EDITORIAL Reporting Standards routes to normalcy … 5 No 2 April 2009.pdfbehalf of Dr. Erastus B...

A Publication of Zenith Bank Plc ISSN: 0189-9732Vol. 5 No. 2 April, 2009

PERISCOPE

ISSUES

nigerian banks: the challenges of adopting

international financial reporting standards

EDITORIAL

POLICY

quality and internal control

challenges: bankers arise!

- Chuks Nwaze

guidelines for commercial agriculture

credit scheme (cacs)

FOREIGN INSIGHTS

building successful business associations:

why good association governance matters

- Aleksandr Shkolnikov

economy: searching

for new paradigms

GLOBAL WATCH

economic crises: weighing

the stimulus packages

economic meltdown: the

realities for the manufacturing sector

nigeria-japan relations: a yawning trade gap

FACTS & FIGURES

economic, financial and business indices

routes to normalcy

Nigerian Banks:Nigerian Banks:

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

Economic Crises:Weighing the Stimulus PackagesEconomic Crises:Weighing the Stimulus Packages

Economic Crises:Weighing the Stimulus Packages

International FinancialReporting Standards

The Challenges of Adopting

zenithbank.com | April 2009 | Zenith Economic Quarterly 1

C O N T E N T SE D I T O R I A L T E A M

MARCEL OKEKE

Editor

EUNICE SAMPSON

Deputy Editor

ELAINE DELANEY

Associate Editor

CHARLES UJOMU

IBRAHIM ABUBAKAR

SUNDAY ENEBELI-UZOR

Analysts

JOHN LUCKY ETOH

Production Supervisor

SYLVESTER UKUT

ROTIMI 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 R SUDOM EMMANUEL

GIDEON JARIKRE

PAT NWARACHE

OCHUKO OKITI

ZENITH ECONOMIC QUARTERLY

is published four times a year by Zenith Bank Plc.

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The views and opinions expressed in this journal

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All correspondence to:

The Editor,

Zenith Economic Quarterly,

Research & Economic Intelligence Group,

Zenith Bank Plc

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E-mail: [email protected],

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ISSN: 0189-9732

EDITORIAL

PERISCOPEAnalyses some major developments in key sectorsof the economy in the first quarter 2009; highlight-ing a number of concerns for the future. Pg. 5-10

POLICYDetails the conditions and requirements guiding thedisbursement of the recently introduced N200 bil-lion Federal Government Commercial AgricultureCredit Scheme. Pg. 12-15

ISSUES IReviews the importance and feasibility of Nigerianbanks’ adoption of the International Financial Re-porting Standards (IFRS) within the shortest pos-sible time frame. Pg.17-26

ISSUES IIExamines the need for banks and bankers to bemore proactive in the prevention and control of thegrowing menace of bank frauds. Pg. 28-36

ISSUES IIIAnalyses the current state of the Nigerian manufac-turing industry especially in relation to capacityutilisation and identifies key remedial actions beingtaken by government. Pg. 38-44

GLOBAL WATCHExamines the policy of stimulus packages at thistime of economic recession and analyses their effec-tiveness as economic recovery measures. Pg. 46-58

FOREIGN INSIGHT IReviews Nigeria-Japan relations, highlighting thestrengths and opportunities in both economies thatcould be leveraged for mutual gains. Pg. 60-65

FOREIGN INSIGHT IIHighlights the critical role of good governance inachieving sustainability and effectiveness of busi-ness associations especially in emerging economies.Pg. 67-74

FACTS & FIGURESExamines major economic indicators as a measureof the economic performance of the Nigerianeconomy in first quarter 2009. Pg. 76-80

2 Zenith Economic Quarterly | April 2009 | zenithbank.com

and restructuring to lessen the pangs or free themselvesfrom the clutches of the dreadful phenomenon. Heads ofGovernments of the Group of Twenty (G-20) industrial-ized countries have met in London, the European Union,African finance ministers and central bank governors haveheld confabs; various profes-sional, labour and civil societyorganizations across the globehave held symposia and other fo-rums—all focused on taming andstemming the ‘monster’ that loomslarge. But what has become criticalin all this is the role of national gov-ernments in ‘checking’ the imper-fections or ‘excesses’ of the freemarket.

In this regard, apart from the bi-/multilateral approach, a number ofcountries have put together what arenow popularly known as ‘stimuluspackages’ in tackling the recession(or even depression) that is the realcolour of the economic crises. Inthe U.S., where the financial melt-down began, banks and manu-facturing companies (especially automakers) are literallygoing cap in hand to get lifelines from the government,while in other climes all manner of creativity is being ap-plied in tinkering with fiscal regimes to stimulate economicgrowth. Whether in Japan, the U.K., Germany, France,China, South Africa or Nigeria, the buzzword is stimuluspackage. Even the Bretton Woods Institutions—the In-ternational Monetary Fund (IMF) and the World Bank—that seem to have been at their wits’ end are now alsogiving ‘doles’ to a few beleaguered countries to boost thestimulus initiatives. The United Nations has also put to-gether the ‘cognoscenti’, mainly economic gurus, to dealwith the global challenge and fashion out a ‘New WorldFinancial (system) Order’. And seven months into the cri-sis (taking September 2008 as onset), we looked at theseinitiatives and efforts under the title “Economic Crisis:Weighing the Stimulus Packages”. Here, we conclude that“if there is one lesson the world must go home with, from

the recent experiences, it is that government cannot com-pletely hands off the business of running the economy”.

One other thing the unfolding crisis has brought to thefore is the confusion about the true meaning of good cor-porate governance and the so-called global best practices—especially when some of the ‘best’ and ‘most successful’business entities worldwide are among those that went un-der with the meltdown. Yet, the tide of globalization isalready so pervasive that ‘global standards’ do not seem toaccommodate any other standard. Thus, even under the

excruciating pangs of the eco-nomic crises, surviving business

organizations seek ways andmeans of asserting their integrityand rectitude. This, perhaps, ex-plains the creeping in of the ‘In-ternational Financial ReportingStandards’ into the competitivetools’ kits of many a Nigerian bankin recent couple of months. So, aspart of heralding the entry of theglobal accounting format into the Ni-gerian business space, we crafted anarticle tagged “Nigerian Banks: TheChallenges of Adopting Interna-tional Financial Reporting Stan-dards”. In this piece, the meaning

and origins of the standards,methods and processes of in-troducing them into any and

every economic jurisdiction are explored and analyzed.We have also analyzed the state and fate of the manu-

facturing sector in the face of the persisting economic melt-down under the topic: “Economic Meltdown: The Reali-ties for the Manufacturing Sector”. Also analyzed in thispackage is the ‘Nigeria-Japan relations’, where we exposedthe yawning trade gap between the two nations. The im-peratives for good governance of business associations;role of bankers in quality and internal control matters inbanks as well as a treatise on the macroeconomic develop-ments in the Nigerian economy during first quarter 2009,all form parts of this masterpiece in your hands. Read,and as usual, be better enriched. Till the next edition…

t is already a self-evident truth that no nation isreally immune to the ravaging global economicand financial crises. In point of fact, virtually ev-ery country, business organization or economicagent is immersed in the adjustments, positioning

I

One other thing the unfolding

crisis has brought to the fore is

the confusion about the true

meaning of good corporate

governance and the so-called

global best practices—especially

when some of the ‘best’ and

‘most successful’ business

entities worldwide are among

those that went under with the

meltdown.


I am directed to acknowledge, with thanks,the receipt of your letter dated 9th Febru-ary, 2009 together with a copy of the Janu-ary 2009 edition of your Economic Quar-terly. Your quality magazine, which is usu-ally stuffed with articles of interest and en-during value, has continued to endear itselfto a considerable number of readership bothat home and abroad. In this wise, the Em-bassy wishes to commend the magazine’sEditorial Team and Board of Advisers re-spectively for their choice and publicationof articles that cut through tothe heart of issues under spot-light; and also to the manage-ment of Zenith Bank Plc for itswise decision of sending com-plimentary copies of the maga-zine to both private and publicinstitutions, including peopleoutside its long list of clientele.Please, keep it up!Best regards.G.O. ArokoyuFor: AmbassadorEmbassy of NigeriaRepublic of Congo

I write to inform you theHonourable Minister of ForeignAffairs, Chief Ojo Maduekwe,has received with thanks yourJanuary 2009 complimentarycopy of ZEQ.He has directed that his appre-ciation be conveyed to you andthe Management of Zenith Bank Plc. Kind-est regards from the Minister as he affirms asalways the assurances of his highest esteem.Iro, O.I. (Mrs.)For: Honourable MinisterMinistry of Foreign Affairs, Abuja

We acknowledge with thanks the receipt ofcomplimentary copies of Zenith Bank Plc’sjournal: Zenith Economic Quarterly includ-ing the January 2009 edition, “Nigeria: Op-tions & Strategies for Surviving EconomicStorm”. We would also like to acknowledgethat Zenith Economic Quarterly is informa-tive, educative and rich in financial and othersocial and economic matters. We strongly be-lieve that the journal will certainly impactpositively on the financial sector in particu-lar and the economy in general, especially, atthis critical period of the infamous globalmeltdown. The publication, in our view, is amust read by banking and financial industryoperators, economic analysts, investors andpotential investors, decision makers, re-searchers, students, educationists, etc. On

behalf of Dr. Erastus B.O. Akingbola, OON,FCIB, President/Chairman of Council, Man-agement and Staff of the Chartered Insti-tute of Bankers of Nigeria, I congratulateyou, the editorial team and the bank for thisconsistent effort while hoping that you willcontinue to improve on the standard whichyou have set.Ben IgbokwePersonal Assistant to the President/Chairman ofCouncil, The Chartered Institute of Bankers ofNigeria

We wish to acknowledge with deep grati-tude the receipt of a copy of your ZenithEconomic Quarterly Magazine (ZEQ) whichfocuses on surviving the global financial cri-sis. We also appreciate the in-dept analysison critical issues on Nigeria and other globaleconomy business policies.Thank you.Mal. Ibrahim Yusuf Moh’dSMTrg/Learning & DevelopmentFor: Executive Chairman,Federal Inland Revenue ServicesLearning & Development DepartmentCorporate Development Group

I am directed to acknowledge with thanks,the receipt of your letter dated February 9,2009 forwarding a copy of the January, 2009edition of the Zenith Economic Quarterly.Please, accept the assurances of our warmregards.I.O. ElegbedeFor: Principal Secretary to the Vice President,State House Abuja, Nigeria

We wish to acknowledge with thanks, re-ceipt of your letter dated 9th February, 2009together with two (2) copies of Zenith Eco-nomic Quarterly (ZEQ). The magazine hascontinued to serve as rich reference materialfor the Consulate General.S.O. OlaniyanFor: Consul GeneralConsulate General of NigeriaNew York

I write to acknowledge the receipt of theJanuary 2009 edition of ZenithEconomic Quarterly. The infor-mation contained therein are ofimmense benefits to the activi-ties of the commission, espe-cially in the compilation of ourcorporate annual report. Pleaseaccept the assurances of my bestregards.Thank you.Engr. Mustafa Bello, FNSEExecutive Secretary/CEONigerian Investment PromotionCommissionAbuja

We wish to acknowledge the re-ceipt of January 2009 editionof Zenith Economic Quarterly(ZEQ) publication and herebyexpress our gratitude to your in-stitute for sending this issue.

Thank you very much for your veryinteresting journal which allows us to have asynthetic objective overview on the Nige-rian economy. Please accept our kind regardsand best wishes.Marie-France DerbierDeputy Commercial CounsellorEmbassy of France in Nigeria, Economic De-partment

I am directed to acknowledge the receipt ofyour Zenith Economic Quarterly (ZEQ)January 2009 edition and letter dated Febru-ary 9, 2009. Also, I am to appreciate yourkind gesture towards a sustainable economicgrowth of our great country. Please, be as-sured that this publication would be put ingood use in our Library. Accept the highestesteem regards of my Director/CEO at alltimes.O.J. SangokunleFor: Director/CEONational Centre for Genetic Resources and Bio-technologyFederal Ministry of Science and Technology


he Nigerian economy, during the first quarter 2009, was hit withthe full import of the global financial meltdown that has since trans-formed into an economic crisis, widely described as the worst sincethe 1930s. Events during the quarter proved Nigeria to be an integralpart of the ‘global village’, vulnerable to the vagaries of issues andactivities even in far-flung climes of the globe. Thus, the quarter wasmarked by the continued sliding and unsteady prices of crude oil, themainstay of the Nigerian economy; declining external reserves; per-sisting bear run in the capital market; fast depreciating local currencyand persisting double digit inflation.

The 2009 budget was also passed by the National Assembly andsigned into law during the quarter, just as a bunch of policies werechurned out by the Federal Government and its agencies to cushionthe unfolding negative impacts of the lingering financial meltdown.For instance, the Federal Government set up a Financial ServicesRegulation Coordinating Committee to effectively monitor and re-view developments in the financial services industry. Withdrawal fromthe Excess Crude Account (ECA)—which was suspended in Decem-ber 2008 was resumed— with a disbursement of US$1.5 billion tothe three tiers of government; downward review of the remunerationof political, public and judicial office holders. The Central Bank of

* By Marcel Okeke

T

PERISCOPE PERISCOPE PERISCOPE PERISCOPE PERISCOPE | Economy: Searching for New Paradigms

Economy: Searching for New Paradigms | PERISCOPE


Nigeria on its part, adopted a broad spectrum of interven-tionist measures to conserve the nation’s external reservesas well as narrow the gap between the official and parallelexchange rates of the naira. It also adopted some newparadigms in its supervisory approach—including the ‘con-solidated supervision framework’.

Similarly, the Securities and Exchange Commission cameup with a new code of corporate governance—for quotedcompanies in Nigeria, and received the report of a com-mittee on capital market structure and processes it hadearlier set up. The National Insurance Commission(NAICOM) also unveiled a code of ethics for the insur-ance industry. There is also the establishment of the N200billion “commercial agricultural credit scheme” (CACS) bythe Federal Government through the CBN to stimulatecommercial agriculture; adoption of export support poli-cies such as the removal of excise duty on some classes ofitems; dropping of bank guarantee as a requirement forexporters to receive their Negotiable Duty Credit Certifi-cates (NDCCs), etc.

The perceived impact of the global economic melt-

down during the first quarter 2009 also robbed off onNigeria’s ‘outlook’ ratings by some international agencies.Specifically, Standard & Poor’s, a leading provider of inde-pendent credit ratings, while affirming Nigeria’s “BB-” for-eign currency and “BB” local currency long-term sover-eign credit ratings, lowered her ‘outlook’ from “stable” to“negative”. S & P hinged its position on the “considerableuncertainty” that surrounded the outlook for the country’sfinances because of the high government spending andOPEC quota limits to oil production. The agency said be-cause of the country’s “overwhelming reliance” on oil whichaccounts for about 80 per cent of government revenueand 95 per cent of foreign exchange earnings, its 2009budget projections may be difficult to attain.

It further observed that the foreign exchange controlsimposed by the CBN in February have caused the emer-gence of parallel foreign exchange market, multiple ratesand market segmentation—adding that these controls havesignificantly weakened portfolio investors’ confidence andcould encourage capital flight. Yet, the London-based Afri-can Rainbow Consulting in their report during the quartertagged ‘Star of Africa Index’, ranked Nigeria as the bestinvestment destination for potential investors in Africa. Thereport which ranks 53 African countries in terms of theirinvestment potential in various fields, also asserted thatpotential growth in energy, water and communications con-sumption could amply reward investors taking the risk.

The approval of the 2009 budget by the National As-sembly during the quarter under review raised some ‘con-cerns’, a development that made the President sign it intolaw with “reservations”. While the original proposal inDecember 2008 had an aggregate expenditure of N2.87

Trends in the Nigerian capital market during

the period were typical of the situations in

several jurisdictions: dominance of the bear

run. Specifically, the Nigerian Stock Ex-

change (NSE) All Share Index (ASI) lost

about 37 per cent of its value at end-De-

cember 2008 to close the first quarter 2009

at 19,852 while the market capitalization

shed 35.60 per cent to hit N4.48 trillion

during the period.



trillion (a deficit of N1.09 trillion or 3.95% of GDP), the2009 budget signed in March comprised N3.10 trillionaggregate expenditure and a deficit of N836.6 billion or3.02% of GDP. The higher approved budget figure, themajor source of the ‘concerns’, in the view of analysts, issusceptible to more funding challenges—especially in viewof evolving constraints arising from the lingering globalfinancial crisis. Already, owing to the subsisting inclementglobal financial environment, the Federal Government has‘suspended’ the issuance of a $500 million naira denomi-nated bond because of perceived “investor skepticism”.This was to be one of the key sources of funds to financethe 2009 budget deficit. Similarly, the monthly Federationaccount sums shared by the three tiers of Government inthe successive months during the first quarter were on thedecline. While N435.40 billion was shared in January, itdropped to N285.58 billion in February, and dropped fur-ther to N250.04 billion in March.

Owing to the persistently low prices of oil in the inter-national market (average price of $45.70 per barrel) dur-ing the quarter and its concomitant declining foreign ex-change earning and depleting exter-nal reserves for Nigeria, the CBNissued a barrage of policies to con-tend with foreign exchange manage-ment during the period. Specifically,the apex bank adopted a broad spec-trum of interventionist measures tonarrow the gap between the officialand parallel market exchange ratesof the Naira. The move is alsoaimed at curtailing the outflow offoreign exchange (both to specula-tors and the parallel market). How-ever, by end-March 2009, althoughthe apex bank achieved some mea-sure of stability in the forex mar-ket, the divergence of rates at theofficial and parallel markets still re-mained significant. Thus, the Nairaexchange rate (official) which closed2008 at N135/US$1, ended the firstquarter 2009 at N147/US$1; in the

parallel market, the rate rose to as high as N180/US$1before closing the quarter at about N170/US$1.

Inflation (year-on-year), against the projected levelof 8.20 per cent in the 2009 budget, stubbornly re-mained at double digit all through the first quarter thisyear. In fact, it was almost sticky at between 14-15 percent; dropping only marginally from end-December2008 level of 15.1 per cent to 14.0 per cent in January2009 despite the cut in the pump price of petrol fromN70 to N65 per litre. It inched up to 14.6 per cent inFebruary and closed the quarter at 14.4 per cent. Thisis unlike the price of oil in the international market

which kept moving in the opposite direction. Thus, theOPEC Reference Basket Price (ORB) closed the first quar-ter 2009 at US$46.65 per barrel as against US$98.63 perbarrel in the corresponding period in 2008. And, althoughthe price of oil occasionally hit US$50 per barrel duringthe quarter, the average price stood at about US$42.90per barrel as against US$92.50 per barrel in the corre-sponding period in the first quarter 2008.

The declining foreign exchange earnings arising fromthe persisting low oil price scenario translated into dwin-dling stock of external reserves. From end-December 2008level of US$52.9 billion, the reserves dropped to US$50.05billion in January, further down to US$49 billion in Febru-ary and closed the quarter at about US$47 billion.

THE CAPITAL MARKETThe ill wind of the global financial meltdown, as in the lastquarter 2008, continued its depressing effect on virtuallyall financial markets worldwide during the first quarter 2009.Thus, trends in the Nigerian capital market during the pe-riod were typical of the situations in several jurisdictions:

Source: CBN



dominance of the bear run. Specifically, the Nigerian StockExchange (NSE) All Share Index (ASI) lost about 37 percent of its value at end-December 2008 to close the firstquarter 2009 at 19,852 while the market capitalization shed35.60 per cent to hit N4.48 trillion during the period.

These outcomes are generally attributable to investors’apathy in the market; the relatively high interest rate in themoney market for the greater part of the period underreview was also a contributory factor. Activities in the sec-ondary segment of the market still showed the dominanceof the banking sector in volume and value terms of tradedshares. All together, a total of 19.16 billion shares worthN108.20 billion were traded in about 419,540 deals duringthe quarter. The average value of shares traded during thequarter was N1.75 billion, while average volume was309.06 million, in an average of 6,763 deals.

Although the market recorded some gains (interms of price appreciations) at a few points duringthe quarter, these were always quickly wiped awayby profit taking and the persisting ‘early exit’ salesby short-term investors and speculators. However,a number of companies came to the primary seg-ment of the market for fresh funds, including aSouth African firm (Pinnacle Point Group Plc).Others that got listed by introduction, rights issue,placement and supplementary issues include Port-land Cement and Product Nigeria Plc, e-TranzactInternational Plc, Mtech Communication, Capital OilPlc, Hallmark Paper Product Plc, Oando Plc StaffEquity Participation shares scheme, et cetera.

This, notwithstanding, concern on the way for-ward for the market both by the regulators and op-erators persisted during the quarter. Market-partici-pant groups, including issuing houses, stockbrokers,shareholders, among others, issued press statements;held conferences and issued communiqués on theway forward. Some of these groups even made rec-ommendations (in writing) on the way forward forthe market and presented/discussed same with topgovernment functionaries and relevant regulatory

agencies. On its part, the CBN had senta Bill to the National Assembly, for thesetting up an asset management companythat would ‘acquire’ all ‘toxic assets’ aris-ing from banks’ exposure to the stockmarket before the meltdown, amongother measures.

BANKING AND FINANCEAs in the previous quarters, competitionremained tough in the banking sectorduring the period under review, especiallyin the face of new policies being churnedout by the regulatory authorities to con-tain the ripple effects of the global fi-

nancial crises. Thus, the hitherto jettisoned common year-end for the banks was restored (effective December 2009);Savannah Bank Plc whose operating license was revokedabout seven years ago had the instrument restored; thestalled merger talks between Ecobank Transnational In-corporated (ETI) and First Bank of Nigeria Plc were re-sumed. Bank PHB acquired a majority stake in the OrientBank of Uganda; UBA took up 56.4 per cent shares pre-viously owned by the Government of Benin Republic inContinental Bank of Benin, while ETI commenced op-erations in Kampala, Uganda.

These developments and expansion also came withimproved services, reckoning and recognitions for the banks.Thus, in their Banking Industry Customer SatisfactionSurvey (BICSS) 2009, the global professional advisory, taxand audit consultants, KPMG, declared Zenith Bank Plc,

Source: CBN & NBS * Provisional



for the third consecutive time, the best among corporatecustomers. In the same vein, five Nigerian banks wereranked among the top 500 in the world by The Bankermagazine, published by the Financial Times of London.The Banker assessed the financial institutions using brandvalue, market capitalization and brand rating, among oth-ers, as parameters. ZenithBank, First Bank, Intercon-tinental Bank, Union Bankand United Bank for Africamade the list.

