per cent to N7.99 trillion at end-June 2011, from N7.91 \ntrillion at end-December 2010. This was mainly attributed to capital appreciation and \nadditional listings.\nThe volume and value of transactions increased by 31.75 and 1.78 per cent to 50.46 \nbillion and N367.60 billion at end-June 2011, from 38.30 billion and N361.16 billion at \nend-December 2010, respectively. However, the number of deals declined by 1.97 per \ncent to 729,365 at end-June 2011, from 744,028 at end-December 2010 (Table 5).\n19\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nPeriod \nVolume \nValue \n \nMarket Cap. \nNo. of \nIndex\nJanuary–June 2011\n \n50.46\n \n367.60\n \n7.99\n 729,365\n \n24,980.20\nJuly–December \n38.30\n \n361.16\n \n7.91\n \n744,028\n \n24,770.52\nPercentage Change\n \n31.75\n \n1.78\n \n1.01\n \n(1.97)\n \n0.85\nTable 5: Transactions on the Nigerian Stock Exchange\nSource: NSE Monthly Statistics and Annual Report 2010.\nThe banking sector accounted for 52.73 per cent of the volume of equities traded in the \nreview period, compared with 58.37 per cent in the second half of 2010. The five most \nactive sectors: banking, conglomerates, insurance, mortgage, and food/beverages and \ntobacco, accounted for 84.02 per cent of the volume traded during the review period, \ncompared with 79.7 per cent in the second half of 2010 in which the banking, insurance, \nfood/beverages and tobacco, ICT, and mortgage sectors were the major contributors. \nThe increase was attributed to renewed investor confidence in the conglomerate sector, \nwhich was not among the top five (5) most active sectors in the second half of 2010, but \nranked second in the period under review.\n \nSector\nVolume \nValue ( N)\nDeals\nBanking\n26,582,601,439\n \n228,172,228,568.19\n \n412,233\n \nConglomerates\n8,453,857,810\n \n21,004,735,560.03\n \n21,091\n \nInsurance\n4,197,201,243\n \n3,984,906,089.61\n \n34,799\n \nMortage Companies\n1,883,045,540\n \n1,244,999,913.58\n \n4,146\n \nFood/Beverages & \nTobacco\n1,236,550,802\n \n31,416,160,143.09\n \n60,431\n \nSub-Total\n42,353,256,834\n \n285,823,030,274.50\n \n532,700\n \nOthers\n8,057,700,502\n \n87,832,656,306\n \n201,063\n \nEquity Traded\n50,410,957,336\n \n373,655,686,580.32\n \n733,763\n \nTable 6: NSE Sectoral Performance in the First Half of 2011\n3.2.4.5.2 The Bond Market\nA.\nPrimary Market Auctions\na.\nFederal Government of Nigeria (FGN) Bonds\nThe value of FGN Bonds increased by 13.10 per cent to N3.28 trillion at end-June 2011, \nfrom N2.90 trillion at end-December 2010. It remained the dominant instrument in the \nbond market, constituting 60.41 per cent of the total outstanding bonds of N5.43 trillion \nat end-June 2011, and accounted for 62.96 per cent of Federal Government's outstanding \n20\n CBN FINANCIAL STABILITY REPORT JUNE 2011\ndomestic debt stock of N5.21 trillion at end-June 2011.\nDuring the first half of 2011, a new 3-year 10.50 per cent FGN 2014 bond was issued, \nwhile existing 3- and 5-year FGN Bonds were reopened. The total amount on offer stood \nat N396.50 billion with public subscription of N861.11 billion and allotment of N396.50 \nbillion (Figure 14 and Table 7).The bid rates ranged from 5.50 to 15.00 per cent for the 3-\nyear tenor and 8.75 to 15.50 per cent for the 5-year tenor, while the average stop rates \nwere 10.84 per cent for the 3-year tenor and 12.05 per cent for the 5-year tenor. The over-\nsubscription was attributed to investor appetite for the short end of the yield curve, as it \nhad higher returns with a lower risk. \nFigure 13: FGN Bond Auctions\nBOND \nTRANCHES\nTENOR\nISSUE \n(BILLION=N=)\nSUBSCRIPTION(BI\nLLION=N=)\nALLOTMENT \n(BILLION=N=)\nRANGE OF BIDS\nCUTOFF \nRATE\nMATURITY \nDATE\nJANUARY 19,2011\n5.5%FGN2013\n3YEAR\n30.00\n80.95\n30.00\n5.50-13.00\n10.4000\n19/02/2013\n4.00%FGN 2015\n5YEAR\n30.00\n56.50\n30.00\n9.00-14.00\n11.1300\n23/04/2015\nSub-Total\n60.00\n137.45\n60.00\nFEBRUARY 16,2011\n5.5%FGN2013\n3YEAR\n36.50\n83.11\n36.50\n5.50-12.24\n9.2500\n19/02/2013\n4.00%FGN 2015\n5YEAR\n30.00\n56.90\n30.00\n8.75-12.78\n11.0000\n23/04/2015\nSub-Total\n66.50\n140.01\n66.50\nMARCH 16,2011\n10.5%FGN2014\n3YEAR (New issue)\n30.00\n55.89\n30.00\n8.00-12.25\n10.5000\n18/3/2014\n4.00%FGN 2015\n5YEAR\n30.00\n46.38\n30.00\n9.98-13.2867\n12.0000\n23/4/2015\nSub-Total\n60.00\n102.27\n60.00\nAPRIL 20,2011\n10.5%FGN2014\n3YEAR \n35.00\n65.89\n35.00\n10.00-15.00\n12.1490\n18/03/2014\n4.00%FGN 2015\n5YEAR\n35.00\n63.33\n35.00\n11.75-15.00\n13.1989\n23/04/2015\nSub-Total\n70.00\n129.22\n70.00\nMAY 18,2011\n10.5%FGN2014\n3YEAR \n35.00\n100.21\n35.00\n9.20-15.00\n11.0390\n18/05/2014\n4.00%FGN 2015\n5YEAR\n35.00\n98.80\n35.00\n10.50-15.00\n12.2300\n23/04/2015\nSub-Total\n70.00\n199.01\n70.00\nJUNE 15,2011\n10.5%FGN2014\n3YEAR \n35.00\n62.52\n35.00\n9.00-15.00\n11.6900\n18/03/2014\n4.00%FGN 2015\n5YEAR\n35.00\n90.63\n35.00\n10.00-15.50\n12.7500\n23/04/2015\nSub-Total\n70.00\n153.15\n70.00\nTOTAL\n396.50\n861.11\n396.50\nTable 7: FGN Bond Auctions, January - June 2011\n21\n CBN FINANCIAL STABILITY REPORT JUNE 2011\na.\nSub-National Bonds\nb.\nCorporate Bonds\nThe sub-national bonds segment was not active in the first half of 2011 as there was no \nissue during the period, compared with N50 billion issued in the second half of 2010. At \nend-June 2011, total sub-national bonds outstanding were N248.50 billion, representing \n4.60 per cent of total bonds outstanding.\nThere was one issue of corporate bonds during the review period, compared with three in \nthe second half of 2010. The total value of corporate bonds offered declined by 97.06 per \ncent to N2.50 billion in the first half of 2011, from N85.00 billion in the second half of \n2010. The total amount allotted was N1.50 billion, compared with N72.50 billion in the \nsecond half of 2010. Total outstanding corporate bonds stood at N93.17 billion, \nrepresenting 1.71 per cent of the outstanding bonds of N5.43 trillion (Tables 8 and 9).\nIssuer\n \nIssue Date \n \nMaturity \nDate \nOffer \n(N\nAllotment\n \n(N\nTenor\n(Years)\nChellaramsPlc \n6-Jan-11 \n6-Jan-16 \n2.50 \n1.50 \n5\nTable 8: Corporate Bonds Issued, January - June 2011\n \n \nCrusader Nigeria \nPlc\n30-Sep-08\n \n30-Sep-13\n \nListed\n \n4.00\n \n4.00\n \n5\nGuaranty Trust \nBank Plc\n18-Dec-09\n \n18-Dec-14\n \nListed \n100.00\n \n13.17\n 5\nNGC Sterile Ltd\n \n1-Apr-10\n \n31-Dec-14\n \nPrivate \nPlacement \n2.00\n \n2.00\n \n5\nUACN Property \nDev. Co. Plc\n \n17-Aug-10\n \n17-Aug-15\n \n \n15.00\n \n15.00\n 5\nUnited Bank for \nAfrica Plc\n30-Sep-10\n \n30-Sep-17\n \n \n35.00\n \n20.00\n \n7\nFlourmills of \nNigeria Plc\n \n9-Dec-10\n \n9-Dec-15\n \n \n35.00\n \n37.50\n \n5\nChellarams PLC\n \n6-Jan-11\n \n6-Jan-16\n \n \n2.50\n \n1.50\n \n5\nTable 9: Outstanding Corporate Bonds\n22\n CBN FINANCIAL STABILITY REPORT JUNE 2011\na.\nAsset Management Corporation of Nigeria (AMCON) Bonds\nA.\nSecondary Market Activities\na.\nOver-the-Counter (OTC) Trading in FGN Bonds\nThe AMCON issued two 3-year zero-coupon consideration bonds with a total face value \nof N534.48 billion to 22 banks in the first half of 2011, in exchange for their Eligible \nBank Assets (EBAs). The total face value of bonds issued by AMCON since its \ninception stood at N1.81 trillion at end-June 2011. This represented 33.28 per cent of the \ntotal outstanding bonds.\nThe OTC trading in FGN bonds declined by 25.53 per cent to N4.20 trillion in 35,374 \ndeals in the first half of 2011, from N5.64 trillion in 48,686 deals recorded in the second \nhalf of 2010 (Figure 15). This development was attributed to the decline in bond prices, \nfollowing the increase in the Monetary Policy Rate to 8.00 per cent in May 2011, \ncompared with 6.25 per cent at end-December 2010. The decline in prices informed \ninvestor preference to hold onto the bonds to avoid capital losses on disposal.\nFigure 14: OTC Trades in FGN Bonds\n3.3\nThe External Sector\n3.3.1\nExternal Reserves Management\nNigeria's external reserve management is largely driven by the need to safeguard the \ninternational value of the Naira. To achieve this objective, the Bank continued the \nimplementation of its Strategic Asset Allocation initiative which classifies the CBN's \nportion of the foreign reserves into Liquidity, Investment and Stable tranches. The other \nportions of the reserves are the Federation and the Federal Government. Meanwhile, the \n23\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nproportion of external reserves under the control of the CBN is expected to drop as the \nExcess Crude Account would be transferred to the Nigeria Sovereign Investment \nAuthority (NSIA) following the enactment of the Nigeria Sovereign Investment \nAuthority Act in April 2011.\nThe gross external reserves at end-June 2011 stood at US$31.89 billion, representing a \ndecrease of US$0.45 billion, or 1.39 per cent, from the level of US$32.34 billion at end-\nDecember 2010. A breakdown of the external reserves by currency shows that 79.29 per \ncent were held in US Dollars, 2.59 per cent in Pounds Sterling, 9.58 per cent in Euro and \n8.54 per cent in other currencies.\nTotal foreign exchange inflow during the first half of 2011 was US$19.57 billion, \ncompared with US$14.87 billion in the second half of 2010, representing an increase of \n31.61 per cent. This was due to increases in oil receipts and other government revenues.\nTotal outflow in the review period was US$20.53 billion, made up of foreign direct \npayments, drawings on letters of credit and external debt service, among others. The \ntotal outflow was lower than the US$20.89 billion recorded in the second half of 2010 by \n1.72 per cent. Outflows during the period were largely in respect of market interventions \nthrough the WDAS and BDC windows, which accounted for US$17.00 billion or 82.80 \nper cent. Others included public sector uses and debt servicing which amounted to \nUS$3.53 billion or 17.20 per cent. The net outflow during the review period was \nUS$0.96 billion, compared with US$6.00 billion in the second half of 2010.