a publication of zenith bank plc iss v ol. 2 no. 3 july, 2006 2 no 3 july 2006.pdf · consistent...

A Publication of Zenith Bank Plc Vol. 2 No. 3 July, 2006

PERISCOPE

ISSUES

bank inspectors, supervisors

and quality service delivery

- Abdullalif A. Muse

EDITORIAL

POLICY

an institutional reform approach

to corporate social responsibility

- Aleksandr Shkolnikov

the contributory pension scheme:

building a new and modern nigeria

FOREIGN INSIGHTS

language, globalisation and technology

- Yomi Makanjuola

canada-nigeria trade: reaping

mutual benefits

economy: coasting to destination

GLOBAL WATCH

capital market and wealth creation:

the global picture

IT deployment as corporate strategy in

repositioning banks in nigeria

EXPRESSION

The stock market as a store of value

- Vincent Nwanma

Latin america:

engaging the disenfranchised, creating wealth

- Álvaro Vargas

FACTS & FIGURES

economic, financial and business indices

w w w. z e n i t h b a n k . c o m

Wealth CreationThrough Through

DrivingDriving

Reforms

££CC

YY

ISSN: 0189-9732

information technology and wealth creation

ZENITH ECONOMIC QUARTERLY : : July, 2006 1

E D I T O R I A L T E A M

CHRIS 'E ONYEMENAMEditor-in-Chief

MARCEL OKEKEEditor

TONI KAN ONWORDIAssistant Editor

EUNICE SAMPSONAssistant Editor

MICHAEL MUSAProduction Assistant

UKUT SYLVESTERROTIMI AROWOBUSOYE

Layout/Design

E D I T O R I A L B O A R D O F A D V I S E RSUDOM EMMANUEL

GIDEON JARIKREPAT NWARACHEOCHUKO OKITI

UGO ANYANWU

ZENITH ECONOMIC QUARTERLYis published four times a year by Zenith Bank Plc.

The views and opinions expressed in this journaldo not necessarily reflect those of the Bank.

All correspondence to:The Editor,

Zenith Economic Quarterly,Research, Economic Intelligence &

Franchise Enhancement Group (R,EI&FEG),Zenith Bank Plc

7th Floor, Zenith HeightsPlot 87, Ajose Adeogun Street,

Victoria Island, Lagos. Tel. Nos.: 2781046-49,2781064-65| Fax: 2703192.

E-mail: [email protected],[email protected]

ISSN: 0189-9732

C O N T E N T SPERISCOPEExamines key developments in various sectors andtheir effect on the economy in the period underreview. Pg. 4-9

EXPRESSIONStrategic importance of ICT to the activities of Ni-gerian banks especially in the 21st century is iden-tified. Pg. 11-14

POLICYPolicy document detailing the imperative for, fea-tures, objective and highlights of the new con-tributory pension scheme. Pg. 16-22

ISSUES (I)Considers the challenges of banking supervisionin the light of the banking sector reforms as well asthe requirements of Basle II. Pg. 24-36.

ISSUES (II)Corporate social responsibility is assessed froman institutional reform perspective by companyCSR strategies in developed and developing coun-tries. Pg. 38-47

ISSUES (III)An analysis pointing to the potential and inherentbenefit of investing in the stock market. Pg. 49-54

FOREIGN INSIGHTS (I)Contemplates the linguistics implications of China’srise to prominence as an emergent global superpower. Pg. 58-61

FOREIGN INSIGHTS (II)Focuses on Canada’s re-emergence as Nigeria’smajor trading partner after a 4-year hiatus.Pg. 63-66

FOREIGN INSIGHTS (III)Analyses the impact of market reforms on politicalprocesses, leadership and how the disenfranchisedcan be engaged in wealth creation in Latin America.Pg. 68-73

GLOBAL WATCHProvides global perspective of the benefits of in-vesting in the stock market while analysing theimplications of recent developments. Pg. 75-81

FACTS & FIGURESHighlights macroeconomic performance usingcharts and figures. Pg. 83-91

ZENITH ECONOMIC QUARTERLY : : July, 20062

From The Editorial Suite

AAdam Smith’s remarkable book ‘An Inquiry into the Nature andCauses of the Wealth of Nations’ published in 1776 changedmankind’s understanding of the economic world perhaps in thesame proportion as the nineteenth century discoveries of scien-tists like Isaac Newton and Albert Einstein changed man’s under-standing of the physical world. His examples remain just as dra-matic today as they were then.

As human society progressed from the hunter-gathering,through agriculture, to industrial age, so did the mode of eco-nomic production. And then, scientific discoveries raised the stakes.With the advent of the information society and due to the acceler-ated globalization process of the last few decades, “Information”and “Knowledge” have become the decisive factors in differenti-ating wealth creating capacities and thus, determination of a nation’scompetitiveness.

Hitherto, wealth creation looked to ‘resources beneath thefeet’ and to industrial production. Today, information technology,IT skills, ‘resources in the brain’ make the difference. Along withthis has been the development of e-technology (e-awareness), e-

industry (e-infrastructure) and e-society (e-readiness). And aseconomies become differentiated by these IT features – the oftenquoted ‘digital divide’- wealth creating capacities manifestly dif-fer, so do the wealth of nations!

Different countries have pursued economic development fromdifferent perspectives with considerable success. Imagine the Ja-pan of today and in the 1970s, or India’s software developmentindustry which thrives on major outsourcing from the USA mar-ket. Then Singapore and now China.

Unfortunately, less developed economies still continue tograpple with the burden of reviving their wealth creating capaci-ties which are mostly natural resources and industrial-productionindexed. On the other hand, developed economies have contin-ued to widen the gap largely through innovations in informationtechnology.

Nigeria’s recent reform efforts have focused largely on bridg-ing the many dimensions of this ‘digital divide’- infrastructure is-sues – telecommunications, road, transport, power, and socialinfrastructure. Other areas include the public sector reform,privatization, the financial services sector – pensions, mortgage,public debts (local and external), insurance, capital market, bank-ing sector and information and communications technology infra-

structure backbone. As with all reform efforts, gestation periodcan be difficult to accommodate. Hopefully, Nigeria’s current ex-perience would be different – ask the local contractors who havejust been paid, or the pensioner who is eagerly looking forwardto collecting his cheque for the pension arrears in August, 2006.

This edition of the ZEQ focuses in a somewhat generic man-ner on ‘Driving Wealth Creation through Reforms’. Theoverarching intent is a recognition of what effect the ongoingreforms has had and continues to have on the various sectors ofthe economy, especially the financial services sector.

The editorial contribution on the pensions scheme is to high-light the basis of the ongoing fundamental restructuring of thepensions system and its expected impact on the hitherto neglectedpensioner whose efforts helped bake the pie years past. MarcelOkeke’s periscope titled: ‘Economy: coasting to destination’summarises significant half year developments in the economythat would positively impact wealth creation nationwide. VincentNwanma’s article on the ‘Capital Market as a Store of Value’ dem-onstrates the role capital markets play in storing value and also in

facilitating the expansion of productive capacities in anation. Eunice Sampson’s ‘global watch’ focuses onthe global dimensions of the capital market and wealthcreation.

Jim Ovia’s piece on IT deployment exemplifies Ni-gerian banks’ effort, in the midst of infrastructure con-straints, at ‘bridging the digital divide while adoptingglobal best practices in service delivery. Muse’s piecehighlights the importance of regulation through super-vision and control in the banking sector as a tool for

ordered development.The article by Toni Kan Onwordi draws attention to the widen-

ing scope and benefits of bilateral relations in Nigeria’s search forgrowth in global trade. The focus this time is Nigeria-Canadarelations. Following on our spotlight on the emergence of Chinaas a global force, both politically and economically and its impli-cations on trade with Nigeria, Yomi Makanjuola considers thelinguistic implication of China’s rise to prominence on the globalstage.

Finally Alvaro Vargas’ piece highlights how the disenfran-chised can be engaged in wealth creation, while Shkolnikov pre-sents an institutional reform approach to corporate social respon-sibility. As usual the ‘facts and figures’ segment presents an over-view of the economic indicators in the quarter. We hope you findthis an interesting reading.

Just to mention that we have included the balance sheet ofZenith Bank Plc as at June 30, 2006. A wonderful result indeed!

Hitherto, wealth creation looked to ‘resources beneath thefeet’ and to industrial production, today informationtechnology, ‘resources in the brain’ make the difference.Along with this has been the development of e-technology(e-awareness), e-industry (e-infrastructure) and e-society(e-readiness).



D

PERISCOPE

* By Marcel Okeke

uring the second quarter 2006 and, in fact, all throughthe first half of the year, reforms continued to maketelling impacts on all segments of the Nigerian economy.Specifically, the period was marked by the consumma-tion of the Paris Club debt exit deal, high and rising oilprices, improved fiscal and monetary management,among others—all leading to macroeconomic stabilityand significantly reduced risks.

Apparently, as a result of this cheering trend, Nige-ria was de-listed from the Non-co-operative Countriesand Territories (NCCTs) list of the Financial Action TaskForce (FATF)—a global anti-money laundering body.This came after Nigeria had enacted a number of lawsand established various commissions to enforce sanc-tions against money laundering and corruption. Nige-ria was placed in FATF’s list of NCCT in June 2001. Also,during the period under review, about ten Nigerian bankseither sealed partnership deals with reputable globalfinancial institutions to manage the country’s externalreserves or were in the process of doing so. Nine banksin the country, the largest number ever, also made TheFinancial Times Best 1000 Global Banks ranking for 2006.

EXTERNAL DEBT/FOREIGN RESERVESDuring the second quarter 2006, Nigeria finally exited itsindebtedness to the Paris Club, following the approvalof its Policy Support Instrument (PSI) by the Interna-tional Monetary Fund (IMF); it made the final tranchepayment of $4.6 billion to the Club. With this develop-ment, Nigeria’s external debt stock which stood at about$35 billion mid-2005 dropped to only $4.847 billion as atend-June 2006. All together, the Paris Club debt exit dealsaw $18 billion, representing 60 per cent of the ($30 bil-lion) debt forgiven and the remaining $12.4 billion boughtback.

Following the debt exit deal, the Federal Governmenthas approved external borrowing ceilings of $3 billionfor 2006, $1.5 billion and $2 billion for 2007 and 2008 re-spectively. This is to forestall frivolous external borrow-ings at the federal and state levels. In fact, a committeeheaded by the Finance Minister has been set up to scru-tinize all proposals of federal ministries and agenciesfor foreign borrowings in 2006, in other to institutionalizethe co-ordination of their borrowing activities. In addi-tion to all these, the Federal Government also during


PERISCOPE

the quarter under review, had set in motion, machineryfor the settlement of its debt to the London Club as well asother multilateral agencies. Towards this end, the FederalGovernment has invited proposals from reputable finan-cial advisory services firms to help determine a numberof suitable options. As at end-June 2006, Nigeria’s indebt-edness to the London Club stood at about $1.4 billion.

While the Federal Government was taking these stepsto free the country completely from the pangs of foreigndebt, the nation’s foreign reserves continued to grow inleaps and bounds, driven mainly by the fortuitous andconsistent rise in the prices of crude oil in the internationalmarket. Thus, Nigeria’s gross external reserves whichstood at $28.28 billion as at end-December 2005, rose to

$36.06 billion by the close of first quarter 2006. Despite thesignificant draw-down from the reserves for the lasttranche payment in the Paris Club debt exit deal in April,the reserves hit $36.63 billion by the close of the secondquarter 2006.The stock of external reserves is expected toincrease even further in the months ahead as Nigeria paysoff/buys back her remaining chunk of foreign debt.

FINANCE/BANKINGDevelopments in the banking and finance sector in thesecond quarter 2006 were driven mainly by the fallouts ofthe first phase of banking industry consolidation whichended in December 2005. These include the processes ofacquisition/disposal or liquidation of the 14 banks that could

not meet the December 2005 re-capitalization deadline,implementation of some monetary management policiesas well as the nurturing of the bond market. The re-capi-talization efforts of some insurance companies also im-pacted activities, especially in the capital market, duringthe quarter. The Central Bank of Nigeria finally imple-mented the long-awaited enhanced Financial Analysis andSurveillance System (e-FASS), which enables it monitordaily transactions in all the 25 banks in Nigeria.

Frantic efforts by some banks to secure partnershipswith reputable global financial institutions preparatory topartaking in the management of the nation’s foreign re-serves intensified during the quarter. By end-June 2006,no less than 10 banks in the country had consummated

strategic alliances with such global banks.The list includes Zenith Bank, First Bank,Access Bank, Guaranty Trust Bank, UnionBank, IBTC-Chartered Bank. Others are In-tercontinental Bank, Bank PHB, OceanicBank, Diamond Bank and First City Monu-ment Bank.

But while the alliances were beingforged between a number of local banks andtheir foreign counterparts, the CBN in Juneissued a guideline, detailing the stature andstandards the partnering banks must attain.Highlights of these include that the foreignpartner must have a minimum track recordof five years in the provision of custodialand/asset management services as well ashave A-ratings by reputable internationalrating agencies. The bank must have alsosecured custodian/asset management ap-proval by relevant off-shore regulatory au-thorities, among others.

During the quarter under review, The Banker Magazine,an arm of the Financial Times Group, made public, the resultof its survey which showed that nine Nigerian banks num-bered among the world’s top 1000 banks in 2006. The rank-ing was based on Tier 1 Capital of banks as defined byBasel’s Bank for International Settlement (BIS). Tier 1 capi-tal includes common stock, disclosed reserves and re-tained earnings and in the case of consolidated accounts,minority interests in the equity of subsidiaries that areless than wholly owned. The following banks in Nigeriamade the 2006 list in the order of their ranking: First Bankof Nigeria Plc (784), Union Bank of Nigeria Plc (797), ZenithBank Plc (857), IBTC-Chartered Bank (863), Intercontinen-tal Bank Plc (877), Spring Bank Plc (888), Guaranty Trust

Nigerian banks in partnership with foreign banks

Source: R, EI&FEG


PERISCOPE

Bank Plc (918), First Inland Bank Plc (975) and Oceanic BankPlc (995).

Further to the microfinance policy introduced by theCBN in December 2005, the apex bank during the quarterunder review, gave approval-in-principle to about sevenNGOs that wished to set up Microfinance Institutions. Li-censes would however be issued to these organizationsafter they have fully met all the operational requirementswhich include a minimum capital base of N20 million. Eachof them must also produce an institutional assessmentreport, based on the works of a reputable, CBN-certifiedrating agency as well as a detailed feasibility report and afive-year business plan, among others. To date, about 75,out of the 759 community banks have met the N20 millioncapital base requirement for MFIs.

In pursuit of its tight monetary management stance,the Central Bank of Nigeria during the quarter, adjustedupwards, the Minimum Rediscount Rate (MRR) by 100 ba-sis points—from 13 per cent to 14 per cent. The MRR is thenominal anchor of all interest rates in the economy; andso, the latest measure portends upward review of interestrates in the market. The MRR was last reviewed by the

CBN in February 2005, when it was cut from 15 per cent to13 per cent. Consequently, banks’ maximum lending ratehad officially remained at the MRR plus 4 percent (i.e. 17per cent). With the latest adjustment in MRR, the maxi-mum lending rate moves to 18 per cent.

The foreign exchange market liberalization effort ofthe CBN continued to take shape during the period underreview, with many banks opening their Bureaux de Change(BDCs) windows/outlets as part of their financial products.In furtherance of this, the CBN not only sold $50 million tothe BDCs weekly, but also authorized banks to sell forexcash directly to them at exchange rates determined bythe inter-bank forex market. This, among other measures,accounted for the significant narrowing of the premiumbetween the Naira exchange rate in the official/inter-bankand parallel markets—leading to the virtual disappear-ance of the gap in the first week of July 2006. That week,the national currency exchanged at N129 to $1 and N128.6to $1 at the ‘black’ and official markets respectively.

In the capital market, the second quarter saw the offi-cial release of the results of Zenith Bank’s jumbo publicoffer for subscription which closed March 20. Although the

CBN Guidelines for Foreign Reserve Management

Source: R, EI&FEG


PERISCOPE

three billion shares at N16.90 per share offer was toraise N50.7 billion, it ended up recording a 105.78 percent subscription level and raking in N53.63 billion.Overall, portfolio re-alignments arising from the bank-ing sector consolidation boosted trading on the Nige-rian Stock Exchange (NSE) during the first half of theyear, with transactions in bank shares standing at 9.13billion units valued at N93.6 billion. In volume terms,this amounted to 74.1 per cent of the total volumetraded.

The Securities and Exchange Commission (SEC)had on March 20, ordered the de-listing of acquiredand merged banks from the official list of the NSE –with April 18, 2006 as deadline. Consequently, by end-June 2006, the following banks had been dropped fromthe official list of the NSE: African Express Bank, GulfBank, Hallmark Bank, Liberty Bank Savannah Bank andTrade Bank. Others include Cooperative DevelopmentBank, Lion Bank, IMB International Bank, Inland Bank andFirst Atlantic Bank. For the insurance companies, negotia-tions for a number of mergers and acquisitions were stillongoing during the quarter; other operators engaged inhybrid offers to raise funds in the capital market, to beatthe February 2007 re-capitalization deadline set for theindustry.

Activities in the bond segment of the capital marketremained upbeat all through the quarter under review—with the first phase of the issuance of the 3rd FGN bondswhich began in January to raise a total of N155 billion clos-ing in June 2006.

In its determination to develop the bond market, theDebt Management Office (DMO), after a rigorous selec-tion process, gave approval to 15 financial institutions com-prising 10 banks and 5 discount houses to perform thefunction of Primary Dealers/Market Makers (PDMM) inthe FGN Bonds. These PDMMs have since been inaugu-rated and commenced operations. On its part, the Nige-

rian Stock Exchange (NSE) carried out an investment roadshow in Atlanta, Georgia, US, during which it invited Ameri-cans and Nigerians in Diaspora to take advantage of theongoing reforms in Nigeria to invest in the country.

OIL & SOLID MINERALSThe 2006 mini licensing round for oil and gas blocs tookplace during the quarter under review, and recorded about12 bidders—mainly multinational oil exploration and pro-duction companies. The blocs put on offer included nineoil prospecting leases (OPLs), being 50 per cent of theblocs relinquished by the operators of the 1993 and 1998production sharing contracts (PSCs) in adherence to ex-

isting regulations. Four other OPLs fromthe 2005 bid round, whose winners de-faulted, were also on offer. In pursuit ofthe local content initiative, the technicalcommittee on the licensing round ensuredthat Local Content Vehicles (LCVs) wereattached to the oil blocs.

Organizations that participated in thebid round include the Chinese NationalPetroleum Corporation (CNPC), ONGC ofIndia, BG-Sahara, Cleanwaters Consor-tium, Ni-Delta United Oil Company andONGC Mittal. Others were Global Steel

Holding, INC Natural Resources Exploration, TransnationalCorporation, NAOC/Lotus, ONGC Videsh, and CPC/Starcrest Energy. A gross earning of about $20.55 billionwas expected from the concession of the oil blocs in themini bid round—mainly from application fees, data pryingfees, bid processing charges, seismic data lease as well

• A coal miner in action

Schedule for the Issuance of the 3rd FGN Bond (Jan—June 2006)

Source: Debt Management Office, Abuja


PERISCOPE

as reports data lease charges. By the close of thesecond quarter 2006, processes leading to the signingof production sharing contract (PSC) between the Ni-gerian National Petroleum Corporation (NNPC) andwinners of oil blocs during the bid round had com-menced.

During the second quarter 2006, prices of crudeoil rose markedly in the international oil market, withNigeria’s reference crude, the Bonny Light, recordingappreciable leap. While the price stood at an aver-age of $62.5 per barrel by end-March 2006, it had risento $72.3 per barrel by June. Crude oil production, in-cluding condensates and natural gas inched up from2.2 million barrels per day (mbd) to 2.3 million mbdbetween March and June. The phenomenal rise in theprices of crude oil in the international market wasattributable to the high and rising demand in the UnitedStates of America, China and India, anxiety over sup-ply disruptions in Nigeria as well as speculations onthe likely impact of the row between Iraq and theinternational community on account of her nuclearprogramme.

Processes leading to a downstream gas sector law alsocommenced during the second quarter 2006. The law aimsto establish a Gas Regulatory Commission, a Nigerian GasTransportation Company and a Nigerian Gas MarketingCompany. It will also provide a separate legal and regula-tory regime for the downstream gas sector to recognizegas as being distinct from oil. Nigeria’s natural gas re-serves are estimated at 177 trillion cubic feet, placing thecountry among the top 10 countries with the largest gasresources in the world.

In the solid minerals sub-sector, processes leading tothe licensing of mineral blocs and the privatization ofparastatals/public-funded mining companies dominatedthe second quarter 2006. Specifically, in April, a committeewas set up to carry out a pre-qualification exercise for theover 100 expressions of interest sequel to an earlier callfor same. At the conclusion of the pre-qualification exer-cise, 12 companies were short-listed to carry out due dili-gence and bid on the two bitumen blocs on offer. 16 com-panies were short-listed for bidding on the 10 coal proper-ties, while a total of 32 companies were short-listed forbidding on the various titles previously held by the Nige-

rian Mining Corporation.The pre-qualified investors comprise

companies from the United Kingdom,Canada, China, Malaysia, Australia, Swit-zerland, Russia and South Africa. The bid-ding was only for bitumen and coal min-eral blocs as well as for ownership of theNigerian Mining Corporation which over-sees the mining of deposits of mineralsand precious stones in Nigeria. A furtherbreakdown of the pre-qualified firmsshow that 8 of them indicated interest inBitumen Bloc 1 located in Ogun/Ondostate, while 12 of the 16 companies indi-cated interest in bidding on Bloc 2 locatedin Ondo state.

The Ministry of Solid Minerals Devel-

Nigeria 2006 Mini Bid Round (Flag Off: April 2006)

Companies Shortlisted for Bitumen and Coal Blocs Bid

Source: R, EI&FEG

Source: R, EI&FEG


PERISCOPE

opment (MSMD), as part of its drive to reactivate thesector, had identified about 34 solid minerals in 250 loca-tions across the country. Although this initial bid roundfocused on bitumen and coal, subsequent ones are billedto cover other minerals that also exist in commercial quan-tity. The bids are being conducted in accordance with theNigeria Extractive Industries Transparency Initiative(NEITI) principles to ensure transparency in the process.The Ministry had earlier published a list of successful com-panies for re-validation of licenses, with a total of 1,450licenses comprising mining, quarrying and prospectingleases across the states of the federation.

TELECOMMUNICATIONSThe Federal Government, during the quarter under re-view, issued licenses to four telecoms operators underthe emerging ‘unified licensing’ regime, from which it re-alized N1.83 billion. The four companies which becamethe first beneficiaries of the new regime are Multi-LinksTelecommunications Limited, Prest Cable and Satellite TVSystems Limited, Intercellular Nigeria Plc and StarcommsLimited. Under the new order, the companies are to oper-ate long distance services, full international gateway,broadband internet and fixed and wireless lines servicesacross the country.

On its part, a newly licensed long-distance operator,Phase 3 Telecoms, has unfolded plans to invest $100 millionin the construction of its nationwide fibre optic infrastruc-ture, while ZTE Nigeria has set up a N1.9 billion handsetfactory in Abuja. The factory has since rolled out proto-type handsets.