Apparently responding toshrinking income flow fromcrude oil exports, a numberof banks during the periodunder review, began to showinterest in agriculture andagro-allied activities. In col-laboration with the CBN andNigerian Agricultural Insur-ance Corporation (NAIC),about four banks had set upschemes in support of agri-cultural development in thecountry. Under theseschemes, soft loans (withsingle digit interest rate) andadvisory services will bemade available to operatorsin various agricultural activi-ties. Further to this new fo-cus on agriculture, the Fed-eral Government, throughthe Central Bank of Nige-ria, set up a N200 billionCommercial AgriculturalCredit Scheme (CACS) to “promote agricultural enterprisesin Nigeria”.

Under the guidelines for the scheme, the fund is beingadministered by two participating banks (UBA and FirstBank), with areas of coverage including cultivation ofcrops, livestock, fishery and processing, storage and mar-keting of target commodities. Credit from the participat-ing banks are in form of loans and overdrafts—with in-terest of nine per cent (inclusive of all charges) and loantenure of seven years or less. The CACS covers integratedlarge scale farms or agro-based enterprises and non-inte-grated commercial farms/agro enterprises, while all stategovernments can also access up to twenty per cent of theN200 billion through specialized agencies. Aside the CACS,the Federal Government has also approved the sum ofSix Billion Naira as a special intervention fund to boostresearch in agriculture. The special fund which is acces-sible to all agric researchers is being operated by the Agri-cultural Research Council of Nigeria.

In terms of regulatory initiatives, the CBN took a num-ber of measures not only to deal with the volatility of theforeign exchange market but also to mitigate other im-pacts of the global financial crisis on the economy. Thus,the Monetary Policy Committee (MPC) of the apex bankmet twice during the quarter under review: January 14 and

February 09. As an outcome ofthese, the CBN made its dailyStanding Lending Facility (SLF)accessible to all deposit moneybanks and discount houses atthe ruling Monetary Policy Rate(MPR), using Federal Govern-ment securities as eligible col-lateral. It also opened its Re-purchase (REPO) window at amaximum tenor of 90 days toall money market participants.CBN also introduced the Ex-panded Discount Window(EDW) which shall be for atenor not exceeding 360 daysand included Non-FGN secu-rities as collaterals for the fa-cility. These include State Gov-ernment Bonds, NDIC Ac-commodations Bills, BankersAcceptances, GuaranteedCommercial Papers and Prom-issory Notes.

In the area of interest rates(deposit and lending), the apexbank came up with non-mar-ket based initiatives, peggingthe deposit and lending rates ata maximum of 15 per cent and

22 per cent respectively—effective, April 1, 2009, and last-ing all through the year. And for lending rate, all chargesshall not exceed two per cent—making the effective maxi-mum rate of 24 per cent. The CBN had earlier replacedthe Wholesale Dutch Auction System (WDAS) in the for-eign exchange market with the Retail Dutch Auction Sys-tem (RDAS) in an effort to check the continuing massivedepreciation of the Naira. Further to this, the CBN alsointroduced stringent conditions for the operations of Bu-reaus de Change (BDCs), categorizing them into two groupsthat must meet specified conditions to continue to play inthe forex market.

OIL, GAS AND POWERPrices of crude oil in the international market during thefirst quarter 2009 hovered between US$35 per barrel andUS$50 per barrel, but stabilized at the higher end towardsthe close of the period. Mid-March, the Organization ofPetroleum Exporting Countries (OPEC) met, but shelved

NNPC List of Firms for the Gas Sector

Source: NNPC



the idea of another output cut in the effort to stem theworrisome fall in the prices of crude oil. The group hadeffected a production/supply reduction of 2.2 million bpd,a record amount, in January, following an earlier cut inOctober 2008. For Nigeria however, oil production dippedto 1.82 mbpd in February, from 1.88 mbpd in January;this is below the 2009 budget oil production benchmarkof 2.29 mbpd—but marginally above the country’s OPECquota of 1.67 mbpd.

OPEC Reference Basket Price (ORB) at the close ofthe first quarter 2009 stood at US$46.65 per barrel asagainst US$98.63 per barrel in the corresponding periodof last year. However, the global oil market showed signsof recovery by the close of the quarter, as the averageprice increased to US$46.17 per barrel from US$41.39

per barrel in February, and US$41.57 perbarrel in January while the maximum priceattained in March was US$50.77 per barrel.This sign of price recovery is attributable tothe perceived gradual improvement in theglobal economy, as various countries and in-stitutions around the world are implementingstimulus packages to encourage economicrecovery.

In furtherance of Nigeria’s gas develop-ment efforts, the Nigerian National Petro-leum Corporation (NNPC) during the periodunder review, short listed 15 firms to be con-sidered as core investors in exploration andproduction in the country’s natural gas sec-tor. The shortlisted firms would be involvedin the building of three major gas gatheringplants and pipelines that would provideenough supplies to the ailing power sector.Nigeria has an estimated natural gas reserveof 180 trillion cubic feet, but has been un-able to fully exploit this due lack funds, poormaintenance and mismanagement, amongother challenges. But the 15 shortlisted com-panies are already submitting proposals to theGovernment on how best to develop thedomestic gas sector, this time around.

In a similar vein, the Presidential SteeringCouncil on National Integrated PowerProjects (NIPP) has approved the sum ofN117.3 billion for the rehabilitation of thePower Holding Company of Nigeria (PHCN)facilities. This is in pursuit of the FederalGovernment’s commitment to boostingpower supply to 6,000 megawatts by Decem-ber 2009. Of the sum, N43.29 billion is tobe devoted to the rehabilitation of existingPHCN infrastructure in the areas of genera-tion, transmission and distribution of power.A separate N70.56 billion was also approved

for the expansion of Alaoji Power Plant, and N2.1 billionfor the construction of ramp jetty across the Imo Riverfor the transport of heavy equipment at Onne Port to theAlaoji power plant. These sums are part of the US$5.3billion counterpart funding for power provided by the threetiers of government towards the 6,000-megawatts targetfor 2009.(* Marcel Okeke is the Editor, Zenith EconomicQuarterly)

In furtherance of Nigeria’s gas develop-

ment efforts, the Nigerian National

Petroleum Corporation (NNPC) during

the period under review, short listed 15

firms to be considered as core inves-

tors in exploration and production in the

country’s natural gas sector.

Zenith Economic Quarterly | April 2009 | zenithbank.com12

Guidelines for Commercial Agriculture Credit Scheme (CACS) | POLICYPOLICYPOLICYPOLICYPOLICY

1.0 Establishment of schemeAs part of its developmental role, the Central Bank ofNigeria (CBN) in collaboration with the Federal Govern-ment of Nigeria represented by the Federal Ministry ofAgriculture and Water Resources has established the Com-mercial Agriculture Credit Scheme, hereinafter referred toas CACS, for promoting commercial agricultural enterprisesin Nigeria. This Fund will complement other special initia-tives of the Central Bank of Nigeria in providing conces-sionary funding for /agriculture such as the AgriculturalCredit Guarantee Scheme (ACGS) which is mostly for smallscale farmers, Interest Draw-back scheme, AgriculturalCredit Support Scheme, etc.

2.0 Funding:The scheme shall be financed from the proceeds of theN200billion bond to be raised by the Debt ManagementOffice (DMO). The fund shall be made available to theparticipating bank(s) to finance commercial agricultural en-terprises. In addition, State Governments and the FCTAcould also borrow up to 20% of the bond proceeds foron-lending to farmers. The ceiling to the States may bereviewed as the need arises by the Project ManagementCommittee (PMC).

3.0 Objectives of the schemeThe objectives of the scheme are;(i) To fast track development of the agricultural sector ofthe Nigerian economy by providing credit facilities to com-mercial agricultural enterprises at a single digit interest rate.(ii) To enhance national food security by increasing foodsupply and effecting lower agricultural produce and prod-

uct prices, thereby promoting low food inflation.(iii) To reduce the cost of credit in agricultural productionto enable farmers to exploit the potentials of the sector.

(iv) To increase output, generate employment, diversifythe revenue base, increase foreign exchange earnings andprovide input for the industrial sector on a sustainable ba-sis.

4.0 Governance of the SchemeThe Central Bank of Nigeria and the Federal Ministry ofAgriculture and Water Resources shall collaborate and co-ordinate effectively to ensure the success of the programme.The specific roles of the various stakeholders are spelt outin Section 17.0 of this document. However, for the day today implementation of the project, the Development Fi-nance Department of the Central Bank and the Commer-cial Agriculture Development Programme (CADP) Secre-tariat of the Federal Ministry of Agriculture shall coordi-nate actions, and report to the Project Management Com-mittee.

The PMC, which meets regularly to review progress andpropose changes if required in the running of theprogramme and advise the relevant stakeholders, shall becomposed as follows:-- Deputy Governor, CBN [Financial Sector Surveillance],Chairman- National Coordinator, Commercial Agriculture Devel-opment Programme, Secretary- Director, Development Finance, CBN, Member


POLICY POLICY POLICY POLICY POLICY | Guidelines for Commercial Agriculture Credit Scheme (CACS)

- One Representative each of the Participating Banks [PBs]- Executive Director, National Food Security AgencyMember- Representative of the Federal Ministry of Finance Mem-ber- Representative of the Large Scale farmers AssociationMember- Representative of the Debt Management Office Mem-ber

The periodic reports of the PMC shall be sent to the Min-ister of FMAWR and Governor, CBN – who should alsomeet from time to time to provide further guidance to thePMC as needs arise.

The Technical Committee of the PMC shall be composedof the Director, Development Finance of the CBN andConsultant CADP, FMWAWR. Both Directors shall liaiseon daily basis, and especially issue “no objection” notes tobanks upon receipt of loan applications, as well as orga-nize periodic monitoring of projects under the scheme andreport to the PMC.

5.0 Target Agricultural CommoditiesKey Agricultural commodities to be covered under thescheme are;(i) Cultivation of target crops (rice, cassava, cotton, oilpalm, wheat, rubber, sugar cane, Jatropha carcus, fruitsand vegetable);(ii) Livestock (dairy, poultry, piggery)(iii) Fisheries;

Credit support to the target commodities shall be adminis-tered along the entire value chain of; Production, Storage,Processing, Market and Enterprise development

6.0 Definition of Commercial Agricultural Enterprise;For the purpose of this scheme, a commercial enterpriseis any farm or agrobased enterprise with agricultural asset(excluding land) of not less than N350Million for an inte-grated farm with prospects of growing the assets toN500Million within the next three years and N200Millionfor non-integrated farms/agro-enterprise. This however,does not apply to loans obtained by state government foron-lending.

7.0 Eligibility for participation in the scheme(A) Participating Bank (PB)The Central Bank of Nigeria shall select, through a com-petitive process, the banks that will participate in the schemewith adequate considerations for the bank(s)’ capacity, as-sets, branch network, liquidity, experience in agriculturallending, credit risk exposures, etc.

The banks bear the credit risk of the loans. For this phaseof the Scheme, the CBN has approved two banks to ad-minister the Fund namely, United Bank for Africa, Plc

(UBA) and First Bank of Nigeria, Plc (FBN)

(B) Borrower(B1) Corporate and Large Scale Commercial Farms/Agro-EnterprisesTo participate in the scheme the borrower shall;i. Be a limited liability company with asset base of not lessthan N350M and having the prospect to grow the net as-set to N500Million in the next three years and complieswith the provision of the Company and Allied Matters act(1990).ii. Have a clear business planiii. Provide up-to-date record on the business operation ifany.iv. Have out growers programme, where appropriatev. Satisfy all the requirement specified by its lending Bank

(B2) Medium Scale Commercial Farms/Agro-Enter-prisesTo participate in the scheme the borrower shall;i. Be a limited liability company with asset base of not lessthan N200M and having the prospect to grow the net as-set to N350 Million in the next three years and complieswith the provision of the Company and Allied Matters act(1990).ii. Have a clear business plan its lending bankiii. Provide up-to-date record on the business operation ifany.

As part of its developmental role, the Cen-

tral Bank of Nigeria (CBN) in collabora-

tion with the Federal Government of Ni-

geria represented by the Federal Ministry

of Agriculture and Water Resources has

established the Commercial Agriculture

Credit Scheme, hereinafter referred to as

CACS, for promoting commercial agricul-

tural enterprises in Nigeria.

Zenith Economic Quarterly | April 2009 | zenithbank.com14

Guidelines for Commercial Agriculture Credit Scheme (CACS) | POLICYPOLICYPOLICYPOLICYPOLICY

iv. Have out growers programme, where appropriatev. Satisfy all the requirement specified by its lending Bank

(B3) State Government/FCTTo participate in the scheme a state Government/FCTshallI. Submit an expression of interest;ii. Put in place appropriate institutional arrangements bysetting up a Secretariat (Special Unit or Agency) staffedwith experienced agricultural experts and credit officersdedicated for the administration of the fund to be bor-rowed which shall be approved by the PMC; andiii. Sign an irrevocable standing payment order (ISPO) infavour of the CBN to deduct at source the total amountin default from the states(s) on monthly basis of Staterevenue allocation on behalf of the PB.

8.0 Modalities of the schemei. Agricultural credit from the participating Banks shall bein the form of loans.ii. Interest on loan shall not exceed 9 per cent, inclusive ofall charges.iii. Enhancement of credit facility, extension or reschedul-ing of payment shall be approved by the PMC

9.0 Acceptable CollateralThe security which may be offered to a participating bankfor the purpose of any loan under the scheme may be oneor more of the following:-• A charge on land in which the borrower holds a legalinterest or a right to farm, or a charge on the land includ-ing fixed assets, crops or livestock.• A charge on the movable property of the borrower.• A life insurance policy, a promissory note or other nego-tiable security• Stocks and shares• Any other collateral acceptable to the participating bank(s)

10.0 Loan Tenor(i) Loans shall have a maximum tenor of five years and/or working capital facility of one year with provision rollsover(ii) The scheme allows for the moratorium in the loan re-payment schedule.

11.0 Limit of liability under the scheme(i) The maximum interest rate to the borrower under thescheme shall not exceed 9 per cent, inclusive of all charges.(ii) The interest subsidy of the scheme shall be borne whollyby the Central Bank of Nigeria

12.0 Procedure for applying for the LoanAll applications for loans under the scheme shall be madeto the PBs in duplicates; one copy of which will be stampedby the PB concerned and forwarded to the DevelopmentFinance Department of CBN and CADP Secretariat ofthe FMAWR. Both Departments shall set up a joint task-

force that promptly (within 48 hours) issues a “no objec-tion” letter to the PB on the loan application, after con-firming that the products/purposes conform to the focusof the scheme. Thereafter, the PB can quickly process theloan and effect disbursement.

Applications received by the PB shall be processed promptlyand not exceeding thirty days. The banks are expected toset up Task-Forces and Fast-Track processes to ensureprompt service delivery. All applications under the schemeshall be treated by PB’s with the same degree of diligence,good faith and competence with which they would nor-mally be expected to treat all applications for loans re-ceived in the normal course of their banking business.

13.0 Verification and Monitoring on ProjectsBoth the Development Finance Department of the CBNand the CADP Secretariat of FMAWR shall ensure peri-odic monitoring of the projects funded under the Scheme,and report to the PMC

14.0 Verification in Other Terms and Condition ofLoanA participating bank shall require a prior approval of thePMC before it can alter any of the terms and conditionsgoverning a loan in respect of which CACS facility is on-going.

15.0 Infractions and SanctionsPB(s)(i) Diversion of funds by the PB(s) shall attract a penaltyat the bank’s average lending rate at the time of infraction.In addition, such PBs shall be barred from further partici-pation under the scheme.

(ii) Non rendition or false returns shall attract the penaltystipulated by BOIFA section 60.(iii) Charging interest rate higher than prescribed shall at-tract the penalty stipulated by BOIFA section 60.(iv) Any PB that fails to follow the agreed disbursementschedule with the borrower after the receipt of the fundwill be charged the prevailing interest rate for the periodthe fund was not disbursed.(v) Any other breach of the guide lines as may be specifiedform time to time.

State Governments/FCT(i) Diversion of funds by the State Government/FCT shallattract a penalty at the PB’s average lending rate at thetime of the infraction, forfeiture of the ISPO and barredfrom further participation in the Scheme.(ii) Any other breach of guidelines as many be specifiedfrom time to time.

16.0 The key stakeholders of the scheme are;• Federal Government of Nigeria (FGN)• Central Bank of Nigeria (CBN)


POLICY POLICY POLICY POLICY POLICY | Guidelines for Commercial Agriculture Credit Scheme (CACS)

• Federal Ministry of Agriculture and Water Resources(FMA&WR)• Debt management Office (DMO)• Participating Banks (PBs)• Borrowers (farmers, Agro-Processors, Marketers andState Governments and FCT.

17.0 Responsibilities of Stake HoldersFor effective implementation of the scheme and for it toachieve the desired objectives, the responsibilities of thestake holders shall include:

a) The FGNThe Federal Government of Nigeria shall be the issuer ofthe Bond

b) The CBNThe Central Bank of Nigeria shall:• Specify the rate at which PBs lend to borrowers underthe Scheme• Absorb the subsidy which may arise in the pricing of theloan to borrowers• Absorb all other incidental expenses• Select the participating banks under the scheme, withdue considerations of the general ability of the banks• Receive and process the periodic returns made by thePBs in relation to the loans under the Scheme• Conduct regular supervision of the PBs as well as moni-tor the borrowers’ enterprises in order to ascertain the per-formance of the Scheme• Prepare regular reports to the PMC

c) The Federal Ministry of Agriculture and WaterResources FMA&WR

The FMA&WR shall:- Conduct monitoring and evaluation of the Scheme- Undertake periodic review of the enterprises financedunder the Scheme

d) The Federal Ministry of Finance (FMF)/ DebtManagement Office (DMO)

The FMF/DMO shall:a. Issue the Bond on behalf of the FGNb. Raise money from the market

e) The Participating Banks (PBs)The PBs shall:a. Guarantee safety and purposeful application of fundsfor onlendingb. Lend funds under the Scheme at the specified ratec. Render periodic returns under the Scheme as may bespecified by the PMC and CBN from time to time.

f) BorrowerThe borrower shall:

a. Utilize the funds for the purpose for which it is granted.b. Insure the project being financed.c. Adhere strictly to the terms and conditions of the Scheme.d. Make the project and records available for inspectionand verification by the PMC.e. Render periodic returns to the PBs as may be required.f. State Governments/FCT shall agree to utilize the fundssolely for the on-lending to registered cooperative unions,cooperative societies, commodity associations and self-helpgroups (SHGs) and qualified individuals.

Returns by the banks should be made to the address be-low:Director,Development Finance Department,Central bank of Nigeria,Central Business districtAbujaFax no. 09-61638655

19.0 Repayment or Discontinuation of a credit facil-ityWhenever a credit facility is otherwise discontinued, thePB shall advise the PCM immediately, giving particularsof the credit facility.

20.0 Disbursement of FundPBs and borrowers should strictly adhere to agreed dis-bursement/repayment schedule. Any deviation from theschedule should be mutually agreed between the partiesand the PMC informed accordingly.

21.0 AmendmentsThese guidelines are subject to review from time to timeas may be deemed necessary by the Project ManagementCommittee

Project Management Committee,Federal Ministry of Agriculture and Water ResourcesKapital Street, Area 11, Garki,orDevelopment FinanceDepartment,Central Bank of Nigeria,Abuja.

All applications for loans under the scheme

shall be made to the PBs in duplicates; one

copy of which will be stamped by the PB

concerned and forwarded to the Development

Finance Department of CBN and CADP

Secretariat of the FMAWR.


ISSUES (I) ISSUES (I) ISSUES (I) ISSUES (I) ISSUES (I) | Nigerian Banks: The Challenges of Adopting International Financial Reporting Standards

here has not been any better time than now for us to contribute to the debate onthe need and feasibility of adopting the International Financial Reporting Stan-dards (IFRS) as a financial reporting framework in Nigeria. This is due to recentpronouncements by the bankers’ committee (a committee of Managing Direc-tors of banks in Nigeria chaired by the Governor of the Central Bank), someindividual banks and the Nigerian Stock Exchange (NSE) to the effect that banksor listed companies (as the case may be) would or should prepare financial state-ments in accordance with the IFRS.

Such pronouncements were made on the back drop that complying with IFRSwill facilitate transparency and lead to more disclosure in financial statementswhich will be very useful to stakeholders, especially foreign stakeholders. It is alsobelieved that Nigerian banks that prepare IFRS-based financial statements standto have added advantage in their business relationships with their correspondentbanks, multilateral institutions and international investors. Companies that pre-pare IFRS-based financial statements are also expected to get some boost in theirrating. For example, Standard & Poor’s (S & P), a renowned credit rating agencyhas indicated that IFRS-based financial statements enhance the consistency ofdata used in comparative analysis of companies being rated.

* By Mukhtar Adam


Nigerian Banks: The Challenges of Adopting International Financial Reporting Standards | ISSUES (I)ISSUES (I)ISSUES (I)ISSUES (I)ISSUES (I)

The question of whether complying with IFRS is neededor feasible at this time is crucial. To answer this question,we would provide an overview of IFRS and the globaltrend so far, in complying with IFRS. We would then moveon to identify the possible technical challenges that couldbe encountered in complying with IFRS, noting the levelof preparedness required to achieve this objective. Somesuggestions on how to make the IFRS transition seamlesswould be made.

OVERVIEWa. The need for a uniform global financial reportingframework:The continuous integration of the world economy and capi-tal markets have increased the interdependence of the in-

ternational financial marketsand also increased mobility ofcapital across boundaries. Lossof investor confidence in thecapital market due to somenegative incidences borderingon corporate reporting has in-creased the need for greatertransparency in financial re-porting. All these have under-lined the need for a harmo-nized reporting frameworkand standards that will increasetransparency in financial re-porting and also make finan-cial statements more compa-rable. The desperate need toimprove investor confidencehas also put pressure on cor-porate bodies to strengthencorporate governance, and im-

prove transparency and thequality of information provided

to stakeholders.