\nThe Bank conducted 48 auctions in the first half of 2011 at the Wholesale Dutch Auction \nSystem Spot (WDAS-SPT) window. The total amount of foreign exchange demanded \nstood at US$17.91 billion, while amounts offered and sold were US$15.37 billion and \nUS$14.99 billion respectively, during the period. In the second half of 2010, total \ndemand for and sales of foreign exchange stood at US$15.37 billion and US$12.99 \nbillion, respectively, while the amount on offer was US$13.01 billion. \nThe foreign exchange Wholesale Dutch Auction System Forward (WDAS-FWD) \ncommenced on Wednesday, March 23, 2011. The WDAS-FWD was introduced with the \naim of deepening the foreign exchange market in order to minimise distortions in \n3.3.2\nMovements in External Reserves\n3.3.3\nForeign Exchange Flows\n3.3.4 Demand for and Supply of Foreign Exchange\n24 \n CBN FINANCIAL STABILITY REPORT JUNE 2011\nexchange rate pricing and smoothen demand for foreign exchange. The forward auctions \nare conducted weekly and offered in tenors of 1-, 2- and 3-months. \nThe total amount demanded at the WDAS-FWD window was US$1.12 billion, while \nUS$953.52 million was sold during the period under review. The difference, therefore, \nrepresented bids below the Bank's reserve rate. The sum of US$547.43 million matured \nat the WDAS-FWD segment in the first half of 2011. \nIn addition to the WDAS auctions, special allocations of US$1.60 billion were made to \nBDCs on a non-competitive basis in the first half of 2011. This represented a decrease of \n42.03 per cent from the US$2.76 billion sold to BDCs in the second half of 2010. The \ndecrease was traceable to the withdrawal of the operating licences of class 'A' BDCs in \nNovember 2010.\nFigure 15: WDAS-SPT Demand and Supply in US$ Million\n3.3.5\nExchange Rate Movements\nThe average exchange rate of the Naira at the WDAS-SPT window depreciated by 1.76 \nper cent to N153.31/US$ at end-June 2011, from N150.66/US$ in the second half of \n2010. At the inter-bank segment of the market, the average exchange rate of the Naira \ndepreciated by 2.02 per cent to close at N154.47/US$, from N151.42/US$ at end-\nDecember 2010. Similarly, the exchange rate at the BDC segment depreciated by 2.35 \nper cent to close at N156.95/US$, from N153.35/US$ at end-December 2010 (Figure \n17). \nThe premium between the WDAS-SPT and BDC exchange rates increased by 33.69 per \ncent to N3.73 in the first half of 2011, from N2.79 in the second half of 2010. The \npremium between WDAS-SPT and inter-bank exchange rates also increased by 45.34 \n25\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nFigure 16: WDAS, Inter-Bank and BDC Rates for \nJuly 2010 - June 2011\n3.4\nKey Risks in the Nigerian Financial System\n3.4.1\nCredit Risk\nThe risks in the Nigerian financial system eased during the review period. This was due \nto the impact of AMCON's activities, effective regulatory interventions and gradual \nglobal economic recovery, driven by the economies of BRICS (Brazil, Russia, India, \nChina, and South Africa) and other emerging economies. However, given the current \nstate of the intervened banks and the prolonged recapitalisation process, the risks \nhighlighted below continued to pose threats to the stability of the financial system.\nThe banking industry risk assets quality continued its modest improvement as the non-\nperforming loans (NPLs) to total loans ratio declined by 4.69 percentage points to 10.81 \nper cent at end-June 2011, from 15.5 per cent at end-December 2010. The decrease in \nNPLs was driven largely by the acquisition of eligible bank assets by AMCON. In \nabsolute terms, the NPLs declined by 44.68 per cent from N1,413.63 billion at end-\nDecember 2010 to N782.06 billion at end-June 2011,. Sub-standard, doubtful and lost \nloans stood at N236.57 billion, N107.53 billion and N437.96 billion or 30.25, 13.75 and \n56.00 per cent of total NPLs, respectively, at end-June 2011. Loan loss provisions \ndeclined from N822.59 billion at end-December 2010 to N585.15 billion at end-June \n2011. \n26\nper cent to N1.25 in the first half of 2011, compared with N0.86 in the second half of \n2010.\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nFigure 17: Selected Credit Ratios, Dec. 2010 June 2011\nThe total credit of N7,706.43 billion at end-December 2010 decreased to N7,231.29 \nbillion at end-June 2011. The top 10, 20, 50 and 100 obligors accounted for 15.12, 20.92, \n31.72 and 40.29 per cent, respectively, of the industry gross credit of N7,231.29 billion, \nindicating a high concentration. \nLiquidity in the banking sector improved marginally as the average liquidity ratio rose \nby 2.79 percentage points to 50.25 per cent at end-June 2011, from 47.46 per cent at end-\nDecember 2010. This was driven by the increase in total deposits to N9.424 trillion at \nend-June 2011 from N9.368 trillion at end-December 2010. Other factors included low \nvolatility of deposits, significant reduction in the assets/liabilities mismatch, and the \nCBN guarantees of inter-bank market transactions and foreign credit lines to banks.\nBanking industry trading books' sensitivity to movements in interest rates, measured by \ncomposite volatility in interest rates, increased from +0.01286 in December 2010 to \n+0.03286 in June 2011. This indicated that a one percentage point parallel change in \ninterest rates would have resulted in a 3.29 per cent increase or decrease in net interest \nincome. Thus, interest rate risk, based on sensitivity of banking trading books to interest \nrates volatility, increased by 200 basis points which was within tolerable limits. \nSimilarly, interest rate risk from the re-pricing of interest-sensitive financial \nassets/liabilities was low, owing to the large spread between deposit and lending rates, \nwhich stood at an average of 19.22 percentage points.\n3.4.2\nLiquidity Risk\n3.4.3\nMarket Risk\n3.4.3.1 Interest Rate Risk \n27\n CBN FINANCIAL STABILITY REPORT JUNE 2011\n3.4.3.2 Exchange Rate Risks\n3.4.4\nOperational Risk\n3.4.5\nReputational Risk\n3.5\nOutlook for the Second Half of 2011\nExchange rates remained stable at the WDAS, interbank and BDC markets during the \nperiod under review. However, given the huge net FX position, the banking industry \nremained vulnerable to exchange rate volatility occasioned by persistent demand \npressure.\nDuring the review period, 1,379 fraud and forgery cases involving a total of N6.50 \nbillion, with a loss of N1.93 billion occurred in the banking industry, as against 2,841 \ncases involving a total of N11.57 billion with a loss of N8.04 billion at end-December \n2010. Similarly, 116 ATM-related cases valued at N17.16 million were reported in the \nfirst half of 2011, as against 411 cases amounting to N82.17 million recorded in the \nsecond half of 2010.\nAt end-June 2011, 2,652 complaints were processed out of a total of 2,742 received by \nthe CBN. The processed complaints resulted in the refund of N3.96 billion, \nUS$198,118.75 and EUR10,000.00, to customers, arising from excess charges and other \nunethical actions. These efforts mitigated reputational risk in the industry. However, the \nspate of litigations against the Bank's effort at recapitalizing intervened banks exposed \nthe financial system to increasing reputational risk. \nThe GDP is projected to grow by 7.98 per cent in 2011, compared with 7.85 per cent in \n2010, while growth rates in the third and fourth quarters of 2011 are projected to be 7.92 \nand 8.46 per cent, as against 7.86 and 8.36 per cent, respectively, recorded in the \ncorresponding periods of 2010. The major drivers of the projected growth in GDP are \nagriculture, wholesale and retail trade, and the telecommunications sectors of the \neconomy. However, growth prospects might be constrained by the slow economic \nrecovery and debt concerns in the developed economies, as well as rising inflation in \nsome emerging economies.\nA tight monetary policy stance is expected to further dampen inflationary pressures, \nwhile the exchange rate should remain relatively stable. The current initiatives aimed at \nincreasing productivity in the real sector as well as sustained reforms in other sectors are \nexpected to yield a positive impact on GDP growth.\n28\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nThe introduction of a Central Securities Depository in the second half of the year, should \nenhance securities and collateral management, and the planned issuance of N1.33 \ntrillion NTB would further deepen the money market. The demand for repo is projected \nto range from N150 billion to N230 billion in the second half of the year as market \nplayers may utilise their AMCON Bonds for accessing the CBN window.\nThe capital market might experience increased activity, following the projected issuance \nof FGN bonds (3-, 5- and 10-year tenors) worth N420.00 billion in the second half of \n2011. \n29\n CBN FINANCIAL STABILITY REPORT JUNE 2011\n4.0\nDEVELOPMENTS IN THE FINANCIAL SECTOR\n4.1\nPromoting Financial System Stability\nThe new banking model which was introduced in 2010 provided, among others, for the \nfollowing:\nClassification of banks into Commercial, Merchant, and Specialised;\nClassification of their operations into International, National, and Regional; \nBanks' divestment from non-bank subsidiaries or the transfer of such \nsubsidiaries to Holding Companies, latest by May 2012; and\nBanks with real estate subsidiaries to divest from such subsidiaries, latest by June \n2013.\nConsequently, Approvals-in-Principle (AIPs) were granted to 17 deposit money banks \n(DMBs) during the review period to pursue their respective compliance plans. Of the 17 \nDMBs, 9 opted for “International”, 6 “National” and 2 “Regional” bank status. Also, 13 \nDMBs opted to divest from their non-bank subsidiaries, while four (4) chose the Holding \nCompany (HoldCo) structure. The processing of the applications of the remaining 7 \nDMBs was deferred pending the conclusion of their recapitalisation plans. It is \nenvisaged that the emerging structure would elicit ownership interest in the industry, \nwith good prospects for attracting Foreign Direct Investment (FDI). \nThe capital requirements for banks and other financial institutions at end-June 2011 were \nprescribed as follows:\nCommercial bank:\no\nInternational\n-\nN50 billion\no\nNational\n-\nN25 billion\no\nRegional\n-\nN10 billion\nMerchant bank\n-\nN15 billion\nNon-interest bank:\no\nNational\n-\nN10 billion\no\nRegional\n-\nN5 billion\nPrimary Mortgage Institution\n-\nN5 billion\nMicrofinance bank:\no\nNational\n-\nN2 billion\no\nState\n-\nN100 million\no\nUnit\n-\nN20 million\n\n\n\n\n\n\n\n\n\n31\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nDuring the review period, the CBN sustained its support for the recapitalization drive of \nthe eight banks in which it had intervened in order to contain systemic distress. \nFollowing the delay in the recapitalization process arising from litigations instituted by \nsome shareholders, the deadline was extended to September 30, 2011, from June 30, \n2011. It was expected that the litigations would have been resolved before the deadline to \nenable the affected banks conclude their recapitalization programmes.