The Nigerian Communications Commission (NCC)announced during the quarter under review, a new re-gime of interconnection rates that is capable of conducingto cheap phone calls. The new rates billed to commence inthe third quarter 2006, will end the three-year old chargesintroduced by the NCC in 2003. Instead of the N5.22 pay-able to fixed line operators by mobile telephone opera-tors and N11.52 paid by fixed line operators to mobile op-erators under the old regime, according to the NCC, theinterconnection rate for fixed call termination using near-end handover shall be N10.80 while rates for fixed calltermination using far-end handover shall be N9.10. Theinterconnection rate for mobile call termination shall beN11.40.

The Federal Government also during the second quar-ter, 2006, commenced the process of harmonizing all In-formation and Communications Technology (ICT) net-works embarked upon by all its agencies. The integrationproject will give birth to a National Information and Com-

munication Infrastructure Backbone to be managed by anew firm, Galaxy Backbone plc. Projects to be pulled to-gether include the Integrated Financial and EconomicManagement Information System (IFEMIS), the Inte-grated Payroll and Personal Information System (IPPIS)and the Public Service Network (PSNet).

POWER AND STEELFurther to the incorporation of the 18 successor compa-nies to the Power Holding Company of Nigeria (PHCN),the Federal Government during the quarter under review,continued its efforts at improving power supply nation-wide. It released about $3 billion to be spent on a specialphased power project to produce 10,000 mega watts ofelectricity. This initiative covers 12 power stations currentlyunder construction, seven of them across the Niger Deltaand an additional five new ones approved for Ondo, Kogiand Abia states. While some stations in the Niger Deltawill be due for commissioning by December this year, thosein Ondo, Kogi and Abia states would be commissionednext year. These projects are distinct from the Indepen-dent Power Projects (IPP) currently being undertaken bysome upstream oil companies.

The Federal Government is also investing N33 billionon the National Integrated Power Project (NIPP). Of thisamount, N15 billion is for gas pipeline and associated in-frastructure, seven new power stations, some transmis-sion lines and associated equipment as well as distribu-tion lines and related equipment.(* Marcel Okeke is the Editor, Zenith Economic Quarterly.)

• A power transmission line


EXPRESSION

I n the past few years, banks in Nigeria have increasinglydepended on the deployment of Information and Commu-nications Technology (ICT) infrastructure to drive their pro-cesses and deliver superior performance to meet and sur-pass customer expectations. Customers’ insatiable appe-tite for efficient services has compelled financial institu-tions to make the transition from the traditional ‘brick andmortar banking’ on to the e-platform and in the processthey have occasioned a more radical transformation oftheir business systems and models by embracing e-bank-ing. With their transition to the e-business, e-commerceand e-banking platform, Nigerian banks are aggressivelymoving towards reduction of cash transactions.

“The twenty-first century will be about velocity: the speed of business and the speed of change. Tostay up with and anticipate change, businesses need radically better information flow. To get abetter flow of information to develop the right processes and strategies, they need a digitalnervous system…The successful companies of the next decade will be the ones that use digitaltools to reinvent the way they work. These companies will make decisions quickly, act efficientlyand directly touch their customers in positive ways.” Bill Gates, Business @ the Speed of Thought.

* By Jim Ovia


EXPRESSION

The Nigerian payments system is still evolving andessentially cash dependent. The over-reliance on cashcontinues to pose enormous challenges to the system andthese challenges have necessitated the need for a reformof the payments system to reduce the level of cash incirculation and move towards a near-cashless society.

To realize this, the Central Bank ofNigeria set up a Sub-Committee onEnhancing the Efficiency of the Nige-rian Payments System in February2004. The sub-committee’s missionwas: “To create an efficient paymentssystem that deploys reliable, secureand convenient Information andCommunication Technology (ICT)tools to satisfy the financial transac-tion needs of the Nigerian economy.”

The sub-committee’s aim was toreview the existing payment system,explore ways of enhancing it and rec-ommend new instruments.

Since the draft report was submit-ted to the Bankers’ Committee in Au-gust 2004, the CBN has taken measuresto effect some of the changes. A N1000(one thousand naira) denominationnote has been introduced and coins areforth coming. A new standardizedcheque format has been introduced andold cheques would be phased out fromSeptember 1, 2006 while the NigerianElectronic Funds Transfer (NEFT) andNIBBS Fast Funds are already operational. There has alsobeen a noticeable improvement in the use of and prolif-eration in the number of Automated Teller Machines aswell as ATM cards and Point Of Sales (POS) terminals.These two latest developments point to the new directionin the financial services and banking sector where the adop-tion of ICT tools and migration to an e-platform is rein-venting the way banks work.

This paper focuses on how the deployment of informa-tion technology has evolved into a key corporate strategyfor repositioning banks in Nigeria to meet the challengesof the financial services sector in the information age. Ni-gerian banks are aggressively moving towards reductionof cash transactions and are now offering e-solutions tocustomers (e-banking, e-commerce, e-payment) whileinternet banking is helping to facilitate product innova-

tions and transaction notifications amongst others.Statistics indicate that the Nigerian banking industry is

the highest ICT spender, having committed well over $500million USD since 2001 into the deployment of ICT infra-structure, hardware, software and solutions far above what

the oil and gas industry – Nigeria’slargest forex earner - has committedto ICT. Recent and ongoing reformsin the financial services sector are ex-pected to further expand the reachand scope of e-banking.

In line with the recommendationsof the CBN’s subcommittee on en-hancing the efficiency of the paymentsystem, most Nigerian banks are em-bracing e-banking solutions. E-bank-ing refers to the automated deliveryof traditional banking products andservices directly to customers throughelectronic and interactive communica-tion channels. E-banking enables finan-cial institutions, customers, individualsor businesses to access accounts,transact businesses or obtain informa-tion on financial products and servicesthrough a private network, including theInternet.

The embrace of e-banking has facili-tated the acceptance and use of plasticmoney. Plastic money as the name im-plies, refer to electronic cards with chipenabled software that allow the cardholder access to his or her bank account

through electronic payment medium/media like automaticteller machines (ATMs) or point of sales (POS) terminalsetc. In this light, plastic money act as electronic purses orwallets in that they allow the card holder to store valueinside the cards in a safe, accessible and efficient way.

PLASTIC MONEYPlastic money comes in different forms. They can be

debit, credit or ATM cards. The important thing is that theyreduce the need to carry cash with you and are thus saferand more efficient.

Debit cards:Debit cards are e-purses and most Nigerian banks nowissue them. The number has grown from less than 2000cards in 2003 to 1.5m in February 2006 with total average


EXPRESSION

monthly transaction over 1,757,271. But even though thevalue of transaction has grown exponentially from a mereN630,754 in 2002 to N61.3bn in 2004, less than 2% Nigeriansare debit card holders.

Credit Cards:Credit cards, which provide short term credits acceptableat accredited merchants are also issued by banks in Nige-ria. Credit cards are like e-purses but they work differ-ently in the sense that the card holder spends before mak-ing payments. Four Nigerian banks are already issuingMasterCard debit cards with over 13,000 cards issued since2004. Master card is available in Nigeria from six bankswith over 9000 cards in use.

ATMs :Automated Teller Machines (ATMs) are card enabled, au-tomated and customer operated machines which dispensecash as their primary function. They can also be used tomake enquiries as well as funds transfers.

ATMs were first introduced into the Nigerian financialservices sector in the late 1980s by Societe Generale Bank.First Bank and Equity Bank followed suit in what was ashort-lived venture. The venture was hamstrung by fac-tors which include offline mode of transaction, resistanceto technology, inadequate and inefficient power supply,and high cost of deployment and dearth of qualified sup-port staff.

The deployment of cutting edge ICT has seen the re-emergence of ATMs in the Nigerian financial services land-


EXPRESSION

scape and customers are availing themselves of 24/7 ac-cess to cash. Available data from the CBN indicate thatthe number of ATMs in the country increased from 352 inJune 2005 to 900 as at March, 2006. While this growth, whichthe CBN has attributed to “increased public awareness,introduction of shared ATMs, increased confidence in thesystem and the higher number of ATMs in use”, is re-markable, it is still negligible compared to ATM statisticsfrom other countries and emerging economies as the tableabove shows.

Internet BankingInternet banking was introduced in Nigeria in 2000 andhas since grown in prominence. All banks in Nigeria havefully functional websites and their customers who haveregistered for e-banking services can transact businessonline.

Although available statistics also point to an increasedtraffic and increasing internet penetration in Nigeria, thereis still room for growth if Nigerian banking customers areto take full advantage of the opportunities open to themvia the internet as other countries like South Africa arealready doing. (See chart.1)

Source: http://www.cia.gov/cia/publications/factbook/geos

Table 1: ATM Density from selected countries

Source: CBN and Vanguard Newspapers(Source: www.internetworldstats.com)

Chart 1: Internet Growth in Nigeria & South Africa: 2002-2005 Chart 2: Value of Card Transactions in Nigeria

CONCLUSIONThe gains from ICT enabled e-paymentsolutions indicate that this is the directionfor banks to go, although the road to thee-platform is a bumpy ride fraught withchallenges and obstacles.

The major challenges facing banksand hindering them from optimally de-ploying ICT tools to reposition the indus-try include:

Inadequate ICT Infrastructure: Operating in excruciat-ing BYOI (Buy Your Own Infrastructure) conditions, bankroof tops are usually dotted with VSAT masts installedand maintained by banks in order to meet their ICT needs.

Power outages & Shortage: The problems plaguing thepower sector which is manifested in frequent power out-ages and shortages continue to hinder accelerated ICTdeployment.

Inadequate funding: A paucity of funds hinders bothoperators and service providers from deploying cuttingedge ICT infrastructure to facilitate e-banking transac-

tions. A consortium of banks had to pool funds together inorder to set up Nigeria’s premier switching company,Interswitch.

High cost of ICT deployment: This is also a major prob-lem exacerbated by high international call tariffs; low band-width, inadequate telephone lines and internet access aswell as slow internet connection.

Security: Issues of cyber security are causes of majorchallenges as banks continue to contend with identitythieves, 419 fraudsters, issues of data integrity and pro-tection of customer information as well as threats fromhackers, viruses and worms.(* Jim Ovia is MD/CEO, Zenith Bank Plc.)


POLICY

countries like Nigeria cannot be an exception to this globaltrend. The country needs to move away from administra-tive systems that carry heavy and avoidable overheads.A practical and common example of a dysfunctional policythat requires urgent reformation is the PENSION SCHEME.

PROBLEMS OF EXISTING PENSIONSCHEMESOver the years, pension schemes in Nigeria, in the publicservice and private sector have been bedeviled by manyproblems. The public service operates an unfunded De-fined Benefits Scheme and the payment of retirement ben-efits are budgeted annually.

The annual budgetary allocation for pensionhas been one of the most vulnerable items inbudget implementation in the light of resourceconstraints. Indeed, even where budgetary pro-visions are made, inadequate and untimely re-lease of funds result in delays and accumulationof arrears. However, arrears of pension pay-ments are only the symptom of a much deepercrisis. As the scheme is unfunded, there is noopportunity for the accumulation of investiblefunds. Even where funds were accumulated un-der some parastatals’ schemes, restrictive in-vestment policies and practices sometimes lim-ited the capacity of such funds to grow.

Political instability and unstable labour poli-cies in the past had engendered massive pre-mature retirements thus creating an unstablepensioner - to active - worker ratio. In addition,poor administration, inadequate delivery structures forpayment and lack of a database of pensioners have re-sulted in delayed payments of benefits and consequentnear destitution of pensioners, adverse publicity in themedia and portrayal of society and government as uncar-ing to the plight of its senior citizens. Such inherent prob-lems of the pension scheme in the country have given riseto insecurity and appeared to have encouraged corrup-tion in the active work force.

With an estimated outstanding pension liabilities na-tion-wide of about N2 trillion, the Defined Benefits Pensionscheme cannot be sustained. The Nigerian Railway Cor-poration is a classic case of unsustainable relationshipbetween the income generating and non income generat-ing salary earners. The Corporation generates N30 mil-lion every month. It pays N250 million to pensioners andN200 million to its regular workers. Then, there is the accu-mulated teachers pension, itself a consequence of thesame skewed pension policy.

Another graphic example is the armed forces, whichhave more officers and men on the pension roll than thosein active service. Many of the retirees were retired in theirthirties and forties. This means that they are at the mercyof budgetary constraints for at least thirty years. It is there-fore not surprising that the pension crisis in Nigeria has

manifested most dramatically and tragically in the Nige-rian Armed Forces, the Railway and the Teaching Ser-vices. This also explains, in part, why the existing pensionscheme collapsed.

The foregoing scenario, among others, necessitated are-think of pension administration in Nigeria. To addressthe issues, this Administration initiated a pension reformin order to address and eliminate the problems associ-ated with the pension schemes.

G overnments around the world are creatingmanagement systems that release the re-sources and energy of their people for growthand sustainable development. Developing


POLICY

PENSION REFORM OBJECTIVES ANDFEATURESThe main objectives of the reform are to:

• Ensure that every person who has worked in eitherthe public or private sector receives his retirement ben-efits as and when due;

• Assist improvident individuals by ensuring that theysave to cater for their livelihood during old age and therebyreducing old age poverty;

• Ensure that pensioners are not subjected to untoldsuffering due to inefficient and cumbersome process ofpension payment;

• Establish a set of standard rules and regulation forthe administration and payment of retirement benefits inthe public and private sectors; and

• Stem the growth of outstanding pension liabilities.The reform process is governed by the key principles

of sustainability, safety and security of benefits, transpar-ency, accountability, equity, flexibility, uniformity and prac-ticability.

The new Pension Scheme will be contributory, fullyfunded by both the employer and employee and based onindividual accounts that are privately managed by Pen-sion Fund Administrators (PFAs) with the pension fundassets held by Pension Funds Custodians (PFCs).

Furthermore, the scheme will be regulated and super-vised by the National Pension Commission (Pencom), toensure effective administration of pension matters in Ni-geria. The Commission will also ensure that the paymentand remittance of contributions are made and beneficia-ries of retirement savings accounts are paid when due.Above all, the Commission will protect the retirement sav-ings of workers by issuing guidelines for licensing, approv-ing, regulating and monitoring the investment activities ofPension Funds Administrators and Custodians.

Under the Contributory Pension Scheme, the NationalPension Commission as the regulator of Pension mattersreceives and investigates any complaint of improprietyleveled against any pension Fund Administrator, Custo-

dian or Employer or any of their staff or agents. Essen-tially, the Pencom stands as a watchdog, with the overrid-ing objective of ensuring that all pension matters are ad-ministered with minimum exposure to fraud and risk.

HIGHLIGHTS OF THE CONTRIBUTORYPENSION SCHEME IN NIGERIA

BACKGROUNDAs is typical worldwide, the Pay As You Go Defined BenefitScheme that operated in Nigeria was burdened with a lotof problems and became unsustainable. Against the back-drop of an estimated N2 trillion deficit, arbitrary increasesin salaries and pensions as well as poor administrativestructures, the need for pension reform became glaring.

Contributory System:Under this system, the employees contribute a minimumof 7.5% of their Basic Salary, Housing and Transport Allow-ances and 2.5% for the Military. Employers shall contrib-

ute 7.5% in the case of the Public sector and 12.5% inthe case of the Military. Employers and employ-

ees in the private sector will contribute a mini-mum of 7.5% each. An Employer may elect tocontribute on behalf of the employees such thatthe total contribution shall not be less than 15%of the Basic Salary, Housing and Transport al-

lowances of the employees. An Employer isobliged to deduct and remit contributions to a Cus-

todian within 7 days from the day the employee is paid hissalary while the Custodian shall notify the PFA within 24hours of the receipt of contribution. Contribution and re-tirement benefits are tax exempt.

Fully Funded:The contributions are deducted immediately from the sal-ary of the employee and transferred to the relevant re-tirement savings account. By so doing, the pension fundsexist from the onset and payments will be made whendue.

Individual Accounts:The employee opens an account to be known as a ‘Retire-ment Savings Account’ in his name with a Pension FundAdministrator of his choice. This individual account be-longs to the employee and will remain with him throughlife. He may change employers or pension fund adminis-trators but the account remains the same. The employeemay only withdraw from this account at the age of 50 or

Under this system, the employees contribute a minimumof 7.5% of their Basic Salary, Housing and TransportAllowances and 2.5% for the Military. Employers shallcontribute 7.5% in the case of the Public sector and 12.5%in the case of the Military. Employers and employees inthe private sector will contribute a minimum of 7.5% each.


POLICY

With any of the above options, thereis an assurance that the pensionerhas sufficient funds available to himfor his old age.

upon retirement thereafter. This withdrawal may take theform of:

• A programmed monthly or quarterly withdrawal;• A purchase of annuity for life through a licensed life

insurance company with monthly or quarterly payments;and

• A lump sum from the balance standing to the creditof his retirement savings account: provided that theamount remaining after the lump sum withdrawal shall besufficient to procure an annuity or fund programmed with-drawals that will produce an amount not less than 50% ofhis monthly remuneration as at the date of his retirement.

With any of the above options, there is an assurancethat the pensioner has sufficient funds available to him forhis old age. Although many have contended that at theend of the working period, they should be allowed to col-lect their savings in one lump sum, experience has shownthat very few individuals have the discipline to managefunds effectively over a long period of time. The abovewas considered a better process than to allow the indi-

vidual withdraw his accumulated savings at once, spend itall and then have no income when he is no longer in aposition to work.

Life Insurance PolicyEvery employer shall maintain life insurance policy infavour of an employee for a minimum of three times theannual total emolument of the employee.

Privately-Managed Pension Fund Adminis-trators And Pension Funds CustodiansThe new scheme requires pension funds to be privatelymanaged by Pension Fund Administrators (PFAs) and Pen-sion Funds Custodians (PFCs).

Pension Fund Administrators (PFAs) will be duly li-censed to open retirement savings accounts for employ-ees, invest and manage the pension funds in fixed incomesecurities listed and other instruments as the Commis-sion may from time to time prescribe, maintain books ofaccounts on all transactions relating to the pension funds

managed by it, provide regular information on investmentstrategy to the employees or beneficiaries and pay retire-ment benefits to employees in accordance with the provi-sions of the ACT.

Before it is issued with an operating licence, the PFAmust be a limited liability company whose sole objectiveis the management of pension funds. To discourage frivo-lous applications and to ensure credibility, such companymust have a paid up share capital of N150,000,000 anddemonstrate professional capacity to manage pensionfunds and administer retirement benefits.

Pension Funds Custodians (PFCs) will be responsiblefor the warehousing of the pension fund assets. It is envis-aged that at no time will the PFAs hold the pension fundsassets. The employer sends the contributions directly tothe Custodian, who notifies the PFA of the receipt of thecontribution and the PFA subsequently credits the retire-ment savings account of the employee.

The Custodian will execute transactions and under-take activities relating to the administration of pensionfund investments upon instructions by the PFA.

To be eligible for an operating licence, the PensionAssets Custodian must be a limited liability companyincorporated under the Companies and Allied Mat-ters Act and a licensed financial institution. The Cus-todian shall hold pension fund assets on trust for its

clients. For the same reason adduced in the case ofthe PFA, the Custodian must have a minimum net worth

of N5,000, 000, 000 and a total balance sheet of not belowN125, 000,000,000 and guaranteed by its shareholdersagainst any loss of the pension fund assets.

THE NATIONAL PENSIONCOMMISSIONThe new Scheme entails the establishment of a NationalPension Commission (Pencom), to regulate, supervise andensure the effective administration of pension matters inNigeria. The Commission will achieve the above by en-suring that payment and remittance of contributions aremade and beneficiaries of retirement savings accountsare paid when due. Above all, the Commission will ensurethe safety of the pension funds by issuing guidelines forlicensing, approving, regulating and monitoring the invest-ment activities of Pension Funds Administrators.

Under the contributory pension scheme, the NationalPension Commission as the regulator of Pension mattersshall receive and investigate any complaint of impropri-ety leveled against any Pension Fund Administrator, Cus-todian or employer or any of their staff or agents. Basi-


POLICY

cally, the Pencom stands as a watchdog, with the overrid-ing objective of ensuring that all pension matters are ad-ministered with minimum exposure to fraud and risk. ThePencom will employ the use of approved risk rating agen-cies to determine the viability of an investment instru-ment.

ELIGIBILITY FOR THE SCHEMEThe law makes it mandatory for all workers in thePublic Service of the Federation and the FederalCapital Territory, and workers in the private sec-tor where the total number of employees is 5 ormore to join the contributory scheme at com-mencement.

EXEMPT INDIVIDUALSExisting pensioners and workers that have 3 years or lessto retire are exempted from the scheme. Also, exemptedare the categories of persons under Section 291 of theConstitution of the Federal Republic of Nigeria. However,they may join of their own volition. The existing pension-ers are also exempted.

TRANSITIONAL PROVISIONS FOR THEPUBLIC SECTOR

Existing PensionersThere shall be established Pension Departments underthe scheme to continue to administer the affairs of exist-ing pensioners. The National Pension Commission will su-pervise the Departments. The responsibilities, funds, and

assets of the relevant existing pensionboards or offices shall be transferredand vested in the respective Depart-ments. It is anticipated that these De-partments shall cease to exist after thedeath of the last pensioner.

Retirement Benefit BondThis is a bond that will be issued to thosewho are currently in employment of thePublic Service of the Federation and theFederal Capital Territory where theschemes were unfunded, who are notexempted from the new scheme buthave worked for a specified number ofyears, in recognition of their accruedrights under the defunct pensionscheme. This bond recognizes govern-

ment indebtedness to them; however, it is only due andpayable when they retire. This is a significant benefit tothe Government, as it will not have to furnish immediatelythe entire funds required to change to the new system,known as Transition Cost. Since Transition Costs are typi-cally huge and in most countries pose as the major hin-

drance to pension reform, the use of Recognition Bondsgoes a long way in allaying a lot of the fears of the workerswho are nearing the end of their service. In this circum-stance, the use of recognition bonds defers governmentliabilities and spaces it over a long period.

Retirement Benefits Bond Redemption FundA fund known as the Retirement Benefits Bond Redemp-tion Fund is to be established and maintained by the Cen-tral Bank of Nigeria. The Federal Government will pay anamount equal to 5% percent of the total monthly wage billpayable to employees in the public service of the Federa-tion and Federal Capital Territory. The total amount in thisfund shall be used to redeem any retirement benefit bond

• The Nigerian Railway Corporation

Existing pensioners and workers that have3 years or less to retire are exempted from thescheme. Also, exempted are the categories ofpersons under Section 291 of the Constitutionof the Federal Republic of Nigeria. Theexisting pensioners are also exempted.


POLICY

issued and payments into this fund shall cease after allretirement benefit bonds have been redeemed.

TRANSITIONAL PROVISIONS FOR THEPRIVATE SECTOR

Private Pension SchemesViable pension schemes in the private sector already inexistence, shall continue to exist provided that they candemonstrate that they are fully funded at all times withany shortfall to be made up within 90 days; the assets ofthe company are fully segregated from the pension fundassets; the pension fund assets held by a custodian; andthe company has the requisite capacity for the manage-ment of pension fund assets. The company must also show

that they have managed pension schemes effectively forat least 5 years before the commencement of the newscheme. The old scheme will retain its present member-ship but will not be allowed further increase.