The move towards developing an ac-ceptable high-quality globally accept-

able financial reporting standardsstarted in 1973 when the International

Accounting Standards Committee (IASC)was formed by 16 professional accountancy

bodies from Australia, Canada, France, Ger-many, Japan, Mexico, the Netherlands, the

United Kingdom and the United States. TheIASC was in 2001 reorganized into the Interna-

tional Accounting Standards Boards (IASB). Todate, the IASB has developed accounting standards

and related interpretations that are collectivelyknown as the International Financial Reporting Stan-

dards (IFRS). The United Nations (UN) has also contrib-uted its quota in promoting a uniform accounting frame-work that will ensure comparability and reliability of cor-porate reports world-wide. For example, the Economic andSocial Council of the United Nations in 1982 establishedthe Intergovernmental Working Group of Experts on In-ternational Standards of Accounting and Reporting (ISAR),with the mandate to work towards an internationally com-parable system of standardized accounting and reporting.Through ISAR, the United Nations Conference on Tradeand Development (UNCTAD) has worked with and as-sisted countries (developing countries in particular), in adopt-ing and implementing international best practices in finan-cial reporting. Additionally, the UNCTAD has workedclosely with the IASB to increase awareness on the impor-tance of accountancy in economic development and to

1973 when the International Account-

ing Standards Committee (IASC) was

formed by 16 professional accoun-

tancy bodies from Australia, Canada,

France, Germany, Japan, Mexico, the

Netherlands, the United Kingdom

and the United States. The IASC was

in 2001 reorganized into the Interna-

tional Accounting Standards Boards

(IASB). To date, the IASB has devel-

oped accounting standards and re-

lated interpretations that are collec-

tively known as the International Fi-

nancial Reporting Standards (IFRS).

The United Nations (UN) has also

contributed its quota in promoting a

uniform accounting framework that

will ensure comparability and reliabil-

ity of corporate reports world-wide.

For example, the Economic and So-

cial Council of the United Nations in

1982 established the Intergovern-

mental Working Group of Experts on

International Standards of Accounting

and Reporting (ISAR), with the man-

date to work towards an internation-

ally comparable system of standard-

ized accounting and reporting.

Through ISAR, the United Nations

Conference on Trade and Develop-

ment (UNCTAD) has worked with and

assisted countries (developing coun-

tries in particular), in adopting and

implementing international best prac-

tices in financial reporting. Addi-

he move towards developing

an acceptable high-quality

globally acceptable financial

reporting standards started inT

tionally, the UNCTAD

has worked closely

with the IASB to in-

crease awareness

on the importance of

accountancy in eco-

nomic development

and to strengthen

the accountancy

profession in devel-

oping countries.



strengthen the accountancy profession in developing coun-tries.

b. How IFRS gained dominanceThe standards set by the IASB began to gain dominancewhen the International Organization of Securities Com-missions (IOSCO) in 2000, endorsed the then IASC stan-dards. This was further boosted when in 2002; the Euro-pean Commission approved a regulation requiring thatlisted companies in EU countries prepare consolidated fi-nancial statements in accordance with IFRS.

The dominance of IFRS further improved in September2002, when the United States’ Financial Accounting Stan-dards Board (FASB) and IASB signed the Norwalk Agree-ment. By this agreement, the bodies undertook to workclosely to develop high quality compatible accounting stan-dards that could be used for both domestic and cross-border financial reporting. These bodies have so far mettheir commitment and are far advanced in the IFRS-USGAAP convergence.

Taking a cue from the world’s major economies, morecountries (including Kenya, Zambia, Malawi, Ghana andSierra Leone) have embraced IFRS either by adoption,

adaptation or convergence. It is expected that more than150 countries will have adopted IFRS by 2011, includingthe U.S, which would converge with IFRS (either by changingUS GAAP or by outright adoptions of IFRS). Should thishappen, countries that have not yet adopted IFRS will beforced to do so or be left out in the global capital market.

It is therefore clear that, Nigeria has no option but to con-verge with, adopt or adapt the IFRS, or face isolation inthe global capital market and the financial world.

c. The technical foundation of IFRSFinancial statements are prepared based on a number ofaccounting principles and assumptions usually referred toas Generally Acceptable Accounting Principles (GAAP).In applying these GAAPs, accountants generally make somejudgments, which are expected to be logically deduciblefrom the relevant GAAPs. The purpose of preparing fi-nancial statements and the main target users of these fi-nancial statements provide guidance to standard setters andpreparers of financial statements.

Under the IFRS dispensation, the expected primary usersof financial statements are investors. IFRS financial state-ments are therefore considered to be ‘investor bias’ as

against other accounting frameworks that seekto balance the need of all stakeholders. IFRS-based financial statements therefore placemore emphasis on fair value than historicalcost. It is generally believed that (subject tosome exceptions) fair value based financialstatements provide more information to in-vestors about the financial position and fi-nancial performance about the reporting en-tity, than historical cost based financial state-ments.

IFRS-based financial statements are preparedbased on two main underlying assumptions;accrual basis and going concern. Under theaccrual basis, the effects of transactions andother events are recognized when they occur(and not as cash or its equivalent are receivedor paid) and they are recorded and reportedin the period to which they relate. The goingconcern basis assumes that a reporting entitywill continue operating in the foreseeable fu-ture and has neither the intention nor the needto liquidate or curtail materially, the scale ofits operations. IFRS-based financial statementsare expected to be understandable (to a knowl-edgeable user), relevant (in terms of natureand materiality of items presented and dis-closed), reliable (that is, free from materialerrors and bias and faithfully presented) and

Taking a cue from

the world’s major

economies, more

countries (includ-

ing Kenya, Zambia,

Malawi, Ghana and

Sierra Leone) have

embraced IFRS

either by adoption,

adaptation or

convergence. It is

expected that more

than 150 countries

will have adopted

IFRS by 2011, including the U.S, which

would converge with IFRS (either by chang-

ing US GAAP or by outright adoptions of

IFRS). Should this happen, countries that

have not yet adopted IFRS will be forced to

do so or be left out in the global capital

market.

It is therefore clear that, Nigeria has no

option but to converge with, adopt or adapt

the IFRS, or face isolation in the global

capital market and the financial world.

Under the IFRS

dispensation,

the expected

primary users

of financial

statements are

investors.



comparable (to previous periods and with different en-tities).

d. Number of IFRSs and IFRICs in forceTo date, up to 41 IASs have been issued with 29 cur-rently in force. A total of 8 IFRs have been issued andare all in force. The interpretation of IASs and IFRSs isthe preserve of the International Financial ReportingInterpretation Committee (IFRIC). To date 17 IFRICshave been issued with 16 currently in force. By theirnature, IFRICs are not accounting standards, rather theyare interpretations to the standards and guide to imple-menting those standards. Though the existing IASs con-tinue to bear their names, necessary amendments aremade to them without renaming them as IFRS. Stan-dards and interpretations issued are continuously re-viewed to ensure that they are relevant to and appli-cable in the current global accounting world. Certainstandards have been revised and others withdrawn basedon these reviews.

This therefore makes the IFRS a very flexible standardthat is capable of meeting the current industry needs.

THE TREND SO FARa. The extent of adoptionCountries use different approaches in adopting IFRSbased on their need and ability to adopt. For example,in the EU, listed companies are required to use IFRS inpreparing consolidated financial statements. This means,a listed company that has no subsidiary is not requiredto use IFRS. Non-listed companies in the EU are re-quired by law or allowed in some cases to file financialstatements prepared in accordance with the local stan-dard or Generally Accepted Accounting Principles(GAAP) applicable in their respective jurisdictions. EUmember states may however, permit non-listed companiesin their jurisdictions to use IFRS. Countries such as Aus-tralia, France, Ireland, Slovenia and the United Kingdomhave so far done that. In countries like Cyprus, Malta andSlovakia, which are EU member states, non-listed entitiesare required to prepare IFRS based financial statements.Other EU member states like Latvia, Lithuania and Po-land require non listed companies to use local GAAP andprohibit them from using IFRS. This gives a clear indica-tion of the extent to which countries are careful aboutadopting IFRS in its totality.

In countries like Canada, India, Japan and the United States,IFRS financial statements are not permitted for listing (with-out reconciliation to local GAAP). Significant gains have,however, been made in these countries to bring domesticstandards in line with IFRS.

Other countries that adopted IFRS in its totality have done

that in a gradual and coordinated manner, allowing forenough transition periods. In Brazil for example, finicalinstitutions have between 2007 to 2010 to comply withIFRS. The Indians commenced IFRS transition in early2007 when the Institute of Chartered Accountants of In-dia (ICAI) formed an IFRS convergence task force to lookinto various convergence issues and prepare a road mapfor full convergence by 2011. In the case of Korea, theFinancial Supervisory Commission and the AccountingStandards Board of the Republic of Korea, after years ofconsultations and ground work, announced in 2009 to per-mit all companies other than financial institutions to applyIFRS as adopted by Korea, but set 2011 for IFRS to be-come mandatory in the country. In neighboring Ghana,the Institute of Chartered Accountants of Ghana has com-menced the IFRS transition project in earnest; but it wasonly in January 2007, that the Minister of Finance andEconomic Planning of Ghana formally launched the adop-tion of IFRS in that country.

Under the IFRS dispensa-

tion, the expected primary

users of financial state-

ments are investors. IFRS

financial statements are

therefore considered to be

‘investor bias’ as against

other accounting frame-

works that seek to balance

the need of all stakehold-

ers. IFRS-based financial

statements therefore place

more emphasis on fair value

than historical cost. It is gen-

erally believed that (subject to

some exceptions) fair value

based financial statements

provide more information to

investors about the financial

position and financial perfor-

mance about the reporting en-

tity, than historical cost based

financial statements.



It is clear, from the few examples cited, that IFRS transi-tion by any country requires a gradual and careful execu-tion of series of planned activities coordinated at the na-tional level.

b. Efforts to converge IFRS and UK GAAPSince 2002, the United States’ Financial Accounting Stan-dards Board (FASB) and the IASB have been working toachieve a better compatibility between the US GAAP andthe IFRS in accordance with the Norwalk Agreement signedby the two entities in September 2002. In February 2006,the FASB and the IASB issued a Memorandum of Under-standing (MoU) setting forth the relative priorities, withinthe FASB-IASB joint work program, in the form of spe-cific milestones to be reached by 2008. This MoU wasbased on three principles;

• Convergence of accounting standards can best beachieved through the development of high quality, com-mon standards over time.• Trying to eliminate differences between the two stan-dards that are in need of significant improvements is notthe best use of FASB’s and IASB’s resources, instead, newcommon standards should be developed that improve thefinancial information reported to investors.• Serving the needs of investors mean that the boardshould seek convergence by replacing standards in need

of improvement with jointly developed new standards.

Both the FASB and IASB committed to the agreementand based on the progress achieved, the US SEC in 2007began to allow non-U.S. companies registered in the U.S touse IFRS compliance financial statements without recon-ciling them to the U.S GAAP.

This key milestone achieved by the FASB-IASB conver-gence team has put pressure on countries that are not yetIFRS compliant to work towards complying in order notto face isolation in the global capital market and the finan-cial world. Therefore, Nigeria may have to work hard toalign to the rest of the world in this direction.

MATTERS ARISINGShould Nigeria decide to converge with, adopt oradapt IFRS, the transition needs to be carefullyplanned and executed in a logical manner to ensuresmooth transition. This can be achieved if the tran-sition is based on a framework of targeted activitiesto be completed within specified periods of time.The transition process should involve key stakehold-ers such as educators, professional accountancy bod-ies, preparers, users, and regulators. Therefore thematters arising are; how informed these stakehold-ers are about IFRS and what needs to be done toensure that they contribute effectively to the transi-tion process.

a. EducatorsIn making transition to IFRS, it is important thatinstitutions that provide accountancy education inthe country review their curricula to include modelson IFRS. This obviously requires some time but itshould be one of the first steps towards achieving asmooth and sustainable transition to IFRS. The re-view of accountancy curricula in educational institu-tions must be taken further to ensure that facultiesin these institutions are well equipped to handle mod-els on IFRS given the complexity that comes with it.Other professional accountancy bodies that providetraining for various accountancy qualifications mustalso review their syllabi to ensure that professional

accountants have the requisite knowledge to practice ac-countancy under the IFRS dispensation. Existing profes-sional accountants in the country equally need training forthe IFRS transition to be successful and sustainable.

Currently, professional accountants in the country are ei-ther working in regulatory institutions such as the CBN,NDIC, NIACOM, SEC etc. or are working as auditors ofeither private accounting firms or public institutions. Manyothers are working in both private and public institutionsas accountants or playing other non-accounting roles. Clearly

The review of accountancy curricula in educa-

tional institutions must be taken further to ensure

that faculties in these institutions are well equipped

to handle models on IFRS given the complexity

that comes with it.



all these accountants will need to be up to date with thenew accounting world in order to discharge their dutieseffectively. Given the complex nature of IFRS and thefrequency and volume of changes made by the IASB toexisting IFRSs, it seems that bringing all accountants up todate with IFRS is an enormous challenge for our domesticaccountancy bodies. Painfully but truthfully, accountantsthat joined the domestic accountancy bodies through for-eign accounting qualifications such as Association of Cer-tified Chartered Accountants (ACCA) will have an advan-tage of relating better to IFRS than their counterparts thatqualified through domestic examinations. The reason is sim-ply because ACCA is based on the IAS which is the back-bone of IFRS.

Nevertheless, domestic accountancy bodies can aggressivelybuild in IFRS training into their Mandatory ContinuousProfessional Education (MCPE) in addition to organizingseminars and other fora. Institutions, both private and publicthat employ the services of accountants will have to investin training these accountants to learn or better understandIFRS. A study conducted by the United Nations Confer-ence on Trade and Development (UNTAD) indicates thatthere is serious shortage of accountants in developing coun-tries that have the requisite skill and experience to imple-ment IFRS. This therefore makes it imperative for theissue of skill gap to be tackled at the very outset in ourIFRS transition.

b. Professional accountancy bodiesAside their crucial role in providing the necessary trainingfor potential and existing accountants, professional accoun-tancy bodies also have the responsibility of ensuring thataccountancy in the country is being practiced at the high-est possible quality. Our domestic professional accountancybodies- The Institute of Chartered Accountant of Nigeria(ICAN) and the Association of National Accountants ofNigeria (ANAN) have the responsibility of giving clearguidance and directions to accountants in the country on

professional standards, code of conduct and general rulesof practicing accounting in the country. ICAN and ANANare also expected to represent professional accountants inmaking submissions on issues like difficulties in applyingaccounting standards, position on existing or proposed stan-dards and other important concerns that directly affectthe accountancy profession either nationally (through theappropriate quarters) or internationally (through Interna-tional Federation of Accountants – IFAC).

If IFRS is adopted as the country’s accounting standards,accountants in the country will have the opportunity ofcontributing to the IFRS setting process by making inputson upcoming standards, seeking clarification on existingIFRSs, or challenging their applicability. For example, As aresult of concerns raised by accountants in Pakistan onthe application of the International Financial ReportingInterpretation Committee 4 (IFRIC 4), the Institute ofChartered Accountants of Pakistan (ICAP) decided to deferthe application of IFRIC 4 to 2009 to allow for betterconsultation and clarifications. The decision of ICAP wasbased on the premise that, IFRIC 4 effectively converts allindependent power producers in Pakistan into leasing com-panies. Another example is where the South African Insti-tute of Chartered Accountants, after consulting IFRIC andobtaining the necessary clarification, issued a circular tobring the national practice of operating lease at par withIFRS. These and other occurrences (too lengthy to bementioned here) demonstrate the crucial role of our do-mestic professional accountancy bodies in the IFRS transi-tion process.

However, the current situation where more than one ac-countancy body function as the umbrella body of accoun-tants in the country may create a problem in the country’srepresentation to international accountancy bodies or stan-dards setters. At best, the necessary number of slots couldbe shared to enable them represent the country at the in-ternational level at the same time, or at worst the country’sslot will be taken on rotational basis by these bodies. Anyhow the country goes, its effective and consistent repre-sentation could be seriously hampered.

Defining the roles of other stakeholders in the country’saccounting regulation such as the Nigerian Accounting Stan-dards Board (NASB) and the proposed Financial Report-ing Council (FRC) requires some attention. The situationwhere accounting standards are set, interpreted and en-forced by the NASB cannot continue under IFRS dispen-sation, since the interpretation of IFRS is the preserve ofIFRIC. Determining compliance with IFRS, at the domes-tic level, which cannot be done without the required inter-pretation and clarification from IFRIC, will therefore posea challenge. A situation where the NASB or the FRC playan advisory and a coordination role is worth considering.

A study conducted by the United Nations Con-

ference on Trade and Development (UNTAD)

indicates that there is serious shortage of ac-

countants in developing countries that have the

requisite skill and experience to implement

IFRS. This therefore makes it imperative for the

issue of skill gap to be tackled at the very out-

set in our IFRS transition.



This however, requires some form of legislative amend-ments.Whichever body emerges as the country’s mouth piece onIFRS will have to identify and work with other profes-sional bodies (not accountants) to ensure that the neces-sary inputs required from those professionals are obtained.A typical area where such non accounting professional arerequired is in applying IAS 19 on employee benefits. Thisrequires actuarial valuation to measure the obligation of areporting entity as it relates to employee retirement ben-efits - in this case, working closely with the relevant profes-sional bodies of actuaries to ensure actuarial estimationfor financial reporting purposes are conducted as requiredand the nature of details provided in the actuarial reportsmeet the requirements of IAS 19.

c. PreparersPreparation of IFRS based financial statements in any or-ganization may be the responsibility of the accounts orfinancial control department, however, the nature of IFRS-based financial statements will necessitate the active in-volvement of certain departments in the financial state-ments preparation process. Besides, making decision onaccounting policies (which tend to be complex under IFRS)requires the active involvement of top management andthose charged with governance(board of directors and audit com-mittee).

Treasury department for example,has a crucial role to play in provid-ing information and documentationthat will form the basis of classify-ing financial instruments into the vari-ous classes. The treasury departmentmust also understand the implicationof such classification so as to guidethem in their treasury activities. Forexample, a treasurer must know thatselling any part of a portfolio classi-fied as Held-to-Maturity (HTM) be-fore their maturity (subject to someexceptions) ‘taints’ the whole port-folio. The implication is that thewhole portfolio will have to be re-classified as Available-for-sale (AFS)and the entity is prohibited from mak-ing HTM designation for two years.

Credit risk management andcredit administration also havecrucial roles to play in carrying outimpairment test on loans and ad-vances in line with IAS 36- Impair-ment of assets. To comply with IAS

36, an entity must have relevant data and documentationthat will form the basis of grouping loans and advancesand forecasting expected cash flows.

Information Technology, both software and hardwareneed to be readily available and have the capacity to pro-vide the required information that will guide managementin making certain decisions that relate to classification, rec-ognition and measurement of transactions and balances.Various financial models that will support the determina-tion of fair values of assets and liabilities must be de-ployed. In some cases, systems acquisition or upgrade willbe necessary to facilitate capturing and processing new datato meet various IFRS measurement and disclosure require-ments. Several provisions of IFRS1 – First-time Adoptionof International Financial Reporting Standards, require ret-rospective application of certain IFRSs (subject to someexemptions). To be successful in this regard, an entity’sinformation system must have the capacity to generate thenecessary information.

The legal department of a reporting entity must also becarried along in the IFRS transition and implementationprocess. This is due to the fact that designing legal docu-ments such as contracts with customers, lenders and in-

vestors must be properly in-terpreted (though substancetransactions should reignover their legal forms) so asto determine appropriatetreatment of certain assetsand liabilities. Lease transac-tions for instance, that havesome derivative elements,need proper interpretation todetermine whether the hostcontract need to be separatedfrom the derivative.

Financial control, aside co-ordinating the activities ofvarious departments thathave roles in the IFRS report-ing process, must contendwith taking inventory of allentities that should be consoli-dated (which is expected toincrease if the guidelines onconsolidation is properly fol-lowed); decide on how tohandle intercompany transac-tions and prepare or updatechart of accounts, consolida-tion packs, reporting timelinesand the actual consolidation.

Financial control, aside coordinating

the activities of various departments that

have roles in the IFRS reporting process,

must contend with taking inventory of all

entities that should be consolidated

(which is expected to increase if the

guidelines on consolidation is properly

followed); decide on how to handle inter-

company transactions and prepare or

update chart of accounts, consolidation

packs, reporting timelines and the ac-

tual consolidation.



Executive management and those charged with gov-ernance have significant roles to play in the IFRS transi-tion process. Selection of accounting polices under IFRSshould be carried out in a well coordinated manner suchthat, the impact of any accounting policy selected is care-fully assessed before being finalized. The restriction posedby IFRS on changes in accounting policies and the exten-sive disclosure required in the event that a reporting entitychanges any of its accounting policies, make it very neces-sary for the accounting policies selection process of a re-porting entity to be rigorous. Corporate executives and thosecharged with governance should also have a good idea ofthe impact of IFRS on financial statements of the organi-zation. Income statement volatility and possible accumula-tion of un-distributable gains and reserves (caused by thefair value approach) must be properly understood by topcorporate executives and board members as it affects divi-dend decisions. The audit committee also has to have agood understanding of IFRS to be able to communicateeffectively with the external auditors and discharge theirduties properly.

In all these, training is considered very critical for any or-ganization that aims at smooth transition to and imple-mentation of IFRS. Also, smooth transition to and imple-mentation of IFRS goes beyond just the finance functionand needs the involvement of the whole organization, fromthe board level to the operators level.

d. Regulators and auditorsThe extensive use of judgments and assumptions underthe IFRS need to be acknowledged by regulatory agencies.Similarly, the use of fair value would introduce some levelof volatility in reported capital of banks with its conse-quent impact on capital adequacy. Some Central Bankshave expressed concerns about the fair value basis becauseit could be used by banks with deteriorating credit condi-tions to write down their liabilities, so as to meet statutorycapital requirements. In this direction, the Central Bank ofNigeria (CBN), the Nigerian Insurance Commission(NICOM), the Nigerian Stock Exchange (NSE), the Secu-rities and Exchange Commission (SEC) and other regula-tors must be decisive on what to do with the impact ofIFRS on the various regulatory parameters they are inter-ested in. It will however, be very helpful if all these regula-tors work together (without forgetting to carry the relevantindustry players along) in tackling this issue, rather thanindividually. Regulators should not forget to carry the Smalland Medium Size Enterprises (SMEs) along in this en-deavor.