\nMeanwhile, AMCON expressed its readiness to bail out the affected banks, through \nacquisition, while it continued to impact positively on the financial system by acquiring \neligible bank assets (EBAs) to enhance liquidity and deepen the capital market. \nThe Revised Microfinance Policy, Regulatory and Supervisory Framework was \napproved in April, 2011. The revision was informed by the challenges encountered in the \nimplementation of the 2005 Microfinance Framework. \nThe new policy regime categorised MFBs and prescribed their minimum capital \nrequirements as follows:\nUnit MFBs: \no\nMinimum paid-up capital of N20 million,\no\nAuthorized to operate in one location only;\nState MFBs: \no\nMinimum paid-up capital of N100 million, \no\nTo operate within a State or the Federal Capital Territory (FCT); and\nNational MFBs: \no\nMinimum paid-up capital of N2 billion, and\no\nTo operate in more than one State, including the FCT. \nThe new policy recognised the need for the establishment of a Microfinance \nDevelopment Fund to provide for the wholesale funding of MFBs/MFIs. Furthermore, \nthe Fund will support the growth of the subsector by providing a refinancing/guarantee \nfacility, capacity building, financial education, and other promotional activities. It would \nbe financed by government and facilities from international development finance \ninstitutions.\nThe policy also provides for the extension of the Interest Drawback Programme (IDP) to \n4.2\nThe Revised Microfinance Policy, Regulatory and Supervisory Framework\n\n\n\n32\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nMFB clients in agriculture-related businesses. In addition, subsidized training/capacity \nbuilding programmes would be made available to staff of MFBs.\nIn line with its commitment to entrench a sound financial system, the Bank continued to \nbuild capacity through targeted training of staff in the following areas: \nSensitisation training on IFRS and its implementation;\nTraining of supervisors from the Bank and the NDIC on the risk-based \nsupervisory methodology;\nPilot training on the utilization of Financial Institutions' Application Processing \nSystem (FIAPS);\nMicrofinance training programme for supervisors from the Bank and the NDIC, \nco-sponsored by the German Technical Corporation (GTZ);\nInitiation of the Microfinance Certification Examination (MFCE) by the Bank in \ncollaboration with the Chartered Institute of Bankers of Nigeria (CIBN). A total \nof 319 candidates completed the certification examination in the period; and\nTraining of staff on the financial markets and Non-interest (Islamic) Banking.\nThe meeting of the West African Monetary Zone Experts Committee held in Accra, \nGhana, from May 25 to 27, 2011 discussed the results of studies on: \nA Framework for the Harmonizing \nForeign Exchange Markets and the \nPooling of Reserves in the WACB; \nFinancial Sector Assessment and Development of an Appropriate Architecture in \nthe WAMZ: Design of the ECO Unit of Account; and\nImpact of Electoral Cycles on Macroeconomic Convergence and the Twin \nDeficits Hypothesis in the WAMZ. \nThe Board of Directors of the African Development Bank (AfDB) Group, on May 26, \n2011, approved two sovereign-guaranteed programmes, totaling US$200 million to the \nNigerian Export-Import Bank (NEXIM) for financing export-oriented Small and \nMedium-sized Enterprises (SMEs), and US$500 million to the Bank of Industry (BOI) \nfor financing domestic SMEs in Nigeria. The funds were to be channelled through \n4.3\nInstitutional Capacity Building\n4.4\nInternational Economic Relations and Cooperation\n4.4.1\nThe WAMZ Committee of Experts Deliberated on the Report of Financial \nSector Assessment and Development\n4.4.2\nAfDB's Cooperation with Nigeria for the Development of SMEs\n\n\n\n\n\n\n\n\n\nof \n33\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nNEXIM and the BOI by way of multi-tranche Lines of Credit. A portion of the proceeds \nof the programmes was to be used to pay for Technical Assistance and capacity building \nin NEXIM, BOI, and the SMEs. \nThe NEXIM programme was designed to mobilize significant financial resources for \nNigeria's export-oriented SMEs operating in various sectors of the economy and \ncontributing to economic development through increased employment opportunities, \nforeign exchange earnings and regional trade integration. NEXIM envisages significant \neconomic outcomes through this programme, including creating about 55,000 new jobs \nfor its SME clients, US$ 1.6 billion in new foreign exchange inflows, an estimated 7.0 \nper cent increase in non-oil exports, and a 10.0 per cent increase in the country's share of \nECOWAS exports. \nThe funds for the BOI were to be deployed towards systematic poverty reduction; \nemployment generation; and wealth creation through entrepreneurial, social and \neconomic development. The programme was to cover for loans to SMEs and financing \nof capital projects in the form of cluster and infrastructure development. \nThe associated Technical Assistance packages were designed to strengthen capacity at \nNEXIM, BOI and the SMEs. In summary, the programmes were expected to generate \nsignificant additional lending to export-oriented SMEs at a time when lending by \ncommercial banks to these schemes was grossly inadequate.\nThe Association of African Central Banks (AACB) held its 2011 Seminar on, “Financing \nDevelopment in Africa: What Role for Central Banks?” at the National Bank of \nRwanda, Kigali, from 30th May to 1st June 2011, in which the central bankers defined a \nrole for central banks in financing development in Africa. Nigeria was one of the five (5) \nAfrican central banks that shared their experiences with participants at the Seminar. The \nobjective of the seminar was to identify alternative sources of financing development in \nAfrica and to further strengthen AACBs goal of promoting the exchange of ideas and \nexperiences on monetary, financial and banking matters. \nAt the end of the Seminar, participants agreed that central banks had a key role to play in \nfinancing development. A central bank's role could be in the form of direct intervention \nto address a specific development issue and/or indirectly, given that development is \n4.4.3\nCooperation with other African Central Banks\n34\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nlargely a long-term phenomenon. A key recommendation of the Seminar was that \nAfrican central banks revisit their laws to include financing development especially \nwhere financing development had not been explicitly provided for in existing \nlegislation. Members expressed their desire to leverage on the experiences of Nigeria, \nThe Gambia and Egypt in their efforts to finance development in their respective \ncountries. The recommendations of the Seminar were to be submitted to the Assembly of \nGovernors of the AACB at their next meeting later in the year.\nA total of 11,410 loans, valued at N2.19 billion were guaranteed in the first half of 2011, \nbringing the total loans guaranteed under the Scheme since its inception in 1978 to \n709,610, valued at N44.34 billion.\nUnder the Interest Drawback Programme (IDP), 7,430 claims valued at N68.93 million \nwere settled during the review period. This reflected a decline of 41.53 and 42.77 per \ncent in volume and value, respectively, when compared with 12,552 claims valued at \nN120.43 million settled in the second half of 2010. The cumulative IDP claims settled \nsince its inception to June 30, 2011 were 127,902, valued at N720.64 million. \nAt end-June 2011, total disbursements under the Scheme remained unchanged at N19.43 \nbillion to 103 agricultural projects as was recorded at end-December 2010. The total \namount paid by the Bank as interest rebate since the inception of the Scheme was \nN844.28 million. \nThe sum of N34.68 billion was disbursed to 45 projects during the period under review, \ncompared with N38.59 billion disbursed to 44 projects in the second half of 2010. This \nreflected a decline of 40.5 and 23.7 percent in value and volume, respectively. A total of \nN131.5 billion had been disbursed to 14 DMBs in respect of 148 projects at end June \n2011. \nThe sum of N199.67 billion, out of the N200 billion earmarked for the Scheme, had been \nreleased to the Bank of Industry (BOI) for disbursement to 539 projects by June 2011. \n4.5\nAccess to Finance\n4.5.1\nThe Agricultural Credit Guarantee Scheme Fund (ACGSF)\n4.5.2\nThe Agricultural Credit Support Scheme (ACSS)\n4.5.3\nThe Commercial Agricultural Credit Scheme (CACS)\n4.5.4\nThe Refinancing/Restructuring Small and Medium Enterprises \nManufacturing Fund\n35\n CBN FINANCIAL STABILITY REPORT JUNE 2011\n4.5.5\nThe Small and Medium Enterprises Credit Guarantee Scheme (SMECGS)\n4.5.6\nThe Power and Aviation Intervention Fund (PAIF)\n4.5.7\nThe Nigerian Incentive-Based Risk Sharing System for Agricultural \nLending (NIRSAL)\n4.5.8\nMicrofinance Banking Activities\n4.5.9\nPrimary Mortgage Institutions' Activities\nTwo (2) projects valued at N120 million were guaranteed under the Scheme during the \nreview period, bringing the total amount guaranteed at end-June 2011 to N227.5 million \nfor 4 projects. \nAt end-June 2011, N41.9 billion had been disbursed for eight (8) airline projects out of \nthe N300 billion earmarked for the Scheme. No disbursements had yet been made with \nrespect to the power sector. \nThe Bank commenced the implementation of NIRSAL, aimed at encouraging banks to \nlend to the agricultural and agricultural finance value chain by offering them incentives \nand technical assistance.\nProvisional data indicated that total assets of MFBs increased to N187.17 billion at end-\nJune 2011 from the revised figure of N170.34 billion at end-December 2010, \nrepresenting a growth of 9.88 per cent. Paid-up share capital and shareholders' funds \nincreased by 7.22 and 7.77 per cent to N44.54 billion and N47.42 billion respectively at \nend-June 2011, from N41.54 billion and a revised figure of N44.00 billion respectively at \nend-December 2010. The deposit liabilities increased by 12.31 per cent to N85.06 billion \nin June, 2011, from the revised figure of N75.74 billion in December 2010. The net loans \nand advances also increased by 23.81 per cent to N65.46 billion at end-June 2011, \ncompared with the revised figure of N52.87 billion at end-December 2010. \nProvisional data showed that the total assets increased marginally to N360.02 billion at \nend-June 2011, from N358.81 billion at end-December 2010, representing a growth of \n0.34 per cent. Net loans and advances increased by 1.63 per cent to N135.05 billion at \nend-June 2011, from N132.88 billion at end-December 2010. The paid-up share capital \nand shareholders' funds also increased by 2.87 and 6.77 per cent to N64.18 billion and \nN89.21 billion, from N62.39 billion and N83.55 billion, respectively. However, deposit \nliabilities decreased by 4.90 per cent to N177.79 billion at end-June 2011, from N186.95 \nbillion at end-December2010.