Central
Bank of Nigeria Economic and Financial Review Volume 48/4 December 2010
31
Written by Cajetan
M. Anyanwu
I.
Introduction
An
economy is usually compartmentalized into four distinct but related sectors.
These are the real, external, fiscal or government and financial sectors. Real
sector activities include agriculture,
industry, building and construction, and services. The sector is strategic for
a variety of reasons. First, it produces and distributes tangible goods and
services required to satisfy aggregate
demand in the
economy. Its performance is, therefore, a gauge or an indirect
measure of the standard of living of the people. Second, the performance of the
sector can be used to measure the effectiveness of macroeconomic policies.
Government policies can only be adjudged successful if they impact positively
on the production and distribution of goods and services which
raise the welfare of the citizenry. Third, a vibrant real sector, particularly
the agricultural and manufacturing activities, create more linkages in the
economy than any other sector and, thus, reduces the pressures on the external
sector. Fourth, the relevance of the real sector is also manifested in its
capacity building role as well as in its high employment and income generating
potentials.
Economic
reforms generally refer to the process of getting policy incentives right and/or
restructuring key implementation institutions. As part of economic reforms, financial
sector reforms focus mainly on restructuring financial sector institutions and
markets through various policy measures. As a component of the financial sector,
the reforms in the banking sector seeks to get the incentives right for the sector
to take the lead role in enhancing the intermediation role of the banks and
enable them contribute to economic growth. As articulated by Omoruyi (1991),
CBN (2004) and Balogun (2007), banking sector reforms in Nigeria have been
embarked upon to achieve the following objectives, among others: market
liberalization in order to promote efficiency in resource allocation, expansion
of the savings mobilization base, promotion of
investment
and growth through market-based interest rates.
Other
objectives are:
improvement
of the regulatory and surveillance framework, fostering healthy competition in
the provision of services and laying the basis for inflation control and
economic growth.
Mr.
C. M. Anyanwu is Deputy Director and Head, Real Sector Division, Research
Department, Central Bank of Nigeria. The views expressed are those of the
author and do not necessarily represent the views of the CBN or its policies.
Five
distinct phases of banking sector reforms are easily discernible in Nigeria.
The first occurred during 1986 to 1993, when the banking industry was
deregulated in order to allow for substantial private sector participation.
Hitherto, the landscape was dominated by banks which emerged from the
indigenization programme of the 1970s, which left the Federal and state
governments with majority stakes. The second was the re-regulation era of
1993-1998, following the deep financial distress. The third phase was initiated
in 1999 with the return of liberalization and the adoption of the universal
banking model. The fourth phase commenced in 2004 with banking sector
consolidation as a major component and was meant to correct the structural and
operational weaknesses that constrained the banks from efficiently playing the
catalytic role of financial intermediation. Following from the exercise, the
aggregate capital of the consolidated banks rose by 439.4 per cent between
2003-2009, while deposit level rose by 241.8 per cent.
However, this was not reflected
in the flow of credit to the real economy, as the growth rate of
credit fell during this period, while actual credit did not reflect the proportionate
contribution of the sector to the GDP. The current and fifth phase, was
triggered by the need to address the combined effects of the global financial
and economic crises, as well banks‘ huge exposures to oil/gas and margin loans,
which were largely non-performing; corporate mis-governance and outright
corruption, among operators in the system. This round of reform, therefore,
seeks to substantially improve the banking infrastructure, strengthen the
regulatory and supervisory framework, and address the issue of impaired capital
and provision of structured finance through various initiatives, so as to provide
cheap credit to the real sector, and financial accommodation for small and
medium-scale enterprises (SMEs).
It
is against this background that this paper seeks to examine the developments in
the banking industry and the real sector of the Nigerian economy since the fourth
phase of the reforms which began in 2004. Specifically, the paper will review
the reform programs and how they have impacted on the flow of creditto the real
sector. With the realization that the sector is facing challenges well beyond
the realm of finance, other constraints would be identified and, thereafter,
policy interventions recommended with a view to making the banking sector
reforms more effective. The rest of the paper is organized as follows. Section
two provides the theoretical underpinning
in the relationship between the financial industry and the real sector
developments, while section three periscopes the banking sector reforms since
2004. Section four reviews developments in the real sector since 2005, and section
five identifies some of the binding constraints that would require policy intervention.
Section six concludes the paper.