Issues relating to reported earnings and recognized incomeand expenses will surely be of interest to the tax authori-ties. Tax planning will equally be affected since basis of

reporting transactions is expected to change. Relevant taxauthorities in the country and the Chartered Institute ofTaxation of Nigeria (CITN) have to work with the rel-evant stakeholders to tackle these issues.

External auditors have major roles to play in the IFRStransition and implementation process. Their roles cut acrossall the areas mentioned as they are expected to bring theirwealth of experience to bear in this process. Before ex-pressing opinions and making categorical statements that aset of financial statements comply with IFRS or other-wise, the external auditors must understand, not just thevarious IFRSs but also how they are expected to be ap-plied or how those standards have been interpreted byIFRIC. This sets the basis for the auditor to guide andsupport the reporting entities to properly implement theIFRS. The challenge to audit firms in the country in thisregard is enormous, ranging from attracting and retainingthe required expertise, training them, getting their clientsto be up and going with IFRS, and acquiring and deployingthe necessary tools (IT software and hardware). Nigerianaudit firms with international affiliations such as AkintolaWilliams Delloite, KPMG and PricewaterhouseCoopersamong others will leverage on the experience, expertiseand resources of their international affiliates to surviveand shine in the IFRS transition and implementation pro-cess. Audit firms without such affiliation would however,find it difficult to cope. This is another issue that needsserious attention by all concerned.

e. UsersUsers of financial statements such as investors, financialanalysts, lenders, and other business partners of any IFRSreporting entity must have a good understanding of theIFRS in order to appreciate the financial statements pre-sented to them. Interestingly, the IASB has identified ‘un-derstandability’ as one of the qualities of IFRS-based fi-nancial statement. The complex nature of IFRS-based fi-nancial statements and the comprehensive disclosure re-quirements, however, make the financial statements verytechnical and bulky for non-accountant users to read andunderstand. A reader must therefore engage the servicesof professionals to interpret the contents of IFRS-basedfinancial statements.

Nevertheless, other users of financial statements are en-couraged to at least have a good idea of the foundationand nature of IFRS-based financial statements in ordernot to be totally lost in the financial world. An averageinvestor, for example, should understand the differencebetween distributable and un-distributable earning in otherto better appreciate basis of declaring dividends.(* Mr. Adam is a staff of Zenith Bank Plc)

Quality And Internal Control Challenges: Bankers Arise! | ISSUES (II)ISSUES (II)ISSUES (II)ISSUES (II)ISSUES (II)


Iahead.

It can never be over emphasized that these are unusualtimes for the banking industry and that unusual times re-quire unusual attitude or approach, especially in the areaof fraud and fraud prevention which is our focus in thisserial. Please note that the principles that will be discussedalso apply to all employees, not only bankers.

As the aftermath of the regulatory-induced consolida-tion, many bankers were thrown into the already saturatedemployment market. For the unscrupulous elements amongthem, if they cannot stay inside the banking halls they arewilling to stay outside, from where they will launch fero-cious attacks at those inside and make life uncomfortablefor them.

Hence, the time has come for the lucky ones who arestill retaining their jobs to develop practical strategies toprotect depositors fund and by so doing continue with theircareer. I am glad, therefore, to recommend the result ofmy own research and experience to the effect that bankers

n the last part of this serial; we commence thediscussion on fraud prevention through internalsurveillance mechanisms. In this edition, we shalldwell on the imperatives for individual bankersif they wish to survive the onslaught and forge

As far as the risk of being caught is con-

cerned, fraud is essentially a gamble. It can

be compared to a military coup where fail-

ure automatically results in dire conse-

quences not only for the coup plotter but also

for his immediate and extended family.

By Chuks Nwaze

should know God, know themselves, know their staff, knowtheir customers and also know their environment. We shalldiscuss these in their individual details.

BANKER, KNOW YOUR GODAt the risk of undue sermonization and intemperate religi-osity, the following aspects of the God-fearing phenom-enon are highlighted as a useful guide for bankers.

• Thank God for your life and position. It is tempting

ISSUES (II)ISSUES (II)ISSUES (II)ISSUES (II)ISSUES (II) | Quality And Internal Control Challenges: Bankers Arise!


to assume that we have a right to be where we are today,forgetting that many are not alive and that even among theliving, there is so much suffering, desperation and injusticein the land. That you are working in the artificial and con-ducive atmosphere within the banking hall should not betaken for granted or as a sign of personal achievementonly. After all, you are probably not the most educated orthe most intelligent among your age mates or classmates.We should simply thank God for the privilege and magna-nimity, even as we are to a large extent undeserving of it.It must be for a purpose that God has done that for usand it behoves us to make the best use of it.

• Believe that God is able to take care of you and yourneeds at all times, and submit to Him. There is a generalmisconception that bankers are doing well financially be-cause they are well paid. Nothing can be farther from thetruth. In fact most bankers are not doing well in relation totheir salaries. Some lack the financialdiscipline required to ensure adequatesavings and sustainable investment andat the end of the day, the salary is notenough. On the other hand, there areseveral non-bankers who are less paidbut doing much better financially becausethey have submitted themselves to thediscipline and scrutinizing influence ofthe Almighty.

• Submit yourself to regular prayer,devotion and meditation. It is also anerror to think that you can survive alone,solely on your own efforts and ability. Itis well known that the banking job is verystressful, and that there is little or notime left for any other preoccupation orindulgence. But you must find time forregular prayer, for family devotion (ifmarried) and for quiet meditation evenin the comfort of your office. Youshould always ask God to take controlof your activities at all times and repelfraudulent or other forces that are aboutto attack you, in your office or at home.Worship regularly in whatever church ormosque that you choose, whether you are a Christian or aMoslem; this is good for your soul, spirit and body.

• Commit some amount of money out of your salaryfor God’s work whether in the name of offering, tithe,sowing of seed or showing appreciation; the name you callit does not really matter. You are also encouraged to helpthe less privileged financially, whenever and wherever youfind them. It is tempting to say that your salary will not beenough, but it will still not be enough even if you do notdo any of these things.

• Have a settled home front. To enable you focus prop-erly and avoid distractions with the attendant frivolities, it

is very essential that you have a settled home where youwill return to after the day’s work. If you have a spouse,be devoted to him or her. Seek appropriate guidance oradvice on some critical aspects of the day’s work whichmight defy your own wisdom or comprehension as an in-dividual. Feel free to share ideas in this manner as this isthe only way to ensure that your perception and under-standing of unusual or uncommon circumstances is opti-mal. And in the process, even if you run into stormy wa-ters and lose your job, it is easy for you to carry along yourhome front and confront whatever obstacles that may arisefrom the sudden loss of income.

• Listen to the inner voice, otherwise called conscience.Few people will doubt the fact that there is always an innervoice at whatever point in time, especially just before somevital decisions are taken in our daily lives. You are enjoinedto always listen to that inner voice as that is the voice of

God. Whether you are about tosign-off a credit, authorize acheque for payment, approve apolicy, employ a new staff, sackan existing employee etc., there isalways a voice that tends to urgeyou to go ahead or discontinue;obey that voice in whatever direc-tion it moves you. However, youmust recognize that voice, hencethe need for concentration.

• Be patient. This principle en-courages us to avoid excessive ma-terialism, ostentation or in-ordinateambition, for these things lead tonowhere. In the fullness of time,and with hard work, perseveranceand transparency, whatever be-longs to you will not pass you by.If this mindset is internalized, thebanking system will be a betterplace and there will be minimalfraudulent tendencies by staff. Itwould also not be easy for exter-nal fraudsters to get the much-needed cooperation from inside,

without which no fraud can succeed. It might also help ifpeople bear in mind the fact that although God has plansfor everybody, He does not have the same plan for every-body at the same time. In other words, your own time willsurely come if you persevere.

BANKER, KNOW THYSELF• To thyself be true. This is a favourite saying which trans-lates to the fact that you can deceive others but you can-not deceive yourself. This particular segment is speciallydevoted to prospective or potential fraudsters as well asthose who are either waiting for the opportunity or sitting

In the fullness of time, and

with hard work, persever-

ance and transparency, what-

ever belongs to you will not

pass you by.



on the fence. I have no doubt, whatsoever, that the rulebook or guidelines suggested in the following paragraphswill send you not only scampering for safety, but also con-vert you into an unrepentant apostle of the anti-fraud cam-paign.

• As far as the risk of being caught is concerned, fraudis essentially a gamble. It can be compared to a militarycoup where failure automatically results in dire consequencesnot only for the coup plotter but also for his immediateand extended family. Sometimes, even friends and per-ceived well-wishers find themselves in situations they didnot bargain for.

• The individual should always take time off to reflecton his own nature. We have already established the factthat fraud is a big gamble that actually requires consider-able guts to contemplate. By nature are you a gambler?Are you a risk taker or a risk averter? The successes youhave recorded in your life so far, were they products of

chance, luck or were they results of hard work and perse-verance? These self assessment questions will help youdetermine the kind of person you are and whether youstand any chance of seeing your way through in the dan-gerous and risky terrain of bank fraud. It would amountto fool-hardiness and patent suicide to jump into it withoutunderstanding your own intrinsic nature.

• The next thing to do is to review your academic orprofessional accomplishments; this gives you an insight intoyour reputation or standing in the society and whether youcan afford to throw all that away. If you happen to be acore professional such as chartered accountant, charteredbanker, lawyer, engineer, medical doctor, architect, phar-

macist etc., then fraud is a no-go area; in fact, it should noteven be contemplated. Members of these and similar pro-fessions are permanently remote-controlled and have nowhere to hide. The certificates issued by these professionsare their property and can be withdrawn, in addition topublic ridicule and opprobrium.

• It is also inevitable that you consider your familybackground and status as this would enable you gauge thepotential impact of your actions. If you come from amodest family, then you must be carrying a bandwagon ofdependants who queue up at your door steps on payday.Thus, your earnings are definitely too important for you totoy with as the ripple effects can be far-reaching. Remem-ber that a failed fraud results in immediate loss of job,with the attendant loss of earnings. Sometimes, it also re-sults in being under the custody of security agents, andpossible prosecution which is a horrendous prospect. Ifyou go into hiding, remember that life on the run is very

expensive and does not last.• Are you from a famous or prosperous family? This is

a good reason why you should not even be seen within thevicinity where fraud is being discussed, talk less of com-mitting one, as you most certainly have a very preciousand valuable family name to protect; a good name is betterthan gold. It is a well known fact that destroying a goodname is much easier than building one. Even the mererumour of fraud in your family will set in motion a chainof negative publicity which is not immediately reversibleeven if subsequent investigation proves your innocence.Be careful so you do not drag the hard-earned family nameinto the mud for peanuts.

If you happen to be a core professional

such as chartered accountant, chartered

banker, lawyer, engineer, medical

doctor, architect, pharmacist

etc., then fraud is a no-go

area; in fact, it should not

even be contemplated.

Members of these and simi-

lar professions are perma-

nently remote-controlled and

have no where to hide. The cer-

tificates issued by these profes-

sions are their property and can be

withdrawn, in addition to public ridicule

and opprobrium.

It is also inevitable that you consider your

family background and status as this would

enable you gauge the potential impact of

your actions. If you come from a modest fam-

ily, then you must be carrying a bandwagon

of dependants who queue up at your door

steps on payday. Thus, your earnings are

definitely too important for you to toy with

as the ripple effects can be far-reaching.

Remember that a failed fraud results in im-

mediate loss of job, with the attendant loss

of earnings.



BANKER, KNOW YOUR STAFF• Since it is an established fact that no bank fraud succeedswithout the active support, collaboration or connivance ofstaff, it stands to reason that you should understand thekind of staff that are working for you. A good under-standing of the private and official dispositions of the gen-erality of staff in your branch or department, their careerhistory and records as well as their individual nuances andidiosyncrasies will enable you gauge the risk you run bykeeping each of them, and by extension, the operationalrisk you need to mitigate. We are going to discuss suchfactors in considerable detail in the following paragraphs.

• You need to observe the personal lifestyle of yourstaff which includes his mode of dressing, the type of car

he drives, the house he resides in, the way he runs hissalary account etc. These factors need to be matched againsthis grade and total emoluments. The obvious objective issimply to know whether he is living beyond his means orwhether he is already consuming fraudulently acquired in-come which would call for discrete enquiry. However, anysuch investigation must take cognizance of his family back-ground and other circumstances before conclusions canbe reached.

What he tells you is not as important as what you ob-served or confirmed from your investigation. If an officeassistant drives an expensive car and wears designer suitsand shoes and he tells you that his father is a governor ora minister, this should be checked out. Any substantial non-salary lodgment into a staff current account should bebrought to your knowledge and duly explained.

• It is also very important to observe the general dispo-sition of your staff while in the office in terms of thefrequency of telephone calls and time spent, the kind ofvisitors he receives in relation to his grade and job func-tion, his level of interaction with customers and the rel-evance to his duties, whether he tries to make deals withstaff of other units without formal directives, whether heis not interested in proceeding for his annual leave even

when he is expected to do so. These are possible signals fora secret agenda which should not be ignored. In all suchunusual circumstances, satisfactory explanations must beobtained from the staff involved, in addition to other chan-nels of information to confirm, corroborate or contradictwhat he tells you.

• No less important is the issue of individual staff pro-file and career history within the bank, as well as in previ-ous employment, if any. How many other organizationshas he worked for? Is he a rolling stone? What are thereasons for leaving each of them? As was earlier empha-sized, what he tells you is not as useful as what your dis-crete enquiries reveal.

You would also gain considerable insight about him bygoing through his staff personal file which will tell youmore about his educational qualifications, his referees, his

assessment by other supervisors prior to hisposting to your branch or department as well asdisciplinary records, status enquiry report fromprevious employers, whether he has been con-firmed or otherwise and the reasons for non-confirmation if that is the case.

• As a follow-up to the above, you also needto assess the interface between him and the job.Is he happy? Does he feel fulfilled generally? Isthere congruence between his own career ob-jectives and the requirements of the job? Is hesent on courses or training regularly to enablehim acquire skills for his short-and medium-termneeds? Has he earned promotions commensu-rate with his ability, together with his peers or

has he lagged behind? Has he been discriminated againston account of his religion, tribe, gender or principle? Hashe worked in other departments, branches or units or hashe been on the same table or unit for several years? Thesequestions must be answered and whatever specific sce-nario each staff presents should be investigated and satis-factorily resolved. Needless to add that any of these issuesnot ironed out presents a potential threat to fraud-freebanking.

Corporate Risks: Do You Know Them?This category of staff can assist you to prevent, control ordetect fraud in much the same manner as they can also bepart of an efficient fraud syndicate if they so desire. Theysell sensitive or confidential corporate information tofraudsters or whoever is interested. Hence, you should makeefforts to identify and cultivate them to reduce the riskyou face. They include:(i) Hardworking staff whose promotions are delayed,(ii) Greedy Staff who desire luxuries far beyond theirearnings(iii) Those who are not well paid in a profitable bank.(iv) Very junior staff who have no hope of rising to thetop.



(v) Ambitious staff who consider their promotion too slow.They work for good or for bad because of their con-

sistent presence wherever anything is happening. They are“witnesses” because they “see”, “hear” or “smell” what-ever is going on which helps gossiping to spread. If youmove to them, they will help you to uncover fraud and ifyou distance yourself from them, they can also assist thefraudsters to operate successfully. Hence, you need to knowthem and treat them with care for positive results.

KNOW YOUR CUSTOMERSThe issue of customer involvement in bank fraud is athing of great regret as the primary business of a bank isto serve the customer and serve him well.

By definition, a bank exists to move resources fromsurplus customers to deficit ones. The benefits derived fromthe deficit units (by way of loan interest) is given to thesurplus units (i.e. interest on deposits) and everybody shouldbe happy. This is the time-honoured business of financialintermediation.

Therefore, a bank has no money of its own as thedifference between interest received and interest paid isthe margin which is used to pay staff salaries and maintainother service imperatives as well as operational infrastruc-ture. Whatever is left, if any, is profit. Perhaps, it is be-cause the generality of customers do not understand thisbasic arrangement that they attack banks with so muchferocity. Banks too, are not doing enough by way of publicenlightenment.

Who Is A Customer?The word ‘customer’ is loosely used to refer to any of thefollowing categories of individuals that enter the bankinghall at one time or another.

• Observer: He is a potential fraudster or armed rob-ber who has come to confirm what he has been told orperfect his plans and this is the only business he came totransact. The banker must be vigilant and ensure that ev-ery body in the banking hall at any point in time has alegitimate mission.

• “Attache”: He accompanied somebody to the bank;

he himself has no business to conduct. He is harmless ifthat is all that he has come to do.

• Personal Representative: He has come to transactbusiness on behalf of his principal or boss who is too busyto come in person. Do not relax, you can’t be too sure.

• Holders of Third Party Cheques: An accountholder has given him a cheque which he has come to col-lect; he himself has no relationship with the bank. Youneed to be careful with this category.

• Account Holder: He is the customer in the truesense of the word. He has certain rights and privilegesunder the banking laws which are jealously guarded, mostof which he is aware of. However, he also has obligationswhich he often tends to overlook. It is this tendency toenforce his rights without taking his obligations into con-sideration that causes friction between the customer andhis bankers and often create a fertile ground for fraud.These are discussed below under appropriate headings.

Problem Customers: Be EfficientSome customers by their behaviour and circumstancespresent formidable challenge to the banker. Although anunintended impression of a hidden agenda is often formed,this may not necessarily be the case. In such situations, allthat the banker needs to do is to be efficient at all times.Such circumstances include, but not limited to the follow-ing:

• Irregular signature: As a banker, you must satisfy your-self before you part with cash. Remember that it is betterto err on the side of caution.

• No satisfactory identification: Most of the time, thishas to do with holders of third party cheques being col-lected over the counter. The operative word here is discre-tion.

• Incomplete documentation: Especially with respectto current accounts, customers often have difficulty inmaking available the complete set of documents to oper-ate the account as stipulated by law. The most importantof these is references. The rule of the thumb here is to beprofessional and comply with both internal regulations aswell as standard banking practices at all times.

• Customers in a hurry also present its own uniquechallenge to the banker, especially a third party payee whohas come to cash an inter-branch instrument in which casethe instrument has to be confirmed by the branch wherethe customer’s account is domiciled. Here, the banker needsto be efficient while also being courteous.

Fraudulent Customers: Be CarefulSome customers articulate, design, and actually attempt toimplement a plan of action which is decidedly fraudulent.The hallmark of experience and vigilance as a banker isyour ability to smell danger when it is close to your door-steps. The shortest way to do this is to learn from theexperience of others and avoid the pitfalls they have suf-

By definition, a bank exists to move resources

from surplus customers to deficit ones. The

benefits derived from the deficit units (by way

of loan interest) is given to the surplus units

(i.e. interest on deposits) and everybody

should be happy. This is the time-honoured

business of financial intermediation.

ISSUES (II)ISSUES (II)ISSUES (II)ISSUES (II)ISSUES (II) | Quality And Internal Control Challenges: Bankers Arise!


fered. Take the following real life scenarios which custom-ers present from time to time to hoodwink bankers whomay not be concentrating.

• Customer Type I: He says you should never pay hischeque without telephone confirmation from him. Hischeque is presented over the counter, you call his line andhe tells you to go ahead and pay. At month end, when hereceives his statement of account, he tells you that hissignature was forged and that the person you spoke withwas not him, hence he cannot absorb the debit. Of course,he will show you the particular leaflet still in his chequebook. Obviously, he presented a cloned cheque which waspaid.

• Customer Type II: This one gives you the mandatethat you must obtain a written confirmation from himbefore his instrument is paid. One of his cheques arrivesand you also receive a written confirmation on his letterheaded paper after which you release cash. He later turnsaround and tells you that both the cheque and the confir-mation were forged and also shows you the cheque num-ber which he has not used.

• Customer Type III: This particular customer saysyou should not pay his cheque unless it is signed in red ink.He signs a cheque in blue ink and gives to someone to goand collect the cash from another branch since your bankis on-line. That branch contacts you and you confirm theinstrument without seeing the colour of the ink used to

sign it. The customer refuses to bear the debit saying it wasnot signed by him and that the cheque leaf was stolenfrom his cheque book.

• Customer Type IV: This group represents custom-ers of all shades and colours who induce all manner offraud in the banking system, including those in previouseditions of this serial; you would marvel at the ingenuityof many of them.

It beholves on bankers to be one step ahead at all timesin order not to fall for the machinations of these types ofcustomers.

KNOW YOUR ENVIRONMENTThere is an unwritten rule that in order to survive in anycorporate organization, you must first understand not onlythe internal dynamics but also the industry outlook. Thissaying is no less true in the banking environment, espe-cially when the issue at stake is fraud and how to combatit. As a banker therefore, it is imperative that you have aworking knowledge of your environment, both internaland external, to enable you take a strategic position andconfront the challenges ahead.

Although weapons must be formed against you whilemissiles must fly in your direction, the objective is the same:To shoot you down or make you vulnerable. The only wayto avoid being vulnerable is to be well equipped by under-standing the intricacies of your environment.

The word ‘customer’ is loosely used

to refer to any of the following catego-

ries of individuals that enter the bank-

ing hall at one time or another.

• Observer: He is a potential

fraudster or armed robber who has

come to confirm what he has been

told or perfect his plans and this is

the only business he came to trans-

act. The banker must be vigilant and

ensure that every body in the banking

hall at any point in time has a legiti-

mate mission.

• “Attache”: He accompanied

somebody to the bank; he himself

has no business to conduct. He is

harmless if that is all that he has

come to do.

• Personal Representative: He

has come to transact business on

behalf of his principal or boss who is

too busy to come in person. Do not

relax, you can’t be too sure.

• Holders of Third Party Cheques:

An account holder has given him a

cheque which he has come to col-

lect; he himself has no relationship

with the bank. You need to be careful

with this category.

• Account Holder: He is the cus-

tomer in the true sense of the word.

He has certain rights and privileges

under the banking laws which are jeal-

ously guarded, most of which he is

aware of. However, he also has obli-

gations which he often tends to over-

look. It is this tendency to enforce his

rights without taking his obligations

into consideration that causes friction

between the customer and his bank-

ers and often create a fertile ground

for fraud. These are discussed be-

low under appropriate headings.



Internal EnvironmentThe following issues are relevant in this regard, and shouldbe meticulously studied and understood by every banker.