\n36\n CBN FINANCIAL STABILITY REPORT JUNE 2011\n4.6\nNon-Interest Banking\n4.7\nAnti-Money Laundering/Combating the Financing of Terrorism \n(AML/CFT)\nThe CBN released the Framework and Guidelines for the Regulation and Supervision of \nNon-Interest (Islamic) Banking in Nigeria. Subsequently, the Bank granted Approvals-\nIn-Principle (AIPs) to one applicant for a full-fledged non-interest (Islamic) bank and a \nwindow to a DMB to offer non-interest (Islamic) banking products. The AIPs require the \ninstitutions to meet the prescribed conditions for the granting of a banking licence within \nsix (6) months.\nIn continuation of the Bank's efforts at combating money laundering and financing of \nterrorism, the following activities were undertaken during the period under review: \nVerification of banks' compliance with the Know-Your-Customer (KYC) \nrequirement; \nPreparation of a draft AML/CFT Risk-Based Examination and Regulation \nManuals for financial institutions;\nReview of the Intergovernmental Action Group Against Money Laundering in \nWest Africa (GIABA)'s Country Report on Nigeria for the year 2010; and \nEstablishment of an Enforcement Unit responsible for monitoring compliance.\nThe Anti-Terrorism Bill (ATB) was passed into law in the first half of 2011, while the \nMoney Laundering Prohibition Act (MLPA) was amended during the period. The Acts \ncriminalised terrorist financing and addressed issues of freezing, seizure and \nconfiscation of both laundered money and terrorist funds. \n\n\n\n\n37\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nREGULATORY AND SUPERVISORY \nACTIVITIES\n5.0\n5.1\nMacro-Prudential Supervision\n5.1.1\nFinancial Soundness Indicators (FSIs)\n5.1.1.1 Capital Adequacy\nThe Nigerian banking sector remained relatively sound as financial soundness indicators \nrevealed a sustained improvement since January 2010 (Table 10).\nThe ratio of regulatory capital to risk weighted assets was 9.9 per cent at end-June 2011, \nreflecting an increase of 2.9 percentage points above the level at end-December 2010 \nand 1.9 percentage points higher than the Basel II minimum requirement of 8.0 per cent. \nHowever, the end-June 2011 level was slightly lower than the country's benchmark of \n10.0 per cent. The ratio of tier 1 capital to risk weighted assets of 6.3 per cent at end-June \n2011 was 2.2 percentage points higher than the 4.1 per cent achieved at end-December \n2010. \n39\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nS/N\n2010 (Revised)\n2011 (Provisional)\n \n \n(1)\n(2)\n(3)\n1\n \nCapital Adequacy\n \n \nRegulatory capital to risk-weighted assets\n6.9\n7.0\n9.9\n \nTier 1 capital to risk-weighted assets\n4.4\n4.1\n6.3\n2\n \nAsset Quality\n \n \nNPLs to total loans\n \n38.3\n20.1\n11.6\n \nNPLs net provision to capital\n \n147.1\n64.2\n34.7\n3\n \nSectoral Distribution of Loans to Total \nCredits\n \n \nDeposit takers\n \n0.1\n0.1\n0.0\n \nOther financial corporation\n \n2.9\n2.8\n2.0\nOther domestic sectors\n93.4\n92.2\n92.2\nGovernment\n3.6\n4.9\n5.8\n4\nEarnings/Profitability\nReturn on equity (ROE)\n11.8\n65.4\n4.5\nReturn on assets (ROA)\n0.4\n2.1\n0.2\nInterest margin to gross income\n50.6\n46.8\n53.8\nNon-interest expenses to gross income\n60.9\n33.8\n71.3\nPersonnel expenses to non-interest expenses\n40.8\n40.8\n53.8\nForeign exchange trading gains (losses) to \ngross income\n2.1\n0.7\n3.2\n5\nLiquidity\nLiquid assets (core) to total assets\n17.7\n18.0\n23.3\nLiquid assets (core) to short-term liabilities\n19.4\n19.8\n25.7\nTable 10: Selected Financial Soundness Indicators in the Nigerian Banking Sector\n The FSIs are computed based on IMF Guidelines\n40\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nFigure 18: Banking Sector Capital Adequacy Ratios, 2010 - 2011\n5.1.1.2 Asset Quality\nThe quality of risk assets in the sector improved in the second half of 2011 as revealed by \nthe ratio of non-performing loans to total loans, which reduced to 11.6 per cent at end-\nJune 2011, from 20.1 per cent at end-December 2010. Also, the ratio of non-performing \nloans net of provisions to capital declined to 34.7 per cent at end-June 2011, from 64.2 \nper cent at end-December 2010. The improvement was mainly attributed to the purchase \nof EBAs by AMCON and improved risk management practices by banks.\nFigure 19: Banking Industry NPLs to Total Loans, 2010 - 2011\n41 \n CBN FINANCIAL STABILITY REPORT JUNE 2011\n5.1.1.3 Earnings and Profitability\nThe return on equity (ROE) dropped sharply to 4.5 per cent in the review period from \n65.4 per cent in December 2010 (Figure 21). The unusually high ROE recorded in \nDecember 2010 was as a result of the sale of EBAs to AMCON that necessitated the \nwrite-back of provisions made on those assets. Similarly, the return on assets (ROA) \ndecreased to 0.2 per cent in June 2011 from 2.1 per cent in December 2010. This decline \nwas corroborated by the rising ratio of expenses: at 71.3 and 53.8 per cent, the ratios of \nnon-interest expenses to gross income and personnel expenses to non-interest expenses \nrose by 37.5 and 13.0 percentage points, respectively, over their levels in the preceding \nhalf year.\nFigure 20: Selected Profitability Ratios of the \nNigerian Banking Industry, 2010 - 2011\n5.1.1.4 Liquidity\nIndicators revealed a sustained improvement in liquidity in the system since 2010. The \nratio of core liquid assets to total assets increased by 5.3 percentage points to 23.3 per \ncent at end-June 2011, from 18.0 per cent at end-December 2010. Similarly, the ratio of \nliquid assets to short-term liabilities increased by 5.9 percentage points to 25.7 per cent at \nend-June 2011 (Figure 22).\n42\n CBN FINANCIAL STABILITY REPORT JUNE 2011\n5.1.2\nThe Banking Industry Stress Test\nIn accordance with a key objective of macro-prudential supervision, a stress test was \nconducted as at June 30, 2011 to identify and measure the vulnerability and resilience of \nthe industry to shocks. \nThe test result indicated that credit risk was the most significant risk faced by the banking \nindustry, followed by exchange rate risk. The industry was adjudged to be less \nvulnerable to liquidity and interest rate risks (Appendix 1) than in the previous six (6) \nmonths.\nIt is expected that the on-going reforms in the industry would address the identified \nweaknesses in the short to medium term.\nFigure 21: Banking Industry Liquidity Ratios\nCredit Risk\nLiquidity Risk\nInterest Rate Risk\nThe main vulnerability of the banks stemmed from credit risk, particularly their \nexposure to the Financial sector, the General sub-sector, and Oil & Gas Sub-sector. \nThe ratio of banking industry NPLs to gross loans stood at 14.5 per cent, while those \nof the large, medium and the small banks were 11.0, 14.9 and 26.9 per cent, \nrespectively. These figures are relatively high and any further deterioration in asset \nquality would lead to significant capital impairment.\nLiquidity risk was rated low in the banking industry as only a few banks showed \nsignificant vulnerability to liquidity shocks.\nThe results of the sensitivity analysis on “returns on assets”, and “returns on \nequity” revealed that the entire banking industry , categorised banks and individual \nbanks are less vulnerable to interest rate risk as their pre-shock positions (in terms of \ncapital impairment, ROA and ROE) declined only marginally, even after the most \nstrained shocks applied.\n43\nBox 1: Summary of Stress Test Result\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nExchange Rate Risk\nFX Trading Risk\nThe banking industry (the big, medium and small banks), was exposed to \nconsiderable foreign exchange rate risk. The impact was higher with the \ndepreciation of the Naira. The depreciation of the Naira had significant impact on \nmost banks. This was due largely to a high FX asset position relative to total risk \nweighted assets and total qualifying capital, which stood at 13.72% and 296.85%, \nrespectively. The entire banking industry, categorised and individual banks, were \nexposed to considerable exchange rate risk.\nThe banking industry showed less vulnerability to FX trading risk. The banks' \npre-shock positions, both in terms of impact on ROA and ROE changed only \nmarginally even after an induced 100% decline in FX trading income. This was \ndue mainly to the high net profit positions of the banks relative to size of the FX \ntrading income.\n5.2\nLicensing and Approvals\n5.2.1\nBureaux-de-Change\n5.2.2\nMicrofinance Banks\n5.2.3\nFinance Companies\n5.2.4\nThe New Banking Model Compliance Plan\n5.3\nSupervision of Banks and Other Financial Institutions\n5.3.1\nDeposit Money Banks (DMBs)\nIn the first half of 2011, 38 new BDCs were granted licences, bringing the total number to \n1,997.\nA total of 123 applications were received of which 28 were granted licences, while the \nremaining 95 were being processed. \nTwo (2) applications were received. One (1) was issued a licence, while the other was \ngranted an AIP status.\nApproval in Principles (AIPs) were granted to seventeen (17) of the twenty four (24) \nDMBs that submitted their compliance plans as required in the new banking model. The \nprocessing of the applications of the remaining seven (7) DMBs was deferred, pending \nthe conclusion of their recapitalisation plans. \nA Target Examination of DMBs, as at December 31, 2010, was conducted during the \n44\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nreview period to assess their asset quality and ascertain the levels of provision required in \ntheir 2010 audited financial statements. The reports noted that most of the banks had sold \nsubstantial portions of their non-performing loans (NPLs) to AMCON, thereby \nsignificantly reducing their required provisions at end-December 2010.\nExamination of the five discount houses revealed that three of them had a composite risk \nrating of “above average”, while two were rated “moderate”.