– By Chief Raymond H. Ihyembe (B.1733)

Keynote Address At Barewa Old Boys Association Annual Dinner Night, Kawo, Kaduna, November, 3, 200

I gives me great pleasure to be here today to talk on a topic which is obviously of interest, not only to all players in the financial services industry, but to every individual in our society. In truth, we all depend in one way or the other, on the activities of the financial institutions to lead our normal lives in any society in which we may find ourselves. Financial institutions are very important in the development of any economy. In fact, the level of sophistication of any economy depends in large part, on the level of sophistication of its financial institutions. Developed economies are characterised, in part, by a network of complex and sometimes specialised but efficient financial institutions. Essentially they play catalytic roles in such economies serving as the oil that greases the engine of the economy and which ensures that the economic engine runs efficiently.
There are various categories of financial institutions and this is also the case with Nigeria. First there is the activity category, which is made up of the regulators and the players. Among the regulators, the most important ones are the Central Bank of Nigeria (CBN), Nigerian Deposit and Insurance Corporation (NDIC), the Securities and Exchange Commission (SEC), and the National Insurance Commission (NAICOM). These bodies are charged with ensuring that the players keep to the rules and that the integrity of the market is not breached.

Among the players, further categorisation is made on the basis of the type of service the institution provides. The two broad categories are the Money Market and the Capital Market players. With the approval of universal banking in Nigeria, the line separating these types of banks has become blurred. Under the universal banking guidelines, any institution can play in both markets, provided it meets the requirements set out by the CBN.

Furthermore, the relevant regulatory body must supervise all such activities undertaken by the financial institution. This means that all capital market activities carried out by say, a commercial bank, must come under the supervisory searchlight of the SEC, Similarly, NAICOM must regulate all insurance activities of such banks. As it is to be expected, the most visible financial institutions in the Nigerian economy are the banks. In fact putting it more succinctly, it is the financial institutions, more than any other institution apart from Government, which have the greatest influence on economic activities in Nigeria. In well- developed economics however, the commercial banks operate at the short- term end of the market where they generate liabilities (deposits) and create assets/loans and advances of relatively short tenure. Usually, such assets or liabilities do not exceed three years, although a small portion of them may be tenured to last longer than that.

There are also the Merchant Banks, known as Investment Banks outside Nigeria. These are actually key players in the advisory end of the market and they structure deals for long term transactions. They are less fund-based in their activities, unlike the commercial banks and are more into fee-based services. They are also very active in the capital market, which is the market for long-term funds.
Some other banks that need to be mentioned here include the Development Finance Institutions (DFIs), examples of which are the Nigeria Industrial Development Bank (NIDB) and the Nigeria Bank for Commerce and Industry (NBCI) and National Economic Reconstruction Fund (NERFUND). There are also the Primary Mortgage Institutions (PMIs), regulated by the Federal Mortgage Bank. There are also numerous Community Banks in many states of the country. Other key financial institutions are the insurance companies, the stock

broking houses, the asset management firms and finance companies. Insurance companies offer life, non-life and reinsurance services. Their roles are very important in every society especially in the mobilisation of long-term funds and it is expected that with the improvement in the Nigerian economy, their importance and value addition will grow.
The capital market is also being boosted by the on-going privatisation efforts and there is every indication that the Nigerian Stock Exchange will be developed to compete with those of other economies. The stock market is a very important source for the acquisition of financial assets. It also offers .investors the easiest methods of entry and exit into any economy and or company. As the wealth of Nigerians continues to increase, pension and asset management activities will play more prominent roles than they hitherto do. The phenomenon has already gathered steam in Nigeria and will expectedly grow as the economy improves further.

The basic roles of the financial institutions in promoting growth are pretty straightforward. In one sentence, the Financial Institutions could be said to be the catalysts in the process of economic development. They assist the real sector by providing long-term capital and overdraft facilities. In doing so, they are essentially inter-mediators who merely add value to the transactions carried out by players in other sectors of the economy. Take the case of commercial banks for example, they pool financial resources from the so-called funds-surplus entities and make them available to the funds-deficit ones.

Nigeria’s economy was traditionally based on agriculture and trade. Agriculture, including farming and herding, accounts for about two-fifths of Nigeria’s GDP and engages 43 percent of the economically active population. Agriculture contributed more than 75 percent of export earnings before 1970. The need to pay taxes to the colonial government forced Nigerian farmers to replace food-producing crops with cash-producing crops, which the government bought at low prices and resold at a profit. Pre-independence Nigeria, its large population notwithstanding, had very little industrial development - a few tanneries and oil-crushing mills that processed raw materials for export. During the 1950s and 1960s a few factories, including the first textile mills and food processing plants, opened to serve Nigerians. During the 1970s and early 1980s industrial production increased rapidly, principally in Lagos, Kaduna, Kano, and Port Harcourt. Factories also appeared in smaller, peripheral cities such as Calabar, Bauchi, Katsina, Akure, and Jebba, due largely to government policies encouraging decentralization (although these policies sometimes ran counter to solid economic criteria). Nigeria has 194,394 km (120,791 miles) of roads. During the 1970s and 1980s federal and state governments built and upgraded numerous expressways and trans-regional trunk roads. State governments also upgraded smaller roads, which helped open rural areas to development.