However, existing members shall have the option tojoin the new scheme. Where an employee exercises thatoption, the employer shall compute his retirement ben-efits to date and such amount will be transferred to hisretirement savings account as maintained with a PFA ofhis choice.

A private pension scheme may retain all its existinginvestments subject to the regulations, rules and stan-dards established by the Commission.

Any employer managing pension fund assets of N500,

000,000 and above shall apply to the Commission for alicence as a Closed Pension Fund Administrator in orderto manage such funds directly or through a wholly ownedsubsidiary dedicated exclusively to the management ofsuch pension fund assets. On issuance of the licence, theCommission will supervise and regulate the activities ofthe closed PFA.

Where an employer is managing pension fund assetsof less than N500,000,000 and desires to maintain its exist-ing scheme, such an employer shall have such pensionscheme administered by a duly licensed PFA.

The National Social Insurance Trust Fund (NSITF) shallestablish a Company to undertake the business of a PFAin accordance with the Provisions of the Act. Contributorsunder the NSITF Act shall, at least 5 years after the com-

mencement of the Act, select a PFA oftheir choice for the management of Pen-sion Fund standing to their credit. How-ever, the pension funds and assets heldby NSITF shall be transferred to a Custo-dian. NSITF shall also be supervised andregulated by the Pencom

SAFEGUARDS FOR THEPENSION SCHEMEThe importance of safety of the pensionfund assets cannot be over-emphasisedas the success of the pension reform ishinged on the availability of funds to con-tributors when they retire. Since the pen-sioner will utilize the fund at the end of hisworking life, it becomes imperative thatadequate measures be taken for its pro-tection. Consequently, there are a num-ber of stringent provisions contained in

the Act with the singular objective of protecting the pen-sion fund assets. The Act embodies a number of checks inorder to preserve the pension fund assets. These include:

Separation of PFA and CustodianAlthough they both deal with pension fund assets, the func-tions of the PFA and Custodian are so clearly delineatedthat it is difficult for either to misuse the pension fundsassets to the detriment of the contributor. At no time willthe PFA have the custody of contributions of the employee.The contributions go directly from the employer to theCustodian. On the other hand, the Custodian will not in-vest the pension assets except to the order of the PFA.

• Nigerian Workers on May Day


POLICY

Pension Assets Custodian GuaranteeApplicant Custodian shall issue a guarantee to the fullsum and value of the pension fund and assets held by it orto be held by it.

Government Pension ContributionGovernment contribution shall be a first charge on theConsolidated Revenue Fund of the Federation.

Risk Rating InstitutionsThese are institutions that will be responsible for ratingthe instruments that pension funds will be invested in. ThePencom requires that these risk rating institutions pos-sess the professional capacity and are licensed to rate therisk of investment instruments.

Compliance OfficersEvery PFA shall employ a Compliance Officer who will beresponsible for ensuring compliance with the provisionsof the law regarding pension matters as well as the inter-nal rules and regulations of the particular PFA. Theywill be required to liaise with the Pencom and theBoard of Directors of the PFA with regard to theactivities of the PFA.

Reporting requirement for PFAsIn order to keep track of their activities, the PFAis required to make a regular report of its activi-ties to the Pencom. Many consider this an onerousrequirement by the Pencom but in view of the vol-ume and nature of the funds the PFAs will handle, itbecomes necessary to be able to spot any wrongdoingearly. Besides, this information is expected to be passedon to the Pencom electronically and would not constitute ahardship for any fully automated PFA.

Statutory Reserve FundA PFA shall maintain a Statutory Reserve Fund, which shallbe credited annually with 12.5% of the net profit after tax,or such percentage of the net profit as may be stipulatedby the Pencom to meet claims.

SanctionsClear legal and administrative sanctions have been pro-vided for nn-compliance with rules and regulations.Public Disclosure of InformationPFAs and Custodians shall be required to disclose theirrates on return and publish their audited accounts.

MINIMUM PENSION GUARANTEEAll retirement savings account holders who have contrib-uted for a number of years to a licensed PFA shall be en-titled to a guaranteed minimum pension as may be speci-fied by the Commission.

BENEFITSNigeria stands to benefit from the pension scheme. In thefirst instance, it addresses the pension liability by stem-ming its further growth and provides a platform for ad-dressing this liability. Since the individuals own the contri-butions, the pensioner is no longer at the mercy of gov-ernment or employer and is assured of regular paymentof retirement benefits. Employee has up to date informa-tion on his retirement savings account. The scheme al-lows the contributor the freedom to choose who adminis-ters his retirement benefits account and this promotescompetition among the PFAs. A major benefit of thescheme to the worker is that the individual accounts areportable and as such, the worker is able to change em-

ployment and still maintain the same account. He is merelyrequired to provide the details of his account to the newemployer.

The scheme imposes fiscal discipline on the nation andis a solid foundation for economic development. There isan expansion of convertible funds, creation of a huge poolof long term funds and enhanced accountability. Thescheme introduces clear legal and administrative sanc-tions and there is a separation of investment, administra-tion and custody of assets. Transparency is also ensuredby the requirements for published rate of returns, regularstatements of contributions and earnings and annual au-dited accounts.

A major benefit of the scheme to the worker isthat the individual accounts are portable andas such, the worker is able to changeemployment and still maintain the sameaccount. He is merely required to provide thedetails of his account to the new employer.


* By Abdullalif A. Muse.

ISSUES (I)

The importance of banks in afinancial system is generally

In 2004, the Ethics and Professionalism sub-Committee of theBankers Committee handled complaints among banks, as well asbetween banks and their customers. As in the preceding years, mostof the complaints bordered, among others, on excess charges bybanks; manipulation and fraudulent practices on customers’accounts; conversion of investment funds; irregular clearing ofcustomers’ cheques, and non-refund of wrong debit to customers’accounts, etc.

well known. They are the vehicles used innational payment systems and also, facili-tate international payments for trade and trav-els. At their optimal performance level, they

contribute towards the stabilisation of the eco-nomic environment and represent the mediumfor the transmission of monetary policies from

government regulatory agencies. Any time abank, anywhere in the world runs into serious

problems, the effects are usually far reaching.There is the case of a Nigerian businessmanwho had a commercial court case in the UKin the early 1990’s. The case involved a

branch of a foreign bank there and haddragged on for about 3 years.A few days after the Nigerian


ISSUES (I)

won the case, he was handed a draftfor over one million pounds and hedropped the instrument in BCCI, Lon-don say on a Friday. He went over tosee the branch that he had lodged thefunds into the very next Monday morn-ing, but Lo and behold! the gates ofthe bank were firmly locked. The bankhad failed.

A strong man, the Nigerian hadsuffered a mild stroke and managedto come out of it about 12 months later!The underlying reasons for the bank’sfailure included the familiar ones ofpoor risk assessment and control,fraud, inadequacy in capitalization andmanagement.

The international consequence ofbank failures is not limited to the mi-cro situation just described. Seriousproblems in the banking system of acountry, whether developing or developed, can threatenfinancial stability both within that country and internation-ally. All men of goodwill need to take steps to check theconsequences of the misfortune!

When Mexico threatened to default on its short termdebt obligation in 1995, President Clinton got America tocome to its rescue with a loan package of about US$ 25billion to save that country and its banking system as wellas the US economy and indeed banks from its effects,without the approval of the US Congress. Mexico repaidthe loan within 2 years and the world cheered a presidentwith guts and foresight!

Indeed, part of the problems of bank failures has to dowith regulations and their rigorous enforcements or oth-erwise. Regulatory enforcements take place at nationallevels or as dictated by prevailing legal circumstances.Sometimes, government’s, discretionary actions prevail,even where they may not be the best advised.

Bank Supervisors and InspectorsIn the context of this discussion, Bank Supervisors andInspectors are individuals, (usually employees but notnecessary so) duly authorised by banking regulatory agen-cies, top of which is the Central Bank to carry out a reviewof any functions to be and indeed being performed byduly constituted and licensed banks or financial institu-tions in accordance with relevant laws. The principal ob-jective of Bank Supervisors is to ensure the safety and

soundness of the banking system. Nigeria Deposit Insur-ance Corporation (NDIC) complements the Supervisoryroles of the Central Bank in this respect. The two principalbanking legislations for Nigeria are the Central Bank Act24 of 1991 and the Banks and Other Financial InstitutionsAct 25 of 1991. Clearly, therefore, the Bank Supervisorsperform their duties with the backing of certain laws andcarry with them the powers of the State.

Bank Supervision in NigeriaIn Nigeria, the official agency of the Nigerian Governmentresponsible for the Supervision of Financial Institutions isthe Central Bank (CBN). Institutions covered in this re-spect are the deposit money banks, the discount houses,primary mortgage institutions, community banks, financecompanies, bureaux-de-changes and development financeinstitutions. The supervisory function of the CBN is struc-tured into two departments – Banking Supervision Depart-ment (BSD) and Other Financial InstitutionsDepartment(OFID). The Banking Supervision Departmentcarries out the supervision of banks and discount houseswhile the Other Financial Institutions Department super-vises community banks and other non-bank financial in-stitutions. The supervisory process involves both on-siteand off-site arrangements, all on elaborate and expen-sive scales. Appropriate levels of government, however,appreciate that inadequate attention to supervision couldbe far more expensive and chaotic.


ISSUES (I)

Banking Supervision DepartmentThe on-site aspect of the department’s function includesindependent on-site assessment of banks corporate gov-ernance, internal control system and checks for the reli-ability of information provided by banks, among others.The field examinations carried out by the department aregrouped into Maiden, which is usually conducted withinsix months of commencement of operation by a new bank;Routine which is the regular examination and Target, whichaddresses specific areas of operation of a bank e.g. credit.Special Examination is carried out as the need may ariseand as provided in section 32 of the Banks and Other Fi-nancial Institutions Act. The departments also conductspot-checks for quick confirmations /verifications.

The off-site aspect reviews and analyses the financialconditions of banks using prudential reports, statutory re-turns and other relevant information. It also monitorstrends and developments for the banking sector as awhole. Industry reports are generated on monthlyand quarterly basis.

Other Financial InstitutionsDepartment(OFID)The department handles the su-pervision of community banks(CBs), primary mortgage insti-tutions (PMIs) finance compa-nies (FCs), bureaux dechanges (BDC) and develop-ment finance institutions (DFIs).

In spite of the laudable struc-tures put in place to supervise thesystem, the banking system still hasproblems that threaten its very exist-ence. For our purpose, we reviewed sev-eral reports from the Banking Supervision Depart-ment between year 2000 and year 2004 which highlightedsome of these.

Problems in the banking systemIn the year 2000, the CBN, in its Banking Supervision De-partment report listed the following public complaintsagainst some banks in the financial system:

i) Exploiting the ignorance of unsuspecting customersthrough excess commissions and illegal charges.

ii) Refusal to open certain types of accounts e.g. salaryaccounts.

iii) Failure to issue bank statements regularly to cus-tomers.

iv) Illegal disposal of customers’ properties pledgedas collateral for credit facilities.

v) Shortages in cash withdrawals.vi) Unilateral application of interest rates outside the

terms negotiated with customers.vii) Refusal to honor the terms of performance bonds.viii) Excess charges on bank drafts.ix) Introduction of extraneous terms into contracts with

customers, to short-change them.x) Unauthorised/arbitrary debiting of customers’ ac-

counts.xi) Release of funds transferred from overseas to im-

personators.xii) Imposition of previously undisclosed charges on

customers’ accounts.xiii) Failure to credit customers’ ledgers with the

amounts deposited.At the level of regulators, thirty one (31) banks were in

various stages of liquidation owing to inadequate capi-talization, poor asset control, insider dealings

involving bank directors and frauds. (NDIC2000 Annual Report and Statement of Ac-

counts).It is pertinent to observe that the

trend of public complaints againstBanks has been on the rise in re-cent times. The high level of com-

plaints in spite of the huge expendi-ture on systems and technology con-

stitutes a drag on the integrity of theprofession and debases the servicelevel below quality grade, especially

since it is a well known fact that qualityservice generates income.

During the year 2004, the Ethics and Professional-ism sub-Committee of the Bankers Committee handled

complaints among banks, and banks and their customers.As in the preceding years, most of the complaints bor-dered, among others, on excess charges by banks; ma-nipulation and fraudulent practices on customers’ ac-counts; conversion of investment funds; irregular clear-ing of customers’ cheques, and non-refund of wrong debitto customers’ accounts, etc.

The CBN Annual report for 2004, Monitoring BankingSector Soundness stressed that “the operational perfor-mance of banks revealed mixed developments. The rat-ing of licensed banks, using the CAMEL parameters, re-

The frustration to get thebanking system up andrunning since 1946 mustconstitute a Supervisor’snightmare and the need

to learn from theexperience of others

must have informed thestep to align with

international standards!


ISSUES (I)

vealed that ten (10) banks were “sound”, fifty one (51)were “satisfactory”, sixteen (16) were rated “marginal”and ten (10) banks were rated “unsound”. However, theperformance of banks since 2001 exhibited a deterioratingtrend as the number of “satisfactory” banks had declinedsteadily from 63 in 2001 to 51 in 2004. In the same vein, thenumber of banks that were “marginal” increased from 8in 2001 to 16 in 2004. “Unsound” banks also increased from9 in 2001 to 10 in 2004. The marginal and/or unsound banksexhibited such weaknesses as undercapitalization, illiquid-ity, weak/poor asset quality and poor earnings.

The total assets of the industry grew by 23.0 per cent toN3,393.0 billion at end-December 2004. Further analysisshowed that, “of the N1,463.0 billion outstanding credit,21.6 per cent was non-performing, while insider credit ac-counted for 6.3 per cent.”

The same Report also had comments on the Surveil-lance Activities of Financial Institutions both on-site andoff-site of licensed banks and other financial institutions in2004 undertaken by the surveillance departments of theCBN. “The surveillance ac-tivities during the year in-volved the wholesale ex-amination of fifty-nine (59)deposit money banks, five(5) discount houses andeight (8) offshore outfits ofsome Nigerian banks. Theroutine examinations cov-ered prudential regula-tions; foreign exchange operations; anti-money launder-ing controls and know-your-customer (KYC) directives.The examinations were aimed at determining the extentto which banks had complied with the banking rules andregulations as well as their financial condition.

The CBN also conducted follow-up examinations onsome financial institutions to determine their compliancewith the CBN recommendations contained in previousexamination reports. The prudential examinations re-vealed various lapses in some of the institutions, includ-ing: undercapitalization, weak internal control systems,granting of credit with inadequate collateralization, poorasset quality, violation of the single obligor limit, and weakcorporate governance. Specifically, in 2004, 54 banks con-travened various CBN regulations and guidelines 99 times,as against 37 banks that contravened 66 times in 2003.Sanctions were appropriately imposed on the erring insti-tutions. The routine examinations of foreign exchangeoperations of the banks revealed various breaches, in-

cluding: non-compliance with open position limits, failureto repatriate interest earned on FEM funds, non-distribu-tion of the naira proceeds repatriated on letters of credittransactions to eligible customers, excess charges by bankson foreign exchange transactions, recycling of airline tick-ets for invisible trade transactions, disbursement of for-eign exchange without complete documentation, and fail-ure to render specified returns to the CBN.”

These concerns must bother any one who cares and itmust have bothered the present crop of the board of CBNto the point of initiating the 13 point Elements of BankingSector Reform which are listed below:

1. The requirement that the minimum capitalizationfor banks should be N25 billion with full compliance byDecember 31, 2005;

2. The phased withdrawal of public sector funds frombanks, starting in July 2004;

3. The consolidation of banking institutions throughmergers & acquisitions;

4. The adoption of a risk-focused, and rule-based regu-latory framework;

5. The adoption ofzero tolerance in theregulatory framework,especially in the area ofdata/information rendi-tion/reporting;

6. The automationprocess for the rendi-tion of returns by banks

and other financial institutions through the enhanced Fi-nancial Analysis and Surveillance System (e-FASS);

7. The establishment of a hotline, confidential internetaddress ([email protected]) for all those wishing toshare any confidential information with the Governor ofthe Central Bank on the operations of any bank or thefinancial system;

8. The strict enforcement of the contingency planningframework for systemic banking distress;

9. The establishment of an Assets Management Com-pany as an important element of distress resolution;

10. The promotion of the enforcement of dormant laws,especially those relating to the issuance of dud cheques,and the law relating to the vicarious liabilities of the Boardmembers of banks in cases of failings by the bank;

11. The revision and updating of relevant laws, and thedrafting of new ones relating to the effective operations ofthe banking system;

12. Closer collaboration with the Economic and Finan-

Rating Of Banks Using The “CAMEL” Parameters Number

Category 2001 2002 2003 2004Sound 10 13 11 10Satisfactory 63 54 53 51Marginal 8 13 14 16Unsound 9 10 9 10


cial Crimes Commission (EFCC) in the establishment ofthe Financial Intelligence Unit (FIU), and the enforcementof the anti-money laundering and other economic crimemeasures; and

13. The rehabilitation and effective management of theNigerian Security Printing and Minting (NSPM) Plc to meetthe security printing needs of Nigeria, including the bank-ing system which constitutes over 90 percent of the NSPM’sbusiness.

To be fair, none of the reform provisions can be faultedas they represent corrective measures to counter wellknown system limitation and improve service quality.

Of course, the high point of the reform is the uniformN25 billion banks recapitalisation requirement but also anumber of these measures answer the concerns of unful-filled or largely unfulfilled parts of the core principles ofthe Basle Committee when the World Bank Financial Sec-tor staff assessed Nigeria’s compliance level. This issue isdiscussed further below.

We believe that the Central Bank should becommended for measuring its own perfor-mance by international standards. Thefrustration to get the banking systemup and running since 1946 must con-stitute a Supervisor ’s nightmareand the need to learn from the ex-perience of others must have in-formed the step to align with in-ternational standards!

The Core principles ofBasleThe phenomenon of internationalcapital movements has also substan-tially made national boundaries al-most irrelevant and the need to stabi-lize the financial system on a global ba-sis has therefore long been recognized.

Official international bodies like the World Bank, In-ternational Monetary Fund, the Bank for InternationalSettlements and the Basle Committee on Banking Super-vision have consequently taken the lead to strengthen thefinancial systems through out the world.

On its own, the Basle Committee on Banking Supervi-sion, consisting of senior representatives of banking su-pervisory authorities from Japan, Germany, France, Bel-gium, UK, Italy, Netherlands, Switzerland, Sweden, Canadaand USA, developed what it called “ Core Principles forEffective Banking Supervision” – (Basle Core Principles)

over a period of 22 years. The views of many other coun-tries were sought as the assignment progressed with theprincipal aim of setting standards so as to strengthen bank-ing supervision in all countries. The Committee regardsthe standards set from the principles as minimum becauseenvironmental conditions in each country may necessi-tate a further strengthening of the principles for desiredeffects.

There are 25 core principles and they are detailed intheir issue with comments, which have been excluded here.They can be very easily picked up on relevant Internetsites using some of the well known search engines, includ-ing Google.

LIST OF CORE PRINCIPLES FOR EFFEC-TIVE BANKING SUPERVISIONPreconditions for Effective Banking Supervi-sion

1. An effective system of banking supervision will haveclear responsibilities and objectives for each agency

involved in the supervision of bankingorganisations. Each such agencyshould possess operational indepen-dence and adequate resources. A

suitable legal framework for bank-ing supervision is also neces-

sary, including provisions re-lating to authorisation of bank-ing organisations and their

ongoing supervision; powers toaddress compliance with laws as

well as safety and soundness con-cerns; and legal protection for su-pervisors. Arrangements for shar-

ing information between supervi-sors and protecting the confidential-

ity of such information should be in place.

Licensing and Structure2. The permissible activities of institutions that are licensedand subject to supervision as banks must be clearly de-fined, and the use of the word “bank” in names should becontrolled as far as possible.

3. The licensing authority must have the right to setcriteria and reject applications for establishments that donot meet the standards set. The licensing process, at aminimum, should consist of an assessment of the bankingorganisation’s ownership structure, directors and seniormanagement, its operating plan and internal controls, and

ISSUES (I)

Of course, the highpoint of the reform is the

uniform N25 billionbanks recapitalisation

requirement but anumber of these

measures also answerthe concerns of

unfulfilled or largelyunfulfilled parts of thecore principles of the

Basle Committee.


ISSUES (I)

its projected financial condition, including its capital base;where the proposed owner or parent organisation is aforeign bank, the prior consent of its home country super-visor should be obtained.

4. Banking supervisors must have the authority to re-view and reject any proposals to transfer significant own-ership or controlling interests in existing banks to otherparties.

5. Banking supervisors must have the authority to es-tablish criteria for reviewing major acquisitions or invest-ments by a bank and ensuring that corporate affiliationsor structures do not expose the bank to undue risks orhinder effective supervision.

Prudential Regulations and Requirements6. Banking supervisors must set prudent and appropriateminimum capital adequacy requirements for all banks.Such requirements should reflect the risks that the banksundertake, and must define the components of capital,bearing in mind their ability to absorb losses. At least forinternationally active banks, these requirements must notbe less than those established in the Basle Capital Accordand its amendments.

7. An essential part of any supervisory system is theevaluation of a bank’s policies, practices and proceduresrelated to the granting of loans and making of investmentsand the ongoing management of the loan and investmentportfolios.

8. Banking supervisors must be satisfied that banksestablish and adhere to adequate policies, practices andprocedures for evaluating the quality of assets and theadequacy of loan loss provisions and loan loss reserves.

9. Banking supervisors must be satisfied that bankshave management information systems that enable man-agement to identify concentrations within the portfolio andsupervisors must set prudential limits to restrict bank ex-posures to single borrowers or groups of related borrow-ers.

10. In order to prevent abuses arising from connectedlending, banking supervisors must have in place require-ments that banks lend to related companies and individu-als on an arm’s-length basis, that such extensions of creditare effectively monitored, and that other appropriate stepsare taken to control or mitigate the risks.

11. Banking supervisors must be satisfied that bankshave adequate policies and procedures for identifying,monitoring and controlling country risk and transfer riskin their international lending and investment activities, andfor maintaining appropriate reserves against such risks.

12. Banking supervisors must be satisfied that bankshave in place systems that accurately measure, monitorand adequately control market risks; supervisors shouldhave powers to impose specific limits and/or a specificcapital charge on market risk exposures, if warranted.

13. Banking supervisors must be satisfied that bankshave in place a comprehensive risk management process(including appropriate board and senior management over-sight) to identify, measure, monitor and control all othermaterial risks and, where appropriate, to hold capitalagainst these risks.

14. Banking supervisors must determine that bankshave in place internal controls that are adequate for thenature and scale of their business. These should includeclear arrangements for delegating authority and respon-sibility; separation of the functions that involve commit-ting the bank, paying away its funds, and accounting for itsassets and liabilities; reconciliation of these processes;safeguarding its assets; and appropriate independent in-ternal or external audit and compliance functions to testadherence to these controls as well as applicable lawsand regulations.

15. Banking supervisors must determine that bankshave adequate policies, practices and procedures in place,including strict “know-your-customer” rules, that promotehigh ethical and professional standards in the financialsector and prevent the bank being used, intentionally orunintentionally, by criminal elements.

Methods of Ongoing Banking Supervision16. An effective banking supervisory system should con-sist of some form of both on-site and off-site supervision.

17. Banking supervisors must have regular contact withbank management and thorough understanding of theinstitution’s operations.