\nThe risk management functions in the discount houses were rated as “needs \nimprovement” owing to weaknesses in risk management and poor corporate governance \npractices arising from weak board oversight and non-appointment of independent \ndirectors.\nThe capital of four of the discount houses was above the minimum regulatory \nrequirement. However, one discount house did not meet the minimum capital adequacy \nrequirement of 10% for the level of its operations for most of the examination period. Its \ncapital was, therefore, rated “weak”, while the capital ratings of the other four discount \nhouses were “acceptable”.\nThe earnings of three discount houses were rated as “acceptable” and two as “needs \nimprovement”. \nFollowing the revocation of the banking licences of 224 MFBs on September 24, 2010, \n121 of these were granted provisional licences as a result of fresh injection of capital and \nrecoveries of bad loans. Special examination was conducted to verify fresh capital \ninjections and compliance with the conditions for the granting of licences. The exercise \nwas carried on 119 of the 121 MFBs during the review period, while 2 were exempted \nbecause one had been acquired and the other was holding an AIP.\n \nHighlights of the examination reports include the following:\n74 or 62.2 per cent of the 119 MFBs had injected fresh capital to shore-up their \nshareholders' funds, unimpaired by losses, to meet the minimum requirement of \nN20 million;\n5.3.2\nDiscount Houses\n5.3.3\nOther Financial Institutions\n5.3.3.1 Microfinance Banks (MFBs)\n\n45\n CBN FINANCIAL STABILITY REPORT JUNE 2011\n\n\n\n\n\n11 or 9.2 per cent of the MFBs injected additional capital which were, however, \ninsufficient to bring the shareholders' funds, unimpaired by losses, to the \nregulatory minimum level; and\n34 or 28.6 per cent of the MFBs were “technically insolvent” and “terminally \ndistressed” owing to the failure of their shareholders to inject additional capital \nnecessary to increase the shareholders' funds, unimpaired by losses, to the \nregulatory minimum of N20 million.\nFollowing the non-issuance of provisional licences to 103 of the 224 MFBs whose \nlicences were revoked in September 2010, the Nigeria Deposit Insurance Corporation \n(NDIC) commenced their liquidation and payment of insured deposits.\nDuring the review period, the Bank also commenced special examination of MFBs that \nwere classified “marginal” and “unsound”, based on the CBN/NDIC joint target \nexamination in 2010.\nThe analysis of the operational status of the licensed 101 PMIs was concluded within the \nreview period. The review led to the classification of 29 PMIs as 'sound', five (5) as \n'marginal', 18 as 'unsound' and 22 as 'insolvent'. One (1) PMI was newly licensed and not \ndue for a regulatory performance review, nine (9) were undergoing restructuring, while \n17 had closed shop. Consequently, the institutions were notified of the following \nregulatory decisions:\nPMIs classified as “marginal” were required to inject fresh capital or liquid assets \nnecessary to bring their prudential ratios within the acceptable limits.\nPMIs classified as “unsound” were, in addition to the requirement specified \nabove: prohibited from paying dividends; restricted from making new \ninvestments in fixed assets and subsidiaries without the prior approval of the \nCBN; advised to embark on aggressive loan recovery; and placed on the \nCBN/NDIC watch list.\nPMIs classified as “technically insolvent” were, in addition to the requirements \nspecified above, restricted from any new lending except to the extent of \nrecoveries made; and given a month's deadline to submit their turnaround \nbusiness plans outlining, inter alia, how fresh funds would be injected into the \ninstitutions. \nThe PMIs were required to fulfil the above conditions within six months, while a joint \nCBN/NDIC special examination was to be carried out on the technically insolvent PMIs \n5.3.3.2 Primary Mortgage Institutions (PMIs)\n46\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nat the expiration of the deadline. The examination was programmed preparatory to the \nrevocation of the licence and takeover for NDIC liquidation of the institutions that failed \nto actualize their turn-around plans. \nNotice of intent to revoke the licences of the PMIs that had closed shop would be \npublished, while members of the public would be allowed to express objections within a \nperiod of 90 days, as specified by the relevant banking laws of Nigeria.\nIn order to stabilise and reduce overheads as well as comply with the new banking model, \nthree (3) Nigerian banks were granted approval to either divest or close their foreign \nsubsidiaries, while one other was granted approval to discontinue the process of \nestablishing a foreign subsidiary. \nSome central banks in the region increased the minimum capital requirement of banks in \ntheir jurisdictions during the review period. As a result, Nigerian banks with subsidiaries \nin the zone were granted approval to comply with the new capital requirements. \nThe third meeting of the College was held at the Central Bank of Nigeria, Abuja, from 8th \nto 9th February 2011, while the fourth meeting was held at the Central Bank of The \nGambia, Banjul, from 1st to 3rd June 2011. Some of the decisions reached at the \nmeetings include the following:\nThe decision of the Committee of Governors of ECOWAS at its meeting held in \nDakar, to admit BCEAO and Cape Verde to join the CSWAMZ on an observer \nstatus was noted and adopted;\nRegulatory reports should be standardised;\nSupervisory processes in the Zone should be harmonised to prevent regulatory \narbitrage;\nMembers should adopt the electronic Financial Analysis and Surveillance \nSystem (e-FASS) as a supervisory tool; \nMembers were urged to implement the RBS, the IFRS, the Basel II and the Basel \nCore Principles for Effective Banking Supervision; and\nFinancial Stability Report should be produced for the Zone.\n5.4\nCross-border Supervision\n5.4.1\nClosure of Foreign Subsidiaries\n5.4.2\nCapital Augmentation for Banks in West Africa\n5.4.3\nThe College of Supervisors of the West African Monetary Zone (CSWAMZ)\n\n\n\n\n\n\n47\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nThe achievements of the College during the review period include the following:\nCapacity building initiatives on IFRS and a Foundation Course on Banking \nSupervision held in April and June 2011, respectively;\nCreation of a portal by WAMI for information-sharing among supervisors;\nDevelopment of a framework on corporate governance for banks and other \nfinancial institutions to strengthen supervisory standards; and\nApproval for the conduct of joint examinations in The Gambia, Ghana, Guinea \nand Sierra Leone by Nigeria and the host supervisors in order to further \nstrengthen cross-border supervision.\nDuring the review period, the CBN signed four MoUs with the Central Bank of Kenya, \nthe National Bank of Rwanda, the Bank of Zambia and Banking Commission of the West \nAfrican Monetary Union (BCEAO), bringing the total number of such memoranda to 12.\nThe FSRCC embarked on a number of initiatives, including the following:\nDeveloping a website, www.fsrcc.gov.ng, to create public awareness of the \ncollaborative efforts of member agencies;\nDrafting a framework for consolidated supervision and examination of financial \nconglomerates; and\nCommissioning studies on the effect of the bond market on the financial \nsoundness of investing banks and the impact of AMCON on the performance of \nbanks and the capital market.\nThe supervisory challenges that were faced during the period centred on the efforts to \nmanage the lingering effects of the global economic and financial crises and the Bank's \nsubsequent intervention in some deposit money banks. The challenges are highlighted \nhereunder, in sub-sections 5.6.1 to 5.6.7. \nDespite various interventions by governments and central banks to address the effects of \nthe global financial and economic crises, recovery had been slow. In Nigeria, the \nchallenges to achieve sustained recovery included the following: \nContaining inflation exacerbated by the quantitative easing and an \n\n\n\n\n\n\n\n\n5.4.4\nMemoranda of Understanding (MoUs)\n5.5\nThe Financial Services Regulation Coordinating Committee (FSRCC)\n5.6\nSupervisory Challenges\n5.6.1\nTowards Recovery from the Global Economic and Financial Crises\n48\n CBN FINANCIAL STABILITY REPORT JUNE 2011\naccommodating monetary policy stance adopted in response to the global \nfinancial crisis;\nRecovery of credits granted for capital market transactions and to the oil and \ngas sector;\nEncouraging banks to lend to the real sector of the economy;\nAttracting foreign investment; and \nMaintaining exchange rate stability in the face of negative real interest rates and \npersistent demand pressure.\nThe challenges faced in the area of corporate governance persisted, although they were \nless serious. The observed improvement was due largely to the resolute enforcement of \nthe provisions of the Code of Corporate Governance for Banks in Nigeria, with the \nstrong cooperation of other stakeholders, including the law enforcement agencies and \nthe judiciary. \nThe inadequacy of the legal framework constituted a major factor which undermined the \neffectiveness of supervision, especially in the area of regulatory interventions. \nMeanwhile, an Anti-Terrorism Act was enacted while the Money Laundering \n(Prohibition) Act of 2004 was amended during the period under review. Efforts are also \nbeing intensified to amend the Banks and Other Financial Institutions Act, 1991.