• Management policy: The management policy ofyour bank is actually a reflection of the ownership struc-ture and objectives at any point in time. We had earlierexamined how the management styles and personal idio-syncrasies of promoters of banks actually provide theenabling environment for fraud to thrive. If you are workingin those categories of banks, then you should be aware ofthose issues. However, irrespective of the bank where youwork, you should have no difficulty in understanding man-agement policy as well as ownership structure as these wouldprovide useful guide for safe navigation.

• Operations policy (manual of procedures): Thebanking operations policy of any bank contains the proce-dures that guide the day-to-day running of various aspectsof the banking business.

Usually, there is a manual of procedures in respect ofbranch operations, credit, foreign operations, inspection,etc. You should be very conversant with the manual relat-ing to your own job function in order to minimize the useof discretion which might put you into trouble if some-thing goes wrong as your motives might be misunderstood.It should be noted that appearance is more important thanreality as nobody sees your mind. You are the only onethat can vouch for yourself; hence, you must be transpar-ent both in words and in deeds.

• Disciplinary policy (staff handbook): You mustalso be very conversant with the disciplinary procedure inyour bank as contained in the staff handbook usually givento every staff but which, sadly, a lot of people never botherto read. You need to be able to determine your fate inadvance before you take a dive into the muddy waters ofdiscretion, or violation of operational policy under anyguise.

• Generational status: It is also vital for you to beable to locate your bank in the generational hierarchy inorder to determine the kind of forces you are up against,where to seek advice or redress and what kind of lessonsto learn.

External Environment:The banker should also be able to analyze developmentsoutside his immediate vicinity and the likely impact it willhave on his work.

• Banking industry scenario: At the moment, wehave a few banks competing among themselves (i.e. oli-gopoly), hence, the issue of size is no longer being a mar-keting tool, instead emphasis is now on efficient servicedelivery and quality of controls. Fraud-prone banks willsuffer considerable adverse publicity and loss of confi-dence and patronage.

• Political Climate: We are gradually entering the sea-son of political party congresses, conventions, primaries,campaigns and eventual elections in 2011. As politics andcash are inseparable, the excessive use of cash in view ofthese activities is predictable, just as banks are bound to gothrough a rash of service-related pressures. This would inturn demand additional surveillance as the cash that ini-tially leaves the banking system would still find its way back.

• Social Climate: The growing army of bankers beingpushed into the unemployment market as well as the thou-sands being churned out from the higher institutions pro-vide a veritable source of worry which should not be takenlightly. A good number of them will surely becomefraudsters or willing tools in the hand of fraudsters, con-stituting themselves into a ready-made army for wreckinghavoc in the banking system. The name of the game isvigilance!

• Technological Climate: The advancement in tech-nology which is a blessing to banking is also a big challengeas things that were impossible yesterday can now be ac-complished with ease. Even the cheque clearing days arebecoming shorter, courtesy of technology, while colourphotocopying is currently for the asking. With the mobilebanking technology, you can now effect banking transac-tions without going to the bank. All these technologicaladvancements are prone to fraudulent abuse and manipu-lations and the only antidote is to be very knowledgeablenot only about how technology is used, but also how it canbe misused or abused.

Next Edition:In the next edition, we shall focus on remedial measuresand specific strategies to be adopted where fraud has takenplace.(* Chuks Nwaze is a Managing Consultant, Control & Surveil-lance Associates Limited)

It should be noted that appearance is

more important than reality as nobody

sees your mind. You are the only one that

can vouch for yourself; hence, you must

be transparent both in words and in

deeds.

Economic Meltdown: The Realities for the Manufacturing Sector | ISSUES (III)ISSUES (III)ISSUES (III)ISSUES (III)ISSUES (III)


* By Sunday Enebeli-Uzor

he raging global economic and financial meltdown which started asdeterioration in portions of the U.S. subprime market in 2007 hasmetamorphosed into severe macroeconomic dislocations, and nowposes systemic risk to the manufacturing sector of many econo-mies across the globe. In the United States, for instance, industrialproduction declined by 3.6 percent between November 2008 andJanuary 2009. US industrial production fell in March for the fifthconsecutive month, by 1.5 percent, to the lowest level in a decade.Output in March dropped to its lowest level since December 1998and was nearly 13 percent below its level a year earlier. On a 12-month basis, output in the U.S. is down by 12.8 percent. In Britain,industrial production fell by 4.4 percent between November 2008and January 2009. In the last three months, output has fallen byabout 6.4 percent, marking the 11th straight month of decline.Britain’s manufacturing industries have suffered serious collapse asoutput has dropped by about 13 percent within a one year period.

The fall is even more pronounced in countries that are highlydependent on manufacturing exports. For instance, Germany’s in-dustrial production in fourth quarter 2008 declined by 6.8 percentwhile Taiwan’s plummeted by a whopping 21.7 percent as the ef-

ISSUES (III)ISSUES (III)ISSUES (III)ISSUES (III)ISSUES (III) | Economic Meltdown: The Realities for the Manufacturing Sector


fects of the global economic meltdown deepen. Japaneseindustrial production fell by 9.4 percent for the fifth straightmonth in February, tumbling by 9.4 percent from January’sposition, and a staggering 38.4 percent year-on-year. Thehardest-hit industries are transport equipment, general ma-chinery, and electrical machinery. From Europe to Asia,and America, factories are closing shop, underscoring thefact that the global whirlwind has caught up with virtuallyevery economy, and in the process, has exposed the vul-nerability of the manufacturing sector. In the case of Ni-geria, industrial capacity utilization dropped by about 15percent between end 2008 and end first quarter 2009. Acollaborative study by the Central Bank of Nigeria, theNational Bureau of Statistics and the Nigerian Communi-cations Commission put the capacity utilization at 53.29per cent as at end-December 2008, while the Manufactur-ers Association of Nigeria (MAN) gave the figure as 38per cent by end-March 2009.

The Manufacturing Sector in NigeriaIn Nigeria, the sector has been operating in agenerally suboptimal environment over theyears, confronted by a myriad of challenges.These challenges are now worsened by the glo-bal economic and financial meltdown which isbeginning to threaten its very existence as theindustrial sector appears to be one of the big-gest victims. In a recent paid advertorial, theManufacturers Association of Nigeria identi-fied persisting high inflation rate in theeconomy as most unfavourable to the sector.This, they say, does not encourage savingsand investment, and ultimately economicgrowth. Indeed, this scenario eventually cul-minates in short-term investments as long terminvestment activities cannot be embarked uponin a situation of uncertainties. MAN also iden-tified the incidence of multiple taxation andunfavorable ECOWAS Common ExternalTariff (CET) policy which they believe, hasculminated in loss of market share for localmanufacturers.

In the report, the body posited that thedearth of infrastructural facilities has becomea serious bane of the sector. Epileptic elec-tricity supply, poor or non-existent water sup-ply, high cost of telecommunication services,and poor transportation systems and networksare major infrastructural challenges facing thesector. These factors, according to MAN, havecombined to cripple a lot of firms and thefew surviving ones operate under severe con-straints. For instance, manufacturers virtuallydepend on generators as a source of powersupply, with private power generation currently

accounting for about 30 percent of manufacturers’ costof production. “Firms are therefore forced to invest hugecapital in alternative infrastructural facilities to run theirbusinesses thereby reducing their profitability, and com-petitiveness”. Other militating factors identified by themanufacturers’ body include: smuggling, excise duty, portcongestion, high interest rates, high exchange rate, incon-sistency in investment policies, and recently, the deprecia-tion of the Naira. These factors have combined to makeNigerian firms uncompetitive in the global market.

In the area of capacity utilization, a recent collabora-tive survey by the National Bureau of Statistics (NBS),the Central Bank of Nigeria (CBN) and the Nigerian Com-munications Commission (NCC), put the figure for 2008at 53.29 percent. However, this has plunged to less than38 percent in recent times owing to the pervading impactof the global financial crisis. Furthermore, statistics fromthe Manufacturers Association of Nigeria show that ca-pacity utilisation for basic metal is currently 37.71 percent,

In Nigeria, the manufac-

turing sector has been

operating in a generally

suboptimal environment

over the years, con-

fronted by a myriad of

challenges. These

challenges are being

worsened by the global

economic and financial

meltdown which is

beginning to threaten its

very existence as the

industrial sector ap-

pears to be one of the

hardest hit. In a recent

paid advertorial, the

Manufacturers Asso-

ciation of Nigeria

(MAN) identified

persisting high infla-

tion rate in the

economy as most

unfavourable to the

manufacturing sector.

This, they say, does

not encourage sav-

ings and investment,

and ultimately eco-

nomic growth. In

deed, this scenario

eventually culminates

in short-term invest-

ments as long term

investment activities

cannot be embarked

upon in a situation of

uncertainties.



while electrical/electronics stands at 46.75 percent. Capacityutilisation for pharmaceuticals is 44.52 percent, metal prod-ucts 41.37 percent, papers/paper products 57.7 percent,automobile 19 percent, food & drinks 54.5 percent, textile32 percent, non-metallic 31.25 percent,and wood products 43.06 percent.

One logical concomitant of all these,according to MAN, is stiff competitionfrom international or foreign competi-tors. Arguably, because of this, MAN hasover the years insisted ontariff and non-tariff pro-tections for its members—especially those regardedas operating as ‘infant in-dustries’. But there areusually two sides to thedomestic infant industryprotection argument (pro-tectionism). While its pro-ponents posit that thecomparative advantageargument for free tradehas lost its legitimacy in aglobally integrated world—in which capital isfree to move internationally - they believethat by imposing high tariffs on imported commodities (oreven out right ban), domestic industries will grow and be-come self-sufficient within the international economy oncethey reach a reasonable size. Proponents of free trade, onthe other hand, criticize protectionism, as they believe itharms the people it is meant to help. They equally contendthat the gains from free trade outweigh any losses; as freetrade creates more jobs than it destroys because it allowscountries to specialize in the production of goods and ser-vices in which they have a comparative advantage. Theyalso argue that protecting domestic industry amounts to“anti-globalization”. In the final analysis however, it is only

expedient that countries, especially industrially weak onesadopt some measures to shield the productive base of theireconomies from stiff international competition to protecttheir national interest. But it could also be said that when

domestic infant industries are protected for too long, theycould become perpetually inept ‘aged-infants’—all to thedetriment of the nation the policy is intended to develop.

Level of Investments: Apparently owing to the generallynot-so-favourable investment climate over the years, in-vestment in the manufacturing sector of the Nigerianeconomy has not grown to match the pace of growingdemand and population. This demand-supply gap hasskewed investment in favour of merchandise/commercebecause of the nature of investible funds in the economy—most funds being short-term in nature. Such short-termfunds are not suitable for investment in manufacturing asit takes a longer gestation time for manufacturing venturesto yield returns to investors.

The high risk nature of manufacturing is also anotherfactor that could discourage lending to the sector as mostlenders prefer low risk lending to guarantee repayment andsafety of shareholders’ funds. Even in some running firms,lack of funds could also hamper investments in modernmachines, information technology, and human capital de-velopment which are critical in cost minimisation, enhancedproductivity, and competitiveness. All these notwithstand-ing, banks’ credit to the manufacturing sector has been onthe increase, as it rose by N66.65 billion to reach N999.45billion as at end-February 2009, representing a 7.15 per-cent increase from its level of N932.80 billion in Decem-ber 2008. On annual basis, this increase has been steady:from N352.04 billion in 2005, it rose to N445.79 billion in

The high risk nature of manufacturing is also

another factor that could discourage lending to

the sector as most lenders prefer low risk lend-

ing to guarantee repayment and safety of share-

holders’ funds. Even in some running firms, lack

of funds could also hamper investments in mod-

ern machines, information technology, and hu-

man capital development which are critical in

cost minimisation, enhanced productivity, and

competitiveness.

Source: National Bureau of Statistics * Provisional



2006; and further to N487.58 billion in2007.

How did it all start?The economic history of Nigeria shows thatthe manufacturing sector has been perform-ing sub-optimally for a long time, especiallysince the discovery of crude oil in commer-cial quantity in the late 1950s. The sectorgot hit by the infamous Dutch disease—aneconomic concept that explains the appar-ent relationship between the exploitation ofnatural resources and a decline in the manu-facturing sector in an economy. The prin-ciple has it that an increase in revenues fromnatural resources tends to reduce the indus-trial capacity of a nation’s economy by rais-ing the exchange rate, which makes themanufacturing sector less competitive andpublic services entangled with business in-terests. Since the term (Dutch disease) wascoined in 1977 by The Economist to describethe decline of the manufacturing sector inthe Netherlands after the discovery of a largenatural gas field in 1959, Nigeria has be-come a classic example of the phenomenonin economic literatures.

The sector’s contribution to the macro-economic development of the country hasremained small, as the ever-promising sec-tor has often contended with myriads ofchallenges leading to persistent low capacity utilization. Thesehydra-headed challenges have in recent times led to theflight/relocation of the processing lines of some top-tiercompanies to neighbouring countries, while a number ofothers closed shop. Two of such companies are Dunlopand Mitchellin—both tyre manufacturers. The resultant

effect of this is loss of jobs and revenue accruing to thegovernment, thereby worsening the unemployment situa-tion in the country. This is further worsened by the unfor-tunate mass importation of goods and commodities (offi-cially or otherwise) from West African neighbours that hith-

erto depended on Nigeria fortheir supplies.

Hope on the horizonIn recent times, the federalgovernment of Nigeria hasembarked on a number ofreforms in a renewed bid toencourage manufacturingand broaden the productivebase of the economy. To thisend, excise duty on somecommodities has been re-moved. The affected itemsinclude perfumes and othertoilet waters, cosmetics, non-alcoholic beverages, fruitjuices, soaps and detergents

GDP Growth Rate (Percentage) of SomeNon-Oil Sectors at 1990 Current Basic Prices

Source: Central Bank of Nigeria

Hope on the horizon

In recent times, the federal govern-

ment of Nigeria has embarked on

a number of reforms in a renewed

bid to encourage manufacturing and

broaden the productive base of the

economy. To this end, excise duty

on some commodities has been re-

moved. The affected items include

perfumes and other toilet waters,

cosmetics, non-alcoholic bever-

ages, fruit juices, soaps and deter-

gents and spaghetti/noodles. Oth-

ers are telephone recharge cards/

vouchers, corrugated paper or pa-

per board, and cartons, boxes and

cases made from corrugated paper

and paper board as well as toilet pa-

pers, cleansing or facial tissue.

ISSUES (III)ISSUES (III)ISSUES (III)ISSUES (III)ISSUES (III) | Economic Meltdown: The Realities for the Manufacturing Sector


and spaghetti/noodles. Others are telephone recharge cards/vouchers, corrugated paper or paper board, and cartons,boxes and cases made from corrugated paper and paperboard as well as toilet papers, cleansing or facial tissue.This measure, holding other factors constant, is expectedto culminate in the reduction of cost incurred by manu-facturers and to encourage them to produce more, espe-cially for export.

The government has also removed bank guarantee forNegotiable Duty Credit Certificates (NDCCs) which hith-erto entitled exporters to offset part or whole of subse-quent Customs and Excise duties payable to the govern-ment as part of efforts to encourage manufacturers ofexport commodities. The removalof the bank guarantee require-ment will reduce costs to themanufacturers as well as removeimpediments to doing business inthe country. Besides, the measurewould encourage exporters to ven-ture into the non-oil sectors,thereby enhancing foreign ex-change earnings for the country.This effort is geared towards en-couraging value addition and en-couraging export of finished prod-ucts to augment foreign exchangeearnings as the volatility of theoil sector continues in the light ofdwindling crude oil productionand plummeting oil prices.

Also, in a bid to mitigate theeffects of the global financial andeconomic crisis on the textile in-dustry in Nigeria, the federal gov-ernment decided to inject N70 bil-lion into the industry as a stimu-lus package. The governmenthopes to immediately release thefund to the industry to avert fur-ther deterioration. The textile in-dustry has the capacity to employmore than 500,000 persons di-rectly at a time and over a millionpeople indirectly as cotton grow-ers and labourers. It is a highlystrategic non-oil industry with in-stalled capacity investment ofabout US$2 billion. The Nigeriantextile industry is the second larg-est in Africa (after Egypt). It is anall important non-oil industry that extensively utilizes localraw materials especially cotton. The industry is critical tothe process of industrialization in any economy as the In-dustrial Revolution of the late 18th and early 19th centu-

ries started with the mechanisation of the textile industry.Unfortunately however, according to MAN statistics, only10 textile firms are currently operating in the country.

Another remarkable effort to boost the nation’s indus-trial capacity is the establishment of free trade zones bythe government. These free trade zones (FTZ) or exportprocessing zones (EPZ) as they are also called are speciallydesignated areas where some normal trade barriers suchas tariffs and quotas are eliminated and bureaucratic re-quirements are lowered to attract new businesses and for-eign investments. The government embraced this approachto achieve a number of objectives, principal amongst whichare diversification of the revenue base of the nation, em-

ployment generation, and the needto encourage export through lo-cal production.

The major incentives of freetrade zones in Nigeria include thefollowing: complete tax holidayfrom all Federal, State and LocalGovernment taxes, rates, cus-toms duties and levies; one-stopapprovals for all permits, operat-ing licenses and incorporation pa-pers; duty-free, tax-free import ofraw materials and components forgoods destined for re-export;duty-free introduction of capitalgoods, consumer goods, machin-ery, equipment, and furniture.Others include permission to sell100 percent of manufactured, as-sembled or imported goods intothe domestic Nigerian market;goods manufactured in the FreeZone and sold into the domesticmarket attract import duty calcu-lated only on the basis of thevalue of the raw materials orcomponents used in assembly, noton the finished products; 100 per-cent foreign ownership of invest-ments; 100 percent repatriationof capital, profits and dividends;waiver of all import and exportlicenses; waiver on all expatriatequotas for companies operatingin the zones; prohibition of strikesand lockouts; and rent free landat construction stage within thezone.

Since Nigeria commenced the free trade zones initia-tive, a number of successes have been recorded. The nu-merous free trade zones provide good investment windowfor firms willing to take advantage of government’s drive

The

sector’s

contribu-

tion to the

macroeco-

nomic

develop-

ment of

the coun-

try has remained small, as the

ever-promising sector has often

contended with myriads of chal-

lenges leading to persistent low

capacity utilization. These hydra-

headed challenges have in re-

cent times led to the flight/reloca-

tion of the processing lines of

some top-tier companies to

neighbouring countries, while a

number of others closed shop.



to encourage production for export. The Free Trade Zonescircumvent tough regulations, eliminate administrative de-lays and provide easy access to export channels for inves-tors.

The Bank of Industry Limited (BOI) which was estab-lished in October, 2001 is undergoing fundamental restruc-turing to more effectively deliver on its mandate as a de-velopment bank. As the name implies, the bank was set upprincipally to meet the finance needs of industries. Thenew vision for the bank seeks to collapse structures of theformer Nigeria Industrial Development Bank (NIDB),Nigerian Bank for Commerce and Industry (NBCI) as wellas National Economic Reconstruction Fund (NERFUND),into one entity. This has not been fully consummated dueto the legislative hurdle of repealing the laws that set upthe legacy institutions and enacting appropriate legislationto back up the policy. Specifically, NERFUND could notcollapse its structures into the BOI by fiat because it wasestablished by an Act of parliament which must be abro-gated or amended to pave way for its dissolution. It ishoped that as soon as this is achieved, the reinvigoratedbank will be a one-stop financial institution for the indus-trial sector. By December 2008, the value of loans ad-vanced by the bank to Micro, Small and Medium Enter-prises (MSMEs) rose to N47.3 billion from N9.8 billion in2005.

Non-oil Export on the riseNon-oil export has witnessed impressive growth in recenttimes. It rose from US$957 million in 2006 to US$1.4 bil-lion in 2007, and in 2008, it stood at US$1.8 billion. The

Nigeria Export Promotion Council however believes thatthese figures only capture formal export trade. A largevolume of trade is transacted in the informal sector, whichis not recorded officially.

Nigerian exports have been skewed towards raw mate-rials – mainly oil (oil revenue accounts for about 95 per-cent of foreign exchange earnings, 80 percent of totalgovernment revenue, 17.54 percent of GDP, and fourpercent of total employment). Trade in raw materials stillaccounts for over 75 percent of the Nigerian export trade.This pattern of export hardly guarantees economic devel-opment as any nation desirous of growth must exportmanufactured goods.

The impact of manufacturing activities on the economyof a nation is enormous. In developed economies for in-stance, they account for a substantial proportion of totaleconomic activities. Experience has shown that industrialdevelopment in any country provides the brightest hopefor sustained growth, employment generation, improvedsavings and investments and indeed, economic develop-ment. There is no gainsaying that the extent of industrial-ization or otherwise determines the dividing line betweeneconomically developed and the under-developed nations.In Nigeria however, the sub-sector has been contributingless than 5 percent to the nation’s GDP for sometime now.In terms of employment generation, it accounts for about12 percent of the labour force in the formal sector of theeconomy.

(* Sunday Enebeli-Uzor is an Analyst, Zenith Eco-nomic Quarterly)

Nigerian exports have been skewedNigerian exports have been skewedNigerian exports have been skewedNigerian exports have been skewedNigerian exports have been skewed

towards raw material exports –towards raw material exports –towards raw material exports –towards raw material exports –towards raw material exports –

mainly oil (oil revenue accounts formainly oil (oil revenue accounts formainly oil (oil revenue accounts formainly oil (oil revenue accounts formainly oil (oil revenue accounts for

about 95 percent of foreign ex-about 95 percent of foreign ex-about 95 percent of foreign ex-about 95 percent of foreign ex-about 95 percent of foreign ex-

change earnings, 80 percent ofchange earnings, 80 percent ofchange earnings, 80 percent ofchange earnings, 80 percent ofchange earnings, 80 percent of

total government revenue, 17.54total government revenue, 17.54total government revenue, 17.54total government revenue, 17.54total government revenue, 17.54

percent of GDP, and four percent ofpercent of GDP, and four percent ofpercent of GDP, and four percent ofpercent of GDP, and four percent ofpercent of GDP, and four percent of

total employment). Trade in rawtotal employment). Trade in rawtotal employment). Trade in rawtotal employment). Trade in rawtotal employment). Trade in raw

materials still accounts for over 75materials still accounts for over 75materials still accounts for over 75materials still accounts for over 75materials still accounts for over 75

percent of the Nigerian exportpercent of the Nigerian exportpercent of the Nigerian exportpercent of the Nigerian exportpercent of the Nigerian export

trade.trade.trade.trade.trade.

