AN OVERVIEW OF CURRENT BANKING SECTOR REFORMS AND THE REAL SECTOR OF THE NIGERIAN ECONOMY

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

Written by Cajetan M. Anyanwu

I. Introduction

An economy is usually compartmentalized into four distinct but related sectors. These are the real, external, fiscal or government and financial sectors. Real sector activities include  agriculture, industry, building and construction, and services. The sector is strategic for a variety of reasons. First, it produces and distributes tangible goods and services required to satisfy aggregate demand in the

economy. Its performance is, therefore, a gauge or an indirect measure of the standard of living of the people. Second, the performance of the sector can be used to measure the effectiveness of macroeconomic policies. Government policies can only be adjudged successful if they impact positively on the production and distribution of goods and services which raise the welfare of the citizenry. Third, a vibrant real sector, particularly the agricultural and manufacturing activities, create more linkages in the economy than any other sector and, thus, reduces the pressures on the external sector. Fourth, the relevance of the real sector is also manifested in its capacity building role as well as in its high employment and income generating potentials.

Economic reforms generally refer to the process of getting policy incentives right and/or restructuring key implementation institutions. As part of economic reforms, financial sector reforms focus mainly on restructuring financial sector institutions and markets through various policy measures. As a component of the financial sector, the reforms in the banking sector seeks to get the incentives right for the sector to take the lead role in enhancing the intermediation role of the banks and enable them contribute to economic growth. As articulated by Omoruyi (1991), CBN (2004) and Balogun (2007), banking sector reforms in Nigeria have been embarked upon to achieve the following objectives, among others: market liberalization in order to promote efficiency in resource allocation, expansion of the savings mobilization base, promotion of

investment and growth through market-based interest rates.

Other objectives are:

improvement of the regulatory and surveillance framework, fostering healthy competition in the provision of services and laying the basis for inflation control and economic growth.

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

Five distinct phases of banking sector reforms are easily discernible in Nigeria. The first occurred during 1986 to 1993, when the banking industry was deregulated in order to allow for substantial private sector participation. Hitherto, the landscape was dominated by banks which emerged from the indigenization programme of the 1970s, which left the Federal and state governments with majority stakes. The second was the re-regulation era of 1993-1998, following the deep financial distress. The third phase was initiated in 1999 with the return of liberalization and the adoption of the universal banking model. The fourth phase commenced in 2004 with banking sector consolidation as a major component and was meant to correct the structural and operational weaknesses that constrained the banks from efficiently playing the catalytic role of financial intermediation. Following from the exercise, the aggregate capital of the consolidated banks rose by 439.4 per cent between 2003-2009, while deposit level rose by 241.8 per cent. 

However, this was not reflected in the flow of credit to the real economy, as the growth rate of credit fell during this period, while actual credit did not reflect the proportionate contribution of the sector to the GDP. The current and fifth phase, was triggered by the need to address the combined effects of the global financial and economic crises, as well banks‘ huge exposures to oil/gas and margin loans, which were largely non-performing; corporate mis-governance and outright corruption, among operators in the system. This round of reform, therefore, seeks to substantially improve the banking infrastructure, strengthen the regulatory and supervisory framework, and address the issue of impaired capital and provision of structured finance through various initiatives, so as to provide cheap credit to the real sector, and financial accommodation for small and medium-scale enterprises (SMEs).

It is against this background that this paper seeks to examine the developments in the banking industry and the real sector of the Nigerian economy since the fourth phase of the reforms which began in 2004. Specifically, the paper will review the reform programs and how they have impacted on the flow of creditto the real sector. With the realization that the sector is facing challenges well beyond the realm of finance, other constraints would be identified and, thereafter, policy interventions recommended with a view to making the banking sector reforms more effective. The rest of the paper is organized as follows. Section two provides the theoretical underpinning in the relationship between the financial industry and the real sector developments, while section three periscopes the banking sector reforms since 2004. Section four reviews developments in the real sector since 2005, and section five identifies some of the binding constraints that would require policy intervention. Section six concludes the paper.