Strengthening the Financial System Establishing an International Financial Centre

1. Strengthening the Financial System Establishing an International Financial Centre Anthony R P Williams, ACIB

2. Where are we now ? • The Banking Sector • Successful consolidation to produce 25 well capitalised banks. • BUT “post-consolidation risk” still a latent threat. • Greater competition, ”real” banking, • New products, term lending, retail banking • Too much capital ? ROE - “Goodwill” in the balance sheet • Ratings – international investors want to invest in Nigerian banks

3. Regulation • Risk Based supervision • Basel 2 adopted • FATF approved – (at last !) • Are managements/CBN/NDIC up to the challenge ? • Role of EFCC ? • Global standards on Anti-money laundering and Financial crime • 419s

4. Insurance/Pensions • Reform of Insurance industry not yet successfully concluded • Pensions reform looking good – • Pencom - PFCs and PFAs – outside investment not yet permitted

5. Stock Market • Well regulated – a guest of London Stock Exchange last week, showcasing Nigerian banks. • Custody Services – Nigerian banksnow offering custody services.

6. Foreign Exchange • Market maturing – • Oil and Gas exports dominate – CBN a prime mover. • Cash market – Bureaux de change, Travelex etc • Diaspora remittances – Western Union, Card offerings, • Cover for imports – Nigeria is world’s major user of LCs • – post shipment inspection – UCP 600.

7. Nigeria’s status • New Government – widely accepted worldwide in spite of poll irregularities. • Important role in regional peacekeeping – Liberia, Sudan etc • Country’s natural resources – particularly hydrocarbons - in demand (USA, China, India etc). • Huge market – 140m people • Unrest in Niger Delta area an ongoing concern

8. The Way Ahead • Reforms to continue • Consolidate reforms – GOVERNANCE – • Are Directors (Banks, Insurance companies, etc) up to the job ? • Staff integrity, training – professional workforce • Risks – operational, credit, reputationaletc • Financial Crime – AML – (EFCC) • Regulatory Compliance – KYC,KYB – the “African way” • CBN Supervision – quality of examiners, A level playing field, • Communicate the objectives – top down – include ALL Nigerians – • Co-ordinate actions – all elements marching on the same path. • Tell the good news – “perception” is more powerful than “actuality”

9. Control of the Economy • Allow the professionals to do their job • Inflation, money supply, exchange rate etc • Federal and State governments must know their place. Do not let them interfere in the private sector! • Punish Stealing of national wealth (Financial Responsibilities Act) • Accurate statistics needed to run a sound economy. • Allow the private sector to prosper – every Nigerian is a potential entrepreneur. • Give Business a chance – Corporates of all sizes must contribute. • They must also behave (File accounts on time, pay taxes etc) • Accountants – Audits – world standards ? • Legal framework - court process too long – corrupt judiciary ?

10. Financial Products • Financial institutions competing at last ! • Few foreign players (Indigenisation Decree) – Citibank, Stanbic • Nigeria catching up – ATMs, Credit/Debit cards, • Telephone/Internet banking, • Insurance products – Life • Islamic Banking • New systems – I/T, satellites etc, Security of staff and customers • Money market – CDs, Interbank, Corporate/Government debt • Forward FX. Hedging. Internationalise the naira.

11. Priorities • Financial Responsibility • State Governments • Annual Balance sheets and Budgets – • monthly P & L reports posted on the internet. These important entities can then begin to play their proper role in the financial life of the nation. Bond issues etc. No overseas borrowing without CBN approval ! • Fiscal responsibility • if public are to pay taxes they must see what they aregetting. • Hospitals, Roads, Schools • EDUCATION, EDUCATION, EDUCATION

12. Land Use Decree • This Decree - promulgated in 1978 - confers ownership of State land (in contrast to Federal or “parastatal” land) in the State Governor. • Not only has this Decree caused many social problems it continues to disrupt “normal” bank financings because the taking of land or property as security (a fundamental banking activity) is made more complex – if not impossible. • Early repeal is recommended so that “mortgage” lending can be developed and the rural community in particular can prosper. • The efficiency of Land registration services, surveys and valuations will also require improvement.

13. Infrastructure/Security • Financial markets rely on secure, reliable communications: • Telecommunications, roads, railways, air travel, sea transport. • Electricity supply. • Safe environment for the staff. • Reliable infrastructure – water, sewage

14. Establishing an International Financial Centre • Why Nigeria ? • What’s the attraction ? • Special incentives • Huge potential – resources, infrastructure projects

15. Which model ? • The idea is to entice the major global financial institutions to set up in Nigeria. • In 1975 BAHRAIN promulgated regulations for the creation of Offshore Banking Units (OBUS) modelled on those operating in Singapore. • OBUS are branches of international banks exempted from foreign-exchange controls, cash reserve requirements, no corporate or personal taxes etc • Minimum paid up capital of USD50m. • OBUs pay an annual licence fee (about USD26,000) • Prohibited from dealing with residents of Bahrain (except Government, its agencies or licenced commercial banks) • Cannot deal in Bahraini dinars – can provide services to non-residents.

16. Bahrain’s success • Since 1975 over 50 OBUs have been established – these are fully staffed operations – not “brass-plates”. • Initially the Lebanese civil war caused an exodus of international banks to Bahrain. OBU numbers rose to over 75 in the early 1980s but declining oil revenues and the first Gulf War caused a number of international banks to withdraw. • Burgeoning oil revenues of its neighbours, the causeway to Saudi Arabia, the return of Arab capital to the region after 9/11, as well as Bahrain’s emergence as the premier “Islamic banking” centre have re-energised the country’s success. • An ambitious “Financial Harbour” project is being built on (more) reclaimed land in Manama (as is the World Financial Centre “twin towers” project).

17. Regulation • Bahrain’s success has been based on strict attention to good governance from the very beginning. • The first Director of the Bahrain Monetary Agency – Alan Moore – (formerly with Williams and Glyns and later Treasurer of Lloyds Bank) worked closely with the Bank of England. That relationship continues with the FSA. • His successor, Abdalla Saif, is now the Financial Adviser to the PM. • Bahrain operates a “light-touch” control regime for OBUs (which are branches of foreign banks) – they are required to provide the Central Bank with monthly statistical information, quarterly prudential reports and annual audited financial statements. • Bahrain Law (decree of 2001) makes money laundering and assisting in money laundering an offence punishable with imprisonment.

18. Other Factors • Strategic location, midway between east and west time zones (permitting trading for a maximum number of hours – open Sundays) • Excellent internal infrastructure and international air transport links (road to Saudi Arabia and a causeway to Qatar planned) • No Taxes. Sustained low rate of inflation • 100% foreign ownership of most types of business – no restrictions on repatriation of capital, dividends or profits. • Sophisticated and reliable telecommunications network. • A well educated workforce – 27years of OBU banking experience. • World class legal and accountancy framework • Modern, high standard of living – cosmopolitan liberal family atmosphere. Good shopping. Entertainment • Low crime, secure environment. • Pleasant and healthy climate. Sports facilities – golf, marina, etc

19. The people • Bahrainis, like Nigerians are amongst the most polite and friendly people in the world.