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PP RUEHMA RUEHPA
DE RUEHUJA #0938/01 1521012
ZNR UUUUU ZZH
P 011012Z JUN 09 ZDK
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC PRIORITY 6138
INFO RUEHOS/AMCONSUL LAGOS PRIORITY 1397
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RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 03 ABUJA 000938 
 
SENSITIVE 
SIPDIS 
 
DEPT PASS TO USTR-AGAMA 
BAGHDAD FOR DUNDAS MCCULLOUGH 
TREASURY FOR PETERS, IERONIMO, AND HALL 
DOC FOR 3317/ITA/OA/KBURRESS AND 
3130/USFC/OIO/ANESA/DHARRIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV NI
SUBJECT:  NIGERIA:  A REVIEW OF CENTRAL BANK GOVERNOR SOLUDO'S 
TENURE 
 
REF: A. LAGOS 152 
 ¶B. LAGOS 188 
 ¶C. ABUJA 614 
 ¶D. ABUJA 08 2437 
 
ABUJA 00000938  001.3 OF 003 
 
 
SENITIVE BUT UNCLASSIFIED-HANDLE ACCORDINGLY 
 
¶1.  (SBU) Summary.  Professor Chukwuma Soludo's first term at the 
Central Bank ended on May 29.  It appears unlikely he will be 
appointed to a second term (First Bank Group Managing Director 
Sanusi Lamido Sanusi appears to be the frontrunner at this point, 
but in Nigeria one can always expect last minute surprises).  The 
Nigerian banking landscape has witnessed several positive changes 
since 2004 under Soludo's tenure.  The 2005-2006 consolidation has 
ensured that Nigerian banks remain relatively stable (although, out 
of 24 banks they are 3-4 that may not have enough capitalization to 
survive) in the face of the current global crisis and bank-provided 
credit to the economy has increased.  Various innovations were 
introduced such as automated teller machines, debit cards, credit 
cards, reduction in the check clearing cycle, and improvements in 
the payments system.  Soludo is criticized by some for the recent 
depreciation of the naira, and the banks' lack of funding for the 
real sector to some extent.  End Summary. 
 
¶2.  (U) Chukwuma Soludo was appointed CBN Governor on May 29, 2004 
by former president Olusegun Obasanjo.  Prior to his appointment he 
was the Chief Economic Adviser to the president and the architect of 
the National Economic Empowerment and Development Strategy (NEEDS), 
Nigeria's homegrown economic reform program which has since faltered 
since Obasanjo term ended.  Soludo's appointment shocked the banking 
industry as he was an outsider to the private sector as a university 
professor from the University of Nigeria, Nsukka. 
 
Banks Recapitalization to the Rescue 
------------------------------------ 
 
¶3.  (U) Major achievements of Soludo's tenure were the 
regulator-induced recapitalization and consolidation, and the 
subsequent market-stimulated recapitalization and consolidation 
which continues today.  The regulator-induced consolidation led to a 
reduction in the number of banks from 89 to 25 banks. The 13 banks 
that were unable to meet the capital requirement of 25 billion naira 
($170 million) were acquired by larger and more successful banks. 
The bank consolidation was unprecedented in Nigerian history.  Many 
credit this consolidation for helping most Nigerian banks' ability 
to steer through the global financial and economic crisis. 
 
Increase in Foreign Credit Lines and Foreign Direct Investment 
--------------------------------------------- ----- 
 
¶4.  (U) Bank consolidation led to an increase of several billion 
dollars through public offers, private placements, and Global 
Depository Receipts in foreign portfolio and direct investments into 
Nigerian banks.  Likewise, foreign credit lines increased 
significantly.  However, both investments and credit lines witnessed 
sharp declines towards the end of 2008 due to the global crisis. 
Industry analysts report that credit lines are slowly trickling back 
into the banking system. 
 
Credit Growth and International Subsidiaries 
-------------------------------------------- 
 
¶5.  (U) Total credit to the economy increased exponentially compared 
with the period prior to consolidation.  Competition among banks 
resulted in the introduction of more lending products to meet the 
growing needs of customers, and gradual reduction in lending rates. 
Total credit to the economy increased from 1.203 trillion naira 
($8.2 billion) in 2003 to 8.127 trillion naira ($55.66 billion) by 
February 2009.  Various loan products were introduced such as asset 
loans to finance the purchase of household items, car loans, and 
educational loans to finance overseas study.  Moreover, Nigerian 
banks have been able to finance big ticket transactions such as 
infrastructure projects either solely or as a consortium without 
requiring the participation of foreign banks, i.e. building the new 
domestic airport terminal in Lagos. At the same time, industry 
non-performing loans declined from 24.1% in 2005 to 7.4% by December 
¶2008. 
 