Experience has shown that industrial devel-Experience has shown that industrial devel-Experience has shown that industrial devel-Experience has shown that industrial devel-Experience has shown that industrial devel-

opment in any country provides the bright-opment in any country provides the bright-opment in any country provides the bright-opment in any country provides the bright-opment in any country provides the bright-

est hope for sustained growth, employmentest hope for sustained growth, employmentest hope for sustained growth, employmentest hope for sustained growth, employmentest hope for sustained growth, employment

generation, improved savings and invest-generation, improved savings and invest-generation, improved savings and invest-generation, improved savings and invest-generation, improved savings and invest-

ments and indeed, economic development.ments and indeed, economic development.ments and indeed, economic development.ments and indeed, economic development.ments and indeed, economic development.


Economic Crises: Weighing The Stimulus Packages | GLGLGLGLGLOBOBOBOBOBAL AL AL AL AL WWWWWAAAAATTTTTCHCHCHCHCH

* By Eunice Sampson

bout the most commonly used cliché atthis period of global economic meltdownis the phrase ‘stimulus package’.

While the current crisis has made theterm unusually ‘fashionable’, the idea ofstimulus packages is not new. As far backas the 1930s, Republican PresidentHebert Hoover of the United Statesadopted it as one of his key economic

rescue measures during the Great Depression.His immediate successor, Franklin D.

Roosevelt (Democrat) gave more impetus tothe policy as he spent much of his 12 years inoffice (1932-1944) wrestling the American andglobal economies, first from the Great Depres-sion which he inherited from his predecessor,and later, the aftermath of World War II.

A


GLGLGLGLGLOBOBOBOBOBAL AL AL AL AL WWWWWAAAAATTTTTCH CH CH CH CH | Economic Crises: Weighing The Stimulus Packages

THE ROOTS OF ECONOMIC

STIMULUSEconomic stimulus is usually a fiscalpolicy in the form of enhanced govern-ment spending and/or significant tax mea-sures taken to revive an ailing economy.It includes measures such as tax cuts, taxrebates and wage increases. It also in-cludes direct fund injections into strate-gic sectors in the forms of bail outs –credits, recapitalization, reinvestment, na-tionalization of sick private corporations– measures intended to boost economicactivities, increase consumer spending,enhance liquidity in the system and cre-ate jobs.

The idea of stimulus packages is de-rived from Keynesian economics, a

theory propounded in 1936 by British born John Keynes.Keynesian theory is based on the premise that activities in theprivate sector could sometimes have wide macroeconomic im-plications, which could result in economic meltdown. At suchtimes, government should respond with fiscal measures that wouldstimulate economic activities and correct the imbalances.

Keynesians believe strongly that the way out for a recedingeconomy is government intervention in the form of a ‘stimulus’,targeted at massive investment in infrastructure and a reductionin interest rates and taxes. These, they believe, trigger a cyclicchain of improved liquidity, increased spending, enlarged pro-ductivity, enhanced investments - a multiplier effect that rein-vigorates the economic engine and keeps it running again.

When, on the other hand, the economy is getting too over-heated as a result of a boom, Keynesians advocate measuresthat would raise interest rates, increase taxes, and other policyactions that could dampen demand and spending.

As earlier noted, US Presidents Hoover and Roosevelt werethe first to adopt measures similar to stimulus packages as wenow know them. Franklin D. Roosevelt’s famous ‘New Deal’, israted as about the most effective economic stimulus effort sofar, a Keynesian-like policy which triggered economic recoveryand the rebuilding of infrastructure (in the US and Europe) de-stroyed during World War II.

Since these early experiments – thanks to the diverging viewsof prominent economists – the practice of stimulus packageshas received knocks and accolades; obscurity and popularity, atdifferent times, with different socioeconomic and political eras.

The Knocks:The major antagonists of economic stimulus have been the ‘mon-etarists’ and free market advocates who believe that governmentintervention in the economy should be at best, minimal. Gov-ernment reaching all out to sweep up the mess generated by theprivate sector is described by adherents of free market capital-ism as a sheer rip-off on, and outright unfairness to hardworking

The idea of

stimulus pack-

ages is derived

from Keynesian

economics, a

theory pro-

pounded in 1936

by British born

John Keynes. Keynesian theory is

based on the premise that activities

in the private sector could some-

times have wide macroeconomic

implications, which could result in

economic meltdown. At such times,

government should respond with

fiscal measures that would stimulate

economic activities and correct the

imbalances.

• John Keynes





taxpayers – a case of ‘robbing Peter to pay Paul.’They argue that government fiscal interventions could

be counter-productive, as it could drive up inflation andgenerate inequality in earnings.

This school of thought insists that government has nobusiness interfering in economic activities under any guise.When things go wrong, the market should be allowed toheal itself. At best, monetary measures (not fiscal), includ-ing interest rates management, could be employed to guidethe market back on track.

But not all experts today agree with this laissez-faireview to addressing economic crisis of the magnitude theworld currently faces. In the current global financial situa-tion for example, where banks are not willing to lend, evenat near 0% official interest rate, monetary policy (espe-cially the lowering of interest rate to spur demand) couldprove unworkable, explaining why governments decidedto adopt fiscal policies by directly injecting funds into thesystem instead of waiting for market forces, possibly end-lessly, to help do so.

The Accolades:Despite strong criticisms from some quarters, economicrecovery measures so far adopted by major economiesshow a growing preference for Keynesian solutions.

World leaders seem highly convinced that it is the mosteffective recovery option at their disposal.

Last November, UK Prime Minister Gordon Brownsaid, “everybody generally agrees that the fiscal stimulus -and what we mean by fiscal stimulus is real help for busi-nesses and families, now - has got to be substantial to havean impact. … I don’t see this as a gamble. I see this asnecessary, responsible action that any sensible governmentwould want to take.”

Defending the decision of France to adopt a stimuluspackage in December 2008, French President NicolasSarkozy said, “Our answer to this crisis is investment, be-cause it is the best way to support growth and save the jobsof today, and the only way to prepare for the jobs oftomorrow.”

This January, Chinese Premier Wen Jiabao lamentedthe depressing impacts of the global financial crisis on China,describing 2009 as the country’s worst year this century.But he was quick to add that his government’s economicstimulus “measures have been proved prompt, correct andeffective,” in gradually bringing the economy back on track.

On signing the $168 billion Economic Stimulus Bill intolaw last February, President George W. Bush called themeasure “a booster shot for our economy”.

And despite all their political and ideological differences,his successor Barack Obama within his first one month inoffice signed into law a stimulus package that was fourtimes bigger than that of George W. Bush, describing it as“the beginnings of the first steps” to economic recovery.

“History has shown repeatedly that when nations do

not take early and aggressive action to get credit flowingagain, they have crises that last years and years instead ofmonths and months …. A dollar of capital in a bank canactually result in eight or 10 dollars of loans to familiesand businesses, a multiplier effect that can ultimately leadto a faster pace of economic growth.” … President BarackObama.

Can all these global leaders and their expert economicadvisers be wrong?

TODAY’S STIMULUS PACKAGESUnited States: The first direct government interventionin the current global financial crisis was the ‘EconomicStimulus Act of 2008’ initiated by US President GeorgeW. Bush and enacted on February 13, 2008.

The $168 billion Stimulus Act offered relief packagessuch as tax rebates totaling $120 billion to low and middleincome tax payers and tax incentives for businesses, among

The first direct government intervention in the

current global financial crisis was the ‘Economic

Stimulus Act of 2008’ initiated by US President

George W. Bush and enacted on February 13,

2008. The $168 billion Stimulus Act offered re-

lief packages such as tax rebates totaling $120

billion to low and middle income tax payers and

tax incentives for businesses, among other pro-

visions aimed at boosting spending in the face

of tightening liquidity.



other provisions aimed at boostingspending in the face of tightening li-quidity.

When in September, statistical re-ports showed a deterioration in the USeconomic nerve centre, the Wall Street,President Bush responded by present-ing another stimulus bill – the Emer-gency Economic Stabilization Bill of2008 – requesting Congress approvalto inject about $700 billion into theeconomy by way of buying over toxicmortgage assets from financial institu-tions. The bill was passed on October3.

Also that month, fears gripped theglobal financial sector after LehmanBrothers filed the largest bankruptcyin US history and government nation-alized drowning Fannie Mae andFreddie Mac. Rescue measures weretaken to save American International

Group; Morgan Stanley; Goldman Sachs, etc.In mid October, President George Bush announced a cash injection package for US

financial institutions similar to an earlier UK bailout measure. About $250 billion from anapproved $700 billion would be injected into sick banks in exchange for government stake.

The historical swearing in of Barack Obama as the 44th United States’ President onJanuary 20 raised public confidence at the beginning of this year. To sustain the temple,President Obama on February 17, 2009 signed a $789 billion stimulus package (the AmericanRecovery and Reinvestment Plan) into law, in what has been described by New York Timesanalysts as “the most expansive unleashing of the government’s fiscal firepower in the face ofa recession since World War II”.

A White House release outlined the major goals of the $789 billion stimulus plan toinclude:

• Doubling renewable energy generating capacity over three years. It took 30 years to

“History has shown repeat-

edly that when nations do not

take early and aggressive

action to get credit flowing

again, they have crises that

last years and years instead

of months and months …. A

dollar of capital in a bank can

actually result in eight or 10

dollars of loans to families and

businesses, a multiplier effect

that can ultimately lead to a

faster pace of economic

growth.” … President Barack

Obama.



reach current levels of renewable energy production. Thisplan will double that level over the next three years – enoughto power 6 million American homes.

• Undertaking the largest weatherization program inhistory, modernizing 75% of federal buildings and twomillion homes.

• Computerizing every American’s health record in fiveyears, reducing medical errors and saving billions of dol-lars in health care costs.

• Launching the most ambitious school modernizationprogram on record, sufficient to upgrade 10,000 schoolsand improve learning environments for approximately 5million children.

• Enacting the largest investment increase in US roads,bridges and mass transit systems since the creation of the

national highway system in the 1950s.The final bill includes $507 billion in infrastructure de-

velopment and $282 billion in tax relief, including a rebateplan that would give credits of up to $400 for individualsand $800 directly to families within certain income limits.It will also provide a one-off payment of $250 to recipi-

ents of Social Security and those under government dis-ability support scheme.

Hopefully, the plans when executed would jumpstartthe economy and create about three to four million jobs“while making a down payment on the nation’s economicfuture”.

But a yet bigger package was in the offing. On March23, US Treasury secretary, Timothy F. Geithner unveileddetails about a $2.5 trillion “Public-Private Investment Pro-gram,” a rescue plan designed to clean the balance sheetof banks, flush out troubled assets such as sub-primemortgages, and address the liquidity squeeze that has beena hallmark of the economic crisis.

Only about $350 billion of this fund would come fromthe already enacted bailout package; the rest would come

from private investors and the Federal Re-serve. Government will play the role of anintermediary between the banks selling the badassets and the private investors buying them,with the FDIC – the country’s leading finan-cial regulator – providing guarantee to buy-ers.

United Kingdom: Like the United States,the UK has adopted fiscal stimulus in effortsto rescue its economy from the grip of theglobal crisis. Last November, government re-sponded to the country’s dwindling economicfortunes with the launch of a $47 billion eco-nomic stimulus package to boost productiv-ity and consumer spending.

Among other measures, the package pro-vides for a tax cut on goods and services,reducing the Value-Added Tax (VAT) from17.5 per cent to 15 per cent (the lowest levelallowed under EU regulations) and effectiveDecember 1, 2008. The cut in VAT rate isestimated to reduce government revenue by£12.5 billion or about $19 billion.

As part of the fiscal intervention mea-sures, the UK has bailed out ailing private fi-nancial institutions. On February 22, 2008, theBritish bank, Northern Rock, became the firstvictim of the nationalization that has becomea global trait. Bradford & Bingley’s was alsonationalized in September, while bailout pack-ages totaling £25 billion were offered toBarclays; Royal Bank of Scotland; HSBCHoldings; Lloyds TSB; HBOS; StandardChartered; Abbey National; Nationwide Build-

ing Society, etc, giving the British government major stakesin these institutions.

European Union: In November 2008, the EuropeanCommission proposed a €200 billion stimulus to createemployment, boost spending and fast track growth in theregion. The stimulus package represents 1.5 percent of its

Unlike other economic blocs, Africa is yet to announce

any consensus stimulus package to tackle its growing

fiscal and macroeconomic challenges resulting from the

recession. Individually, African countries are under pres-

sure to act to reverse the mounting side effects of the

meltdown.



GDP.About €170 billion of the fund will be provided for in

national budgets of member states while the balance willcome from the EU and the European Investment Bank.

Several member countries have announced their ownstimulus packages, including the region’s biggest economy,Germany which in November unveiled a $65 billion fiscalplan.

France also launched a €26 billion (about $33 billion)package with about €11 billion of it to be spent on busi-nesses and €4 billion on infrastructure and public service.France is injecting an additional €11.5 billion into theeconomy in the form of credits and tax breaks in effortsto trigger industrial production and consumption and easegrowing unemployment which at 8% is one of the highestin the region.

Japan: The world’s second leading economy has an-nounced series of bailout measures since the inception ofthe current crisis. In the latest ofsuch plans, Japan on April 5, 2009pledged a fiscal stimulus of about10 trillion yen ($100 billion) to boostthe economy and avert a repeat ofits “lost decade” experience of the1990s. Japan has so far packagedeconomic stimulus equal to 4% ofits GDP.

The fiscal interventions are de-signed to raise national output whichdropped by a staggering 12% year-on-year in fourth quarter 2008; re-kindle consumer and manufacturers’confidence; support the jobless andsmall businesses; revive key sectorslike health and energy and createemployment.

China: Like Japan, the Chineseeconomy is driven by industrial out-put and export, sectors that havebeen severely hurt by the crisis.

Beijing like the Western economies, hasdemonstrated faith in fiscal stimulus asa way out of the quagmire. Last No-vember, Chinese authorities announceda stimulus plan that would boost theeconomy back to double digit growth.

The Four trillion Yuan ($586 billion)two-year package will be spent on up-grading infrastructure, particularlyroads, railways, airport, power, and sec-tors such as auto and steel, oil and pet-rochemicals, electronics and informa-tion technology, textile, among others.Rehabilitation and reconstruction worksfollowing the earthquake in the Sichuan

province of the country last May will also be targeted.With external reserve of almost $2 trillion, China, more

than any other country has the wherewithal to finance itsway out of the recession, if that is what it takes. Despite itsdwindling earnings, China’s budget deficit in 2009 is still amere 3% of GDP as against the United States’ 12%.

Afro-Asian Economies: Major Asian emerging mar-kets have also taken ‘stimulus’ steps. India for example inaddition to interest rate cuts and an enhanced 2009 budgetunveiled a $4 billion stimulus package last December. InNovember, South Korea uncovered an $11 billion fiscalstimulus plan. Others in this region include Bangladeshwhich this April disclosed a $500 million fiscal package tohelp stimulate declining economic activities.

As the crisis bites harder, countries – from Australia toZimbabwe – seem to be mapping out stimulus plans in linewith their economic size and fiscal capability.

In Africa, the highly commodity dependent region is

Source: Research & EIG; National Economic reports

With external reserve of

almost $2 trillion, China,

more than any other

country has the where-

withal to finance its way

out of the recession, if

that is what it takes.

Despite its dwindling

earnings, China’s budget

deficit in 2009 is still a

mere 3% of GDP as

against the United

States’ 12%.



witnessing a relapse after seven consecutive years of strong growth. In the face ofpilling budget deficits, external debt and record liquidity squeeze, the African Develop-ment Bank has projected a growth rate of 3 percent for the region in 2009, the lowestexpansion since 2002.

Unlike other economic blocs, Africa is yet to announce any consensus stimuluspackage to tackle its growing fiscal and macroeconomic challenges resulting from therecession.

Individually, African countries are under pressure to act to reverse the mountingside effects of the meltdown.

Efforts to close the widening financial gaps created by the crisis is compelling oil-dependent economies like Nigeria to use up their external reserves and other specialaccounts. The story is the same for other commodity dependent African economies,raising fears that, at this rate, Africa’s external reserve position could be depleted by asmuch as half by the time this crisis is over.

Even if the global economy is to recover by the second half of 2010 as some haveprojected, the local and international efforts made over the years to arrest endemicpoverty in the world’s most fragile continent has already suffered a critical setback.

Meanwhile, there is yet no unanimous response to a recent plea by World BankPresident, Robert Zoellick for developed economies to pledge 0.7 percent of theirstimulus package to support the poorest countries.

The recent decision of the G-20 to inject $1.1 trillion into the global economythrough the World Bank and IMF is believed to be the stimulus package designed fordeveloping economies, including Africa. The fund is planned to be channeled intotrade, investment, Millennium Development Goals, liquidity in the financial servicessector, among others.

A breakdown of the proposed stimulus shows that $100 billion of it would be usedas credits for poor countries through development banks; $250bn would be spent toboost global trade finance; $750bn would go to the IMF for onward lending to devel-oping countries.

But the plan is still on the drawing board and time is of the essence. Since thestimulus plan is yet to be executed, it is uncertain whetherthe plan would directly touch Africa, or succeed in re-versing the economic losses the continent has sufferedowing to the crisis.

HOW ARE ECONOMIES RESPONDING TO

STIMULI?After all the frenzied efforts to package the different eco-nomic stimulus plans, the trillion dollar question now is,“are the measures working?”

There are already cautious signs of recovery in someof the countries where stimulus policies have beenadopted.

In the US, major financial institutions including WellsFargo, Goldman Sachs, HSBC, Citigroup, etc have re-turned to profit. Goldman Sachs recently announced a$1.81 billion profit for first quarter 2009. In mid-April,Citigroup announced a $1.6 billion first quarter 2009 profit,after an $8.2 billion net loss in fourth quarter 2008.

Also, some of the financial institutions that accessedthe mandatory US government’s $700 billion troubledassets relief program (TARP) are either already payingback or planning to do so soon. Reports show that someof the smaller banks have so far returned about $442

Efforts to close

the widening finan-

cial gaps created

by the crisis is

compelling oil-

dependent econo-

mies like Nigeria

to use up their

external reserves

and other special

accounts.



million TARP funds, including the 5 percent interest.Goldman Sachs recently announced plans to raise $5

billion from shareholders to repay its bailout funds. JPMorgan Chase, Wells Fargo and Bank of America, alsoplan to return their bailout funds.

In addition, global capital markets are showing signs ofrecovery. Though the turbulence is far from over, the se-ries of aggressive economic stimulus plans are renewinginvestors’ confidence as the double-digit daily drops inmarket indices witnessed in much of the last two quartersof 2008 have eased.

On March 23 2009, global markets responded posi-tively to the unveiling in the United States of a $2.5 trillion

toxic assets mop up plan. Stocks ofmajor banks (including Citigroupand Bank of America) soared byas much as 15% that day.

Similar experiences greeted theunfolding of stimulus packages inother economies, including the UKwhere the FTSE 100 Index jumped10 percent - its biggest one day gainever – on the day the country’sstimulus was announced.

Also in Japan, news of the $100billion stimulus in April 2009pushed stock markets in Asia totheir highest level since October2008.

In mid April, Ben Bernanke,chairman of the US Federal Re-serve pointed to “tentative signs”suggesting that the rapid declinewitnessed in the US economy in thepreceding quarters may be moder-ating.

In the UK, agreed mortgagesales rose in March 2009 for thefirst time in almost two years. In-struction to sell is falling while in-structions to buy and purchase en-quiries are on the rise. The housingmarket remains fragile, but demandis on its way up again. For aneconomy which recession was trig-gered by the sharp drop in housingdemand and prices, this could be afirst tentative signal of recovery.

But in the entire global scene,other signs of an economy introuble still persist – high unemploy-ment rate, lower wages, record tradeand budget deficits, huge publicdebt, low consumer demand, etc, in-dicating that, as Kenyans would say,

‘it is not yet Uhuru’.The surest assurance of the workability of stimulus

packages so far has come from China, where the ChinesePremier Wen Jiabao on April 18, 2009, during the BoaoForum for Asia announced a major pickup in China’seconomy. The Premier said the economy has respondedto the $586 billion stimulus “better than expected”, withliquidity, investment, lending, consumption, industrial out-put, commodity price, employment and stock market in-dices picking up; and raising optimism that the economycould fair better in the second quarter than its abysmal6.1% growth in first quarter 2009. For the Chinese au-thorities, the worst just might be over.

Source: Wall Street Journal; April 1, 2009



But are these sure signs of deep rooted, sustainableglobal economic recovery?

Limitations of Economic StimulusA major shortcoming of economic stimulus efforts is thehuge national debt and budget deficit that results.

In the euro zone, budget deficits of major economieshave surpassed the EU’s benchmark of 3%. France’ bud-get deficit could reach 3.9% of GDP, with the stimuluspackage swelling public debt by an additional €26 billion.

The UK stimulus package will be funded by state bor-rowing, increasing public debt to £78 billion this year and afurther rise to £118 billion or 48 percent of GDP by 2010.

The $100 billion stimulus package undertaken by Ja-

pan would fuel the country’s public debt which, even be-fore the fiscal measure was over 175% of GDP.

In the case of the United States, the multi-trillion dol-lar stimulus package will heighten public debt status whichnow stands at close to $11 trillion. Budget deficit is cur-rently at a staggering 12% of GDP.

Current massive tax cuts in developed economies, whichare part of stimulus efforts, could lead to higher tax ratesas soon as the recession is over.

Significantly, despite the stimulus, virtually all the ma-jor economies will most likely experience negative growthin 2009, because, as President Barack Obama has warnedrepeatedly, ‘it will get worse before it starts getting better.’

Another challenge is the possibility of misapplicationof stimulus funds on areas that might not have any directimpact on economic recovery. Where it works, stimuluspackages are known to work better where governmentspending is targeted at the real sector and capital projects,especially infrastructure development.

The stimulus package passed in early 2008 by Presi-

dent George W. Bush has been faulted as an example of amisapplied fiscal measure. About $120 billion of the $168billion was spent on tax rebates.