18. Banking supervisors must have a means of collect-ing, reviewing and analysing prudential reports and sta-tistical returns from banks on a solo and consolidated ba-sis.

19. Banking supervisors must have a means of inde-pendent validation of supervisory information eitherthrough on-site examinations or use of external auditors.

20. An essential element of banking supervision is theability of the supervisors to supervise the banking groupon a consolidated basis.

Information Requirements21. Banking supervisors must be satisfied that each bankmaintains adequate records drawn up in accordance with


ISSUES (I)

rily at their foreign branches, joint ventures and subsid-iaries.

24. A key component of consolidated supervision isestablishing contact and information exchange with thevarious other supervisors involved, primarily host coun-try supervisory authorities.

25. Banking supervisors must require the local opera-tions of foreign banks to be conducted to the same highstandards as are required of domestic institutions and musthave powers to share information needed by the homecountry supervisors of those banks for the purpose of car-rying out consolidated supervision.

The World Bank, the IMF and other similar world bod-ies were encouraged to use these standards in their ef-forts to support countries to promote their overall macro-economic and financial stability.

Since Nigeria has endorsed the Basle Core Principles,a World Bank Financial Sector Mission in 1999 carried outan assessment of compliance by the Central Bank.

A close review of the 25 provisions would show that it’sbest that the entire banking system either as Supervisors

consistent accounting policies and practices that enablethe supervisor to obtain a true and fair view of the finan-cial condition of the bank and the profitability of its busi-ness, and that the bank publishes on a regular basis finan-cial statements that fairly reflect its condition.

Formal Powers of Supervisors22. Banking supervisors must have at their disposal ad-equate supervisory measures to bring about timely cor-rective action when banks fail to meet prudential require-ments (such as minimum capital adequacy ratios), whenthere are regulatory violations, or where depositors arethreatened in any other way. In extreme circumstances,this should include the ability to revoke the banking li-cence or recommend its revocation.

Cross-border Banking23. Banking supervisors must practise global consolidatedsupervision over their internationally-active bankingorganisations, adequately monitoring and applying appro-priate prudential norms to all aspects of the business con-ducted by these banking organisations worldwide, prima-

•E-Banking: overcoming the queues in banking halls


ISSUES (I)

or Operators comes to terms with the minimum standardsof Basle. For Nigerian bankers, this would appear to be animperative since the official government regulators haveendorsed the standards and would apply them. For thesafety of the huge investment in capital and their depos-its, the general public and students of Economics, Bankingand Finance need to be familiar with the provisions. Ofcourse, Accountants and Auditing firms have a more thanpassing interest in the matter since they generate the auditof the financial condition of banks for analysis and rating.

Assessment of Nigeria’s Compliance withBasle core principlesThe report of the Assessment is contained in the BankingSupervision Annual Report 2000. The state of compliancewas categorised into four, namely, fulfilled, largely fulfilled,largely unfulfilled and unfulfilled.

Details of some of the Mission’s assessments and com-ments by the regulatory authorities are highlighted be-low.

Permissible activities of licenzed institutionsUnder the current regulatory framework, regulators arein a position to ensure that all banks and non-bank finan-cial institutions including finance companies, primarymortgage institutions, discount houses and bureaux dechanges are licensed.

Beyond the institutions under the CBN regulatory pur-view, other operators in the financial system – capital mar-ket and insurance - must be licensed by their respectiveregulators - the Securities and Exchange Commission andthe National Insurance Commission, respectively. In thespecific case of bank licensing, there is strict control overthe use of the word “bank” in the name of institutions. ThisPrinciple was adjudged both from self-assessment and bythe Mission to have been fulfilled.

Regular contact with bank management andsupervisors’ understanding of bank opera-tionsThis Principle was also considered to have been fulfilled.Mainly in the course of examination, supervisors come inclose contact with the management of the supervised in-stitutions. This has been further improved in recent timesin the series of focused meetings between the supervi-sors and the management of supervised banks at the ex-ecutive level. The approach has reduced significantly theseeming distrust between the two sides of the divide. Asregards the understanding of banks’ operations, supervi-

sors display a good knowledge of activities performed byNigerian banks, thereby enabling them to discharge theirduties effectively and with credibility. The latest change inthe executive management of the CBN has further en-hanced this understanding, with a good representation ofexperienced operators in the new team.

Independent validation of supervisory infor-mation either through on-site examination oruse of external auditors.This Principle was adjudged to have been fulfilled. TheMission observed that full on-site examinations are con-ducted on the average of once in 18 months. This may notbe sufficient for big banks and those in distress. In addi-tion, however, other types of examination such as target,which is focused on a particular area of the bank’s opera-tion (e. g. credit), maiden (usually conducted in the first 6months of a new bank’s operation) and special (for a bankthat is perceived to be in serious problem) are common.With the adoption of risk-based approach to supervision,adequate coverage of the high-risk areas of banks’ opera-tions are expected. The examination cycle is also expectedto shorten with the restructuring of the regulatory depart-ments into a team-based arrangement rather than theerstwhile functional set-up. The idea of outsourcing somesupervisory functions has been adopted. A policy positionhas already been taken in the case of community banksand a number of auditors and retired examiners have beenregistered for this purpose. The BOFIA requires that thefinancial statements of banks be audited, and approvedby the CBN before publication. To ensure the indepen-dence of auditors, the banking laws require that any changeof auditor by the banks must be with the approval of theCBN.

Consolidated supervisionThough there is no specific provision in the banking lawfor consolidated supervision, the Banks and Other Finan-cial Institutions Act requires that supervisors shall haveaccess to all the books of a licensed bank. On the basis ofthis, the Nigerian supervisory authorities have com-menced the supervision of related institutions on a con-solidated basis. Co-operation among supervisors in thevarious sectors of the financial system is being greatlyfacilitated by the establishment of the Financial ServicesRegulation Co-ordinating Committee [FSRCC]. The estab-lishment of this body is the first major step towards incor-porating specific provisions for consolidated supervisioninto the banking laws. Consolidated supervision is still lim-


ISSUES (I)

ited within the Nigerian financial system, as offshore bank-ing is minimal. This informed the “fulfilled” rating grantedto this Principle by the Mission.

Global supervision, foreign bank branchesand cooperation with foreign supervisorsVery few Nigerian banks operate offshore. The few off-shore operations have always been subject to supervi-sion by the authorities with the cooperation of the hostsupervisors. For example, the Financial Services Author-ity [FSA] of U.K. has always contacted the CBN for infor-mation on the management and internal control practicesof the three Nigerian banks that have branches in the U.K.The World Bank Mission concluded that issues related tocross-border supervision were not relevant to Nigerianbanks as their activities were domestic to a very largeextent.

Country and market risksHitherto, banks and supervisors in Ni-geria had not been focusing on theseissues. However, with the adoptionof risk-based approach to supervi-sion, the framework would be putin place to address the issueswhich are yet to be given dueattention. The assessment was“not applicable” as the risk ex-posures were almost nil.

Supervisory powersBoth the CBN and the NDIC have suf-ficient and comprehensive legal pow-ers to take adequate and timely action onbanks in distress. This was demonstrated in the liqui-dation of 26 terminally distressed banks in 1998 and, re-cently, by the revocation of the licences of three (3) banksin December 2000. The World Bank Mission expressed fearabout political pressure, which might hinder the supervi-sory authorities from exercising their powers and ratedthis principle as largely fulfilled.

Other principles adjudged to be largely fulfilled in-cluded those dealing with loan classification, money laun-dering, off-site and on-site supervision, powers to addresscompliance with laws, transfer of ownership, power to re-view acquisitions and investments, management processto control material risks and accounting policies and dis-closures.

Internal ControlIt is expected that with the risk-based approach to on-sitesupervision, greater and more focused attention wouldbe given to internal control.

The appraisal of banks is focused on analysis of finan-cial ratios and compliance with regulations. Although theCBN has enough powers under the existing banking lawsto bring erring bank directors into line or to outrightly re-move them, the critical role of the board in safeguardingthe assets of the bank is not emphasised in the laws. Thisprinciple was consequently adjudged largely unfulfilled.

Operational independenceThe 1999 amendment to the CBN Act granted autonomyto the CBN in the execution of its functions. The WorldBank Mission was, however, of the view that the CBN may

not perform its duties independently from political forcessince the government, from a legal standpoint,

could influence most actions taken orintended to be taken by the regula-tory authorities. Efforts are being fo-

cused on addressing the inad-equacies in the Banking Act

through appropriate amend-ments. The Mission foundthe supervisors seriously

lacking in the provision andupgrading of Information

Technology [IT] systems. Thisprinciple was assessed to belargely unfulfilled but efforts to

fulfill this requirement were un-derway especially as the CBN has

initiated action to upgrade its IT systems.

Management InformationThe Mission was of the view that Management Infor-

mation Systems [MIS], which would enable supervisors toidentify concentration and related issues, were lacking.Moreover, it argued that Nigeria’s practice of restrictingthe definition of “large exposures” to 20% or 50% of capitalfor commercial or merchant banks, respectively, was un-satisfactory and questioned the rationale for allowing mer-chant banks to hold higher single exposures than com-mercial banks whose activities were more diversified. TheMission concluded that the Principle on management in-formation was not fulfilled and efforts to achieve it werenot underway. It however noted the efforts of the CBN tocollect information on loans of N1 million and above

In spite of the laudablestructures to supervise the

system, the bankingsystem still has problems

that threaten its veryexistence.


ISSUES (I)

through the Credit Risk Management System (CRMS) orCredit Bureau and advised that it should be incorporatedinto the supervisory data process. The restriction on singleobligor limits for commercial and merchant banks wasexpected to be streamlined when Universal Banking com-menced in 2001.

Connected lendingThe Mission was also of the view that the core principle onconnected lending was largely unfulfilled and efforts toachieve fulfilment were not underway. The reason wasthat regulatory safeguards were not sufficient to discour-age unsound lending practices, nor were penalties stiff

enough to avert such unsound practices.The issue of insider abuse had been a source of con-

cern to regulators in Nigeria. Serious steps had been takento address the problem including the implementation ofthe Failed Banks (Recovery of Debts) and Financial Mal-practices in Banks Act 1994 with the cases hitherto handledby Special Tribunals now moved to dedicated divisions ofthe Federal High Courts.

However, a new policy position regarding borrowingby key shareholders and directors of banks was expectedto be taken in 2001.

Legal frameworkThe core principle on legal framework and the provisionsrelating to the authorisation of banking establishmentsand on-going supervision was assessed to be unfulfilledand efforts to achieve fulfilment underway, without actu-ally stating what action had not been addressed.

The Mission confirmed the granting of larger autonomyto CBN, which the regulatory authorities believed had elimi-nated obstacles to achieving fulfillment.

Licensing of banksThe CBN has continued to license new banks while theinspection of community banks to determine their viabil-

ity for the grant of licences was carried out. Whilethe Mission was aware of the CBN’s autonomy, itwas not aware that the CBN had started grantinglicences to new banks or had started the inspectionof community banks for licensing. Consequently, the“unfulfilled” rating, for the reason that, no new bankhad been licensed, and that no final licence had beenissued to a community bank, would be reviewed.

Prudential reportingThe Core Principle on Prudential Reporting involv-ing the processing of returns from banks was as-sessed “unfulfilled and efforts to achieve fulfillmentnot underway”. This assessment was based on thefact that the level of the IT systems of the regula-tors and the banks does not allow for the best use ofinformation. The Mission believed that the BankAnalysis System (BAS) might partially remedy thesituation. The authorities totally agreed with theMission’s assessment but hoped that the presentpolicy thrust of the CBN towards the developmentof IT would, to a large extent, remedy the situation.

Legal protection to supervisors and cor-rective action

There were other principles which, in the opinion of theMission, required legal provisions, otherwise they wouldremain “unfulfilled and effort to achieve fulfilment notunderway”. These included, among others, legal protec-tion for supervisors, and corrective action by CBN andNDIC on distressed/failing banks without government in-terference. It is therefore the responsibility of the super-visors to make a comprehensive proposal to the NationalAssembly on the relevant provisions that need to beamended or included in the CBN and Banks and OtherFinancial Institutions Acts.

Veer.com


ISSUES (I)

In its summary of the assessment of Banking Supervi-sion against the 30 core principles, the World Bank Mis-sion indicated that 9 were fulfilled, 11 largely fulfilled, 5largely unfulfilled and 5 unfulfilled”.

In conclusion, the Central Bank had some disagree-ment between its own self-assessment and the view ofthe Mission, and considered that a review is necessary, inthe light of recent developments. However, the lapses ob-served were believed to be indicative of areas requiringfurther supervisory action.

Consequences of AssessmentAs we pointed out earlier, the consequences of the WorldBank assessment would appear to reflect in the new bankreforms. From the standpoint of analysis, it seems clearthat certain problems have remained endemic in the Ni-gerian financial system and seem to have defied solution,for so long, in spite of both the application and enforce-ment of regulatory sanctions and moral suasion.

New Capitalisation requirementIt is debatable whether the reform mea-sures have gone far enough to solve theproblem of under capitalization bearingin mind that neither too little nor toomuch of capital is good for business. Wewould however grant that drastic diseasessometimes require drastic measures!

Conclusion and RecommendationLike other businesses, Banks can still fail evenwith Supervision. Too much will constrain initiatives andtoo little will generate laxity. The essence of bank supervi-sion and inspection, we submit, is to stem failures fromwreaking serious havoc to the banking public, creatingloss of confidence, causing tax payers money to rebuildconfidence in the system even as it deals with erring bankpersonnel for deliberate misdemeanour. What is adequatesupervision is a product of experience learnt in the fieldand can be drawn from the global knowledge base whichis now so much easier to access. Disregard for the safetyof investors and depositors’ funds could adversely affectthe confidence of the general public in the financial sys-tem and result in economic chaos.

Banking educationIn the recent past, the concern of regulators has been theneed for far more education for themselves and bankerson the emerging instruments of portfolio management

known as derivatives. We submit that the problems aremore than that. Quite apart from glaring knowledge gapsevident at most levels from the experience of the SubCommittee on Ethics and Professionalism in the Bankingand Financial Industry that require new attention, banksupervisors seem to be knocking their heads against abrick wall as they take measures after measures to checkand improve on bank service quality. Each measure tocorrect a lapse has literally pushed banks to be more dis-ingenuous. Those unwholesome practices will not besolved by recapitalization! The unethical practices in ourbanks that have become a national embarrassment maynot reduce because of increase in sanctions! The systemwould appear to need a whole lot less with the right per-sonal leadership education for bankers, (the whole spec-trum of bankers) that will extol and motivate good virtuesof trust and integrity. These need to be taught from staff

induction and through every level of seminars andmeetings. We must drill down to the

very heart of the problem and get tothe proverbial pain-points to over-

come this embarrassment.For banks, the scare has al-

ways been and would remainabout change. From our expe-

rience, it would appear that therehas not been enough articulation

in the banking system even now onthe nature, feature, intensity and

dynamics of change. Whilst a few ap-preciate the implication of this phenomenon

on their career, many would not appear to andtherefore lack the ability to assimilate transitions and theirchallenges. The result is that an unduly stressful conditionthat is better imagined is created and along with it dys-functional behavior patterns. For our own sake, we haveto change how we see change and teach bankers to man-age at the speed that change is occuring.

From a review of the measures, it is clear too that a lotof education would attend the reforms. Education in termsof new skills on the handling of the consequences of merg-ers and acquisition, for those who chose that route to com-ply with the capitalisation request.

Finally, we submit that the permanent feature of changeand its management needs to be an integral part of thecurriculum of the banking Institute and bank trainers gen-erally.(* Mr. Muse, former CEO, Access Bank Plc is a consultant inLagos.)

In spite of the laudablestructures to supervise the

system, the bankingsystem still has problems

that threaten its veryexistence.


B

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usiness is under increased pressure to invest and re-in-vest its resources and profits to meet the social needs andwants of the communities in which it operates. Althoughthese pressures are not new, they have been rising withthe spread of globalization and the growing gap betweenthe world’s rich and the world’s poor. The corporate socialresponsibility debate has taken on a distinct meaning indeveloping countries, and in many cases the problemsarise from the mistaken perceptions of and difficult expe-riences with market reforms. The result has been rever-sals from the course of democratic and free market re-form as skeptics began to point their fingers at businessand blame capitalism for corruption scandals, financialcollapses, disastrous privatizations, and similar events.

The reality of any economic system is that businessdoes not operate as a single entity; each company pur-sues its own interests. Therefore, reform efforts must fo-cus on the internal conduct of individual businesses andnot treat the business community as a monolith. One ofthe solutions in this case would be the introduction andstrengthening of solid corporate governance mechanisms.Corporate governance mechanisms can provide a bar-rier to corruption while still allowing businesses to increasetheir profits.

* By Aleksandr Shkolnikov


ISSUES (II)

In addition to improving corporate governance, theinstitutional environment in which companies operate mustbe conducive to honest business activity. Improving thequality of institutions as the rules of the game that makecompetitive markets possible and reducing the legal andregulatory burdens the private sector faces are two of theanswers to ensuring that markets live up to the expecta-tions of society. Those reforms, which can be enacted bymeans of private-sector advocacy, will also enable all citi-zens to have access to markets and the prosperity theybring. In that regard, getting the private sector involved inlegal and regulatory reform can be thought of as a proac-tive approach to corporate social responsibility.

For a long time, economists’ responses to social re-sponsibility pressures have been straightforward. In someregard, it was summarized by Milton Friedman in his 1970article in the New York Times Magazine. In fact, one does nothave to read the whole article – for defenders of privateenterprise as well as for its natural critics, it was largelycaptured in the title, which reads “The Social Responsibil-ity of Business is to Increase its Profits.” Although therewas much more to the argument Friedman made, theemphasis on profits was quickly picked up by the publicand continues to be the core of the debate over the issue.

In some cases, the corporate social responsibility and

profit-by-any-means debate became a quarrel over theability of free-market economies to deliver. As such, nega-tive connotation of profits and selfishness became syn-onymous with free markets in many countries. This is evi-denced by the rise of nationalist, populist movements,which seek to build socially-oriented economic systemsand replace “exploitative” market mechanisms. Althougha push for, and the subsequent emergence of, highly con-trolled, micromanaged economies to ensure responsiblebehavior by business is hardly a new idea, it seems to bestriking a chord with the public in more country than one.In those countries, we are seeing a reversal of free-mar-ket reforms by democratically elected leaders.

Frustration with markets is and was not without a rea-son. The unchallenged conventional wisdom of neoclassi-cal economics was that free markets make societies bet-ter off, and such was the message channeled by reform-ers in developing countries. Yet, the daily realities of re-forms in transitioning economies brought to the surfaceone of the major pitfalls of neoclassical economics – treat-ing economies in aggregate terms.

Unlike in theory, in reality not everybody became bet-ter off , and the promises of democratic equality and mar-ket prosperity materialized for some but not for all. Expertpropositions that incomplete reforms led to the creationof crony capitalist economies where only a select few haveaccess to the system attract little sympathy from citizens,who often want immediate changes and are fed up withpromises of economic prosperity that do not materialize.Another assumption of neoclassical economics, that keyinstitutions are in place and function properly, has also ledto frustration, when seemingly simple reforms with aproven track record in developed economies have failedin achieving similar results in emerging economies.

Overall, the unprecedented economic expansion of thepast several decades has been marred by the emergenceof clear winners and losers of reforms in the globaleconomy and has put a spotlight on the role of privateenterprise, as skeptics began to point their fingers at busi-ness and blame capitalism for the plight of African coun-tries, corruption scandals, financial collapses, disastrousprivatizations, and similar events. “The worst enemy ofhumanity is capitalism,” declared Evo Morales in a run upto the presidential elections in Bolivia several years ago.These words of Morales became one of the pillars of hiselection campaign and echoed in the hearts and minds ofmillions who voted him into office, as well as many othersaround the world who felt left out, watching the train ofeconomic prosperity pass them by. Today’s events illus-


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trate that it was not simply rhetoric; the actions of Moralesand the likes, such as nationalization of industries and in-creasing barriers to doing business, show that the electedleaders are living up to their campaign promises.

The social responsibility of business: devel-oping countries’ perspectiveAdam Smith’s view of markets was built around the con-cept of self-interest. In his world, one could address socialinterests through private needs and wants by means ofmarket mechanisms (Shand 1990). The modern-day de-bate about the merits of capitalism still goes back to theidea of self-interest and Smith’s now famous quote that “itis not from the benevolence of the butcher, thebrewer, or the baker that we expect our dinner,but from their regard to their own interest”(Smith 1981: 26). Yet, magically, Smith’s com-ments have a whole new meaning today. Overthe years, in many emerging and stagnatingeconomies, the ideas of self-interest and entre-preneurship advocated by Smith and others likehim obtained a negative connotation and were replacedwith notions of selfishness. As such, in many economies,capitalism as an economic system became synonymouswith vice rather than virtue, and unethical behavior ratherthan morality.

For the most part, the real intention of free-marketreformers in the 1980s and 1990s was to improve socio-economic conditions for the benefit of all citizens. In theworld of Adam Smith, Frédéric Bastiat, and other classicaleconomists, market forces always lead to beneficial con-sequences for all (Shand 1990).

These ideas of classical economists were channeled

by reformers to the public, driving up the expectations ofmarket prosperity – until these expectations began tomaterialize for some and elude others.

For example, privatization schemes in Russia in the1990s left thousands of people unemployed and industriesdevastated, while the owners of newly acquired enter-prises – the new business elite or so-called oligarchs –abused the opportunities presented to them by the newsystem. They engaged asset-stripping, thus padding theirown pockets rather than contributing to economic growththrough private enterprise, and engaged in unfair compe-tition, using bribery, extortion, and other illegal means tofend off and eliminate competition. Throughout the 1990s,

as the business elite was capturing the largest share ofeconomic growth, most of the country was mired in rela-tive poverty. By the early 2000s, the new administrationhad a new, clear agenda in mind; it determined that busi-ness cannot be left to itself and that strict political controlsmust be put in place to ensure that it acts in the interest ofsociety.

Although one can debate the relative merits of in-creased pressure on business from the government inRussia, the fact that the playing field has increasingly be-come more restricted is undeniable. Moreover, increasedpolitical control over private enterprise seems to find popu-

lar support, as the calls for social values replacethe ideals of liberty, private initiative, and enter-prise.

Such sentiments are not limited to Russia. Inthe 1990s and 2000s, leaders in countries acrossthe world began to rethink business-society rela-tions, increasing pressure on business to addresssocial needs and wants.

In some countries, governments began to co-erce business into sharing its profits through regu-latory measures or administrative threats, givingrise to micromanaged market systems. In others,private enterprises began to revert back to stateownership, and market mechanisms began to bereplaced altogether. As a result, the corporate so-cial responsibility debate, limited for a long time to

Traditionally, in developed economies, corporatesocial responsibility focused on the economicperformance of firms and the social andenvironmental impact of their operation.

A car plant in Russia


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developed countries, began to address developing econo-mies – not only through the operation of multinationalenterprises in those markets, but also through domesticbusiness and politics.

Traditionally, in developed economies, corporate so-cial responsibility focused on the economic performanceof firms and the social and environmental impact of theiroperation. It was largely viewed through the prism of busi-ness’ relation with society through workforce issues, envi-ronmental impact, and community leadership. Businesssought to behave responsibly in its operations and stroveto take into the account not only the interests of its imme-diate owners but other stakeholders, i.e. society at large,as well.

