VZCZCXRO4283
RR RUEHMA RUEHPA
DE RUEHOS #0290/01 2051428
ZNR UUUUU ZZH
R 231428Z JUL 08
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC 0064
INFO RUEHUJA/AMEMBASSY ABUJA 9748
RUEHZK/ECOWAS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAWJA/DEPT OF JUSTICE WASHDC

UNCLAS SECTION 01 OF 03 LAGOS 000290 
 
SIPDIS 
 
STATE PASS USAID FOR NFREEMAN, GBERTOLIN 
DOC FOR 3317/ITA/OA/KBURRESS 
DOC FOR 3310/USFC/OIO/ANESA/DHARRIS 
DOC FOR USPTO-PAUL SALMON 
DOJ FOR MARIE-FLORE KOUAME 
TREASURY FOR RHALL, DPETERS 
STATE PASS EXIM FOR JRICHTER 
STATE PASS OPIC FOR ZHAN, MSTUCKART, JEDWARDS 
STATE PASS TDA FOR LFITTS, PMARIN 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV ENRG NI
 
SUBJECT: NIGERIA: U.S. TREASURY VISITOR DISCUSSES HOUSING AND 
MORTGAGES, AFC, STATE BOND ISSUANCE 
 
Ref: A) Septel Lagos 266 
B) Abuja 1147 
 
¶1. (SBU) Summary: During June 19-20 meetings with Richard Hall, U.S. 
Department of Treasury, Nigerian bankers and financiers expressed 
concerns about the need for more coherence in Nigeria's financial 
regulatory environment.  Housing and mortgages hold the most promise 
for investment and high returns.  State governments are going to the 
debt market to finance infrastructure projects, but lack debt 
management capacity. End Summary. 
. 
What Roles, Responsibilities 
for Regulators? 
---------------------------- 
. 
¶2. (U) In June 19-20 meetings with Richard Hall, International 
Economist of the U.S. Department of Treasury, stakeholders took a 
range of positions on what should be the appropriate level of 
regulation in the financial sector.  Bismarck Rewane of Financial 
Derivatives lamented the Nigerian Stock Exchange (NSE)'s attempts to 
control stock prices. (Note: In response to the recent dips in stock 
prices, the Security Exchange Commission (SEC) has been making 
statements about the stock market growing stronger and listed 
companies delivering good returns.  SEC's statements, instead of 
allaying investor fears, have only confirmed concerns about the 
stock market's performance.(Ref B) End Note) He alleged that high 
NSE transaction fees cost foreign investors about USD 4 million on 
every USD 100 million of investment. These costs also deter those 
investors who had exited the market from reinvesting.  Malcolm 
Gilroy of United Bank for Africa (UBA) also believes immediate 
changes are needed to ensure that regulators are not also players in 
the stock market.  He emphasized the need for fewer regulations, 
arguing that the Central Bank of Nigeria (CBN)'s stringent oversight 
is not conducive to the emergence of a sophisticated market.  The 
CBN should let the banks figure certain things out themselves rather 
than controlling them through mandates, he added.  Taking the 
opposite view, Rewane argued the need to have one single regulator, 
possibly the CBN, for the financial sector in order to implement 
correct policies.  He predicted that Nigeria would explore the 
option of a centralized regulatory framework to oversee the entire 
financial sector, including banking, insurance, and capital markets. 
 
 
¶3. (U) Also under debate was the division of roles and 
responsibilities between the Central Bank of Nigeria (CBN), Security 
and Exchange Commission (SEC), and Nigerian Stock Exchange (NSE). 
Professor Doyin Salami of the Lagos Business School said the CBN has 
not acknowledged the fragility and fundamental weaknesses in the 
financial system and has been behaving as if no problem exists. 
Instead of cooperating, the regulators jockey and compete for power. 
 Whereas the SEC exists to regulate the NSE, in reality it has been 
the other way around, Salami contended.  Richard Kramer of African 
Capital Alliance (ACA) also underscored the need for the CBN, SEC, 
and NSE to act in line with their regulatory purviews. 
. 
CBN Governor's Future in Doubt 
------------------------------ 
. 
¶4. (SBU) Salami and Rewane also voiced concern about the rumored 
removal of CBN Governor Chukwuma Soludo and any future role for the 
current Minister of Finance Shamsuddeen Usman at the Central Bank. 
Neither expert thinks that Usman would be the best candidate to 
replace Soludo as Central Bank Governor should Soludo be removed. 
Gilroy agreed that Soludo's future in the job looks bleak, and 
expressed further reservations about President Yar'Adua's policy 
agenda and its implications for the macro-economy.  Gilroy said 
former President Obasanjo had put the economy on an even keel during 
his administration; that economic stability may be shaken if 
President Yar'Adua cannot get beyond the demands of politicians, he 
contended. 
. 
How to Redirect Wealth to the North 
----------------------------------- 
. 
¶5. (SBU) Rewane opined that there are crosswinds blowing over 
Nigeria presently with economic power shifting southward and 
political power shifting northward. Political leaders in the north 
 