\nIn order to promote data integrity, a proposal to design and install a system that would be \nused to carry out forensic checks on banks' applications was being considered. \nMeanwhile the Approved Persons' Regime in Banks was approved and is being \nimplemented. Furthermore, the electronic Financial Analysis and Surveillance System \n(eFASS), the main platform used by Financial Institutions for the rendition of returns to \nthe supervisory authorities is being reviewed with the support of the developers to bring \non stream identified user requirement modules. \nThe adoption of the RBS and Consolidated Supervision methods in the supervision of \nfinancial institutions has faced some challenges in terms of the skills required for their \nsuccessful implementation. The CBN, therefore, has embarked on the training and \n\n\n\n\n5.6.2\nWeak Corporate Governance\n5.6.3\nInadequate Legal Framework\n5.6.4\nData Integrity\n5.6.5\nInadequate Supervisory Capacity\n49 \n CBN FINANCIAL STABILITY REPORT JUNE 2011\nretraining of staff, especially in the areas of risk-based supervision and consolidated \nsupervision to address the challenges. \nIn order to address concerns over the growing complexity in the products and operations \nof financial institutions in Nigeria, a number of initiatives have been adopted and are \nbeing implemented. These include: the new banking model to ring-fence banks from \nrisks arising from non-bank businesses; the strengthening of the supervisory processes \nthrough the RBS and consolidated supervision; intensification of efforts aimed at \nimproving corporate governance and risk management practices in supervised \ninstitutions; and the signing of MoUs with some countries to streamline areas of \ncooperation for effective supervision. \nThe CBN intensified efforts to check the menace of illegal Fund Managers, otherwise \nknown as “wonder banks”, which continued to pose a challenge to the financial sector \nduring the review period. In this regard, the CBN sustained its extensive media campaign \nembarked upon since December 2010, using the print and electronic media as well as \nmobile telephony to caution the public on the activities of illegal Fund Managers. Banks \nwere also made to refund the amounts illegally withdrawn from the accounts of “wonder \nbanks” maintained with them after the judgment of the Investment and Securities \nTribunal and to transfer same to an escrow account in the CBN. In addition, a \nsurveillance team was constituted to monitor and close down offices of illegal Fund \nManagers once they are identified. Also, the consent of the Attorney General of the \nFederation was obtained for the courts to appoint Liquidators for the 30 “wonder banks” \nthat accounted for about 50 per cent of the total deposits illegally mobilized from the \npublic. Furthermore, the EFCC/SFU commenced criminal proceedings against some \noperators of “wonder banks”.\n During the review period, the Bank received 682 complaints, bringing the total to 2,742 \nfrom March 1, 2010 to end-June 2011. The complaints are mostly on excess charges, \nfraudulent withdrawals, non-crediting of accounts, cheque conversions, among others. \nOf the complaints received in the review period, 610 or 89.44 per cent had been \nprocessed, resulting in the refund of N1.68 billion. The total number of complaints \n5.6.6\nGrowing Complexity in the Operations of Financial Institutions\n5.6.7\nThe Activities of Illegal Finance Operators in the Economy\n5.7\nConsumer Protection\n50 \n CBN FINANCIAL STABILITY REPORT JUNE 2011\nprocessed, so far stood at 2,652 or 96.72 per cent, while total refunds, so far amounted to \nN3.96 billion, US$198,118.75, and €10,000. \nWith the planned adoption of the International Financial Reporting Standards (IFRS) by \nNigerian banks in 2012, the CBN issued a Guidance Document on the IFRS during the \nreview period. Banks were required to submit quarterly progress reports on their IFRS \nimplementation efforts. Surveillance activities would, therefore, focus on ensuring a \nseamless transition from the NGAAP+ to the IFRS.\nIn order to promote financial stability, supervisory activities in the second half of 2011 \nwill focus on strengthening the Financial Stability Committee (FSC), in conjunction \nwith other bodies through the FSRCC, on the identification of early warning signals on \nsystemic distress. The implementation of the revised banking model that requires banks \nto divest from their non-banking subsidiaries and the framework for the regulation of the \nCredit Bureau will also be in focus and be closely monitored.\nThe activities of the AMCON will aim at ensuring that banks' NPL ratios are kept below \nthe prudential maximum of 5.0 per cent. The CBN will also ensure that strategic \ninvestors in the intervened banks entrench good corporate governance and risk \nmanagement practices.\n5.8\nThe Focus of Supervision\n51\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nTHE NIGERIAN PAYMENTS SYSTEM\n6.0\nConsistent with the objectives of the Payments System Vision 2020, the Bank adopted \npayment policies that focused on migration from a cash-based to an e-payment-driven \nsystem. In addition, circulars and guidelines were issued towards promoting the \nefficiency, safety and reliability of the payments system.\nThe implementation of the PSV 2020 recorded additional achievements in the first half \nof 2011, as the CBN took the following measures:\nCommissioned an independent audit of 16 mobile payment schemes which were \non a pilot run, pursuant to the issuance of final operating licences;\nSensitised stakeholders on the Approved Direct Debit rules to facilitate the use of \nelectronic consumer bill payments; \nIssued guidelines on the initiatives listed below to improve public confidence in \nthe payments system:\no\nElectronic payment of taxes,\no\nElectronic payment of salaries and pensions by organizations with more \nthan 50 employees, and\no\nElectronic payment of government suppliers;\nCommenced the upgrade of the Real-Time Gross Settlement (RTGS) System to \nmeet the requirements of FSS 2020;\nDirected banks to implement the 10-digit Nigeria Uniform Bank Account \nNumber (NUBAN) with a transition period of one year ending June 1, 2012. The \nNUBAN is expected to reduce the:\no\nVolume of unprocessed transactions due to wrong account numbers,\no\nNumber of postings to wrong accounts by receiving banks, and\no\nIncidence of delayed presentation of Automated Clearing House (ACH) \nitems. \nThe CBN adopted the following initiatives to enhance the Nigerian Payments System: \nFixed a daily cumulative limit of N150,000 for individual customers and \nN1,000,000 for corporate customers on cash withdrawals effective June 1, 2012. \nHowever, withdrawals above these limits would attract charges. The pilot run \n6.1\nThe Payments System Vision 2020 (PSV 2020)\n6.2\nDevelopments in the Payments System\n\n\n\n\n\n\n53\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nwould commence in Lagos State, the Federal Capital Territory (FCT), Kano, \nPort-Harcourt, and Aba from January 2, 2012. The above measure was \nintroduced to reduce the high dominance of cash in payments transactions and \nthe concomitant high and unsustainable currency issue and management \nexpenses, thereby promoting the use of more cost-effective non-cash payment \nmodes: \nOver-the-counter encashment of third party cheques above N150,000 would be \ndisallowed, with effect from June 1, 2012 when value for such cheques shall only \nbe received through clearing;\nCash-in-transit (CIT) lodgement services rendered to merchant customers by \nbanks shall cease from June 1, 2012. However, customers could engage the \nservices of CBN-licensed CIT companies to facilitate cash movements to and \nfrom their banks at mutually agreed terms and conditions;\nProhibited exclusive acquirer contracts for card schemes to enhance \ninteroperability, with effect from June 2011; \nMassive deployment of Point of Sale (POS) terminals under the shared service \nproject with a view to reducing the cost of operations; and\nApproved, in principle, a strategic alliance with the Nigerian Postal Service \n(NIPOST) to integrate the Post into the payments system by offering branchless \nbanking to reach the remote parts of the country. \nThese initiatives were expected to promote confidence in the system, enhance efficiency, \nimprove customer convenience and facilitate financial inclusion.\nThe volume and value of inter-bank transactions through CBN's RTGS System (CBN \nInter-bank Funds Transfer System - CIFTS) increased to 223,959 and N53,146.82 \nbillion, respectively, in the first half of 2011, from 190,138 and N49,640 billion in the \nsecond half of 2010, reflecting growth rates of 17.79 and 7.06 per cent, respectively \n(Figure 23).\n\n\n\n\n\n6.2.1\nThe Real-Time Gross Settlement (RTGS) System\n54 \n CBN FINANCIAL STABILITY REPORT JUNE 2011\n0\n50,000\n \n100,000\n \n150,000 \n200,000\n \n250,000\nDec\n-2010\nJune\n- 2011\nValue (N\nVolume\nFigure 22: CBN's RTGS Transactions, July 2010 - June 2011\n6.2.2\nCheque Clearing\nIn the first half of 2011, the volume and value of cheques cleared declined by 12.30 and \n4.74 per cent to 16,188,775 and N9,919.05 billion, respectively, from 18,458,480 and \nN10,412.12 billion recorded in the second half of 2010 (Figure 23). The decline was \nattributed to increased use of other modes of payment, such as RTGS, NIBSS Inter-bank \nFunds Transfer (NEFT), Automated Teller Machines (ATMs), mobile banking, and \ninternet payments, among others.\n \n \n0\n \n2,000,000\n \n4,000,000\n \n6,000,000\n \n8,000,000\n \n10,000,000\n \n12,000,000\n \n14,000,000\n \n16,000,000\n \n18,000,000\n \n20,000,000\nDec\n- 2010\nJune\n- 2011\nValue\n \n(N\nVolume\n \nFigure 23: Volume and Value of Cheques Cleared, July 2010 - June 2011\nThe volume and value of electronic card (e-card) transactions increased to 167,962,665 \nand N764.14 billion during the first half of 2011, from 106,739,822 and N610.22 \nbillion, respectively, during the second half of 2010, reflecting increases of 57.36 and \n25.22 per cent, respectively (Figure 24). The growth was attributed to enhanced public \nconfidence in card payments, following the enhanced security features in the cards and \nadoption of stringent measures to combat fraud and deepen the use of electronic \npayments. \n55\n6.2.3 Electronic Card Payments\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nFigure 24: Electronic Card Transactions, July 2010 - July 2011\nAvailable data on various e-payment channels for the period under review indicated that \nATMs remained the most patronized, accounting for 98.09 per cent of the number of \ntransactions, followed by the Web (Internet) 0.72 per cent, and Mobile 0.71 per cent. The \nPoint-of-Sale (POS) terminal was the least patronised, accounting for 0.48 per cent of \ntotal e-payment transactions (Figure 25).\nFigure 25: Volume of Electronic Card Transactions, January - June 2011\nSimilarly, in value terms, ATMs accounted for 91.37 per cent, the Web (Internet) 6.04 per \ncent, POS 1.67 per cent, while Mobile payments accounted for 0.92 per cent (Figure 26).