There is no guarantee that the cheques issued out toindividuals, for example, would be spent right away as in-tended, or be saved for months or, worst still, be used tosettle credit cards or other outstanding debts. Even when itis spent, some beneficiaries could decide to use them tobuy imported products, which will not have much positiveimpact on the local US economy.

Yet another criticism of stimulus packages is the beliefthat wealth is being taken from lowly tax payers and usedto further enrich corporate elites whose action or inactions(including lavish remunerations and years of shady finan-

cial practices) have been blamedfor the current crisis.

The recent bonus scandalinvolving AIG chief executiveshas further rekindled public out-cry and resentment. Many arguethat the desperate efforts beingmade by financial institutions toquickly pay back the bailoutfunds is to enable them circum-vent the tightened restrictions onbonuses and dividend payoutsplaced on executives of banksthat have benefited from bail-outs.

If there is one lesson theworld must go home with fromthe recent experiences, it is that,government cannot completelyhands off the business of run-ning the economy. Countries that

have faired better than others in these difficult times arethose that have managed to exert some level of strict over-sight function of private sector activities.

The practice of leaving the economy totally at the mercyof private sector players has repeatedly failed and must bereassessed meticulously.

Finally, though economic stimulus efforts seem to bepaying off slowly, the early signs of recovery so far are,understanding, noticed only in the advanced economies.

For the developing and third world countries to beginto feel the impact of the still tentative recovery, demandfor, and prices of their commodities must begin to experi-ence a rebound; growing budget deficits and rising unem-ployment must begin to improve; and liquidity in their fi-nancial services sector, including banks and capital mar-kets must begin to surge.(* Eunice Sampson is the Deputy Editor, Zenith Economic Quar-terly)

Source: US National Bureau of Economic Research


Building Successful Business Associations: Why Good Association Governance Matters | FOREIGN INSIGHTS (I)FOREIGN INSIGHTS (I)FOREIGN INSIGHTS (I)FOREIGN INSIGHTS (I)FOREIGN INSIGHTS (I)

orporate governance became an issue of utmost importance for all emerging and transitioning economiesjust over a decade ago. Until several financial crises and high-profile scandals put it on top of the agenda forcompanies small and large in countries around the world, corporate governance was assumed to be some-thing which concerned only large companies in major industrialized economies. Today, good governance inthe private sector is discussed publicly and privately in a variety of contexts and its contribution to theeconomic and political development is increasingly noticeable. There is growing evidence that corporategovernance helps to create dynamic, sustainable, and successful companies, industries, economies, andcountries.

Business associations around the world are facing the same set of issues companies began to face twodecades ago. How relevant is the concept of governance for them? Who should be engaged in businessassociation governance reform? Should all business associations be concerned with governance issues equally?What are the key principles? Why should you reform? What are the benefits and costs? Where does theimpetus for reform come from and where do you begin?

Governance – A Necessary ComponentBusiness associations, as representative organizations, play a special role in the development of countries.They are often perfectly positioned to fill the gap that often exists between the private and public sectors. Ina broader public policy view of development, business associations provide key information to policymakerson matters of reform and provide a channel for information from the government back to the privatesector. Business associations also strengthen the private sector by providing services that allow companiesto remain competitive and access new markets. By becoming a vehicle of the private sector’s transparentparticipation in the public policymaking process, business associations in and of themselves are democracy-strengthening and market-reforming institutions. They gather the views and opinions of many membersand synthesize them into concrete policy recommendations and advocacy campaigns.

However, business associations do not fulfill this role simply through their existence. Many business

* By Aleksandr Shkolnikov



FOREIGN INSIGHTS (I)FOREIGN INSIGHTS (I)FOREIGN INSIGHTS (I)FOREIGN INSIGHTS (I)FOREIGN INSIGHTS (I) | Building Successful Business Associations: Why Good Association Governance Matters

associations do not live up to these expectations. In orderto do so, business associations have to take the necessarysteps and put into place sound mechanisms of their day-to-day operations. Of those, good governance is the mostimportant one, as it serves as a foundation upon whicheverything else is built – from membership programs andoutreach efforts to public policy advocacy and strategicplanning.Although strengthening association governance isnecessary, it may be a more difficult task than it sounds.From the governance perspective, business associations areunique – unlike companies or public sector entities, theirboard members are also direct customers of associationservices as well as owners (i.e., dues-paying members). Threedistinct roles have to be filled by each individual – boardmember, customer, and owner. The fact that all membersare also owners of a business association is often ignoredin many emerging markets. Most governance dilemmasarise from the lack of recognition of this equal share inassociation ownership. Instead, the founding members, thelargest members, the president, or several board membersfrequently deem ownership to be exclusively their preroga-tive. This means that several individuals strive to run theorganization to respond to their own, narrow needs ratherthan to the broader concerns of the businesses they aresupposed to represent. Therefore, one of the primary goalsof governance reform should be ensuring that ownershipof a business association lies in the hands of its members– all of its members – and is not hijacked by a select few.Thecentral concern of corporate and public governance re-mains relevant when applied to business associations: howdo you set up effective mechanisms to deal with issuesarising from the separation of ownership and control? Howdo you ensure that associations act in the best inter-est of all their owners, and in the case of busi-ness associations, their dues-paying mem-bers?

A model governance frameworkachieves this by introducing pro-cedures that allow members toelect a board that focuses onpolicy-level issues and super-vises staff, ensuring that theorganization operates in thebest interest of its mem-bers. Proper governanceprocedures allow businessassociations to discernmember expectations ofwhat the organization oughtto do from managementand board perceptions ofwhat members are expectingfrom the organization. In a simi-lar way, they help separate mem-ber needs from board and manage-

ment wants. In countries where transparency mechanismsare lacking and decision-making is often conducted behindclosed doors, governance reform becomes a much moredifficult objective. Yet, it is in these precicise conditions ofpoor transparency where governance reform is needed todevelop business associations as effective, private sector,representative institutions. Challenges to Business Associa-tion GovernanceThe issue of good governance in associa-tions, especially in developing and transitioning economies,is often an afterthought. Just as corporate governance wasinitially regarded as something applicable only to a few largeenterprises in major economies, business association gov-ernance today tends to be seen as something of interest tolarger organizations in developed markets rather than as-sociations in emerging economies. Yet, it is the latter asso-ciations – beset by low membership numbers, an inadequatefinancial base, or weak advocacy capacity – that are mostin need of better governance. It may seem that there aremany other more pressing needs that associations face thangovernance – from the larger issues of competing againststronger associations, launching advocacy efforts, or re-cruiting members to the basic ones of paying utility bills orgetting computers. And when governance does gain im-portance, oftentimes the roadblocks to improving it maylie within organizations themselves. For example, it is notuncommon to see some association board members argu-ing against term limits, as they gain visible social status intheir communities by being in a position of leadership inan association. Some remain in the same leadership posi-tions for decades, becoming a permanent fixture withinorganizations. Giving up this status is understandably diffi-cult, especially in a country where the number of high-


Business associations, as

representative organiza-

tions, play a special role in

the development of coun-

tries. They are often per-

fectly positioned to fill the

gap that often exists be-

tween the private and

public sectors. In a broader

public policy view of

development, business

associations provide key

information to policymakers

on matters of reform and

provide a channel for

information from the

government back to the

private sector.



profile associations may be quite limited. For many asso-ciations in developing countries there is a general unwill-ingness on the part of the leadership to provide enoughresponsibility and clout to the chief executive and staff,whether due to the fear of losing control over the organi-zation or one’s own status. In the extreme, micro-manag-ing chairmen may get involved in the minute tasks of run-ning an association’s daily operations, taking away fromtime that can be better spent on pressing strategic objec-tives. In such organizations, the chief executive does notfulfill his or her fundamental role, instead serving as apersonal assistant for the association president.Other ex-amples of poor governance practices include boards ofdirectors conducting meetings in order to open up mail ordecide what to have for lunch during a workshop. It iscrucial to understand the failure of basic governancemechanisms if such a situation occurs. These may be ex-treme examples, but the point is that boards may easily getoverly involved in the day-to-day management of associa-tions (even if driven by a good purpose) without givingenough attention to their core governance responsibilities.At times, a blurred understanding of good governance andleadership thwarts genuine efforts to improve governance.The notions of leadership versus management or strategicplanning versus implementation may not be clear-cut indifferent cultures. Language plays a part – in Russian, forexample, the words for “governance” and “management”are identical. Thus, on a cognitive level the two conceptsmay not come across as distinctly as they should. Similarly,for a long time there was no agreed-upon Arabic phrasefor “corporate governance,” which prevented the non-English speaking business community in the Middle Eastfrom capturing and recognizing its true meaning. In Ro-mania, the word for governance – guvernanta – had to beintroduced to distinguish the concept from management –conducere. The Romanian experience also proved that intro-

ducing the word is only a first step. Associations that madestrides in improving their own governance practices haveundergone rigorous training and capacity-building in orderto effectively apply the concept of governance in practice.Changing perceptions and understanding of complex con-cepts such as governance is a difficult task that is not ac-complished overnight.

There is also a tendency for founding members to at-tempt to secure special rights in the association’s bylaws.From the founding members’ perspective their special rightscome with good reason. They may be trying to preservetheir legacy or they may feel concerned about other mem-bers steering the organization in a direction different fromtheir originally envisioned purpose. The fallacy of this ap-proach is that it automatically regards everyone else as sec-ond-tier members, reducing incentives to join and be partof the association. The bottom line, as stated above, is thatassociations should strive to represent the interests of alltheir members.

Whatever the reasons justifying the lack of genuineefforts to improve governance structures may be – andthere can be many – it is becoming increasingly clear thatassociation governance cannot be ignored. The experienceof successful associations shows that it is valuable for andapplicable to organizations of all sizes, industries, and geo-graphic locations, as they face the dilemma similar to theone we faced with corporate governance when it beganspreading around the world. Good association governanceis the necessary foundation upon which associations canbegin to build effective membership campaigns, improvetheir communications, strengthen credibility, or launch ad-vocacy efforts.

Essentially, there are two options on the table beforebusiness associations today. They can either implement goodgovernance mechanisms, proactively seeking the benefitsof improved governance, or, if they choose to ignore it,those associations will be forced to deal with the issue whencrises and scandals hit. The difference between crisis pre-vention strategies and post-crisis management is significant,however. In being pro-active, senior association leaders whochoose to initiate reform are asking themselves, “What isin it for my organization and why should I do it?” Ulti-mately, answering that question drives associations to seekinternal governance reform in order to be positioned toadvocate for improved governance in their respective coun-tries.

Business Associations as Non-Profit and Private

Sector ActorsAlthough business associations share many governance is-sues with other non-governmental organizations and theprivate sector companies they represent, they do have sev-eral unique features which make association governance adistinct issue. This means that associations can both buildon the experiences of other types of organizations in im-

Benefits of Good Association GovernanceBenefits of Good Association GovernanceBenefits of Good Association GovernanceBenefits of Good Association GovernanceBenefits of Good Association Governance

• Transparency in operations and decision-mak-ing

• Financial integrity before members• Ability to attract and retain talent• Proper focus on strategic issues facing the or-

ganization• Clear separation of governance and manage-

ment• Clear separation of individual member needs

and organizational purpose• Ability to meet competitiveness pressures• Ability to better identify member needs and

address them• Credibility in pushing for democratic and eco-

nomic reform issues



proving their governance procedures as well as developtheir own methods and approaches.One distinctive fea-ture of voluntary business associations is the fact thatthey depend on dues-paying members for survival. Thiscan be both a liability and an opportunity in relation togood governance. By the nature of their existence, as-sociations are accountable to their dues-paying mem-bers. There are a number of stakeholders that may havea direct interest in associations’ survival and perfor-mance, but at the end of the day there is only one groupof “shareholders” – the members. At the same time, itis the members who form the governing bodies of busi-ness associations. This raises a number of questions re-lated to the strategic direction of organizations, espe-cially in countries with poor governance and high levelsof corruption. For example, how do you improve gov-ernance in an association if its own members are nottransparent and have few incentives to implementchange? Where would the pressure come from? Whohas the credibility? How do you put in place a transpar-ent advocacy process without making your membersrid their own ranks of corruption in the firstplace?Another issue in this regard is that many associa-tions in emerging economies are still working to becometruly representative organizations. Rather than focusingon advancing the interests of the broad-based businesscommunity they may be trapped in responding to theneeds and interests of just the bigger, more powerfulmembers – especially those who provide visibility forthe organization. If such members “capture” the board,it can create a host of governance problems, both fromthe strategic and managerial perspective.There are sev-eral other trends in business associations around theworld that intensify the need for governance reform.One such trend is tolerance for poor performance. Whilethe private sector is focused on concrete outcomes andrewards for well-performing individuals and organiza-tions, the non-profit sector – of which business associa-tions are a part – tends to exhibit much higher tolerancefor weak performance.

Such attitudes, however, are increasingly losing theirground, especially as competitive pressures of the pri-vate sector are increasingly mirrored in the non-profitcommunity. With continued globalization and the open-ing of economic borders, companies are not only gain-ing access to new markets, they are gaining access tonew service providers, including new possibilities forassociation. Local business associations, therefore, mightwant to begin to ask themselves a question: “What do Iprovide for my current and potential members that as-sociations in others parts of my country or other coun-tries cannot provide?” In other words, as business asso-ciations have to compete with other associations in theirfield, within the borders of their country and beyond,they have to figure out how to remain competitive and

The Business Case: Benefits of Good Asso-The Business Case: Benefits of Good Asso-The Business Case: Benefits of Good Asso-The Business Case: Benefits of Good Asso-The Business Case: Benefits of Good Asso-ciation Governanceciation Governanceciation Governanceciation Governanceciation Governance

TransparencyTransparencyTransparencyTransparencyTransparency• Good association governance provides the neces-

sary mechanisms for instituting transparency withinorganizations on several levels. Above all, it is trans-parency in decision-making, both in terms of elect-ing the leadership as well as in making and com-municating strategic and business decisions per-taining to operations of an association. The impor-tance of transparency should also be stressed as itrelates to the management of resources – financialand human – well-governed associations are bet-ter positioned to fulfill their fiduciary duties trans-parently before their members.

Creating mission-driven organizationsCreating mission-driven organizationsCreating mission-driven organizationsCreating mission-driven organizationsCreating mission-driven organizations• Good governance is essential in getting association

leadership to outline the overall purpose of the or-ganization and ensure that it remains focused onits core mission in its operations.

Ability to attract and retain high quality staffAbility to attract and retain high quality staffAbility to attract and retain high quality staffAbility to attract and retain high quality staffAbility to attract and retain high quality staff• Non-governmental organizations in emerging mar-

kets, and business associations are not an excep-tion, often find it difficult to retain high quality staffwho can find better paying jobs in the private sec-tor. Putting in place better governance standardsensures that staff receives more opportunities todevelop and grow on the job in an association.

Proper focus on strategic issuesProper focus on strategic issuesProper focus on strategic issuesProper focus on strategic issuesProper focus on strategic issues• An association’s survival depends on its ability to

identify emerging issues and to position itself as aleader in addressing those issues. In other words,successful associations remain relevant for mem-bership in any economic climate and provide thenecessary solutions to members’ problems. Theability to identify emergent issues is directly tied tothe governance structures of organizations. If muchof the governance capacity is wasted on managingorganizations, it comes at the expense of devotingenough time and attention to the identification ofissues and crafting a proper response strategy.

Credibility in pushing for democratic and eco-Credibility in pushing for democratic and eco-Credibility in pushing for democratic and eco-Credibility in pushing for democratic and eco-Credibility in pushing for democratic and eco-nomic reform issuesnomic reform issuesnomic reform issuesnomic reform issuesnomic reform issues• Associations fulfill their primary role through public

policy advocacy, but being a credible advocate onprivate sector issues requires that associationsthemselves are well-governed. In addition to help-ing ensure that associations represent the views ofall their constituents (and not just a select few),good governance is a public statement by associa-tions to turn word into action when talking aboutdemocratic reform, anti-corruption, corporate gov-ernance, and other issues.



adaptable in order to survive. For instance, how preparedis a business association in Manila or Lima to competeagainst much larger competitors from other countries thatmay be willing to attract major companies in the Philip-pines or Peru as members? Successful associations neverstop thinking about their potential competition and properresponse strategies. Being able to actively respond to suchpressures means associations have to be fast-paced anddynamic, more so than ever before, and good governanceis a crucial first step in getting there. This also means thatassociations should strive to put in place at least the same,if not higher, level of governance standards found in theprivate sector.Good Governance as the Essence of Demo-cratic Principles Beyond the business case, another reasonfor instituting good governance mechanisms is rooted inthe underlying idea of associations and their fundamentalrole in society. Business associations – as representativeorganizations – must embody democratic values and ide-als to fulfill their representative role. Business associationshave to be able to discern the interests of their members,define their own agenda, and cater to the needs of theentire membership, not individual members. Good gover-nance and transparent decision-making are absolutes forthis to occur. In describing the representative role of asso-ciations in general, Alexis de Tocqueville once wrote: “Whenan opinion is represented by a society, it necessarily as-sumes a more exact and explicit form. It numbers its par-tisans and engages them in its cause; they, on the otherhand, become acquainted with one another, and their zealis increased by their number. An association unites intoone channel the efforts of divergent minds and urges themvigorously towards the one end which it clearly pointsout.”Business associations are no exception in this regard.If an association does not have the proper governanceprocedures to ensure that it represents the opinion of allof its constituents – rather than the opinion of just someof its most prominent constituents – it does not subscribeto the principles that underlay associations as representa-tive organizations (as envisioned by de Tocqueville). Thisis an issue apparent in many business associations today –trying to achieve the proper balance between representingthe views of the business community, rather than one ortwo dominant members who may “capture” the board anduse the organization to their own benefit. Achieving broad-based representation as well as transparency in decision-making through good governance is essentially what givesassociations the credibility with political and regulatory bodiesas well as the public in the democratic policymakingprocess.The trend of having government officials on theboards of business associations is also a troubling one thatundermines the fundamental role associations play in asociety. In many countries the argument is that having gov-ernment officials within business associations is beneficial– it provides access as well as key resources crucial to thesurvival of organizations. These may be valid points, but,

ultimately, how can an association approach legal and regu-latory reform issues and push for change if its ability todisagree with the government is limited by its direct depen-dency on it?Where Do You Begin?Certainly, various orga-nizations have different needs in regards to associationgovernance reform. One key issue is that different coun-tries present business associations with a variety of legaland institutional challenges that make each governanceproblem unique. What works in one country may not workin another simply due to differences in legal requirementsaffecting business associations. Yet, there are general stepsand model guidelines, which any association may follow inorder to improve how it is governed and, more impor-tantly, redefine how successful and sustainable it is:

• Create mission-driven organizations.• Update bylaws as needed.• Develop clear yearly strategic plans and a• forward looking 5-year strategic plan.• Outline job responsibility of board members, chair

man, and staff to avoid duplication of efforts.• Capture key policies and values in an association gov-

ernance code.• Establish relevant board committees, limit the num-

ber of committees board members can serve on, and pro-vide staff support to committees.

• Create incentives for board members to be engagedin activities of the board.

• Engage in a systematic renewal of board composi-tion.

• Evaluate the performance of board members.• Develop an ethics and conflict of interest code for

the board and for staff.• Establish clear procedures for nominating board mem-

bers and introduce board tenure limits.• Enforce rules and standards.• Focus the board’s attention on policy and impact is-

sues rather than operations.Improving association governance plays an important

part in resolving the issues facing business associations everyday around the world.

Good governance provides the necessary mechanismsfor organizations to remain more dynamic, more able todeal with emergent issues by being strategically prepared,develop and deliver valuable services to members, andfulfill their advocacy role.

Conversely, without good governance, associations can-not effectively fulfill their key representative role as a voiceof the private sector in a democratic policymaking pro-cess.

We are grateful to the Centre for International PrivateEnterprise (CIPE) for permission to publish this article.(*Aleksandr Shkolnikov is the Senior Program Officer for the Glo-bal Programs at CIPE)


FOREIGN INSIGHTS (II)FOREIGN INSIGHTS (II)FOREIGN INSIGHTS (II)FOREIGN INSIGHTS (II)FOREIGN INSIGHTS (II) | Nigeria-Japan Relations: A Yawning Trade Gap

he Japanese economy is one of the strongest in the world. It ranks second after theUnited States of America in terms of Gross National Products (GNP). Japan’seconomy is highly diversified and very competitive, ranking 19th among 111 coun-tries on productivity. It also boasts of a highly educated labour force and has goodsavings and investments’ culture. Today, measured on a purchasing power parity(PPP) basis, Japan is the third-largest economy in the world after the US andChina. Japan uses planned development of science and technology, and has astrong work culture which benefits the country as a whole. It also stresses goodrelationships between the industrial sector and national government. The country’sindustrial sector is heavily dependent on imported raw materials and crude oilwhile its tiny agricultural sector is highly subsidized and protected, with crop yieldsamong the highest in the world.

Nigeria, a petroleum based economy, is located in the Sub-Saharan Africa re-gion. The oil-rich country is Africa’s most populous nation and is composed ofmore than 250 ethnic groups. In the past years, economic development had been

* By Charles Ujomu


Nigeria-Japan Relations: A Yawning Trade Gap | FOREIGN INSIGHTS (II)FOREIGN INSIGHTS (II)FOREIGN INSIGHTS (II)FOREIGN INSIGHTS (II)FOREIGN INSIGHTS (II)

hindered by years of military rule. However, the variousreforms embarked upon to tackle corruption, mismanage-ment, and restoration of democracy have somehow putNigeria back on the path towards attaining its full eco-nomic potential, and as one of the key economies to reckonwith in Africa. The country is classified as an emergingmarket and is rapidly approaching middle income status.Nigeria, with its abundant natural and human resources,was ranked 37th in the world in terms of GDP-PPP in2007.

Japan Vs Nigeria: Some Demographic and Physical

FeaturesJapan, with an annual population growth rate of -0.191percent, has a population of about 127.08 million makingit the world’s tenth most populous nation. Japan’s popula-tion size is attributed to fast growth rates experienced dur-ing the late 19th and early 20th centuries. In recent timeshowever, this trend has changed as Japan now experiencesnet population loss; 7.87 births/1,000 population against9.26 deaths/1,000 population (2008 est.). Obviously, thisis due to falling birth rates, almost no net migration, highpopulation densities and its life expectancy at 82.12 yearsof age as of 2008, one of the highest in the world. Nige-ria, on its part, is the eighth most populous country in theworld with an annual population growth rate of 1.99 per-cent. The country is the most populous in Africa and evenconservative estimates have it that more than 20 percentof the world’s black population lives in Nigeria. Accordingto the United Nations, Nigeria has been undergoing explo-sive population growth and now has one of the highestgrowth and fertility rates in the whole world. Unlike theJapanese case, birth rate in Nigeria is significantly higherthan death rate at 37.23 and 16.88 per 1000 people re-spectively. Nigeria’s relatively low life expectancy rate at46.94 years is not unconnected to the country’s generallypoor healthcare system and living conditions.