Some firms, of course, completely dismissed the ideaof social responsibility from the beginning, holdingFriedman’s view that the social responsibility of businessis to increase its profits. The logic of this argument is thatif private business does not make a profit, it simply cannotexist, as the alternative to making profits is making losses.While loss-making state-owned enterprises can continueoperation because they are subsidized by the government(never mind the fact that the government in turn extractsthe funds from the citizens through taxes and othermeans), private-sector companies do not have such a

luxury. And if a business perishes, so will the people de-pendent on it for jobs, goods, services, and income. Fur-ther, if a business does not employ people and if it doesnot pay taxes, how can governments provide public ser-vices? That was one view held by many for quite sometime.

However, the reality of the complex socioeconomicsystems within which business operates made ignoringsocial responsibility pressures a difficult task, especiallyafter calls for voluntary socially responsible behavior onthe part of companies began to be replaced with real ac-tions through lawsuits, media campaigns, and regulationsby governments and some nongovernmental organiza-tions.

The alternative to ignoring the problem altogethercame in the form of a passive response to social responsi-bility pressures – philanthropy. The reason philanthropyis essentially a passive response is because it does notaddress the root sources of the problem – it is a strategyintended to deal with problems, not solve them. In thatregard, the evolution of philanthropy is interesting. Volun-tary philanthropy in the form of ‘giving back to the com-munity’ has always been part of business, as individualbusiness owners would share some of their profits to meetthe needs of society beyond providing employment andgoods and services. The key point here is that philanthropiccontributions have historically been made by individualowners of companies – wealthy businesspeople – on avoluntary basis. They did not serve a particular businesspurpose, as companies in the United States, for example,were legally prohibited for a long time from becominginvolved in social affairs (Smith 2003).

Yet, philanthropy has transformed over the years, andin many cases additional contributions to societal well-being are no longer just voluntary – frequently they areexpected and demanded from business, and penalties forcompanies that refuse to cooperate can be quite high. Asfirms were increasingly expected to donate a share oftheir profits beyond taxes for the good of society, philan-

thropy evolved into a business strategy – help-ing companies build a market image, respondto pressures, and fend off critics.

In comparison with developed countries, intransitioning and emerging economies social re-sponsibility concerns have a somewhat differ-ent meaning and a more profound effect. Thereality of market reforms was such that busi-ness was put in a rather uncomfortable position

in regards to its role in society.In cases of privatization, for example, unprofitable

state-owned enterprises were transferred into privateownership in order to make the company competitive in amarket economy. While undergoing restructuring, thesenew privately owned companies laid off excess workersand increased the previously subsidized prices for goodsand services. While the conventional wisdom channeledto the public by market reformers was that privately ownedcompanies are more efficient in terms of delivering higherquality goods and services in larger quantities and at lowerprices, the reality in many cases, at least in the short-term, was quite the opposite.

In Brazil, for example, privatization of the energy sec-

In others, private enterprises began to revert back to stateownership, and market mechanisms began to be replacedaltogether. As a result, the corporate social responsibilitydebate, limited for a long time to developed countries,began to address developing economies – not onlythrough the operation of multinational enterprises in thosemarkets, but also through domestic business and politics.


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tor resulted in disrupted service and higher prices. Thereal reason was the incomplete reform process – onlypart of the energy sector was privatized while the restremained under state ownership. Although privatized com-panies had to compete under market rules and prices, thegovernment did not liberalize the energy tariffs (Sullivan,et. al. 2003). When Brazil faced the grim reality of not be-ing able to satisfy the growing energy demand, popularopinion quickly identified the privatization process and theprivate sector’s concerns with profits, not incomplete re-forms, as the primary suspects.

In the Philippines, the term ‘crony capitalism’ was bornin the 1970s and 1980s, as democratically electedFerdinand Marcos and his cronies established tight con-trol over the economy, building huge monopolies and si-phoning profits into their personal bank accounts in Swit-zerland. Corruption and backdoor dealings allowed agroup of wealthy businesspeople to essentially rob thepoor, denying them the opportunity to participate in themarket process and setting up a system where only a fewinsiders could benefit from the distorted market reforms.

And in countries like Nigeria and Venezuela, as theprice of oil increased, citizens found themselves watchingoil companies reap large profits from the natural resources,while they were stuck at the bottom of nearly every devel-opment index. Development and profits in those coun-tries did not extend beyond the places of extraction ofnatural resources.

The examples are many, but they all lead to the factthat during the liberalization and reform processes of the

1980s and 1990s, in many emerging economies the popu-lar perception of business became that of dishonest orga-nizations seeking to increase their profits by any means.However, it would be unfair to say that such was the situ-ation in all transitioning and emerging economies; in some,the private sector became a driver of reform efforts andimproved its image drastically. Montenegro is one of thecountries where the process was successful, and the busi-ness community worked to gain the trust and respect ofcitizens and government officials1. The improved relation-ship between the business community and government

and society in Montenegro had an effect on the legal sys-tem as well – the private sector saw more efficient regula-tions come from the legislature as its involvement in thepolicymaking process steadily increased. The governmentrecognized the role that the private sector plays in creat-ing jobs and wealth in the country, and through a consulta-tive process rewarded the business community with busi-ness-friendly regulations.

However, there are countries where the public sectoris still viewed as a primary source of employment andincome. In those economies, the rise of cautious attitudestowards business and a lack of trust in the private sectorhave proven to be dangerous from the development per-spective. Some citizens began to view market mechanismsas tools for the rich to use countries’ resources for theirpersonal benefit and capitalism as an outside system im-posed on them by foreign entities seeking to satisfy theirown interests. The morality of markets began to be ques-tioned and political control over the economy began toreturn in some countries after years of steps towards lib-eralization. In light of this, the reversals from the courseof economic reform and continued stagnation of coun-tries in the Middle East, Africa, Eurasia, and Latin Americaare not coincidental.

Who is business?Economists are often criticized for their tendency to speakand think in aggregate terms. Yet, citizens holding nega-tive perceptions of business and capitalism in developingcountries fall into the same trap – they treat business in

aggregate terms.The reality of any economic system is that busi-

ness is not a monolith (Sullivan 1999). Various compa-nies have different interest and often operate underdifferent rules. In any economy, there are small andmedium companies, large firms, state-owned compa-nies, micro enterprises, family-owned firms, informalsector vendors, state-connected companies, multina-

tional corporations, and many others. Each type of com-pany pursues its own interests and has different issues onthe agenda. Labeling all of these different types of com-panies as simply “the business community” is a mistakemade by many – and a mistake that has significant policyimplications.

Breaking business down into its appropriate compo-nents is useful in evaluating the interests of different typesof companies, the barriers they face, and the impact oftheir activities in the marketplace on society. While somestate-connected companies, such as the case of the Phil-

The reason philanthropy is essentially a passiveresponse is because it does not address the rootsources of the problem – it is a strategy intendedto deal with problems, not solve them.


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ippines under Marcos, can circumvent legal mandatesthrough bribery and backdoor dealings, informal sectorvendors often struggle to survive under a myriad of legaland regulatory barriers, such as the case of Peru in the1980s. Some cutting-edge companies may seek access toforeign markets to bring new technologies, goods, andservices into domestic markets, while state-owned enter-prises may keep borders closed, thereby suppressing freetrade and keeping competition in check.

Thinking about business in these terms is a gateway tounderstanding that relations between states, societies, andbusiness do not take place in the ex-tremes – it is a mixture of various inter-ests and strategies. While some firmsmay be a burden on society, wastingresources, suppressing competitivemarket forces, keeping out innovation,and corrupting the legal system, othercompanies seek to alleviate poverty,create jobs, remove trade barriers, in-troduce new technology, and providegoods and services. In that regard, at-tempts to penalize all businesses for themisbehavior of some is a faulty strat-egy.

Dividing business into its key com-ponents in this way is not, however, thefinal step. Going back to MiltonFriedman’s view of corporate social re-sponsibility, while he was largely quoted for calling prof-its-making the social responsibility of business, he made amuch more important point in his works. As he so rightlynoted in the New York Times Magazine article, we cannotthink about the social responsibility of businesses; we needto put the emphasis on individuals.

The discussions of the “social responsibilities of business” arenotable for their analytical looseness and lack of rigor. What doesit mean to say that “business” has responsibilities? Only peoplecan have responsibilities. A corporation is an artificial person andin this sense may have artificial responsibilities, but “business” asa whole cannot be said to have responsibilities, even in this vaguesense.

This comment opens the door to a very different viewof the social responsibility of business. To illustrate thepoint, consider the following example of corruption: a com-pany bribing a government to gain favorable access tothe market or to receive preferential treatment regardingthe enforcement of regulations. After observing such be-havior, the typical response would be to declare business

corrupt and impose regulatory penalties or political over-sight over the company or, in most cases, the whole in-dustry, to prevent such behavior from taking place again.

But in treating this behavior from an inside-out ratherthan an outside-in approach, it is easy to see that it wouldreally be an individual (a company executive) providing abribe to another individual (a government official) to gainfavorable access to the market. The motive in the casewould be not to provide the company with an access to themarket but to reap individual benefits in the form of salaryincrease, for example, for the individual involved in bribe-

giving as well as the one receiving the bribe. With an out-side-in view of corruption and an outside-in response to it,we would be equally penalizing the company employeewho is providing a bribe and the company’s workers andshareholders who may not know anything about this ac-tivity taking place. This is not to say that companies shouldnot be held accountable for their actions, but we must becareful when imposing penalties and increasing regula-tions when the system is not broken.

One of the solutions in this case would be the introduc-tion and strengthening of corporate governance mecha-nisms, which can act as an antidote to corruption.

Corporate governance mechanisms can provide abarrier to corrupt dealings on the part of individuals bylimiting discretionary decision-making, increasing over-sight over the distribution of funds, and introducing codesof ethics and conduct. Multinational companies and firmsin emerging economies are only beginning to think aboutcorporate governance as a successful tool against brib-ery, yet it has great potential. As case studies in the recent


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U.N. Global Compact publication “BusinessAgainst Corruption” show, companies can suc-cessfully erect barriers to corrupt dealingsthrough internal company measures.

What the inside-out approach yields is thatbusiness is not inherently bad and actions onthe part of some individuals should not be con-sidered a reason for political control over theprivate sector. In fact, a viable alternative togovernment control over an economy throughincreased regulations (an approach that fre-quently fails to take into account the costs andbenefits of regulations at the margin) is aninternal business value approach. That ap-proach involves private-sector companies de-veloping internal ethical guidelines and cor-porate governance mechanisms to ensurethat company incentives are aligned in a waythat encourages ethical behavior along thecountry’s moral and cultural value systems.

From social responsibility to institu-tionsAnother important point made by Friedman(2002) in his discussion of the social responsi-bility of business is that emphasis must be puton the rules and the competitive marketswithin which a business operates.

[In a free economy] there is one and onlyone social responsibility of business – to useits resources and engage in activities designedto increase its profits so long as it stays withinthe rules of the game, which is to say, engagesin open and free competition without deception or fraud.

Friedman correctly recognized the tendency in the so-cial responsibility movement to extract business from themarket environment in which it operates – but taking thatmarket environment into account is of utmost importancewhen dealing with social responsibility pressures. Whilebreaking down business into its structural components al-lows us to recognize the different interests of various com-panies and individuals, recognizing the structure of themarkets within which companies operate allows us to ad-dress the incentive structures that drive the behavior ofthose individuals.

Market structures separate countries from one anotherand doing business in one country is different from doingbusiness in another. In some countries, for example, itmay take more than a year for a company to enforce a

contract and work its way through a complex judicial sys-tem, and providing a facilitation payment to speed up theprocess may seem like a viable alternative.

In other countries, where judicial systems functionmore efficiently, the need for such a facilitation paymentdisappears.

Or, consider property rights protection. In countrieswith poor property rights regulations, doors are open to avariety of anti-competitive actions. Competitors may bribejudges to transfer shares of a company into their namesillegally, or government officials may threaten expropria-tion if certain demands are not met. In countries whereproperty rights are enforced, the possibility of such ac-tions taking place is greatly reduced.

Understanding the institutional structure of marketsallows us to understand why in many cases there has been

World Bank HQ


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a breakdown between market reforms and market per-formance. Market reforms implemented in the absenceof true economic freedoms are bound to not live up toexpectations. For example, privatization is much more thansimply transferring titles from public into private owner-ship. It may be so in developed countries where the insti-tutions necessary for the privatization process to workare already in place, but in many developing countries, inthe absence of rule of law, privatizations are often an opendoor to asset-stripping, corruption, and resource misallo-cation.

At the end of the day, it comes down to the fact thatwhile advocating for market reforms in developing coun-tries, many experts have taken institutions for granted(North 2005). That mistake has had a profound effect onpeople’s perceptions of the future benefits of reforms andtheir real outcomes. Seemingly simple economic reformsimplemented in an institutional vacuum have broughtabout conflicting results and outcomes.

Understanding the institutional structure of marketsalso provides some insight into why there are increasingcalls for political controls over business and pushbackagainst market reforms in so many developing countries.Further, it can explain why the increasing of political over-sight over the private enterprise is bound to exacerbatethe inherent problems rather than provide viable solu-tions. But the most important outcome of such an approach

is that it allows us to better understand the root sources ofdiscontent with the performance of business in some de-veloping countries and thus devise effective solutions tocombat negative perceptions of private enterprise, mar-kets, and capitalism as an economic system.

A proactive approach to social responsibilitypressuresThe World Bank’s Doing Business Database captures wellthe inherent economic problems in many developing coun-tries2. It shows a clear connection between the overregu-lation of business and corruption, lower development lev-els, poor investment, and other economic ills. But while in

many cases over-regulation has been the cause of coun-tries’ bad economic performance and subsequent discon-tent with market mechanisms, the traditional response byanti-market forces has been more instead of less regula-tion (Caplan 2004).

Improving the quality of institutions as the rules of thegame that make competitive markets possible and reduc-ing the legal and regulatory burdens the private sectorfaces are two of the answers to ensuring that markets liveup to the expectations of society. Those reforms will alsoenable all citizens, not just a select few, to have access tomarkets and the prosperity they bring.

In that regard, getting the private sector involved inlegal and regulatory reform can be thought of as a proac-tive approach to corporate social responsibility. Insteadof responding to pressures through philanthropy, institu-tional reform in developing countries can address the rootsources of public discontent. In other words, if we speak ofthe social responsibility of business, we should speak ofbusiness’ role in building truly competitive markets, whichallows for economic growth and provides opportunitiesfor people stuck at the bottom of the pyramid to move upthe development ladder.

This can be done by means of private-sector advo-cacy through business associations. In such an approach,business associations are not a redistributive mechanismthat allows companies to capture rents (Krueger 1973);

rather, they are an advocacy mechanism that im-proves the business environment across the board.Here lies a key difference between lobbying as try-ing to capture a larger share of the pie and advo-cacy as simply increasing business opportunities byremoving barriers to doing business and, as a re-sult, making the pie bigger rather than seeking tocapture one of its pieces. One of the more funda-mental concepts of economics is that free markets

are not a zero-sum game, and private-sector advocacyexemplifies well this fundamental concept.

It is also a viable alternative to Mancur Olson’s (1982)view of interest groups as predatory groups bound to driveeconomies into stagnation and societies into despair.

Certainly, not all business associations are capable ofbeing advocates for free-market reforms. Some associa-tions may act as vehicles for business groups to “capturethe state,” (Hellman, et. al. 2000). These types of businessassociations act as barriers to, not as facilitators of, eco-nomic reform. Other types of associations, particularlythose based on the mandatory membership-type Conti-nental model of associations, have few incentives to ad-

Corporate governance mechanisms canprovide a barrier to corrupt dealings on thepart of individuals by limiting discretionarydecision-making, increasing oversight overthe distribution of funds, and introducingcodes of ethics and conduct.


BibliographyCaplan, B. (2004). “The Idea Trap.” The Library of Economics andLiberty.Friedman, M. (1970). “The Social Responsibility of Business isto Increase its Profits.” New York Times Magazine.Friedman, M. and R. D. Friedman (2002). Capitalism and Freedom.Chicago, University of Chicago Press.Hellman, J. S., G. Jones, et al. (2000). “Seize the State, Seize theDay: State Capture, Corruption and Influence in Transition.”North, D. C. (2005). Understanding the Process of Economic Change.Princeton, N.J., Princeton University Press.Olson, M. (1982). The Rise and Decline of Nations: Economic Growth,Stagflation, and Social Rigidities. New Haven, Yale University Press.Pilgrim, M. and R. Meier (1995). “National Chambers of Com-merce: A Primer on the Organization and Role of Chamber Sys-tems.”Shand, A. H. (1990). Free Market Morality: The Political Economy ofthe Austrian School. London; New York, Routledge.Smith, A., R. H. Campbell, et al. (1981). An inquiry into the Natureand Causes of the Wealth of Nations. Indianapolis, Liberty Clas-sics.Smith, C. (2003). “The New Corporate Philanthropy.” HarvardBusiness Review on Corporate Responsibility.Sullivan, J. D. (1999). “How Business Can Affect Public Policy.”Economic Reform Today.Sullivan, J. D., C. Kuchta-Helbling, et al. (2002). “National Busi-ness Agenda Guidebook.”Young, S. (2003). Moral Capitalism: Reconciling Private Interest withthe Public Good. San Francisco, Berrett-Koehler Publishers.

dress the institutional deficiencies and act as ‘the voice ofbusiness.’ Those types of associations act more as tax-collection agencies, since their survival is dependent onlyon laws that require businesses to become members.

Voluntary membership-based associations of theAnglo-Saxon model are much better candidates to advo-cate for institutional reforms, as their survival is depen-dent directly on their ability to attract and retain members(Pilgrim and Meier, 1995). From another perspective, vol-untary business associations can act as ‘the voice of busi-ness’ in the political reform process, bringing the issuescompanies face on a day-to-day basis and possible solu-tions to those problems before policymakers. The pro-cess has become known as the national business agendaand it has been implemented by the U.S. Chamber of Com-merce in the United States. The basic idea of the nationalbusiness agenda is that associations survey their mem-bers to identify the barriers to doing business they face,devise solutions, and channel the problemsalong with the solutions to the policymakers.

As noted above, not all associations are thesame. The key difference between market-pro-tection and market-expansion associations isthat market-protection associations seek toshield their member companies from competi-tion such as, for example, erecting trade barri-ers, thereby limiting the functioning of markets.

Market-expansion associations, on the otherhand, seek to improve the functioning of mar-kets, such as supporting measures to improvecontract enforcement or reduce transactionscosts in the form of business registration pro-cedures. The case for association participationin institutional reform as an answer to socialresponsibility pressures in developing countriesis made for market expansion, not market pro-tection associations. Unfortunately, in many de-veloping countries the latter exceeds theformer in number and efforts to erect marketbarriers often outnumber efforts to removethem.

The greatest challenges lie in creating andsupporting these reform-oriented private-sec-tor associations and breaking down the politi-cal barriers that prevent them from playing anactive role in policymaking. In countries wherethe private sector is not given an opportunityto voice its concerns and participate inpolicymaking, the regulatory burden on the pri-

vate sector and political control of business are likely toincrease, distorting the performance of markets evenmore. In countries where the private sector is given avoice in policymaking, and laws and regulations are cre-ated in a bottom-up, transparent manner, market institu-tions have a better chance of surviving and lifting citizensout of poverty.

1For more see Ivanovic, Petar and Ralph Marlatt“Strengthening Democracy and Developing the PrivateSector: Seven Years of Reform in Montenegro” CIPE Eco-nomic Reform Feature Service http://www.cipe.org/publica-tions/fs/articles/022806.htm.

2 Available at http://rru.worldbank.org.(* Aleksandr Shkolnikov is the Program Officer for Glo-

bal Programs at the Center for International Private Enter-prise and a doctoral student in the Department of Econom-ics at George Mason University). CIPE permit gratefullyacknowledged.

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You probably have heard many stories of people whose lives were changed for the betterthrough the stock market. Here’s another: Persuaded by a teacher in a remedial school,where she could hardly afford to pay the child’s fees, a widow struggled to invest about50,000 naira in stocks through a broker. Some two years later, pressed hard by increasedneeds, she called at the broker and asked to be given her money. “How much do youwant to take, Madam?” the broker asked. “My money,” was the woman’s reply.

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* By Vincent Nwanma


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Now, the broker had some explanations to make. First,the money had grown in value beyond the 50,000 nairathat she had invested. Secondly, she could take just a part,and still leave the rest to grow even further. At the end ofthe day, the woman took the amount she needed immedi-ately while the balance remained invested.

The stock market is obviously one of the wonders ofthe capitalist system. It is not just an institution for saving;rather, it is a vehicle for capital formation or accumulationthrough proper articulation of one’s financial objectives orgoals. The Nigerian Stock Exchange explains this clearlyin its Mission Statement:

“To promote increased capital formation in Nigeria by provid-ing issuers and investors with a responsive, fair and efficient stockmarket through competent and dedicated professionals using thelatest technology, thus assuring local and foreign investors ac-cess to the Nigerian stock market with confidence both in theregulatory framework and in the reliability of trading and settle-ment systems.”1

In the story above, the woman’s money grew in valueover the period because the broker, acting on the agree-ment with her, invested the fund in stocks that had thepotential to appreciate in value.

Without knowing in details all that the broker did, onecan surmise that he probably bought securities of morethan one company, and probably also sold all or some astheir prices rose. Having done that, he probably reinvestedthe amount in other stocks, or the same stocks (less theprofit), and probably sold later as the prices rose.

Alternatively, he could simply have held on to the stockshe purchased initially, until their values rose, such thatwhen he sold some, he could realize the initial amountthat the woman invested.

On the other hand, it is possible that the broker in-vested the whole amount in equities. He could also have

invested part in equities, and part in fixed-income securi-ties, or possibly in mutual funds. These are the variousinvestment instruments available on the stock market forprofitable investment. The choice of which security to in-vest in, is normally influenced by a number of factors,chief among them being the objectives of the investor.We shall say more about these objectives later.

The above descriptions mirror, although in a highlysimplified form, the processes by which investors createvalue for themselves over time through the mechanismof the stock market.

Risks AssessmentThe stock market is thus one of the amazing features ofcapitalism, which permits private ownership of wealththrough individual effort. It is underscored by an objec-tive assessment of the risks inherent in every investment

process. This is done through the analysis ofthe records of the general economy, compa-nies, and the industry or sectors in which theyoperate.

By appropriately pricing or assessing risksinherent in investments, individuals are ableto increase the value of their financial assetsover time through the optimisation of returnson such investments.Those that are able to

do this correctly –or as correctly as possible – get rewardedthrough the increase in value that they get.

Here lies the distinction between the stock market andgambling. The market is regulated, and operators play bythe rules. On their part, investors are expected to be guidedby information sourced by themselves or their brokers.

The reader probably already knows this: themoney in your pocket or under your pillownow is worth less today than it was yesterday.


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The purpose is to ensure that investors’ actions aredriven by the right information and that the actions theytake are the appropriate response to the market senti-ment at any given point.