Discovered in 1956, petroleum is produced from more than 150 oil fields, mostly in the ·Niger Delta. In the 1960s and 1970s the petroleum industry developed, prompting greatly increased export earnings and allowing massive investments in industry, agriculture, infrastructure, and social services. Since then, however, agriculture has stagnated, partly due to government neglect and poor investment, and partly due to ecological factors such as drought, disease, and reduction in soil fertility. By the mid-1900s, agriculture’s share of exports had declined to less than 5 percent, most of which was contributed by cocoa. Nigeria’s major crops of the mid-1900s included palm oil (of which Nigeria was the world’s leading producer until 1971), peanut oil, rubber, and cotton, all of which were once exported but are now sold mostly locally. During the early and mid-1900s mining contributed an average of about 25 percent of the GDP, depending on the price of petroleum. Nigeria has Africa’s largest reserves of natural gas, most of which coincide with the oil fields. Despite efforts to develop markets for natural gas-including investment in gas-fired electrical installations, a liquefied natural gas (LNG) plant, and fertilizer and chemical ventures-almost three-quarters of production is burned off rather than diverted for use.

Production of coal declined to about 140,000 metric tons, far less than the late 1950s production, largely because the Enugu coal fields are almost exhausted. Also in sharp decline are production of tin (200 metric tons per year) and columbite, which have been mined from alluvial gravels on the Jos Plateau since 1905 but which now yield about 1 percent of their late 1960s levels. In 1998, manufacturing accounted for 5 percent of the GDP, down from 13 percent in 1982. In an attempt to broaden Nigeria’s industrial base, the government invested heavily in joint ventures with private companies. The largest of such projects is the integrated steel complex at Abaokuta, built at a cost of$4 billion but till not operational after almost 20 years. The government has also invested heavily in petroleum refining, petrochemicals, fertilizers, and implements for assembling automobiles and farm equipment. Lack of infrastructure and other unsound economic policies over the years have hampered industrial development by making it difficult for manufacturers to obtain sufficient raw materials and spare parts. Partly as a result, only 30 percent of the country’s manufacturing capacity was utilized in 1996. Despite major programs to extend electricity to homes, only a small portion of rural households is electrified. Demand for electricity outstrips supply, in part because the government agency overseeing energy production is inefficient.

In 1998 Nigeria’s gross domestic product (GDP) was $41 billion. The GDP has varied widely, depending on the price of oil in the international market: $81 billion in 1985, $33-2 billion in 1994, $40.5 billion in 1995. Petroleum now accounts for as much as 98 percent of export earnings and produces about four- fifths of government revenues, in 1998 Nigeria’s gross national product (GNP) per capita was only $300, among the 20 lowest in the world and well below the average for sub-Saharan Africa.

The Nigerian economy became burdened with massive external debt amounting in 1995 to $34.3 billion, most of it owed to other governments and multilateral agencies. In 1996, yearly debt payments totalled $4.7 billion, the equivalent of 38 percent of export earnings or 17 percent of the GDP. As of 1996 Nigeria was $10.2 billion in arrears on its payments of interest and principal. Most of the debt stems from government mega-projects and imports of consumer goods, especially from the civilian regime of 1979 to 1983- The sudden collapse of oil prices in the early 1980s only made matters worse. In recent years international lenders have forced Nigeria to introduce reforms to restructure its economy.

The role of financial institutions therefore, should transcend the traditional provision of funds. The sector should play a much more active role by partnering with other stakeholders and investors to direct the course of industrial development. Financial institutions should step up the level of traditional services offered or rendered to enterprises irrespective of size such as the provision of financial advisory services, investment advice, funds management, project appraisal and finance, and others such as equipment leasing, foreign exchange procurement where necessary and assisting SMEs access to the capital market for long-term funds. But let me say at this juncture that before now the financial sector has been at the forefront of promoting the growth of the real sector through the provision of needed funds and other financial services. In Afribank, financial co-operation with the SMEs is classified under projects of national significance, which enjoy priority consideration. We have been involved in the financing of SMEs over the years and we will continue to do it. The bank has been a major facilitator of the UNDP - assisted Micro-Credit Scheme for poverty alleviation. We also administered and disbursed credit facilities under the Family Economic Advancement Programme and are properly positioned to play even bigger role in the ongoing poverty alleviation programme. We will continue to be involved in projects that will bring about an improved productive base for the economy and which enhance employment opportunities. A situation of high productivity and sustained employment encourages savings thereby enabling financial institutions to mobilise funds for on-ward lending for productive activities.
Supporting SMEs