LAGOS 00000290  002 OF 003 
 
 
want to redirect economic power from the south to the north, he 
alleged. This desire stemmed from the economic disparity between the 
north and south, where wealth is concentrated in the south.  He 
noted that the per capita income of Port Harcourt in the south is 
seven times that of Maiduguri in the north; he also noted that only 
nine percent of bank shareholdings are in northern hands. Rewane 
believes the "northern conspiracy" to redistribute economic wealth 
has been partially responsible for the recent downward turn in bank 
stock prices on the NSE. 
. 
NESG Supports Establishment 
of Sovereign Wealth Fund 
--------------------------- 
. 
¶6. (U) According to Mansur Ahmed, Executive Director of the Nigerian 
Economic Summit Group (NESG), the Federal Government had set up a 
subcommittee to explore the possibility of creating a sovereign 
wealth fund for Nigeria.  He believes within six to nine months 
concrete plans to establish a fund will be in place, although he was 
uncertain about the potential size of the fund.  He sees the fund as 
a conduit to better utilize foreign reserves through a more market 
driven strategy. (Comment: Ahmed's comment is not really clear given 
that a constitutional amendment would be required for Nigeria to 
have a sovereign wealth fund. End comment) 
. 
Housing Sector, Mortgage 
Present Big Opportunities 
------------------------- 
. 
¶7. (U) The mortgage market and housing sector hold the most promise 
in terms of investment and high returns, stakeholders posited. 
According to Gilroy, the staggering costs of housing and rent 
contribute to the increasing inflation rates in Nigeria's 
metropolitan areas.  He said rental prices on Ikoyi and Victoria 
Islands, the upscale residential and commercial areas in Lagos 
State, easily double in a year without any value added to the 
property.  The situation has worsened in recent years due to a 
confluence of factors, including an expanding middle class, a 
migration of people from Port Harcourt to Lagos, a return of 
successful Nigerians from the diaspora, and an influx of expatriates 
into the oil, banking, and telecommunication industries, Cecilia 
Ibru, Managing Director of Oceanic Bank, elaborated. 
. 
State Governments Head to 
Market to Raise Capital 
------------------------- 
. 
¶8. (U) Gilroy pointed out the recent spate of state governments 
going to the debt market to raise capital, but noted the states' 
lack of capacity for debt management.  Lagos State Government 
(LASG), in particular, has been moving aggressively to the bond 
market to fund plans for massive infrastructure spending. (Note: For 
example, the Africa Finance Corporation is working with LASG to 
provide a long-term sustainable mortgage finance solution for 
housing construction.  They plan to do so through a public bond 
issuance by LASG to be backed by credit guarantees from development 
financial institutions such as African Development Bank. End Note) 
On state governments raising capital from the debt market, Gilroy 
sees a need for cooperation between international financial 
institutions (IFIs), such as the World Bank and International 
Monetary Fund (IMF), and the state governments.  Whereas the 
magnitude of projects conceived by state governments far exceeds the 
human and technical capacity found at this level, IFIs can provide 
technical assistance and expertise, he recommended. 
. 
AFC to Address Gaps in 
Project-Financing for Africa 
---------------------------- 
. 
¶9. (U) (Comment: AFC is currently under investigation by the Federal 
Government about the CBN's seed capital investment in the 
corporation.  Interlocutors express reservations about the CBN's 
management structure. (Ref B)  The information provided by AFC 
should be considered within this framework. End comment) Executive 
Vice President of Africa Finance Corporation (AFC) Asamoah said, 
while many countries have a reasonable development framework on the 
books, most governments lack the capacity at the lower echelon to 
 
LAGOS 00000290  003 OF 003 
 
 
implement projects.  The Nigerian private sector has been benefiting 
from the government's under-capacity by securing lucrative 
contracts, only to have them terminated upon a change in 
administration.  Asamoah recognized the technical expertise and 
long-term financing capacity of the International Finance 
Corporation (IFC); however, he criticized the conditionality 
attached to IFC-funded projects and the slow pace at which they are 
executed. 
 
¶10. (U) AFC's strategy is to fill gaps in the current system by 
providing missing links, which could be the creation, development, 
and in some cases implementation of projects, Asamoah argued.  The 
AFC was set up to address two major stumbling blocks to 
project-financing in Africa: getting projects to a bankable stage 
and providing early risk capital.  With respect to the first issue, 
AFC houses a project development arm that conducts feasibility 
studies and provides the engineering and technical skills needed to 
make projects bankable, in other words, to take projects to the 
stage where financiers can invest in them.  Of equal importance is 
the AFC's role in providing risk capital, and even bridge financing, 
in the early stages of a project's inception and development, 
Asamoah maintained.  AFC is poised to launch an infrastructure fund, 
a general equity fund, and, over the long term a mining fund for 
Africa, Tunde Omotoba, Head of AFC's Private Equity division, told 
Hall. 
 
¶11. (U) With regard to the CBN's role in the creation of AFC, 
Asamoah considers the ongoing investigation ordered by President 
Yar'Adua a fall-out from the change in administrations.  He 
contended that, with the CBN as a central shareholder, the AFC's 
management board can avoid overt political influence and send a 
positive signal to the private sector about the Government of 
Nigeria's (GON) commitment to development.  Asamoah also said the 
decision to headquarter the AFC in Nigeria was for ease in raising 
funds; instead of going to all countries for seed capital, a process 
that could take more than five years, AFC circumvented this 
protracted process by raising capital in Nigeria where the money is. 
 When prompted about the process of project selection, Omotoba said 
AFC has an internal committee set up to vet projects before they are 
turned over for selection to the general investment committee, which 
has a private sector majority. 
. 
AFC Illustrates Cozy Relationship 
Between Regulators, Banks 
--------------------------------- 
. 
¶12. (U) The ongoing investigation into the CBN's role in 
establishing the AFC highlights concerns over the cozy relationship 
between the banks and their regulators.  Stakeholders pointed to 
membership of the regulator, 
CBN Governor Soludo, and the regulatees, banks' Managing Directors, 
on the Board of AFC as indicative that the various interests in the 
banking sector have to be sorted out.  Kramer disagreed that this 
constitutes a problem, arguing that the banks are not as close to 
President Yar'Adua as they had been to former President Obasanjo. 
However, vested interests are still strong in resisting policy 
reforms, he quickly added. 
 
¶13. (U) This cable has been cleared with Richard Hall and Embassy 
Abuja. 
 
BLAIR