This of course does not in any way imply that investorsin this market operate with absolute certainty. Despite theefforts made at risk reduction through the provision ofinformation, it is evident that the future cannot be pre-dicted with full accuracy. While industry or firm-specificissues could be analysed and hedged against to reducerisk, it is not so with economy-wide issues. Yet, operatorscan access the risks they carry, as provided by historicalfacts on the market or individual companies, and the pro-jections for the future.

The market therefore provides a safe haven for es-cape from the scourge of inflation that invariably eats intothe value of money left on its own. The reader probablyalready knows this: the money in your pocket or underyour pillow now is worth less today than it was yesterday.Any subsequent day that passes by sees this value de-cline further. Therefore, in terms of the real value or pur-chasing power of that amount, it diminishes with time.

This is the concept of the Time Value of Money. Simplyput, it states that money in hand today is worth more thanthe same amount to be received tomorrow. Or, alterna-tively, it says that money received at time T1 is worthmore than the same amount of money to be received attime T2. This is illustrated in the time line above.

There are at least two sources of this difference in thevalue of money received over time. One is inflation, therise, over time, in the general price of goods and services.The other, perhaps the more relevant in the case of fixed-income securities such as bonds, is interest payment.

Inflation matters because it eats into the real value of

money that all of us carry. From the inflation figures in thetable, it is clear that any amount of money held withoutbeing invested since the beginning of 2006 has depreci-ated in real terms by as much as 17.5%. Similarly, anyamount of money invested in an instrument that pays just17.5% and held until the end of the year will simply main-tain its original value, if, for instance, the inflation rateremains at this average level for the whole of the year.

While the inflation element compensates the buyer orholder of the bond for possible loss in purchasing power ofthe future receipts, the interest element is compensationfor deferred consumption or use of the funds today. It isalso a compensation for the risk of default by the bor-rower that the lender bears in parting with the money.

Between January and June 23, 2006, the All-Share In-dex of the Nigerian Stock Exchange rose by 6.57%, havingrisen to 25,668.00 points, up from 24,084.76 points, where itended the year 2005. The index is a broad measure of theperformance of the stock market, across board.

From the Inflation Table, it is clear that for this year,the average inflation rate for the first four months hasbeen 17.5%.1 Therefore, if you put your funds in securitiesthat paid you 17.5% per annum, you have simply alteredthe location of your money without raising its value. Itmeans, for instance, you moved it from under your mat-tress into a fixed-deposit account, but it’s a kind of motionwithout movement because there has been no change inits value.

From the above, it would seem that investors on thestock exchange have lost out this first half of the year.

That is what the all-share index of the mar-ket would suggest, on the average, judgingfrom its performance. This, however, is farfrom the truth.

It must be pointed out that some of thesevalues of the index actually under-reportthe performance of the market. First, it doesnot include the dividend income that com-panies pay to their shareholders every year.This is discussed below. Besides, the per-formance of the entire market falls short ofsome stocks in a year, sometimes as a re-sult of industry-specific events. In otherwords, some stocks actually outperform themarket, while others, unfortunately, per-form below the market.

Timeline

Inflation in Nigeria

* Average for the first four months of the year. Source: National Statistical Bureau


ISSUES (III)

Portfolio Selection and Diversifica-tionThe above scenario makes it imperative forinvestors to diversify their investments as ahedge against loss of value. A distinguishingfeature of stock market investment is the factthat operators recognize the existence of risk,and make efforts to minimize the impact ofsuch risks on the eventual outcome of theinvestment processes. This constitutes thebulk of activities undertaken by regulatorsand operators- to ensure that risks are re-duced to their barest minimum. And the great-est factor that leads to risk reduction is infor-mation. Investors are able to make the best decisions onthe basis of information available to them. Those who pos-sess this information are likely, therefore, to act in themost appropriate way, as far as the market is concerned.

“The process of buying different stocks for your port-folio is known as diversification. It is simply another nameof the expression that one should not put one’s eggs in onebasket. The reason is that in the stock market, like anyother market, prices go up and also go down. But there ishardly any day when all the stocks fall in price, except inthe event of a market crash. And since at any point in timethe total value of your portfolio is determined by the sumof the values of each of your stocks, it makes sense tohave different stocks, so that if some are down in price, atleast some will be up. In this way, you are able to maintainthe value of your portfolio, despite fluctuations in prices.”3

Therefore, depending on the composition of their port-folios, investors on the Nigerian Stock Exchange this yearhave achieved significant levels of returns, some of themobviously higher than the recorded inflation rate.

Sources of Growth In Stock ValueMany people are averse to the stock market largely be-cause they do not understand the mechanism by which itoperates to create value for investors. There are threemain sources of growth in the stock market, and an

investor’s aspiration should be to benefit from one or moreof these sources.

Share price appreciationOne of the expectations of investors is that over time, theprice at which they buy their stocks would rise so they cansell at a higher price and therefore make profit. This is oneof the forces that drive the stock market. Various reasonsaccount for this rise in stock prices, chief among thembeing the interplay of demand and supply, which in turnare driven by the fundamentals of a company.

When a company is doing well or is expected by themarket to do well, demand for its shares rises, as moreinvestors seek to take advantage of the envisaged im-proved performance of the company. Generally, this ex-pected improved performance would in turn result in

higher cash dividend being declared for the share-holders. All these help to push up prices of securities.We have seen this in some of the companies on theNigeria Stock Exchange.

In the banking industry, for instance, some of thebanks have experienced significant price increasesfollowing the consolidation exercise. With improvedcapital bases, the banks are now expected to per-form better, which in turn should lead to improved

returns to shareholders.Price appreciation occurs both in the short and long

terms, and investors can sell to take advantage of it, de-pending on their investment horizons and objectives. Inthe first half of 2006, many of the stocks listed on the NSErecorded appreciable price increases (and decreases, insome cases). The table below tells part of the story.

Except for the two stocks that showed price deprecia-tion, all the other 10 clearly outperformed the market dur-ing the period. Therefore, depending on the composition

Table 2: Performance of the Nigeria Stock Exchange, 1997-20064

* As at June 23, 2006Source: NSE

Investors are able to make the best decisionson the basis of information available to them.Those who possess this information are likelytherefore to act in the most appropriate way,as far as the market is concerned.


ISSUES (III)

of their portfolios, investors certainly have made somesignificant returns on their equities this first half of theyear. And, should this trend continue for the second half ofthe year, it is obvious that some stocks will achieve morethan 100% return – on price appreciation alone.

Cash Dividend IncomeThis is another source of growth in stock investment. In-deed, for some groups of investors, this constitutes themajor reason for investing in stocks. Generally, compa-nies reward their shareholders yearly by paying a certainportion of their net profits as dividend to their investors.The portion to be declared as dividend is not constant, butdepends on the company’s performance, its investmentplans (some of the profit has to be reinvested into thecompany’s operations), etc.

Companies’ dividend payment history is one of the

factors that affect the selection of stocks by many Nige-rian investors. This explains their preference for some ofthe mature enterprises, many of which are known for theyearly dividend payments. Therefore, the more of a par-ticular share an investor has, the larger the total sum hereceives as dividend income from that stock each year.

Bonus share issueThis is also known as Stock Dividend. From time to timecompanies give non-cash dividends, often in the form ofbonus shares. These are free stocks that the companygives to existing shareholders, in a certain proportion totheir current shareholding, thereby increasing the num-ber of paid up capital/shares in their books. For instance, a

company could decide that at the end of its accountingyear 2006, it will give every shareholder one new share forevery ten already held. In other words, a shareholder whohas previously held 100 shares gets 10 new shares (youget this by dividing 100 by 10), which makes his newshareholding now 110.

Usually, the price of the share in question is expectedto fall in proportion to the ratio of bonus shares. Investorson the NSE have benefited from bonus shares declaredby companies. The fall in price usually offers an opportu-nity for more investors to invest in such stocks. This hasalso happened this year, with several companies, includ-ing banks, offering bonus shares to existing shareholdersas the companies seek to raise their share capital.

To benefit from any or all of the above sources of growthin the value of stocks, an investor must have clearly de-fined investment objectives. It is these objectives that will

determine the types of stocks to be rec-ommended to you by your stockbroker.

So, the reader should think again:What is your investment objective? Is itdividend income? Is it capital apprecia-tion, in which case you want to buy andsell as the price of the stock rises? Orperhaps a mixture of these- such thatyou can take advantage of current highprices, and be able to accumulate a cer-tain amount of money at a future date.All these are possible in this market. Fora start, why don’t you talk to a brokertoday?

1 The Nigerian Stock ExchangeFACTBOOK 2002, page 15.

2 CPI figures for the months are: Jan17.9%; Feb 17.8%; Mar 17.4%, and Apr

16.9%. Source: National Statistical Bureau.3 Nwanma, Vincent : Creating Wealth Through the Stock

Market, 2005, page 21.4 From various editions of The Nigerian Stock Exchange

FACT BOOK(* Author of Creating Wealth Through The Stock Market,Nwanma is Nigeria’s Correspondent for Dow JonesNewswires. He was a World Bank Scholar on the Knight-Bagehot Fellowship in Economics and Business Journalismat Columbia University, New York).

* Union Bank made a Public Offer/Rights Issue at N20 per share. At this price, the capitalappreciation is even higher – 59.47%.Source: NSE

Table 3: Price Movement on Selected Shares on theNigerian Stock Exchange, Jan – June 23, 2006.


F REIGN INSIGHTS (I)

* By Yomi Makanjuola

t is not often that the leader of the world’s most popu-lous and fastest growing economy, China, visits the

black world’s most populous nation, Nigeria. Todrive home this point, just as one in five of thehuman race is a Chinese, every fifth African ispresumed to be a Nigerian. Political and eco-nomic pundits predict that China is on courseto emerge as a full-fledged superpower bythe middle of this century, powerful enough to

challenge the global supremacy of the UnitedStates of America. Of course, it must be stressed

that China’s date with destiny is not solely based onits headcount, but the fact that the country’s resource-

hungry and awe inspiring economy has been growing atclose to double-digit pace for over two decades. Therefore, for

Nigeria to emerge as a genuine regional power and a force to bereckoned with, both in Africa and on the world stage, a pre-condi-tion is a strong, dynamic and modern economy.

During his recent state visit to Nigeria, President Hu Jintao ofthe People’s Republic of China was given the rare honour of

addressing the nation’s joint legislative body at the

As the global economy evolves by becoming more integrated,it is clear that two languages - English and Mandarin Chinese -are set to dominate international commerce and trade, scienceand technology discourse, and electronic communication.



National Assembly. During that evening’s television broad-cast, my attention was drawn to the throng of federal law-makers listening to President Hu’s speech. Colourfullydecked out for the occasion, they generally wore a quizzi-cal “all very well but what-is-in-it-for-us” look that utterly failedto mask their boredom. Granted that Mr. Hu spoke Chi-nese (more specifically, Mandarin), an unintelligible lan-guage in these parts, there was nevertheless a drawling,voice-over translation in the background. However, whatreally caught the eye was not President Hu’s smart West-ern suit and tie, but what I can only describeas the ugliest, full-throated yawn evercaptured on camera this side of theequator. Judging from the bodylanguage and sweaty demeanourof this camera-friendly HouseMember, inelegantly sand-wiched between two other bravehearts, overt discomfort waswritten all over him. No doubt,this was made even worse by thefact that he was compelled to lis-ten to a total stranger speaking inan alien tongue. Whoever said it wasan easy job being a legislator?

Now tagged the “World’s Workshop”, just

about every consumer productimaginable is now made and ex-ported from China - shoes, toys,home appliances, sports equipment,just name it. Leveraging capital anda relatively low-wage labour force,there are few countries, if any, thatcan match China’s manufacturingcost structure.

Chances are that if you lookcarefully at the packaging of a Madein China product lying around yourhouse, you are liable to come acrossoperating instructions written in theChinese language.

Printed alongside may be this il-lustrative, less than crisp, Englishrendition: “The section cut off very hand-some and yet very easy to cut in onehand. Be careful not to place your fingerunder blade by your first holding of thehandle for serious cutting will happen”or “When connect to the LD player hav-

ing system control terminall, may wield two-faced securing, donot connect any ting to the system control terminall of the LDplayer’. But if you think the Chinese are laughable, whydon’t you consider this faithful reproduction of a job appli-cation entry written by a Nigerian graduate (he was askedto describe his interest in that company):

“I, want to say sincerely that these company is an organised,among indigenous company who is really abreast in our country.What interested me mostly was that is a company that strivehard to exell and also to be their best. Not only that, the company

gave her staff free hand to produce with efficiency in allher given task its uniqueness in all its organiza-

tion.”Clearly, the Nigerian education sec-

tor is facing a serious crisis. And asthe country continues to turn out tensof thousands of university graduates,the society and employers are leftto bear the brunt. The hard truth isthat the teaching profession hasbeen so badly traumatised, it is in-

congruous to expect teachers to passon to our children what they themselves

do not possess. To build an effective andfunctional workforce for the future, govern-

ment, communities and parents must join hands

Clearly, the Nigerianeducation sector is facing

a serious crisis. And asthe country continues to

turn out tens ofthousands of universitygraduates, the society

and employers areleft to bear the brunt.



to reverse this dreadful trend. On the other hand,Asian product manuals, in particular, are justifi-ably famed for being badly written. Needing tocut costs, these companies sometimes composeinstruction manuals in their native language andthen transcribe word for word into English, usinga dictionary. Occasionally, the poor quality is notdue to a lack of will, many entrepreneurs oftenface the real challenge of finding skilled linguists.

As the global economy evolves by becomingmore integrated, it is clear that two languages -English and Mandarin Chinese - are set to domi-nate international commerce and trade, scienceand technology discourse, and electronic com-munication. Unlike Mandarin Chinese, which isspoken by over 70% of the Chinese population(other key variants are Wu Chinese andCantonese) across a relatively contiguous terri-tory, English is the official language of that otheremerging heavyweight, India, and the current solesuperpower, the U.S.

Today, over 1.5 billion people live in countrieswhere English is the official language, spreadacross 50 odd countries. Recognised as the pre-eminent language in science and technology, di-plomacy, international business, popular cultureand so on, about 20% of the planet’s population speaksEnglish with varying degrees of proficiency. It is also pro-jected that the number of people who claim English as asecondary language will soon surpass the total number ofnative speakers. To demonstrate its global reach, MicrosoftWord, the ubiquitous office productivity tool, has a dictio-nary containing different variants for countries as diverseas Australia, Belize, Canada, Caribbean, Honk Kong, In-dia, Indonesia, Ireland, Jamaica, Malaysia, New Zealand,Philippines, Singapore, South Africa, Trinidad and Tobago,U.K., U.S., and Zimbabwe. Just as Microsoft’s operatingsystem locked in millions of users early, the spread ofEnglish owes a lot to England’s past colonial exploits, aswell as the rise of the United States as an economic power.Today, because the U.S. accounts for about a quarter ofglobal GDP, the bulk of electronic communication includ-ing radio, cable, and mail traffic is in English. However,with the rapid spread of Internet traffic and wireless com-munication, and as their economies continue to boom, thecentre of gravity is beginning to shift towards Asian coun-tries, especially China.

While Spanish is not faring too badly, spoken mainly inSpain and much of Latin America by about 350 million

people, another old colonial power is doing less well. France(despite its self-consciousness and doggedness in preserv-ing its culture) is finding it difficult to embrace globalisationor to accept the erosion of its international influence; alltold, native French speakers in fact number fewer than100 million. Globally, experts estimate that there are stillover 5,000 different languages in existence, many oral butunwritten, with about 200 of these having one million ormore indigenous speakers. Anthropologists fear that closeto half of the world’s languages may soon become extinctbecause children in many communities are no longerlearning their mother tongue. What is emerging is a formof linguistic and cultural hegemony - a creeping hazardthat is driven mainly by powerful media companies andunbridled capitalism, enveloping even former Commu-nist or closed societies. Evidently, the economic, socialand demographic changes that the world is witnessing isaccelerating rather than slowing down, almost like a tidalwave, as markets become more interconnected. The im-plication is that, to compete effectively in world markets,language skills - both spoken and written - are bound tobecome more important and may become indispensabletools for achieving competitive advantage.

Even as we explore and exploit global trends, Nigerian



parents and schools must con-tinue to encourage the teachingof indigenous languages. Wemust take great pride in our heri-tage, and desist from jettisoningour customs wholesale at the al-tar of foreign norms. Govern-ment has a big role to play bypromoting social and educa-tional policies that simulta-neously strive to preserve ourculture while focusing on strate-gic, economic-themed goals.One of these should be theteaching of Mandarin Chineseas a foreign language in selectedschools, starting now. ManyAsian countries are beginning toflock towards Mandarin and, even in the U.S., it is esti-mated that over 30,000 students enrolled in Chinese classesback in 2002. I seriously believe that Mandarin should begiven as much prominence as, say, the French languagebecause, accept it or not, the whole world will soon beangling to enter the Chinese market, comprising hundredsof millions of upwardly-mobile consumers.

For languages, much like in nature, it is a caseof survival of the fittest. Although speech istransmitted in analogue mode, digitalelectronics continues to enhance ourability to modulate and processspeech or sound from analogue todigital and back to analogue mode.Using the globe-girding Internet plat-form for data simulation and multime-dia transmission, information exchangenow occurs literally at the speed of light.Hence, while English and Chinese Mandarinmay shortly emerge as de facto world languagesand others like French and German may become morebalkanised, the real winner and language superpower mayturn out to be computer and communications protocols,which are internationally agreed-upon formats for trans-mitting data between various electronic devices. A popu-lar example is what is technically referred to as IP (orInternet Protocol) which is a standard method of digitaltransmission over the Internet.

With greater computer processing power and furtherminiaturisation, yet-to-be perfected middleware technolo-gies and speech engines may soon be available over com-

munication networks to facilitate real-time, on-line voiceand data translation. Shall we therefore look forward tothe day when we can do away with expensive human in-terpreters and towards near-instantaneous communica-tion and comprehension between people speaking in dif-ferent tongues? As this far-fetched prospect draws nearer,

we shall be close to achieving the modern-day versionof the Tower of Babel or Babel redux. In virtu-

ous hands, technology has the powerto improve the overall quality of hu-

man life. In the wrong hands, itcould represent a sinister force forevil. Metaphorically, progress isand always will be a double-edgedsword.

As boring as all this may seem,I wouldn’t yawn if I were you. But, if

you must, at least try to cover yourmouth. Beyond obvious health reasons,

the mouth must be treated with due respect atall times because housed inside it is that most formidableof all God’s handiwork. Remember always that no otherinstrument known to man is as soundly connected and nonethat cuts as seriously or viciously as an unrestrained hu-man tongue. Imagine, therefore, a digitalized and fullynetworked planet where language barriers become artifi-cial and consigned to the past. All in all, let’s be carefulwhat we wish for.

(* Yomi Makanjuola is Group Executive Director,Honeywell Group)

Today, over 1.5 billionpeople live in countries

where English is theofficial language, spreadacross 50 odd countries.

ZENITH ECONOMIC QUARTERLY : : April, 2006 63

F REIGN INSIGHTS (II)

* By Toni Kan Onwordi

Canada is a significant and strategic trading partnerfor Nigeria. Ranked as one of the world’s wealthiestnations in terms of GDP per capita which stood at$31,500 in 2004, Canada is a member of the Group ofEight (G8) industrialized nations and the Organiza-tion for Economic Cooperation and Development(OECD).

Operating a free market economy, the NorthAmerican country, which is blessed with a huge landmass, the second largest after Russia, has a wide

array of natural resources which accounts for thecountry’s huge earnings not just from logging andpetroleum but also mining and fishing amongst oth-ers. These natural resources which are found in dif-ferent regions of the country help enforce thecountry’s regionalism. Oil for instance which is themainstay of Alberta in the east, is easier andcheaper to sell to the US rather than to the WesternOntario province which is forced to rely on importedfuel and nuclear power for its energy needs.

ZENITH ECONOMIC QUARTERLY : : April, 200664


The exploitation of these huge natural resources hasraised serious environmental concerns as well as conten-tions from native land claims. These problems have forcedmany Canadian companies to focus their exploration andexpansion activities abroad, making Africa a destination

of choice because of the abundant cheap labour as well asmore conducive and less stringent operating environ-ments.

Aside from the extractive industries, Canada has awell developed service industry, a pre-eminent manufac-turing sector and remains one of the world’s most impor-

tant suppliers of agricultural products especially wheatand sundry grains. Its agricultural products find their waymostly to the US, Europe and East Asia.

In Manufacturing, Canada’s automobile industry whichis generally regarded as a creation of the Autopact of the

60s remains one of the most important. TheOntario based automobile industry is re-puted to produce more vehicles per annumcompared to the US state of Michigan, theheart of the US automobile industry. Manu-facturers are drawn to Canada on accountof a few advantages and incentives whichinclude the highly educated and skilledworkforce, the low labour costs and gov-

ernment run healthcare which exempts companies fromhealth insurance costs unlike in the US.

The Canadian service sector is a vast and varied oneaccounting for 2/3 of GDP and employing about 75% of thepopulation with the retail industry taking up the largest

Canada’s relationship with Nigeria has blossomed bothon the political and economic fronts. The relationshipwas fractured in 1996 following the judicial murder ofwriter and environmental activist, Ken Saro-Wiwa inlate 1995.



chunk of about 12% of the labour force. Other key sectorsare the financial services, real estate and communica-tions industry

Even though Canada occupies a peculiar position asone of the few developed nations that is a net exporter ofEnergy, it is also one of the world’s highest consumer percapita of energy and because the Western provinces areshut off from the oil that is produced in the Eastern prov-inces, their reliance on imported oil means that Canadaexpends vast amounts of its resources on importation. In2004, Canada spent CDN$51.3m on importation of crudeand fuel oil from Nigeria accounting for 55.4% of total im-ports for the period. It is instructive tonote too that Canada exported CDN$13mworth of oil and gas equipment to Nige-ria.

Canada’s relationship with Nigeriahas blossomed both on the political andeconomic fronts. The relationship was,however, fractured in 1996 following thejudicial murder of writer and environ-mental activist, Ken Saro-Wiwa in late1995. The schism was healed in September 1998 as a newera of democratic governance began to dawn and the Ca-nadian-Nigerian Joint Economic Commission resumed sit-ting after a ten year hiatus, affording both countries anopportunity to resume discussions and collaborations inareas of mutually beneficial bilateral cooperation.

The resumption of both political and eco-nomic relations has been beneficial to bothcountries. The first major fallout was the re-opening of the Canadian embassy in Nigeriathus ensuring that Nigerians no longer had togo to Ghana to obtain or renew Canadian vi-sas.

By the end of 2001, there were already 156Canadian companies registered with the Ca-nadian mission to do business in Nigeria withspecial emphasis on 11 different sectors of theeconomy especially telecom, oil and gas andenergy. By the end of 2002, the number of reg-istered Canadian companies had risen to over200 with most of them concentrated in the en-ergy and telecommunications sectors of theeconomy.

Trade between the two countries was alsolooking up, with Canada paying CND$196m forNigerian crude oil and CND$7m for cocoa. Ni-geria on the other hand spent CND$80.5m onthe importation of various goods, mostly grains,

machinery, plastics and vehicles. Foreign Direct Invest-ment inflow from Canada to Nigeria totaled CND$375m in2002.

The positive balance of payment position is good newsfor Nigeria which is in a weaker economic position com-pared to Canada. With a population of 128 million people,Nigeria’s GDP per capita was US$1000 in 2004 as againstthe US$31,500 (11th in the world) recorded for Canada witha population of 33 million people in the same period.