Japan, like other post-industrial nations, faces the ben-efits as well as the potential shortcomings associated withaging population. It is on record that while young popula-tions such as those in Sub-Saharan Africa, (Nigeria as apoint of reference) unavoidably face problems of pov-erty, crime and underdevelopment, older populations suchas Japan enjoy a much higher quality of life as evident inJapan’s life expectancy of 82.12 years. Only 11.6 percentof the population in Japan was 65 years or older about 20years ago, but projections then were that 25.6 percent wouldbe in that age category by 2030. Those estimates howevernow seem low given that 21.2 percent (2009 est.) are al-ready 65 and above, now the world’s highest. For Nigeria,3.1 percent of the population is 65 years and over and thisis far below what obtains in Japan. A number of factorsare actually responsible for small/large families in the twocountries. High/low education, devotion to raising healthychildren, early/late marriage, increased participation of

Figures in red are projected

Po

pu

lati

on

in

mil

lio

ns

Japan, with an annual population

growth rate of -0.191 percent, has

a population of about 127.08 mil-

lion making it the world’s tenth

most populous nation. Japan’s

population size is attributed to

fast growth rates experienced

during the late 19th and early 20th

centuries.

Source: CIA World Fact Book


FOREIGN INSIGHTS (II)FOREIGN INSIGHTS (II)FOREIGN INSIGHTS (II)FOREIGN INSIGHTS (II)FOREIGN INSIGHTS (II) | Nigeria-Japan Relations: A Yawning Trade Gap

women in the labour force,education about the prob-lems of overpopulation andhigh costs of child educa-tion amongst others are evi-dently responsible for thetrends and population pat-terns seen in both Nigeriaand Japan.

Nigeria, a West Africancountry, bordering the Gulfof Guinea, and lying be-tween Benin and Cameroonhas a total area of 923,768square kilometer. Japan, anEastern Asia nation, locatedon the island chain betweenthe North Pacific Oceanand the Sea of Japan, eastof the Korean Peninsulaboasts of a total area of 377,835 square kilometer. Nigerian area is slightly more thantwice the size of California and almost two and half the size of Japan. In terms ofland use, Nigeria’s arable land of 33.02 percent is higher than that of Japan, 11.64percent. While about 1.41 percent of the landscape in Nigeria is water, Japan has lessthan one percent of its total landscape as water area. This explains the fact thatNigeria has more in terms of coastal areas than Japan. Ironically, Japan producesmore in the area of fishing and some other aquatic activities than Nigeria. On theother hand, land use in Nigeria is threatened by soil degradation, rapid deforestation,urban air and water pollution. Water, air, and soil have suffered serious damage fromoil spills. Japan too has some serious environmental issues contributing to the deple-tion of its resources. Acid rain resulting from air pollution from power plant emis-sions, acidification of lakes and reservoirs (degrading water quality), all threaten aquaticlife, even as Japan is known to be one of the largest consumers of fish and tropicaltimber in the world.

Comparing Economies: Japan Vs NigeriaJapanese economy witnessed a phenomenal growth after the Second World War andup till the ‘80s, to become the second largest economy in the world. The country’smassive diversified manufacturing sector which has produced high-quality productssuch as electronics and cars, much in demand in many international markets, is prin-cipally linked to the economic growth witnessed in Japan over the past decades. Also,the post-war Japanese economy which was largely closed to foreign competition throughrestrictive regulations and high tariffs aimed at protecting domestic industries cameunder heavy pressures by its trading partners and competitors such as the UnitedStates. Hence, Japan began to open its economy to foreign competition in the late1980s. This resulted in a higher rate of imports, which lowered trade surpluses untilearly in the 1990s. On the other hand, Nigerian economy is overly dependent on thecapital-intensive oil sector, which provides 20 percent of GDP, 95 percent of foreignexchange earnings, and about 65 percent of government revenue.

The country’s largely subsistence agricultural sector has not kept up with rapidpopulation growth, and Nigeria once a large net exporter of food, now imports someof its foods. According to the Central Intelligence Agency’s World Fact Book, theestimated GDP-Purchasing Power Parity of Japan (2008 est.) is US$4.4 trillion andthe GDP per capita is US$34,200 while Nigeria on the other hand has US$338.1billion GDP-PPP and US$2,300 GDP Per Capita respectively. This clearly shows that

Key Demographic and Physical Features: Nigeria and Japan

Source: World Fact Book - 2008

While about 1.41

percent of the

landscape in Nige-

ria is water, Japan

has less than one

percent of its total

landscape as water

area. This explains

the fact that Nigeria

has more in terms

of coastal areas

than Japan. Ironi-

cally, Japan pro-

duces more in the

area of fishing and

some other aquatic

activities than

Nigeria.



Japanese economy is worth 12 times more than Nigeria’sin terms of GDP-Purchasing Power Parity and 13 timesbigger than Nigeria in the area of GDP Per Capita as of2008 estimates.

Japanese economy is highly advanced and dominatedby the services sector, which accounts for 66.4 percent.The industrial sector, once the key driver of Japan’sgrowth, now contributes 27.9 percent of the gross do-mestic product while the agricultural sector accounts foronly 4.4 percent of the economy. Distinctively, Japan hassome structures that have marked its rapid rise from theashes of the Second World War to preeminence espe-cially in the 1980s. Its manufacturers, suppliers and dis-tributors work closely together in informal but tight set-tings called ‘keiretsu’, with intimate support from finan-cial institutions and government. This undoubtedly couldbe responsible for the much progress and growth experi-enced in the Japanese industrial sector.

The Nigerian economy sectoral contribution patternis largely different from that of Japan. In Nigeria, theindustrial sector contributes the least to the economy,accounting for about 10 percent. This somehow is notsurprising as the country’s manufacturing sector keepsstruggling with capacity underutilization, low funding fromboth the government and the various private financialinstitutions in the country, amongst others. The servicessector in Nigeria accounts for about 20 percent of thenations’ GDP, about one-third the size of that of Japan,

Top 10 Economies in the World by GDP-PPP

Percentage of GDP contributed by eachsector in the top ten economies of the

world



while agricultural sector in Nigeria accountsfor about 70 percent to the economy. Ironi-cally, Nigeria’s agriculture has a higher per-centage contribution to its economy than theJapanese, yet this sector cannot support thenation’s teeming population in the area offood production. It still relies heavily on im-portation of food to augment the local pro-duce. This essentially is as a result of the sub-sistence system of agriculture being practicedin Nigeria as mechanization is still at infancy.However, Japan’s tiny agricultural sector ishighly subsidized and protected, with cropyields among the highest in the world. Japanmaintains one of the world’s largest fleets andaccounts for nearly 15 percent of the globalcatch.

For quite some years, Japan experienceddeflation (an annual drop in prices) as thecountry’s customers had grown accustomedto dropping prices. In 2008 however, thetrend was reversed as the whole world washit by rising oil, food and commodity prices.Source: World Fact Book - 2008

Key Economic Indicators: Nigeria and Japan



inflation figure of 10.60 percent as at 2008. Interestingly,while the Japanese government tries to manage its infla-tion rate for sustained growth and stability of the economy,Nigerian government is seriously engaged with some eco-nomic measures that would keep the nation’s inflation ratejust below 2-digit mark. As at the end of February 2009,Nigerian’s inflation rate stood at 14.6 percent while that ofJapan was -0.10 percent.

In the area of investment as a percentage of grossdomestic products, Japan’s investment clearly outweighsthat of Nigeria even though in percentage terms theymaintain some closeness at 22.5 percent and 21.4 percentof GDP for both Japan and Nigeria respectively. Japaneseinvestment as a proportion of its gross domestic products(US$978.3 billion) alone is far higher than the whole ofNigeria GDP-Purchasing Power Parity (US$338.1 billionest. 2008). This again reflects the size of the Japaneseeconomy compared to that of Nigeria.

Nigeria – Japan Trade RelationsJapan’s trade relation with Africa is a somewhat slow trendestablished due to some socio-economic issues relating toapartheid in South Africa. Japan’s dependence on raw ma-terials from South Africa made it almost impossible forTokyo (in the two decades of 70s and 80s) to supportother African states in their fight against the minority gov-ernment and its policy of apartheid. Apparently, Japan’spolitical, economic and diplomatic relations with Sub-Sa-haran Africa from the mid-70s to early 90s reflect a rathersluggish and lukewarm trend as Tokyo was not in any waywilling to join in the struggle against apartheid. But all thishas changed with the end of apartheid. Nigeria ranked 5th

behind South Africa, Liberia, Egypt and Algeria in termsof exports transactions carried out with Japan between2004 and 2008.

In terms of imports, South Africa also maintained num-ber one position while Nigeria ranked second. In 2008,Nigeria was Japan’s fifth major trade partner in Africa (af-ter South Africa, Egypt, Liberia and Algeria). Japan is thesecond largest import partner of Nigeria in Sub SaharaAfrica region and the fifth largest export partner withinthe region. Primarily, Nigeria exports crude oil, cocoa and

Nigeria Trade: GDP by Sector

Japan Inflation Rate

Source: NBS

Source: IMF

Source: IMF

With prices suddenly going up, Japanese inflation rate rose1.5 percent in May 2008, its highest rate in ten years. Ac-cording to the CIA, Japanese estimated inflation figure for2008 is 1.8 percent. Nigeria on the hand has an average

Nigeria-Japan: Exports & Imports

Source: Japan External Trade Organization

Nigeria, Trade with the World (mio euro)

Nigeria, Trade with the European Union (mio euro)

Source: Ministry of Internal Affairs & www.tradingeconomics.com

Source: World Bank

Annual Inflation Rate



rubber amongst others to Japan while it imports ma-chineries, transportation equipment, manufacturedgoods, chemicals and food and live animals from Ja-pan. Yet, Nigeria’s position in the international tradespace with Japan in Africa is still significantly low com-pared to her trade relations with countries like theUS (51.6% exports), Brazil (8.9% exports) and Spain(7.7% exports) in 2007 alone. Also, in terms of im-ports, China, Netherlands, US, South Korea, UK,France, Brazil and Germany were top on the list ofNigerian imports partners.

Nigeria – Japan Trade Relations: Exports

FiguresNigeria has consistently ranked among the top fivecountries in terms of exports to Japan over the pastyears. Its exports grew by over 140 percent between2004 and 2008, accounting for 5.02, 6.33, 5.97,6.31and 6.92 percent of total exports from Africa toJapan in 2004, 2005, 2006, 2007 and 2008 respec-tively. In 2007 and 2008 alone, Nigeria recorded 26.19percent and 7.5 percent year-on-year growth in itsexports to Japan, ranking fifth after four other Af-rica countries; South Africa, Liberia, Egypt and Alge-ria. The total value of exports from Nigeria to Japanrose from US$731.80 million in 2007 to US$923.48million, representing a 26.19 percent growth in ex-ports within the period. According to the CIA WorldFact Book, Nigerian exports stood at US$83.09 bil-lion (est. 2008), far lower than that of Japan’s (US$776.8billion). Japan’s major export partners in the world are US,China, South Korea, Taiwan, and Hong Kong. In 2007,20.4 percent of Japanese exports went to US, 15.3 percentto China, and 7.6 percent to Taiwan while Hong Kong got5.4 percent.

Nigeria – Japan Trade Relations: Imports FiguresIn terms of imports from Japan, Nigeria ranks second inAfrica after South Africa. South Africa’s dominance ofboth the exports and imports trade relations with Japanover the years dates back to the apartheid era. The tradetie continues even till today as evidenced by the availablestatistics. South Africa alone was responsible for about 43percent of imports from Japan in 2008, buttressing thelong-term established trade pattern. Nigeria’s imports fromJapan rose by 23.24 percent from 2004 to 2008. A de-tailed analysis of Nigeria’s imports from Japan shows 16.4,10.06, 6.11, 4.56 and 8.42 percent in 2004, 2005, 2006,2007 and 2008 respectively. Nigeria’s imports from Japanwent up by 60.9 percent and 159.4 percent in 2004 and2008, showing a remarkable improvement.

In absolute terms, Nigeria’s imports only moved fromUS$674.18 million in 2007 to US$1.75 billion in 2008. In2007 alone, Japan’s import from China was 20.5 percentof its total imports in that year. This shows a very strong

trade tie that exists between the two countries. During thesame period, 11.6 percent, 5.7 percent, 5.2 percent, 5 per-cent, 4.4 percent and 4.2 percent of Japan’s imports werefrom US, Saudi Arabia, UAE, Australia, South Korea andIndonesia. It can be deduced from this that the rather lowJapanese imports from Nigeria in the area of petroleumand petroleum products is not unconnected with its strongties with both Saudi Arabia and UAE (also major exportersof petrol and petroleum products). However, Nigeria stillranks among the major African trading partners of Japan.According to the CIA, Japanese total imports stood atUS$696.2 billion (est. 2008) while that of Nigeria wasUS$46.36, less than one-tenth the size of Japan. A criticallook at the trade relationship between Nigeria and Japanshows that there are huge opportunities for both countriesto tap into, especially considering manufactured productsand other machineries from Japan and also Nigeria’s pe-troleum and petroleum products needed by Japan.Expectedly, it is believed that the vantage positions occu-pied by these two nations in Asia and Africa clearly defineand provide good platform for much bigger trade rela-tions.(* Charles Ujomu is an Analyst, Zenith EconomicQuarterly)

Nigeria, Trade with the World (mio euro)

Source: IMF


By Ibrahim Abubakar

MACROECONOMIC ENVIRONMENTThe Nigerian economy in first quarter 2009, recorded mixed performance in several parameters. Some of the indica-tors began on a downbeat note but rebounded at the tail end of the quarter. Gross Domestic Product (GDP) in the firstquarter started with a seasonal slump when compared with the corresponding period of 2008. Inflation ended thequarter lower than last year’s end position. Foreign exchange reserve plunged as export revenues dwindled. The nation’scurrency, the naira, lost value significantly against other major world currencies but stabilised towards the end of thequarter. The Monetary Policy Rate remained unchanged during the quarter. Bearish sentiments continued their domi-nance in the capital market as share prices hovered around a low ‘steady zone’. In the international oil market, crude oilprices plummeted but recovered and hovered around US$50 per barrel.

GROSS DOMESTIC PRODUCTGross Domestic Product (GDP)growth rate was estimated at 6.32percent in the first quarter, up from5.78 percent in the preceding quar-ter. Real GDP growth continued tobe driven by the non-oil sector. Agri-culture continued its dominance asthe major contributor to GDP. Com-pared to the same quarter last year,GDP growth rate dipped marginallyfrom 6.4 percent. For the oil sector,the lingering crisis in the Niger Deltacontinued to hamper production, asoutput declined by 5.7 percent fromthe preceding quarter. Real GDPgrowth has been projected to suffer a slump from about 6.4 percent in 2008 to 5.75 percent in 2009.

Source: CBN, NBS

INFLATIONThe year-on-year inflation experi-enced haphazard trend with mar-ginal movements during first quar-ter 2009. The headline inflationrate has remained in the ‘doubledigit zone’ for three consecutivequarters, closing at 14.4 percent.Inflationary pressures which begansince the second quarter of lastyear, surged to a 3-year high of15.1 percent in December 2008.It dipped in January 2009 mainlydue to the drop in pump price ofpetrol from N70 to N65 per litre.However, the fall was short-livedas inflation returned sharply in

February with an upward swing to 14.6 percent. The inflationary pressures were attributed to rising food prices (maize,yam, guinea corn, millet, meat, fruit/vegetables among others) and higher prices of imported manufactured goods. Itclosed the first quarter at 14.4 percent

Source: CBN


EXTERNAL RESERVEThe nation’s external reserves continuedits downward slide during the quarterunder review, amidst CBN’s effort tocheck a sharp run down. Foreign exchangereserve shrunk by about 27 percent(about US$17 billion) in just sevenmonths, from a record high of US$64billion in August 2008. The stock of ex-ternal reserves stood at 18 months lowof US$47 billion as at March 2009, ca-pable of financing up to 15 months ofimports. Foreign exchange reserves hit anall-time high of US$64 billion in August2008 as a result of record high crude oilprices. The dwindling external reserves can be attributed to the plummeting prices of crude oil; lower inflows of directand portfolio investments; lower Diaspora remittances and the country’s unfavourable trade balance with major econo-mies such as the United States.

Source: CBN, *Based on CBN’s announcement

INTEREST RATEAmidst spiralling cost of funds that causedfears among manufacturers, the Central Bankof Nigeria (CBN) left interest rate unchangedin the first quarter of 2009. The MonetaryPolicy Rate (MPR) has remained at 9.75 per-cent for two consecutive quarters.

The average monthly interbank rate(NIBOR) went up across most tenors aftersigns of moderations in January. Volatilitywas higher on the call and 7 Days tenors.The rates on these tenors both peaked ashigh as 26.08 percent. Liquidity pressureeased in January due to a total of N120 bil-lion worth of matured bills repaid into thesystem, among others. Although this was notenough to rein in rates as the interbank rateinched up again in February. In March how-ever, rates eased due to the disbursement tothe three tiers of government of aboutUS$1.5 billion and N254 billion (about US$1.7billion) from the excess crude account andFederation Account, respectively.

In terms of the cost of borrowing, the aver-age Prime Lending Rate (PLR) had spiralmovements with periods of ups and downs.The average PLR hit 18 percent twice dur-

Source: Money Market Association of Nigeria (MMAN)



ing the quarter, reflect-ing the risk premium thatbanks demanded in or-der to lend. However,the rocketing rates madethe Bankers’ Committeeto cap lending at nomore than 24 percent inMarch. Also the lendingrates were to be at most7 percent above the de-posit rate, which ispegged at a maximum of15 percent.

The average deposit rate went up marginally across most investment horizons during the quarter. Rates declined margin-ally in January due to increased liquidity. However, they climbed back up in February with higher returns on theOvernight and 270 Days, which went up by 36 and 47 basis points respectively. In March, rates increased further acrossmost tenors with the highest returns on the 270 Days, and 90 Days tenors which went up by 164 and 136 basis pointsrespectively. However, rates are expected to ease as banks will not source for deposits at above 15 percent.


CAPITAL MARKETThe capital market continued its losing run in the first quarter of 2009 with share prices unable to hold on to anymeaningful recovery. The All-Share Index (ASI) and market capitalisation closed the quarter lower at 19,851.89 and

N4.48 trillion, respectively, from 31,450.78 andN6.957 trillion in the preceding quarter. Inves-tors have remained on the sideline as the mar-ket took a plunge by 29.7 percent in just a monthin January. A major concern among investorswas whether stock prices ‘bottomed out’ as themarket drifted sideways in the months of Feb-ruary and March, with market capitalisation hit-ting a fresh 26 months low of N4.4 trillion. Onthe upside, the market witnessed some gains inconfidence which culminated in foreign listingsas South Africa’s Pinnacle Point Group listed 4.57billion units at N6.00 per share. The oversub-scription of the Lagos State Bond by N8.9billionwas also another show of confidence as marketcapitalisation rose marginally in February. Con-cerned about dull sentiments in the market, theNSE introduced five new indices (NSE 30 In-dex, NSE Food/Beverage 10 index, NSE Bank-ing 10 index, NSE Insurance 10 index, and NSEOil/Gas 5 index) to deepen trading activities onthe floor of the Exchange. However, the bearsdominated activities and all the indices slumbered.

Source: NSE

Source: NSE


EXCHANGE RATEThe nation’s currency, the naira,continued its freefall in the firstquarter of 2009, it howeverstabilised at the tail end of the quar-ter. The naira has lost about 25percent of its values since Novem-ber 26, 2008, tumbling to a recordlow of N145.2/US$ as at endMarch 2009. In a precautionarymove, the CBN suspended itsWhole Sale Dutch Auction System(WDAS) and reverted to the RetailDutch Auction System (RDAS)where banks’ purchases of foreignexchange were cash backed. The intervention shored up the naira temporarily, as the exchange rate stabilised at aboutN145/US$, offering some relief to the authorities. However, the scarcity of the dollar widened the gap between theofficial and parallel markets, generating uncertainty as the naira remained vulnerable to speculations. The apex bankstepped in by offering to fund the market with about US$100 million and US$200 million on a weekly basis. The CBNfurther moved to firm up the market through a mixture of polices such as pegging the personal and business travelallowances at US$4,000 and US$5,000, respectively; requesting oil companies to sell dollars to the apex bank instead ofcommercial banks; banning interbank forex trading; and reforming the bureaux de change operations into two groups:catergory A (with minimum paid up capital of N500million and mandatory deposit of US$200,000) and category Bwhich are to operate under their existing licensing requirements.

OIL PRICE MOVEMENTThe international crude oil market witnessed asteady but cautious climb in prices in first quar-ter 2009 after plummeting to as low asUS$33.89 per barrel at the beginning of thequarter. However, after sliding by about threepercent in the first two months, oil prices re-bounded strongly ending the quarter at aroundUS$50 per barrel. Crude oil prices reboundedafter a more than expected cut from OPECand glimpses of recovery in the US in the lat-ter part of the quarter. The price of Nigeria’sbrand of crude oil, Bonny Light, gained aboutUS$3 in the first quarter, from US$49 perbarrel in December 2008 to about US$52 per

barrel as at end March 2009. Industry analysts attributed the rebound in crude oil prices to falling supply and better thanexpected demand towards the end of the quarter. Although there was no clear direction for crude oil prices, OPECmembers implemented only 2.3 million barrels per day of their announced 4.2 million barrels per day productioncutbacks. In the months ahead, crude oil output is expected to drop as budget planners in Venezuela, Iran, Saudia Arabiaand Oman among others are stranded with the possibility of running production deficits.

Source: CBN

Source: Energy Information Administration

EDITORIAL Reporting Standards routes to normalcy … 5 No 2 April 2009.pdfbehalf of Dr. Erastus B...

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