\n56\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nFigure 26: Value of Electronic Card Transactions, January - June 2011\n6.2.4\nAutomated Teller Machine (ATM) Transactions\n6.2.5\nMobile Banking\n6.3\nPayments System Challenges\nThe number of ATMs deployed stood at 9,443 at end-June 2011. The increase in the use \nof ATMs continued during the first half of 2011, with the volume and value of \ntransactions amounting to 164,755,055 and N698.19 billion, respectively. These figures \nreflected increases of 60.57 and 27.74 per cent over the volume and value of \n102,608,918 and N546.55 billion, respectively, recorded in the second half of 2010.\nThe volume and value of payments through the mobile banking channel increased by \n60.96 and 60.09 per cent to 1,195,459 and N7.06 billion, respectively, in the period \nunder review, from 742,694 and N4.41 billion in the second half of 2010. \nDespite the progress recorded so far, the following challenges persisted, among others:\nHigh transaction costs,\nHigh dependence on cash transactions,\nHigh level of illiteracy,\nLow level of nternet access,\nInadequate inter-connectivity and inter-operability,\nLow level of public awareness of the existence of some non-cash payment \nproducts, resulting in under-utilisation of e-payments solutions, \nHigh concentration of e-payment facilities in urban centres,\nPoor state of infrastructure,\nHigh incidence of electronic fraud, \nLarge informal sector where cash is the only acceptable means of payment and \nlack of transparency and audit trail associated with cash transactions, and\nHigh level of money laundering risks and vulnerabilities.\nIt is expected that the full implementation of the PSV 2020 project and other on-going \nreforms would significantly address these challenges.\n\n\n\n\n\n\n\n\n\n\n\n i\n57\n CBN FINANCIAL STABILITY REPORT JUNE 2011\n7.0\nPRESERVING THE INTEGRITY OF THE \nFINANCIAL SYSTEM\n7.1\nThe Asset Management Corporation of Nigeria (AMCON)\n7.2\nThe Implementation of International Financial Reporting Standards \n(IFRS)\n7.3\nUpdate on Credit Information Bureaux\n7.3.1\nCBN's Credit Risk Management System (CRMS)\nThe Corporation continued to play significant roles in stabilizing the financial system \nthrough the acquisition of EBAs. At end-June 2011, three tranches of bonds amounting \nto N1,811 billion had been issued in exchange for EBAs valued at N2,827 billion. These \nresulted in:\nImproved NPL/TL ratio\nImproved liquidity to the banking industry\nImproved banks' capital\nIncreased lending by banks\nEnhanced earning opportunities to the banks through the bond income; and\nImproved confidence in the banking industry\nDuring the period under review, a number of actions were taken by the CBN towards the \nimplementation of the IFRS. These included:\nIssuance of a circular on the conversion of end-2010 financial statements to the \nIFRS-based figures;\nSetting up of six workgroups on Gap/Impact Analysis, Information Technology, \nInternal Reporting, Mobilisation, Sensitisation & Administration, Capacity \nBuilding, and Legal & Legislative Review; and\nReview of the IFRS implementation plan.\nAlthough appreciable progress has been made to prepare the sector for the IFRS \nadoption, additional work is required to meet the target reporting date of January 2012.\nThe CBN, through its CRMS, recorded a remarkable improvement in the management \nof basic credit information on customers, thereby enhancing credit administration and \nthe quality of risk assets.\nThe number of registered borrowers in the CRMS database grew by 2.20 per cent, from \n\n\n\n\n\n\n\n\n\n59\n CBN FINANCIAL STABILITY REPORT JUNE 2011\n73,189 in December 2010 to 74,786 at end-June 2011. Similarly, the number of \nborrowers with outstanding credit facilities of N1 million and above grew by 1.8 per \ncent, from 26,367 in December 2010 to 26,854 in June 2011, while the number of \noutstanding credit facilities rose by 4.4 per cent, from 32,557 to 33,975 in the same \nperiod. However, the value of total outstanding credits declined by 0.25 per cent, from \nN5,240 billion at end-December 2010 to N5,227 billion at end-June 2011(Figure 27).\nFigure 27: Selected CRMS Statistics, 2010 2011\nThe growth in the number of registered borrowers and credit facilities was largely driven \nby two factors: \nImproved appreciation among banks and their customers on the critical role of \nthe CRMS; and\nIncreased co-operation among stakeholders.\nThe decrease in total outstanding credit is attributed to the sale of non-performing loans \nto AMCON.\nThe number of private credit bureaux remained at three during the period under review, \nand their activities continued to complement CBN's Credit Bureau (CRMS). Their \nactivities were buoyed by increased demand for borrower/customer credit information \nand status enquiries by financial and non-financial entities.\nThe range of products and services provided by the PCBs were:\nCustomer identity verification,\nCredit reports,\nSelf-enquiry,\nBulk portfolio review,\n\n\n\n\n\n\n7.3.2\nPrivate Credit Bureaux (PCBs)\n60\n CBN FINANCIAL STABILITY REPORT JUNE 2011\n\n\n\n\n\n\n\n\n\nCredit scoring and rating, and\nReferencing and credit risk assessment.\nThe challenges faced by the PCBs included:\nLow public awareness on the importance of their operations;\nLack of an acceptable unique identifier;\nInadequate skilled manpower; and\nLong turnaround time for the resolution of disputes.\nThe Financial System Strategy 2020 (FSS 2020) was initiated to make Nigeria's \nfinancial services industry serve as a catalyst for the growth and development of Nigeria \ninto an international financial centre and the transformation of Nigeria into one of the \nworld's 20 largest economies by 2020.\nThe activities of the FSS 2020 included the following:\nLegislative Engagement: The FSS 2020 Secretariat intensified its legislative \nengagement for the consideration of the following bills by the National \nAssembly the Nigeria International Financial Centre Bill, the Financial \nOmbudsman Bill, the Electronic Transactions Bill and the Alternative Dispute \nResolution Commission Bill. These bills seek to enhance the legal framework \nfor the sustenance of financial stability in Nigeria.\nRisk-Based Supervision (RBS): The Secretariat facilitated the formation of a \nProject Management Group for the implementation of RBS in the financial \nsystem.\nInternational Financial Reporting Standards (IFRS): The FSS 2020 Secretariat \nestablished the Regulators' Forum for the harmonization and standardization of \ninstitutional roadmaps on the implementation of IFRS in Nigeria. \nThe Secretariat will continue to provide a platform for the successful implementation of \nthe FSS 2020.\n7.4\nThe Financial System Strategy 2020 (FSS 2020)\n61\n CBN FINANCIAL STABILITY REPORT JUNE 2011\n8.0\nCONCLUSION \nThe promotion of a sound and stable financial system remained a core mandate of the \nCBN. This mandate is critical to the achievement of government's broad macroeconomic \nobjectives of maintaining price stability, a favourable balance of payments, low \nunemployment, and sustainable economic growth and development.\nIn order to ensure the effectiveness and efficiency of the financial system, the CBN \ncontinued to embark on a systematic review of relevant regulations, guidelines and \nsupervisory methodologies towards addressing the challenges of data integrity, \nregulatory enforcement, corporate governance, and risk management. The Bank also \npursued the amendment or enactment of related enabling legislation to strengthen the \nregulatory and supervisory framework for the financial system.\nThe state of the intervened banks and their prolonged recapitalisation process gave rise \nto a number of vulnerabilities and weaknesses which posed threats to the stability of the \nfinancial system. Despite these challenges, the quality of banking industry risk assets \nimproved modestly, owing mainly to the activities of AMCON, the implementation of a \nrisk-based supervision framework, improved risk management practices in the DMBs, \nand the provision of real sector intervention funds by the Bank. Activities in the capital \nmarket were also influenced positively by improved liquidity and the successful conduct \nof the 2011 general elections.\nAs part of the efforts to enhance transparency in financial reporting, the CBN issued a \nGuidance Document on IFRS during the review period, requiring banks to submit \nquarterly progress reports of their IFRS implementation efforts towards the adoption of \nthe Standards by 2012. \nIn promoting financial stability, supervisory activities in the second half of 2011 will \nfocus on the implementation of the revised banking model and the framework for the \nregulation of the credit bureaux; re-capitalization of the intervened banks; good \ncorporate governance and risk management practices; and strengthening the Financial \nStability Committee (FSC) with the FSRCC for the identification of systemic distress \nearly warning signals. \n63\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nIn view of the commitment of the Federal Government to the on-going economic and \nfinancial reforms, the economy is expected to record modest growth in the second half of \n2011. Inflationary pressure is also expected to be contained, in view of the tight monetary \npolicy stance of the Bank, while the exchange rate would be expected to remain \nrelatively stable. \nOverall, the current initiatives aimed at increased productivity in the real sector and \nreforms in the other sectors are expected to impact positively on the economy.\n64\n CBN FINANCIAL STABILITY REPORT JUNE 2011\na)\nTechnical Terms\nConcentration Ratio (CR)\nCredit Risk \nCredit risk \nHerfindahl-Hirschman Index (HHI)\nLiquidity Risk\nLiquidity risk \nMarket Capitalization\nMarket Risk\nMarket risk\nMoney Supply \nOperational Risk\nOperational risk \nThis is the percentage market share attributable to a given number of firms in an industry, \ne.g., CR6 means the market share of the largest six firms.\nis an investor's risk of loss arising from a borrower who does not make \npayments as promised. Another name for credit risk is 'default risk'.\nThis is a measure of market concentration. It is calculated by squaring the market share \nof each firm competing in the market and then summing up the resulting numbers.\nis the risk that a given security or asset cannot be traded quickly enough in \nthe market to prevent a loss (or make the desired profit).