On the political front, bilateral relations between thetwo countries continue to yield beneficial results for Nige-ria. Canada’s bilateral assistance to Nigeria focuses pri-

marily on health, environmental and agricultural issues.In the area of health, Canada, which has made a successof its health care system is offering assistance targeted athelping reform the public health care system in Nigeriawhile also focusing on polio eradication, provision of basiccare, reproductive medicine issues and the fight against

Source: www.cia.gov/cia/publications/factbook/geos/ca.html (2005 estimates)


By the end of 2001, there were already 156 Canadiancompanies registered with the Canadian mission to dobusiness in Nigeria with special emphasis on 11 differentsectors of the economy especially telecom, oil and gasand energy.

Production Consumption



HIV/AIDS. In financial terms, $6m was commit-ted to polio eradication in 2001, while another $10mwas committed to fighting HIV/AIDS.

There is also ongoing assistance in Nigeria’sland and water management which aims to con-trol the serious soil erosion and desertificationproblems plaguing parts of the country. Awarethat good governance is a sine qua non for a goodinvestment environment that will attract foreignbusinesses, Canada continues to, through the Ca-nadian International Development Agency (CIDA), pro-vide support in upholding principles of good governanceand electoral reform for Nigeria’s fledgling democracy.

Nigeria also reaped substantial gains from Canadawhen its debts were written off last year. Canada wasamong the G8 countries which pledged to write off debts

owed by some of the world’s poorest countries to the WorldBank, the International Monetary Fund and the AfricanDevelopment Fund. In 2005, Canada’s aid budgetamounted to 0.31 per cent of GDP, which puts it in thirdplace among G8 countries, behind only France (0.38 per

cent) and Britain (0.33 per cent)The importance of Canada-Nigeria trade is apparent

from the fact that Nigeria remains Canada’s second larg-est trading partner in Sub-Saharan Africa after South Af-rica. With over two hundred Canadian companies cur-rently doing business in Nigeria and with more expected

as Nigeria’s telecommunications and energy sectors ex-pand, Canadian Foreign Direct Investment in Nigeria isexpected to increase and so would its oil imports fromNigeria. Nigeria is also expected to reciprocate in like mea-sure in its import of grains, machinery, plastics, vehicles

and other essentials.The reform agenda which has seen consis-

tent and substantial improvements in the Nige-rian economy as well as the strengthening ofdemocratic structures is expected to engendermore confidence in the economy and thus at-tract more investments and bilateral aid fromCanada in the coming years.* Toni Kan Onwordi is an Assistant Editor, ZenithEconomic Quarterly.)

• Resort & spa, Canada • Yankari Spring, Nigeria



Comparative GDP Indices


F REIGN INSIGHTS (III)

A* By Álvaro Vargas

lthough the macroeconomic situation throughout LatinAmerica has been continuously improving, the citizensof many countries are turning toward radical leftist lead-ers. It is apparent that while statistics show growth andincreasing prosperity, the average citizen has not reapedany of the benefits. Voters are expressing their frustra-tion with their current socioeconomic status, their lackof options, and their exclusion from the economic sys-tem in various ways.

To address the problems Latin America faces, theinstitutional environment must be reformed. Withoutinstitutional reforms that facilitate wealth creation, en-trepreneurship, and enfranchisement, people will re-main angry, and their anger will be perfectly justified. If

Latin American leadershave the courage toaddress these issuesin a fundamental way,there will not be a fu-

ture for demagoguesand populists.Latin America has a lot

of hard work ahead of it, andits leaders must be realistic about

current trends and sentiments. Previous gov-ernments in the region made a lot of mistakes when theyhad the chance to engage in free-market reform, and nowthere is a natural backlash against that. However, that willrun its course, they will get another chance, and whenthey do, they need to get it right!

It is evident that, current policies are not working andthat fundamental institutional changes are necessary toensure that Latin America moves towards free-marketreform and democracy and away from populism. The cur-rent levels of centralization, bureaucracy, corruption, andpoverty have created a large population that does nottrust politicians or the government. It is only through en-franchisement, transparency, and increased economicopportunities for all citizens that Latin America will re-verse the current political trend.

Let’s start with the positive side of things. Latin America



today is doing very well by historical standards. Macro-economic statistics are very positive. For instance, GDPgrowth in Latin America was about 4.3 percent last year.Direct foreign investment has increased dramatically, toapproximately $50 billion in the last year. That is about fivebillion more than the previous year, which demonstratesa trend of positive growth.

A closer look at specific countries paints an evenbrighter picture. The economy of Venezuela grew by ninepercent and Argentina’s grew by eight percent. Peru, Chile,Panama, and Uruguay all experienced a six percent growthrate the last year. Although those rates may not be ashigh as China’s or India’s, they are still good.

In addition, inflation is very low, and fiscal deficits areboth low and manageable. Debt has decreased from about50 percent of GDP to about 30 percent of GDP – and a 30percent debt is quite manage-able. This is a significantly bet-ter situation than the one in Eu-rope, for example, which isburdened by a high debt toGDP ratio.

Adding to that, the positivetrends above are not new. Infact, in the last four years, LatinAmerica has experienced sub-stantial economic growth. Be-tween 2003 and 2006, the aver-age GDP growth rate was fourpercent across the region, andpoverty has decreased fromabout 45 percent to about 40percent. That type of growth isexactly what the region needs.

The estimates for this yearlook positive as well. GDPgrowth, on average, is goingto be about four percent. Although it will be slightly lowerthan last year in Argentina and Brazil, dropping from eightand nine percent respectively to six percent, six percent isstill a commendable figure. In Peru and Colombia, thegrowth rate is going to be approximately four or 4.5 per-cent, which is encouraging by the standards of the region’scomplicated past.

In other words, the macroeconomic situation in LatinAmerica is encouraging.

Why is there a huge backlash against sensible reform,good management, rational government, and good gov-ernance?

There is a huge disconnect between the macroeco-nomic statistics and what is happening at the grassrootslevel. The direction of grassroots movements and votingpatterns seems to be moving in the opposite direction ofeconomic trends. This is a development that will have amajor impact on the future of Latin America, and it hashappened many times before – in the 1950s, the 1970s, andparts of the 19th century. There is a tendency for the re-gion to experience periodic backlash against free-marketreform and good governance and support for populism.

‘Populism’ in Latin America has a completely differentmeaning than populism in the United States. The popu-lism in Latin America is not related to local governance; itis not Jeffersonian populism. It is a heavy left-wing formof populism native to Latin America and exemplified bythe regimes of Juan Perón in Argentina, Getúlio Vargas in

Brazil, and Alan García in Peru2

Although this situation has occurred many times be-fore, this iteration is particularly important, as it will havea large impact on the future of Latin America. If it is notaddressed, it is going to continue to reoccur.

The statistics provide some insight as to why this ishappening and what exactly is going wrong. Investmentlevels are very low – between 15 and 20 percent of GDP.Compared to East Asia, where investment rates are be-tween 25 and 30 percent, Latin America is lagging far be-hind.

The actual reason for the positive macroeconomic sta-

A fruit market in Peru



tistics presented above also helps to explain the problem.There is a heavy reliance on profits from natural resources,as there has been throughout history. Recently, demandhas risen by approximately 30 percent as a result of in-creased trade with China and India. However, the profitsfrom those commodities do not reach the people; there isno trickle-down effect. Only the elites benefit. Thus, themacroeconomic picture does not reflect the situation atthe local level.

In the 1990s, a number of free-market reforms wereimplemented across Latin America and a number of sig-nificant accomplishments were made. Inflation was con-trolled, which was a major feat. For example, in the 1980s,before the reforms, Peru experienced one million accu-mulated inflation over five years.

Hyperinflation devalued the currency to such a de-gree that 100 intis in 1985 were worth two intis in 19903.Inflation was controlled in the 1990s due to a series ofmonetary and fiscal reforms, and some of the fiscal defi-cits were reduced. In addition, investment increased in

some countries. However, although Latin America expe-rienced economic growth, some necessary reforms werenot implemented, and some were not true free-marketreforms.

Privatization caused a number of problems becausesome state-owned companies became monopolies, whichtranslated into high tariffs and high prices, especially forsocial services. In Argentina, most tariffs decreased dra-matically in the early 1990s, but because of regional trad-ing blocs like Mercosur, tariffs on 71 out of 97 goods in-creased. Of course, the fallout was a backlash againstprivatization.

These reforms created a lot of frustration. They cre-ated a lot of losers – disenfranchised citizens – who thenturned against free-market reform. Thus, the current situ-ation in Latin America, which is characterized by a vibrantanti-market movement, is not entirely surprising. How-ever, the situation is not entirely negative because there

are many different ‘anti-market’ constituencies and not allof them are really anti-market. At least half of the ‘anti-market’ constituencies can be addressed in an effectiveway from a free-market point of view.

There are many different types of anti-market move-ments. The first type is relatively anarchist, radical, left-wing, such as “Que se vayan todos” – “Get rid of all” – inArgentina. The next type is protectionist, comprising busi-ness leaders, labor leaders who lost ground in the 1990s,and politicians who fell from favor in the 1990s. The thirdgroup of anti-market proponents is composed of national-ists – people who resent partnerships with the UnitedStates, with the International Monetary Fund, and otherinternational organizations. Those three groups are themost hard core anti-market constituencies, and there isno effective way to accommodate them. No amount ofreason will convince them that free markets will ensure abetter future; they do not want progress for Latin America.

However, those groups do not constitute a majority.There are other groups that consider themselves anti-

market but may be amenable to marketreforms. For instance, there are manypeople who shun market reforms as a re-action against corruption. This group wantsmore transparency and more accountabil-ity, which was sorely lacking during thereforms undertaken during the 1990s. Yet,what occurred then simply was not full,free-market reform. Although it is a diffi-cult argument to make, the people oppos-ing market reforms as a result of the cor-

ruption in the 1990s are not truly anti-market – they areagainst the type of bureaucracy that makes corruption away of life.

Another group of people misguidedly reacting againstfree markets is composed of the disenfranchised.

Their reaction stems from their own socioeconomicsituation. They are excluded from the market and havenot benefited from it, although they have seen others pros-per. The feeling of exclusion fuels the anti-market senti-ment, but their true issue is not with the market itself.They simply would like the opportunity and know-how toplay a more integral role in society.

They would like the post-privatization prices of socialservices to decrease to levels indicative of a competitivemarket, not a monopoly. They would like lower interestrates. They would like the tax burden to be reduced. Mostimportantly, they want to participate.

Unfortunately, they currently see insurmountable ob-

In the 1990s, a number of free-market reforms wereimplemented across Latin America and a numberof significant accomplishments were made. Inflationwas controlled, which was a major feat.



stacles in the way of participa-tion. Yet, this is actually a goodsign. Although they are angryand resentful, they want tobecome contributing mem-bers of society and their com-munities.

There is a third group thatcan likely be convinced of themerits of a free-market sys-tem. This group is made up ofpeople who want to spend – onhealthcare, education, and in-frastructure. They are not ad-vocates of redistribution, theydo not want to expropriatecompanies, and they are notin favor of big government.

Instead, their priorities arefocused on providing for soci-ety as a whole; they want toimprove and expand the edu-cational systems, and they want to build infrastructure,which is direly needed in most countries in the region.

For instance, experts calculate that Peru needs a $20billion investment in infrastructure, and in January, themain highway from Maiquetia, Venezuela’s airport, toCaracas collapsed, which is likely the result of imprudenteconomic policies. There are real infrastructure problemssuch as this, and it is logical that people want more invest-ment in infrastructure, healthcare, and education. How-ever, by no means are they populist or vehemently op-posed to the concept of a market economy.

There is also an ethnic dimension to this problem thatcould easily be addressed. There is a large indigenousand mestizo population in Latin America, and politicianshave gained their support through anti-market rhetoric.The speeches of politicians like Humala, Morales, andChávez are resonating with people, who are beginning tobelieve that there is a policy of ethnic apartheid in LatinAmerica.

To some extent, there is. Many of the disenfranchised– those people who have been left out of the marketeconomy – are of a particular ethnic background and comefrom specific regions. These regions are often poor andthe inhabitants live far from the capital, where almost allof the opportunities for upward mobility lie. This problemis a factor of the high degree of centralization in manyLatin American countries. For instance, Lima, the capital

city of Peru, produces almost 60 percent of the wealth inthe country. The second largest city in Peru produces nomore than six percent. That demonstrates the huge dividebetween Lima and the provinces. If the second largestcity produces only six percent, other poorer regions pro-duce only nominal amounts of wealth. The centralizationpenalizes those who do not live in the capital city, who aredisproportionately indigenous persons. In the case of Peru,most of the Humala’s voters come from the Andean south,where there is a heavy concentration of indigenous per-sons. In Bolivia, indigenous people from La Paz and Orurocame out in support of Evo Morales.

However, those voters are not necessary anti-market.In fact, the indigenous population believes in the marketbecause it values production, trade, and creating value.Unfortunately, while the values of the indigenous commu-nity are not different from any other sector in society, ithas not been able to translate this politically into a pro-market movement. For this reason, indigenous peoplehave become dazzled by populist politicians.

Thus, within the group of anti-market proponents, thereis the potential for change, but currently there are manydifferent groups of people in Latin America reactingagainst the market and electing anti-market governments.However, because these groups are so different, with di-verse and contradictory priorities and values, the populistgovernments do not know to whom to cater.

Fishermen hunting Squids in Chile



Three excellent examples of this are Argentina, Brazil,and Uruguay. Argentinean President Nestor Kirschner willact like a left-wing populist one day and a responsible ad-vocate of free markets the next. In Brazil, President LuizInácio Lula da Silva has a very strong anti-market base ofsupport, but behaves in a very responsible way, at leastfrom a macroeconomic point of view. Even though he isnot engaging in radical free-market reform, he cam-paigned on a Marxist platform, he is doing exactly theopposite of what the people who voted for him were ex-pecting from him, and he still has enough support. Per-haps he will be reelected later this year in Brazil.

In the case of Uruguay, current President TabaréVásquez comes from an even more radical backgroundthan Lula. Most of the people supporting him had some

connection to the Tupamaros movement4. These wererevolutionaries, violent people who took up arms in the1960s, and yet Vásquez has turned out to be a very re-sponsible leader. He is currently advocating a free tradeagreement with the United States.

Therefore, there are not one, but many differentleftwing currents in Latin America. There is the Chávezline, the Lula line, and even the Chilean line. Under a so-cialist government, Chile was able to reduce poverty toabout 18 percent of the population. Chile is truly on theright path and is slowly becoming a developed nation. Ifthe trend continues, within approximately the next gen-eration, Chile will join the ranks of developed countries,which is a wonderful success story for Latin America. Theinteresting part of this situation is that Chile has had two

A Red Cross official teaching children first aid skills in Colombia



consecutive socialist governments – socialist governmentsthat have implemented reasonable policies promotingfree-market reform.

There is a battle going on in Latin America for the soulof the left, and the goals of the two opposing sides can besummarized as follows. One wants to turn Latin America’sleft into a European Social Democratic kind of left and theother simply wants to continue along the path of FidelCastro and Hugo Chávez.

It is heartening to note that Chávez, despite his petro-diplomacy and the approximately $25 billion he has spentover the past seven years in an attempt to woo the rest ofthe region, is not winning – at least not yet. He has an allyin Evo Morales, yet even Morales has not behaved quitelike Chávez would prefer. In general, most leftist leadersare a great deal more moderate than he is, which is apositive indicator.

From a long-term perspective, these issues will con-tinue to play an influential role in the development of LatinAmerica, and they are something that must be addressednow. The 1990s were full of light, but also full of shadows –and in order for the proponents of free markets to suc-ceed, those shadows must be addressed head on. Freemarketeers need to understand that unless they breakdown the barriers that separate a large part of the popula-tion from the realm of opportunity, people are going tooppose market reforms and continue to support the typesof reactionary leaders that have been voted into powerrecently. The solution is to generate and foster wider par-ticipation in the market.

The first step is that the moderate left needs to win thisbattle against the radical left. However, that is not enough.When the pendulum swings in the other direction, and itwill eventually, as it has always happened in Latin America,the center-right and the liberals (in the Latin Americansense of the word) need to come to power and support

free-market reform. Of course, it is not just a matter ofsupport – they need to learn from the mistakes of the1990s. They need to engage in much more meaningfulreform that will enfranchise the large segments of thepopulation that feel excluded, are naturally reacting totheir feelings of exclusion with passion, and are lendingears to the first demagogue that comes along, simply outof desperation.

The situation is not entirely negative, and LatinAmerica is not condemned to a future full of leaders likeChávez and Morales. Throughout the rest of the world,countries are winning their battles against poverty, and itis possible for Latin America to do the same. The regionhas natural resources and a very creative population. It isreadily apparent from the success of Latin American im-migrants to the United States that the potential for LatinAmerican prosperity is alive within the people. They open

businesses, they create wealth, andthey want bright futures for their chil-dren.

It is the institutional environmentthat has been holding Latin Americaback. Without institutional reformsthat facilitate wealth creation, entre-preneurship, and enfranchisement,people will remain angry, and theiranger will be perfectly justified. If LatinAmerican leaders have the courageto address these issues in a funda-mental way, there will not be a future

for demagogues and populists.This message is both optimistic and realistic. Latin

America has a lot of hard work ahead of it, and its leadersmust be realistic about current trends and sentiments.Previous governments in the region made a lot of mis-takes when they had the chance to engage in free-marketreform and now there is a natural backlash against that.However, that will run its course, they will get anotherchance, and when they do, they need to get it right!

(*Álvaro Vargas Llosa is a Senior Fellow and Director of TheCenter on Global Prosperity at the Independent Institute and anationally and internationally syndicated columnist for the Wash-ington Post Writers Group.

This article was adapted from a presentation given by Mr.Vargas Llosa at the Center for International Private Enterpriseon April 11, 2006. Permission to publish this article from Alvaro/centre for Private International Enterprise is generally acknowl-edged)

Without institutional reforms that facilitate wealthcreation, entrepreneurship, and enfranchisement, peoplewill remain angry, and their anger will be perfectlyjustified. If Latin American leaders have the courage toaddress these issues in a fundamental way, there will notbe a future for demagogues and populists.


S*By Eunice Sampson

GLOBAL WATCH

tatistics indicate that over 60% of theworld’s 6.4 billion population live in abjectpoverty. Poverty alleviation and wealth cre-ation have become primary issues for dis-cussion in any gathering of world leaders.Though much has not been achieved bysuch deliberations, it is pertinent that theworld now acknowledges poverty as a ma-

jor threat to global peace and security, andagrees that something must be done to ar-rest the dreadful trend.

While nations worry themselves aboutwealth creation for their citizenry, individu-als and corporate entities also struggle tomaintain the tempo. This is why the ‘invest-ment’ phenomenon is now a way of life – to


ensure sustainable cre-ation of wealth.

According to PhilBartle, an expert in commu-nity empowerment, “Youcan do three things withwealth: (1) consume it, (2)store it, and (3) invest it”. So,wealth in itself does notmean much; what mattersis what you do with it to en-sure its sustainability. Thecapital market has become the preferred investment op-tion for many because, more often than not, it is a reliablechannel of investment and a sustainable store of wealth.

So, what is the capital market? It is a market wheresecurities are traded, where companies, governments, etcraise long-term funds to achieve different developmentalpurposes.

The capital market includes the Stock Market and theBond Market. Another common distinction is the primarymarket (where new issues are offered to investors) andthe secondary market (where existing securities aretraded).

As part of the Capital Market, a Stock Market is a mar-ket where company stocks – the listed securities and theprivately placed – are bought and sold.

The size of the world stock market is estimated at about$41.66 trillion, while that of the worldwide ‘bond market’ isestimated at $87 trillion, with the United States and Europeaccounting for over 65% in both cases. Over the years, thecapital market has stored more and more ofthe global wealth, making it a funda-mental economic performance in-dicator.

EVOLUTION OF THECAPITAL MARKETThe origin of the Capital Mar-ket is traceable to the 12th

century when courratier dechange emerged. These enti-ties acted as representativesof banks in the managementand regulation of debts owed byagricultural communities. Theyare often referred to as the first‘brokers’ in global history. From themiddle of the 13th century Italian banks

in Venice, Verona, Flo-rence, etc began to tradein government securities.

Later, the Dutch was tostart a system which al-lowed shareholders to in-vest in business venturesand get a share of theprofit. In 1602, the DutchEast India Company issuedthe first shares on theAmsterdam Stock Ex-

change, thus becoming the first company to offer stocksand bonds to the public. In the early 17th century, theAmsterdam Stock Exchange also became the first Ex-change to engage in continuous stock trading, pioneeringsuch market features as short selling, option trading, debt-equity swaps, merchant banking, unit trusts and otherspeculative instruments.

Today, there are Stock Markets in virtually every de-veloped and developing economy, with the world’s big-gest markets being in the United States, UK, Germany,France, and Japan.

TRENDS IN MODERN CAPITALMARKETSSince the mid-1990s, drastic changes have occurred in theway capital markets are run worldwide. Modern stockmarkets have moved away from trading mostly on gov-ernment securities to offering highly diverse investmentopportunities with diverse risks portfolios. Many have been

liberalized from government control and owner-ship and now operate as private, profit-mak-

ing, business entities.Some of the diverse financial in-

struments today’s Markets offer in-clude:

• Stocks• Bonds• Commercial papers• Certificates of deposit• Pension policies• Insurance policies

• Mortgages• Mutual funds

• Savings account• Checking account

• DerivativesDue to globalization and advances in

G L O B A L W A T C H

The capital market hasbecome the preferred

investment option for manybecause, more often than

not, it is a reliable channel ofinvestment and a sustainable

store of wealth.

Source: The Netherlands Bank



Information and Communication Technology (ICT), com-petition has intensified as Capital Markets now operateon a global scale. This has brought about radical changesin the structure, operations and services of capital mar-kets. Pioneered by Exchanges in the major economies,consolidation and demutualization are taking root in the glo-bal Capital Market. It is pertinent to note that on March 8,2006, for example, the 213-year old New York Stock Ex-change (NYSE) became a listed company after a success-ful merger with its all-electronic rival, Archipelago Hold-ings Inc in April 2005. The merger is expected to move theNYSE operation towards complete electronic trading.

In 2005, merger talks between Euronext (which oper-ates exchanges in Paris, Amsterdam, Brussels, Lisbon, andLondon) and Deutsche Börse failed, as the two could notreach a compromise. In March 2006, NASDAQ’s acquisi-tion offer to the London Stock Exchange was rejected.Despite these initial hiccups, it is significant that the globalCapital Market has entered a new era that would shapethe future of Stock Exchanges especially since NYSE andEuroNext announced a merger of equals on June 01, 2006.The new group to be known as NYSEEuronext creates theworld’s largest and most liquid market place with com-bined market capitalisation of $20bn (15bn Euros) and to-tal market capitalisation of listed companies of $27 trillion

(or 21 trillion Euros).From the examples of the major Exchanges (NYSE,

LSE, TSE, Paris Bourse, etc) the value and volume of capi-tal market transactions have grown overwhelmingly inrecent times as more investors and fund-seekers resortto that market segment.

Investors are more prepared to take calculated riskson equities, attaching less importance to the traditionalgovernment-insured bank deposits as investment options.