SMEs are the main stay of economic activities in Nigeria and, indeed, in all other economies. They are central to any effort that would bring about meaningful and sustained economic growth and development. Yet, SMEs are often discriminated against in the funds market. For instance, in the market for short-term funds, financial institutions demand collateral and security conditions that are far stiffer than they demand from large-scale firms and are usually more prepared to charge lower interest rate for bigger firms. This is understandable because lending to SMEs has higher risks than lending to larger, well-managed firms. Similarly, in the market for long-term funds, i.e. the Capital Market, SMEs either find it difficult to meet the listing requirements, or are unaware of the opportunities available therein or are entirely unwilling to be listed for fear of losing control of their enterprises. The problems facing SMEs affect all of us because SMEs exert considerable influence on the rate of development of any economy, including ours by their sheer collective volume of output, employment and spread. Thus, without their development, the economy cannot move forward. Re-Invigorating The Real Sector & Promoting Non-Oil Exports

There are still some constraints in the development of the real sector in Nigeria. Such constraints include a deficient planning process, lack of funding, high cost of borrowing and a near absence of long term funds. Many of such real sector borrowers rely on expensive short-term funds. Again, loan beneficiaries in the past have been known to default in repayment due to a number of reasons including diversion of loans to other uses and the fact that the economy has long been unfavourable to manufacturing. Companies that still manage to operate despite the harsh economic, climate cannot find markets for their products because of low per capita income. Lately the influx of cheap imports from Asia has dealt a further blow on manufacturing. But we cannot and should not continue on this path of decline. Something must be done, and done urgently. One of these is to provide funding for enterprises that are export oriented such as those in the export-processing zones. When manufacturing receives a boost in the EPZ and other industrial areas and these firms are able to export more, Nigeria will be in a position to diversify its sources of foreign exchange to non-oil sources instead of depending largely on crude oil exports. This is the only viable long-term way of stabilising the value of the naira.

Ordinarily financial institutions provide money for viable projects. The criteria for determining viability have to be adjusted in favour of developmental objectives, because if viability is an overriding consideration, the cost of funds will likely remain high. For this reason, investing funds in the development of infrastructure such as telephones, water supply and real estate is imperative. We must now begin to focus more on financing power supply, water, health care and other projects that will bring about the greater development of the real sector, by reducing the cost of establishing them. This will help to create jobs for the teaming population.

Financial institutions should play a more direct role by partnering with government and individuals and corporate bodies to ensure a smooth transition to market economy.
Ø In doing this, they have to facilitate the evolution of novel credit schemes to create a new class of shareholders. Already efforts are being made by some financial institutions to establish a share purchase fund, into which funds can be contributed for onward lending to Nigerians who are interested in buying into firms being privatised. Individual financial institutions are also known to a grant share purchase loans to their customers and to their employees for the same purposes.
Ø Also financial institutions are playing leading roles as financial advisors and consultants to the government firms to be privatised. This should continue.
Ø By playing these roles, they are helping to develop the capital market. Note that financial institutions act as issuing houses, and collecting agents for public issues. Given the large volume of shares involved under the privatisation programme, the financial system will be further deepened thereby enabling the financial services industry to develop the capacity necessary for the development of the industrial, agricultural and other sectors of the economy.

One of the major complaints of most borrowers has been the relatively high cost of borrowing. Interest rates are generally influenced by the rate of inflation, the base rate, the cost of doing business as well as the risk factors attached to either individual borrowers or sectors. One major plan from which to attack this problem of high interest rate should be an all-out war on inflation. This battle cannot be won unless the Government controls money supply and also adopts other prudent fiscal and monetary policies. Unfortunately, money supply also tends to affect the exchange rate. Happily, the Government and the CBN are very much aware of this and are doing all they can to keep money supply and therefore inflation under check.
In solving the problem of funding, the cost of borrowing must also be affordable to those who need the funds. Apart from being affordable, they must also be accessible. This is where the relevance of the novel funding schemes that I spoke about earlier on becomes apparent. Abroad, most corporate borrowers access funds by way of bonds, which can be traded on the floor of the exchange. Such funds are usually long-term and relatively cheaper. It is high time the CBN blazed the trail by commencing the issuance of Government Bonds tradeable in the capital market. Such bonds will be priced on a yield basis, with the price changing almost daily as is the case with ordinary stocks. This will likely be followed by companies with good financial track records issuing corporate Bonds. This way, borrowing costs can be lowered significantly. Such funding will also be of a long-tem ‘1 nature and therefore will be of greater benefit to the real sector. For the bond market to develop and remain attractive, the rate of inflation and the exchange rate will need to be fairly low and stable.

To conclude, we must acknowledge that financial institutions do not exist in
isolation. They exist to render services to individuals and organisations for the generation of wealth in the economy. The continued survival and growth of the financial sector is therefore related to the survival and growth of other sectors of the economy. Since wealth generated in the other sectors finds its way into the financial sector, we have no reason not to support them. The financial sector and the real sector are partners in the onerous task of economic development. The relationship is symbiotic and necessary for the survival of both sectors. Perhaps without the real sector, there will be little reason for financial institutions to be founded and remain in business. Therefore, the relationship should and must be nurtured and sustained.
I wish to thank the National Executive Committee of BOBA for inviting
me to give this paper and hope that I have provided some useful ideas for
further debate and discussions.

Thank you all.