\nThis is the total market value of a company's issued shares. Market capitalization is \ncalculated by multiplying number of a company's shares outstanding by the current \nmarket price of the shares. \n is the risk that the value of an investment portfolio, or a trading portfolio, \nwill decrease as a result of changes in either rates or prices or a combination of rates and \nprices.\nThe total money in circulation in an economy of a given country at a given time. \nis the risk arising from the execution of a company's business \nfunctions. It is a very broad concept which focuses on risks arising from the people, \nsystems and processes through which a company operates.\nGLOSSARY\n65\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nReputational Risk\nReputational risk \nb)\nOrganizations in Nigeria's Financial Sector\nThe Asset Management Corporation of Nigeria (AMCON)\nThe Central Bank of Nigeria\nThe Debt Management Office (DMO)\nThe National Insurance Commission (NAICOM) \nThe National Pension Commission (PENCOM)\nThe Nigeria Deposit Insurance Corporation (NDIC)\nThe Nigerian Stock Exchange (NSE) and the Abuja Securities and Commodities \nExchange (ASCE)\nis any risk to an organization's reputation that is likely to destroy \nshareholder value.\nAMCON was established through the AMCON Act of 2010, with responsibility for the \nacquisition, management and disposal of the non-performing assets of Nigerian banks.\nThe CBN regulates deposit money banks (DMBs) and other financial institutions \n(OFIs), namely, primary mortgage institutions (PMIs), bureaux-de-change (BDCs), \nmicrofinance banks (MFBs), finance companies (FCs), discount houses (DHs), and \ndevelopment finance institutions (DFIs). \nThe DMO is responsible for the management of public debt in Nigeria. \nNAICOM is responsible for the regulation and supervision of the insurance sub-sector. \nPENCOM is the regulatory agency charged with the oversight responsibility for pension \nfund custodians and pension fund administrators in Nigeria, under the Pension Reform \nAct of 2004. \nThe primary responsibility of the NDIC is the insurance of depositors' funds in DMBs \nand other insured financial institutions. In addition to complementing the supervisory \nefforts of the CBN, the Corporation liquidates failed financial institutions. \nThese are the two exchanges in the Nigerian capital market. The NSE has authority over \nthe securities' trading rules and regulations, while the ASCE superintends commodities \ntrading.\n66\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nThe Securities and Exchange Commission (SEC)\nThe Securities and Exchange Commission is the regulator of the Nigerian capital \nmarket. \n67\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nAppendix 1: Result of the Banking Industry Stress Test at end-June 2011\nMinimum Regulatory CAR :10%\n \nAll banks \n(24)\n \nLarge \nbanks \n(6)\n \nMedium-\nsized \nbanks(8)\n \nSmall \nbanks \n(10)\nPre-shock CAR \n4.62\n \n11.93\n \n4.05\n \n-17.32\n \nShock 1ai (10%NPLs increase)\n \n3.95\n \n11.45\n \n3.32\n \n-18.61\n \nShock 1aiii (20% NPLs \nincrease) \n \n3.28\n \n10.97\n \n2.58\n \n-19.92\n \nShock 1av (50% NPLs increase) \n \n1.19\n \n9.50\n \n0.29\n \n-24.06\n \nShock 1avii (200% NPLs \nincrease) \n \n-10.78\n \n1.37\n \n-12.99\n \n-49.88\n \nShock 1bi (shift 20%)\n \n4.03\n \n11.49\n \n3.28\n \n-18.11\nShock 1biii (shift 100%)\n \n2.08\n \n10.10\n \n0.95\n \n-21.33\n \n2ai -\n \nSingle biggest corporate \nobligor credit facilities shifted \nfrom Pass -through to Sub -\nstandard (10%)\n \n4.17\n \n11.48\n \n3.60\n \n-17.77\n69\n CBN FINANCIAL STABILITY REPORT JUNE 2011\n2aiii- Single biggest corporate obligor \ncredit facilities shifted from Doubtful \nto Lost (100%)\n \n-0.08\n7.30\n-0.67\n-21.98\n2bii-\n \nFive biggest corporate obligor \ncredit facilities shifted from Sub -\nstandard to Doubtful (50%)\n \n-3.02\n \n4.70\n \n-3.68\n \n-25.86\n \n \n \n \nShock 3aii (Oil & Gas) 50% \n3.97 \n11.34 \n3.41\n -18.21\n \n \n \n \nShock 3bii (Public Utilities 20% \ndefault) \n \n4.62\n \n11.93\n \n4.05\n \n-17.33\nShock 3biv (Public Utilities 100% \ndefault) \n \n4.61\n \n11.93\n \n4.05\n \n-17.36\nShock 3ci (General sector 20% \ndefault)\n \n4.38\n \n11.74\n \n3.86\n \n-17.88\n70\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nShock 3ciii (General sector 100% \ndefault)\n \n3.42\n11.01\n3.09\n-20.17\nShock 3di (100% Gen com becomes \nNPLs)\n \n4.11\n \n11.62\n \n3.35\n \n-18.21\nShock 3diii (100% Gen com becomes \nNPLs)\n \n2.00\n \n11.93\n \n0.45\n \n-21.92\nShock 3ei (Fin services 20%) \n4.04 \n11.50 \n3.19\n -19.12\nShock 3eiii (Fin services 100%) \n1.64 \n9.73 \n2.28\n -26.56\nShock 3fi (10% default in exposure to \nReal Estate)\n \n4.33 \n11.73 \n3.35\n -18.21\nShock 3fiii (30% default in exposure \nto Real Estate)\n \n3.17\n \n10.94\n \n2.82\n \n-21.18\nShock 3fv (100% default in exposure \nto Real Estate)\n \n3.17\n \n10.94\n \n2.82\n \n-21.18\nShock 3gi (10% default in exposure \nto Aviation)\n \n4.56\n \n11.84\n \n4.04\n \n-17.39\n71\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nShock 3giii (50% default in exposure \nto Aviation)\n \n4.31\n \n11.49\n \n4.01\n \n-17.69\n \n \n \n \nShock 3hii (50% default in exposure \nto Information and Communication) \n2.55\n \n10.35\n \n1.37\n \n-19.88\n \n \n \n \nShock 3kii (20% default in exposure \nto Power and Energy)\n \n4.51 \n11.83 \n3.87\n -17.36\nShock 3kiii (50% default i n exposure \nto Power and Energy)\n \n4.04\n \n11.45\n \n3.16\n \n-17.53\n \n \n \n \nShock 3lii (20% default in exposure \n4.39\n11.77\n3.92\n-18.07\n72\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nShock 3lii (20% default in ex\nposure \nto Capital Market)\n \n4.39\n11.77\n3.92\n-18.07\nShock 3liv (100% default in exposure \nto Capital Market)\n \n3.46\n \n11.15\n \n3.36\n \n-21.21\nShock 3mi (20% default in exposure \nto Government)\n \n4.33\n \n11.67\n \n3.85\n \n-17.97\nShock 3miii (100% default in \nexposure to Government) \n3.13 \n10.62 \n3.05\n -20.63\nShocks/Impact on CAR \n \n \n \n \nShock 4aii (20% depreciation against \nthe Naira)\n \n7.24 \n15.47 \n5.68\n -15.70\nShock 4bi (10% appreciation against \nthe Naira)\n \n3.31\n \n10.15\n \n3.24\n \n-18.13\nShock 4biii (50% appreciation against \nthe Naira)\n-1.92\n \n3.06\n \n-0.01\n \n-21.36\n73\n CBN FINANCIAL STABILITY REPORT JUNE 2011\n \nInterest Rate\n \n \n \n \n \nShock 5ai (200bps upward parallel \nshift in yield curve)\n \n4.61\n \n12.04\n \n3.90\n \n-17.45\nShock 5aiii (500bps upward parallel \nshift in yield curve)\n \n4.59\n \n12.21\n \n3.66\n \n-17.65\nShock 5bi (200bps downward parallel \nshift in yield curve)\n \n4.63 \n11.81\n \n4.21\n -17.18\nShock 5biii (500bps downward \nparallel shift in yield curve) \n4.65 \n11.64 \n4.44\n -16.98\nInitial ROA \n \n6.17\n \n6.01\n \n6.04\n \n6.96\nImpact of Parallel Shift in Yield Curve \nShocks on ROA\n \n \n \n \n \nROA after:\n \n \n \n \n \nShock 5ai (200bps upward parallel shift \nin yield curve)\n \n6.16\n \n6.09\n \n5.92\n \n6.86\nShock 5aii (400bps upward parallel shift \nin yield curve)\n6.16\n \n6.17\n \n5.88\n \n5.93\n74\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nShock 5aiii (500bps upward parallel shift \nin yield curve)\n \n6.15\n6.21\n5.74\n6.72\nShock 5aiv (1000bps upward parallel \nshift in yield curve)\n \n6.13\n \n6.41\n \n5.43\n \n6.47\nShock 5bi (200bps downward parallel \nshift in yield curve)\n \n6.18\n \n5.93\n \n6.16\n \n7.06\nShock 5bii (400bps downward parallel \nshift in yield curve)\n \n6.19\n \n5.85\n \n6.28\n \n7.15\nShock 5biii (500bps downward parallel \nshift in yield curve)\n \n6.20\n \n5.81\n \n6.34\n \n7.20\nShock 5biv (1000bps downward parallel \nshift in yield curve)\n \n6.22\n \n5.61\n \n6.64\n \n7.45\nShock 5biv (1000bps downward parallel \nshift in yield curve)\n379.83\n \n575.90\n \n430.85\n \n186.96\n75\n CBN FINANCIAL STABILITY REPORT JUNE 2011\n \n \n \nInitial LR\n \n47.9%\n \n52.9%\n \n43%\n \n54.4%\n \nShock 6ai (Gen run 10 %)\n \n29.83%\n \n34.98%\n \n14.43%\n \n42.85%\nShock 6aiv (Gen run 25%)\n \n13.86%\n \n19.15%\n \n-3.36%\n \n30.37%\nShock 6bi (Run on ST Dep 20%) \n31.26% \n35.86%\n \n16.39%\n \n44.86%\nShock 6biii (Run on ST Dep 50%) \n19.03% \n22.44%\n \n3.50%\n 37.33%\nShock 6ci (Run on LT Dep 20%) \n28.34% \n34.08%\n \n34.08%\n 40.68%\nShock 6ciii (Run on LT Dep 50%) \n7.99% \n15.56%\n \n15.56%\n 21.65%\nShock 6di (10% Run on LT and 20% on ST \nDep)\n \n26.03%\n \n30.95%\n \n10.34%\n \n40.37%\nShock 6diii (20% Run on LT and 50% on \nST Dep)\n \n2.84%\n \n6.32%\n \n-14.32%\n \n24.40%\nShock 6eii (50% Run on largest Deposit)\n35.10%\n40.17%\n21.98%\n \n44.88%\n76\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nShock 6fi (5% Run on 5 largest Deposits)\n \n37.09%\n \n42.09%\n \n22.86%\n \n48.28%\nShock 6fiii (15% Run on largest Deposits)\n \n36.15%\n \n41.26%\n \n22.12%\n \n46.90%\nShock 6gi (5% Run on 10 largest \nDeposits)\n \n31.93%\n \n37.53%\n \n16.12%\n \n44.05%\nShock 6gii (10% Run on 10 largest \nDeposits)\n \n25.20% \n31.63%\n \n7.56%\n \n38.12%\nShock 6giii (15% Run on 10 largest \nDeposits)\n \n17.00% \n24.50%\n \n-2.95%\n 30.78%\nShock 6hi (5% Run on 20 largest \nDeposits)\n \n30.95% \n36.82%\n \n14.87%\n 42.79%\nShock 6hii (10% Run on 20 largest \nDeposits)\n \n22.80% \n29.92%\n \n4.46%\n 34.93%\nShock 6hiii (15% Run on 20 largest \nDeposits)\n \n12.46% \n21.32%\n \n-8.84%\n \n24.58%\n \n \n \nImpact of FX Trading Shocks on ROA\n \n \n \n \nInitial ROA\n \n6.17\n \n6.01\n \n6.04\n \n6.96\n \nFX Trading Income Volatility\n \n \n \n \n \nShock 7ai (10% decline in FX trading \nIncome)\n \n6.15\n \n5.99\n \n6.02\n \n6.92\nShock 7aii (20% decline in FX trading \nIncome)\n6.12\n \n5.96\n \n5.99\n \n6.89\n77\n CBN FINANCIAL STABILITY REPORT JUNE 2011\nShock 7aii (20% decline in FX trading \nIncome)\n \n6.12\n \n5.96\n \n5.99\n \n6.89\nShock 7aiii (50% decline in FX trading \nIncome)\n \n6.04\n \n5.88\n \n5.93\n \n6.78\nShock 7aiv (100% decline in FX trading \nIncome)\n \n5.91\n \n5.75\n \n5.82\n \n6.61\n \n \n \nImpact of FX Trading Shocks on ROE \n \n \n \nInitial ROE\n \n376.95 \n617.13 \n391.66\n 174.70\nFX Trading Income Volatility \n \n \n \n \nShock 7ai (10% decline in FX trading \nIncome)\n \n375.36 \n614.48 \n390.23\n 173.82\nShock 7aii (20% decline in FX trading \nIncome)\n \n373.76 \n611.84 \n388.81\n 172.95\nShock 7aiii (50% decline in FX trading \nIncome)\n \n368.98\n \n603.90\n \n384.54\n \n170.32\nShock 7aiv (100% decline in FX trading \nIncome)\n \n361.01\n \n590.67\n \n377.42\n \n165.93\n78", "source": "CBN", "stratum": "cb_requests", "fetch_date": "2026-05-11", "url": "file:///CBN/Financial_Stability_Reports/financial stability report 2011.pdf"}
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