Ideally, stock movements should be based on the realor perceived global or national economic situation, and ofcourse, the performance of the individual corporate enti-ties whose stocks are traded. While capital market theo-rists emphasize the fundamental considerations thatshould determine investment choices and price move-ments (corporate earnings, profits, dividend payout, etc),in reality, these principles do not always hold. Most often,speculations, perceptions, expectations and current stockprice value drive market directions.

A practical example of modern stock market behaviouris the sudden NASDAQ rally on June 29, 2006. NASDAQComposite Index had reacted sharply to news that the USFederal Reserve will soon stop the rate-hike regime. Sinceall things being equal, the stock market performs betterwhen rates are lower than when they’re higher, there was



a strong rally in the US market with the Dow Jones Indus-trial Average rising more than 217 points and the NasdaqComposite increasing by an incredible 62.54 points.

The Federal decision to halt rates hike is due to a weak-ening in the US economy in the second quarter, followinga drop in the housing market boom and the negative im-pact of rising interest rates and energy prices. It was there-fore shocking to many stock analysts that the marketshould rally so strongly in the wake of such economic de-velopments. Under normal circumstances, news of a weak-ening economy ought to dampen activities and prices inthe stock market.

The reaction is typical of trends in capital markets to-day, where more often than not, irrational assumption be-cloud market activities. It will not be surprising if few daysor weeks later; the markets come crashing as investorsbetter rationalize the reasons for the interest rate deci-sion.

Another trend that is changing is the class of capitalmarket investors. Years ago, buyers and sellers of marketsecurities were individual investors (mostly upper-classbusinessmen or royals). Today, individuals of all classesand financial status invest in securities. Also significant isthe fact that ‘institutional investors (e.g., banks, mutualfunds, pension funds, insurance companies, etc)are now dominant players in capital markets.

CAPITAL MARKETS AND WEALTHCREATION“With each passing year, the noise level in the stockmarket rises. Television commentators, financial writers,analysts, and market strategists are all overtaking eachother to get investors’ attention.... Sometimes there ap-pears to be no rhyme or reason to the market, only folly.”

The quote above is from Warren Buffet, a bigtime American stock market player. Warren Buffetbegan his career with only $100 and has over timebuilt himself a multibillion-dollar fortune throughcalculated investments in securities. In one of hisnumerous equity investments, Warren Buffet in1965 invested $10,000 into Berkshire HathawayCompany. By 2005, the investment had grown to$30million. Today, Buffet is worth over $43billion andis now commonly described as the greatest stockmarket investor of modern times.

At no better time has the capital market beenempowered to create and store wealth than in thisera of globalization, information technology, ex-panding global economy and enhanced profitabil-

ity of corporate institutions.Private companies and governments float stocks and

bonds to raise funds from the public for development andexpansion. In turn, they share accruing profits with theinvestors.

Investor’s perception of stock value is based primarilyon expectations in terms of dividend, bonuses and stockprice appreciation over time. ‘To assess return, you add anyincrease or decrease in price from the time of purchase and anydividends the stock has paid over that time. Then you divide bythe amount you invested to find percent return. As a final step,you can find the annualized return by dividing the return by thenumber of years you owned the stock’ (www.optionsxpress.com).Some investors adopt the strategy of purchasing equitieson margin when there are indications of double-digit re-turns in the immediate future.

For the companies whose stocks are offered or traded,value is measured by their ability to generate sufficientcapital flow for expansion and improved services, for bet-ter competitiveness and enhanced profitability which inturn translates to better returns for investors.

For the larger economy, capital market creates wealthwhen the sectors are well funded, gross domestic productis expanded, jobs are created and the economy flourishes.

Source: http://bigcharts.marketwatch.com

Source: http://www.nasdaq.com



The capital market has overtime met investors’ expec-tations for wealth creation. In the fourth quarter of 2004for example, the personal income of US investors wasboosted by $99.4 billion generated from dividend payouts.And by December that year, personal dividend incomestood at an estimated $298.2 billion on annual rate. As aresult, the standard of living was enhanced; consumerspending increased; national productivity and growth alsoexpanded.

The cyclical impact that capital market investmentcould have on any economy is best illustrated with theMicrosoft dividend payout illustration. On July 20, 2004,Microsoft Corporation announced that it would pay a spe-cial dividend of $3.00 per share to shareholders on itsrecord as at November 17, 2004. The dividend amountedto $32 billion out of which about three-fourths (or $24.9billion) was paid to individuals.

The dividend payment, which was effected on Decem-ber 2, 2004, affected the fourth-quarter 2004 estimate ofUS personal income that was released on January 28, 2005.The largesse also affected estimates of corporate profits,national income and government current receipts releasedat the end of the first quarter of 2005.

In 2005, the income tax of benefiting US workersalso rose as a result, impacting positively on gov-ernment current receipts. But the payout would havenegative impact on the foreign transactions accounts,as the current account balance will become morenegative by the amount of the dividend paymentsdistributed to foreign shareholders.

Some of the most profitable and stable stocks inthe global capital market today are Microsoft Inc.,General Electric, Dell Computers, CISCO, Exxon-Mobil, Pfizer, etc. Investments in these and manyother equities have made millionaires of individualand corporate investors.

STOCK MARKET BOOMStock Market boom is said to occur when there is asudden dramatic rise in the value of shares of listedcompanies. A good example is the June 29, 2006NASDAQ rally.

Factors that drive stock market boom include:• Sound economic Prosperity• Positive country rating• Low interest rates• Favorable investors’ perception• Good corporate governance and performance• Discovery of valuable natural resource

• Speculative future rise in stock pricesAs good as such booms might seem, the major set-

back is that companies’ shares become highly overval-ued, resulting very often in a ‘bubble burst’. When thebubble bursts, share prices fall dramatically, many com-panies could go out of business and the economy goesinto recession.

The dot-com bubble – One of the most historical stockmarket boom and the resultant bubble burst is the ‘dot-com bubble’. From 1997, many Internet based companiesemerged in the US stock markets with their stock pricesclimbing up dramatically in response to favorable marketspeculations and widespread availability of venture capi-tal. In what Alan Greenspan (Federal Reserve Board Chair-man during the boom period) described as “Irrational exu-berance”, the prices of these stocks were highly overval-ued.

But when the bubble burst in the late 2000 and through2001, most developed economies suffered a mild but pro-longed recession which impacted negatively on personaland corporate income, savings, spending and overall eco-nomic growth.

Source: OECD; *2006 figures are projections

Source: http://en.wikipedia.org



STOCK MARKET CRASHLike any other channel of investment,capital markets sometimes sufferdownturns in the form of stock pricecrash and panic selling.

‘A stock market crash is a sudden dra-matic decline of stock prices across a sig-nificant cross-section of a market. Crashesare driven by panic as much as by underly-ing economic factors. They often followspeculative stock market bubbles such asthe dot-com boom’ – http://en.wikipedia.org.

The two major reference pointsare the crash of 1929 (The Great De-pression) and the ‘Black Monday’Crash of 1987.

The First Crash (1929) – The GreatDepression was a worldwide economic downturn whichlasted from 1929 till the 1930s. The depression has beenblamed on the Stock Market Crash of 1929 which precededit, and which saw the Dow Jones Industrial Average drop-ping 50%.

Mostly affected were the highly industrialized nationsof Europe (Germany, United Kingdom, France, etc) andthe United States and Canada. Mining and constructionactivities were grounded; prices of agricultural productsfell by 40-60%; millions of jobs were cut; and the invest-ment spirit was killed.

The ‘Black Monday’ Crash – ‘Black Monday’ is the namegiven to Monday, October 19, 1987 when the Dow JonesIndustrial Average (DJIA) suddenly went down 22.6%. Aus-tralian stock market fell 41.8%; Canada, 22.5%; United King-dom, 26.4%; Hong Kong, 45.8%. It was the second largestone-day percentage decline in stock market history, thelargest being that of Saturday December 12, 1914 whenthe DJIA fell 24.39%. But the case of 1914 was due to theclosure of the New York market for over five months fol-

lowing the outbreak of World War I.Different explanations have been

given for the ‘Black Monday’ crash, in-cluding the panic selling in London andNew York, the biggest stock marketsin the world, which affected other mar-kets around the world, creating a glo-bal stock market crash.

Factors that could cause stockmarket crash include:

• Overvaluation (‘Irrational Exu-berance’)

• Illiquidity• Market pessimism and panic sell-

ing• Corporate scandals and poor fi-

nancial performance• Natural disasters

• Technology failure• Macroeconomic instability and economic downturn• Negative country rating• Bubble burstsA recent case is the Icelandic stock market crash of

February 22, 2006. Various asset classes and emergingmarket bonds were hit as investors reconsidered some oftheir emerging market exposures. An immediate reasonadduced for the crash is the downgrading of Iceland byFitch over fears about an unsustainable Icelandic currentaccount deficit similar to imbalances evident before the1997 Asian crisis. The temporary spillover effect on otherassets has been attributed to traders trying to close theirprofitable emerging market positions to compensate forIcelandic losses.

CAPITAL MARKETS IN DEVELOPINGECONOMIESThe developing economies have in recent years, sustainedstrong economic growth, far stronger than their devel-oped counterparts at an average of 5.5%. The capital mar-

ket is an evolving trend in most developing econo-mies but already contributes over 10% of GDP in someof them.

The International Finance Corporation, IFC (theprivate sector arm of the World Bank Group) recentlyestimated that by 2006, market capitalization ofemerging Stock Markets would exceed $5 trillion forthe first time, up from less than $2 trillion in 1995.Emerging markets now constitute more than 12% ofworld market capitalization.Source: http://www.pennystock.com

Source: http://en.wikipedia.org


Governments, multilateral organizations and in-ternational financial institutions are exploiting the pos-sibility of bringing about socio-economic change inthis region through the promotion of private capital,free enterprise, and social entrepreneurship, ratherthan the traditional over-reliance on foreign aids. Thecapital market has the potential to drive this vision.

It is noteworthy that the flow of private capital intothe developing countries is currently put at about $350billion, more than four times the amount of interna-tional aid flow to these economies. Net foreign assis-tance from official sources (aid, debt, and grants) isan estimated $70 billion, while private flows (debt and eq-uity) are roughly $300 billion.

The capital market remains the easiest channel throughwhich developing economies could tap into the global fi-nancial market and increase capital flow for sustainablegrowth and development.

‘From 1990 to 2002, the percentage of people in thedeveloping world living on less than $1 per day droppedfrom 27.9% to 21.1%; similarly, the percentage of popula-tion living on less than $2 per day dropped from 60.8% to49.9%’ – IFC.

The issuance of international securities by emergingmarket sovereigns and corporates has increased from alevel of $325 million in 1995 to about $1 billion. Meanwhile,the level of domestic bond issuance by emerging marketsissuers has also risen, from $1 trillion as at 1995 to about$2.8 trillion.

With higher oil prices, OPEC member countries (mostlydeveloping economies) invest some of their oil surplus inUS assets. In January 2006, OPEC countries’ holdings ofUS assets increased to $77.6 billion, up from $66.5 billion inDecember 2005 and the high of $67.6 billion in November2005.


FUTURE OF THE CAPITAL MARKET ASSTORE OF VALUEFor every investor, (individual, corporate, government,etc) the bottom-line is the return on investment. Invest-ment in stock and bonds is becoming increasingly popularworldwide because it offers good and sustainable returns.

The capital market phenomenon will therefore furtherexpand in future and offer more investment portfolios.Sophisticated technology would be deployed for enhancedoperational and transactional efficiency and data integ-rity.

Cross-border investments would grow; and investorswould demand for enhanced corporate performance tomaximize return on their investments. More synergiesand consolidation would take place in the capital markets,nationally, regionally and globally. Strategies that wouldimprove economies of scale would be pursued.

For developing economies, ongoing macroeconomicand social reforms in most countries would further vital-ize the capital markets. In Nigeria for example, the pen-sion reform programme, the recent introduction of a Mi-cro-finance policy, financial services sector consolidation

and privatization of government owned enterprises, aresome of the factors that would boost activities in thenation’s capital market and enhance economic growthprospects and the welfare of the common man.

For wealth creation and sustainable economic growth,the developing economies would do well to build up theircapital markets to meet global standards and enhancetheir interactions with the global financial system andcapital pool.(* Eunice Sampson is an Assistant Editor, Zenith Economic Quar-terly)

Source: IFC

• Bombay Stock Exchange • New York Stock Exchange


FACTS & FIGURES

ZEQ DATABANKMacroeconomic EnvironmentNigeria’s macroeconomic environment continues to improve on the heels of sustained high crude oil prices, improveddebt profile and strengthened national economic management. Commodity prices which have remained the focalpoint of current global economic expansion have complemented this improvement particularly as Nigeria’s non-oilsector growth (rose to about 8.5% in 2005) show signs of sustaining this growth. This trend is beginning to reflect in thereal sector.

Generally, macroeconomic fundamentals seem to be ‘looking up’ for Africa, including Nigeria. Africa has experiencedGDP growth rate of 4.5% consecutively in the last three years and Nigeria’s growth performance (6% + in the past twoyears) accounted for much of the good showing in West Africa.

This upward trend in macro fundamentals has been driven largely by three factors: expansion in global trade incommodities and the consequent significant improvements in terms of trade and export growth (improved exportperformance), debt relief measures which have contributed to a steady decline in debt service, and finally, improvedmacroeconomic policies and strengthened national economic management. These have begun to yield result, facilitat-ing the eventual introduction of further growth-enabling reforms, essentially in terms of ‘rightsizing the public sectors’business focus and orientation and therefore better resource allocation. Clearly, the same can be said of Nigeria, giventhe ongoing sector reforms and its effect on the real sector.

The only snag, and it is quite worrisome, given its impact on the revenue earnings of the Federation, is the seemingvolatile condition in the Niger Delta region and the perceptible inactivity on the political scene. Indeed the stakes arequite peculiar now in view of the fact that about 70% (including at least six governors of the Niger Delta region), of thestate governors are ineligible for elections in 2007, having served two terms.

GDP GrowthAlthough GDP growth rate for the year is projected at more than 7%, it is doubtful if the restiveness in the Niger Deltaregion would not hinder the attainment of this goal. YoY rate for first quarter 2006, was about 3% with non-oil sector asmain driver. (In 2005 it contributed YoY, 8% and thus far it has contributed 5%). From all indications GDP growth rate maybe sustained at about last year’s 6.5% since non-oil sectors especially Agriculture have responded positively to govern-ment policy initiatives so far. GDP at year end is expected to be more than $120bn.

Real GDP Growth (Percent) 2000 -2006 (June est.)

Source: FOS/CBN/R&EIG


FACTS & FIGURES

It is expected that the same significant contributors to growth in GDP would account for growth this year. However, thepower sector, currently about 3.5% in terms of size and contribution to GDP, has the potential of a leapfrogged contribu-tion in the immediate future when the various IPPs, national integrated power projects and the Niger Delta powerprojects become operational.

Size, Growth and Sector Contribution to GDP in 2005

Source: FOS/CBN/R&EIG

There is no question about the fact that Agriculture, especially crop production, would continue to be the most impor-tant contributor to GDP growth.

Manufacturing Capacity UtilizationThe prospect for improved capacity utilization is very high especially given the 2006 budgetary provision (subsidy)toavoid increases in the pump price for petroleum products. More importantly, the reforms in the foreign exchangemarket and the international price of crude oil continue to assure manufacturers sustainable access to foreign ex-change (at relatively stable rates). Although the energy crisis remain relatively the same, it is expected that third andfourth quarter capacity utilization would improve significantly to bring year end levels close to 50%.

Source: CBN/R&EIG

Manufacturing capacity utilization [yearly rates]

Interestingly, domestic credit to the private sector has sustained its gradual growth since 2004. It grew by about 37% in2005, and compared to same quarter last year, by about 17% this year.


FACTS & FIGURES

Inflation RateInflation rate which started on a low double digit in January, rose by March, only to decline to 10.5% in May (due largelyto early harvests in crop production with its moderating effect on food prices) and rising again in June, fueling specula-tions that systems liquidity was getting out of hand (especially after the MRR was reduced from 15% to 13%). It isimportant that the rate has remained significantly below the Policy Support Instrument (PSI) target range of 17-21% setby the IMF, and the peak rate of about 29% in August 2005.

There is a reoccurrence of declining short term interest rate and excess liquidity. The recent commencement ofrepayment of government outstanding domestic debts to local contractors and arrears to pensioners would certainlyadd another dimension. These would certainly affect prices and therefore the trend in inflation rate for the rest of theyear, especially when political activities begin to pick up.

CBN aims to keep inflation at single digit by year end and plans a formal implementation of an inflation targetingframework which clearly points to monetary policy as the main tool for containing inflation, especially as governmentspending is set to rise ahead of the 2007 elections and in the light of huge excess crude oil revenues.

Unless there is a deliberate attention by the regulatory authorities, the upward trend would be sustained, a far cry fromthe single digit target set for the year.

Inflation rates in Nigeria: Jan -June 2006

Sourc: MMAN / R&EIG

Interest RateInterest rates have generally been on the increase (except for savings which, on the average declined marginally) inspite of the noticeable excess liquidity. Indeed, rates on most deposit maturities rose by between 5% and 10%.

Sourc: MMAN / R&EIG

Nigerian inter-bank offered rates [Nibor]: January - June 2006.


FACTS & FIGURES

Banks average interest rates: January - June, 2006.

Source: MMAN / R&EIG

Except for sudden swings in rates occasioned by the now-typical pattern of federation account operation-FAC alloca-tions, there had been some stable, even if upward, trend in general interest rates for all tenors.

Government securities market remained active with higher values of Treasury Bills (TB) issues to accommodatematurities during the quarter. Although yields have been volatile, banks and discount houses have continued to holdmuch of the outstanding stock for obvious reasons. Bond market activity declined relatively but is expected to pick upgiven the timetable of new issues by the Debt Management Office, and the prospects of strong competition amongstthe primary dealers appointed recently. There are indications that primary dealers would be appointed before the endof the year for treasury bills market also.

Primary Market Auction

Source: MMAN / R&EIG

Banks Interest Selected (Monthly Average)


FACTS & FIGURES

Foreign Exchange MarketSignificant changes have been introduced into the foreign exchange market since the ongoing reforms in the bankingsector. The introduction of the Wholesale Dutch Auction had unified the official and interbank markets, thus enhancingthe effectiveness of CBN intervention in the foreign exchange markets. Similarly, the commencement of Bureau DeChange services by banks has further demystified foreign exchange transactions.

Foreign Exchange [official rates]: January - June, 2006.

Source: MMAN / R,EI &FEG

Foreign exchange rates [parallel market]: January - June, 2006.

In recent times, the market has become more de-segmented and the recent announcement by the CBN that rates in theparallel and official markets have merged for the first time in so many years, is indicative of the level of attention beinggiven to this market. Clearly, the massive intervention by the CBN in the retail market and the dismantling of the huge,sometimes worrisome level of documentation required to conduct even a simple transaction in this market has beenquite successful.

Source: MMAN / R,EI &FEG


FACTS & FIGURES

Exchange Rate

Source:Economicassociates/FDC/R,EI&FEG

Given the sustainable (short term at least) oil revenues inflow, a stable supply of forex and an appreciating naira can beexpected for the rest of the year. Certainly the complete unification of the two main foreign exchange markets can berealised and sustained. There has also been a growing acceptance of the market rules as non-official sources havecontinued to complement official inflows – especially foreign direct investment sources like the Vmobile transactionwhich resulted in an inflow of about $1.0bn into the market – which compares favourably with total official inflows todate.

Source: R,EI &FEG

Volume of Dutch Auction System [DAS and WDAS]: January - June, 2006.

Not all banks participated in the various WDAS sessions during the quarter. For the greater part of the quarter, demandfar outstripped supply. However CBN met the demand (largely due to the increased inflows from oil proceeds). Therewas an average increase of about 20% in the monthly sales to authorized dealers in the quarter with a marginalappreciation of the naira over the dollar.


FACTS & FIGURES

Clearly, the Naira has continued to achieve a stronger purchasing power parity level. This is not likely to cease in theshort term, as the CBN might focus on defending the Naira at about this level. With reduced debt service obligations,expected good harvests and sustained oil earnings (in spite of the reduction in production), this can be achieved.However, the nature of interest rate volatility might occasionally put pressure on the Naira.

Source: R,EI &FEG

Foreign Exchange market (WDAS/DAS) Jan - June 2006

Capital MarketThe capital market ended the quarter on a bullish note. The all-share index rose generally in the quarter. Marketcapitalization increased marginally due to significant price movement in some sectors. Although growth in earningsdoes not seem to justify price momentum, the banking sector recorded the highest growth in earnings in the quarter.The capital market has continued to be significantly sensitive to rumours and speculations, especially about dividend(rather than by earnings and other fundamentals.)

All-Share Index movement (July '05 - June '06)

A few developments in the market are pointers to increased activity in the coming quarters – Pension Fund Administra-tors have entered into the market albeit cautiously (by cherry picking stocks), Banks with unamortized goodwill are notallowed to pay dividends (and this has implications for stock prices) and some banks are considering the capital marketoption as they strive to recapitalize further to meet the global custodianship minimum criteria for managing part ofNigeria’s external reserves. This is aside from the appreciation of the naira, declining yield on Treasury Bills and otherfixed income securities and discernable liquidity due to payment of pension arrears and outstanding debts to localcontractors. Therefore, in the short run, claims to being the biggest bank would be rampant after each successfuloffering. Perhaps the time has come for a regulatory intervention to achieve a uniform financial year end for all banks.

Source: R& EIG


FACTS & FIGURES

Crude Oil MarketThe crude oil market has continued to impress generally. The average price of Bonny Light has remained significantlyabove the benchmark for 2006 federal budget. There are speculations that states would canvass strongly for distribu-tion of part of the excess crude proceeds to meet current development efforts. Nigeria’s Bonny light ended the quartervery close to $80pb. Given the declining US stock, prices are likely to exceed the $80pb mark by year end. Nigeria’sproduction levels have been significantly affected by the restiveness in the Niger Delta and clearly, this would affecttotal revenue projections for the year at the current prices. For example, Shell Petroleum Development Company,(SPDC) which recently reported an additional loss of 180,000bpd due to a leakage in the Nembe Creek truck line, alreadyhas a total production loss of over 650,000bpd and SPDC is Nigeria’s largest oil production company. Although this hasthe effect of pushing prices up, reduced production would certainly affect Nigeria’s Dollar cash flow negatively.

Crude Oil Index 2006

Source: R&EIG

Source: FDC/R&EIG


FACTS & FIGURES

External ReservesNigeria’s external reserves have continued to improve due largely to three factors. First the debt service obligationshave reduced since it exited the Paris Club Debt. Secondly, the high price of crude oil has meant that revenues haveexceeded projections (budgetary benchmark for 2006 is $35pb) and finally the Administration has continued to exerciseconsiderable fiscal restraint, preferring the option of prudent management of resources. Although demand for foreignexchange rose sharply during the quarter, inflows were good as external reserves grew in May alone by about 3.1% to$34.1bn, which is estimated to be at least a 22 months import cover. The estimate for June 2006 is $37bn.

Nigeria's External Reserves $bn) Jan-Jun(est.) 2006

Source: R& EIG

a publication of zenith bank plc iss v ol. 2 no. 3 july, 2006 2 no 3 july 2006.pdf · consistent...

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