¶6.  (U) Nigerian banks increased their branch networks domestically, 
and established subsidiaries within the region and in Europe. 
United Bank for Africa (UBA) Plc, Intercontinental Bank, Guaranty 
 
ABUJA 00000938  002.3 OF 003 
 
 
Trust Bank (GTB) Plc, Zenith Bank Plc, and Access Bank Plc 
established wholly owned subsidiaries in London.  Prior to 
consolidation, only First Bank and Union Bank had a presence in 
London.  Nigerian banks are making their presence felt in the 
West-African sub-region by acquiring existing banking franchises and 
establishing wholly-owned subsidiaries.  Nigerian banks such as UBA, 
Intercontinental, Access Bank, GTB, FinBank, Zenith, Diamond Bank, 
First Bank, and Union Bank can now be found in Gambia, Sierra Leone, 
Liberia, Ghana, Rwanda, and Benin Republic. 
 
Improved Rankings 
----------------- 
 
¶7.  (U) Most Nigerian banks received favorable rankings since the 
consolidation.  Sixteen Nigerian banks rank among the top 1000 banks 
in the world, and five Nigerian banks rank among the top ten in 
Africa.  Likewise in the Forbes Global 2000 listing of the world's 
top companies, Nigeria's First bank, Intercontinental Bank, and UBA 
Plc were featured. 
 
Exchange Rate and Inflation 
--------------------------- 
 
¶8. (U) Two of the principal responsibilities of a Central Bank are 
to manage the value of the local currency domestically while 
ensuring low and stable inflation, and to affect stable exchange 
rates internationally.  The CBN under Soludo has been able to 
maintain a stable exchange rate.  The Naira appreciated from 137 
naira for $1 in 2003 to 117 naira for $1 in September 2008 and the 
premium between the official and parallel market exchange rates 
reduced substantially.  However, deliberate depreciation of the 
naira at the end of 2008 was needed to safeguard foreign reserves in 
light of reduced inflows resulting from the fall in the price of 
crude oil (from $147.27 on July 11, 2008 to $33.87 on December 21, 
2008), lower remittances from the Nigerian diaspora, call-ins or 
non-renewal of foreign credit lines, and decreasing FDI.  The naira 
is currently trading at the rate of 147 naira for one dollar. 
 
¶9.  (U) Inflation also reduced significantly from double digits of 
23.8% in 2003 to 6.6% at the end of 2007.  Though inflation climbed 
to double digits again by late 2008 due to the global food, 
financial and economic crisis, it recorded a marginal decline from 
14.6% in February 2009 to 13.3% in April 2009. 
 
Credit Bureau 
------------- 
 
¶10.  (U) Soludo approved the licensing of a credit bureau to provide 
credit information on users of bank credit.  This information is 
available to banks in order to make their lending decisions.  The 
first credit bureau, the Credit Reference Company, was licensed 
during the first quarter of 2009.  It is owned by a consortium of 
banks (UBA, First Bank, IBTC Chartered Bank Plc, GTB, Diamond Bank, 
Intercontinental Bank, Access Bank, Standard Chartered Bank, and 
First City Monument Bank) in partnership with credit reference 
company Dunn and Bradstreet.  The private sector arm of the World 
Bank, the International Finance Corporation, and international 
consulting company, Accenture, are providing technical and advisory 
support.  More credit bureaus are expected to be licensed in the 
course of the year. 
 
The Payments System 
------------------- 
 
¶11.  (U) Soludo reformed the payments system by introducing 
electronic payments.  In addition, the check clearing cycle has 
improved from five to two days within the check origin clearing 
zone, and from ten to two days outside the clearing zone.  The 
banking reforms also saw the introduction of many card products such 
as debit cards, credit cards, and the use of ATMs.  International 
cards such as Visa and Mastercard are now used in Nigeria mostly in 
internationally-linked hotels or institutions in partnership with 
Nigerian banks. 
 
Currency Management 
------------------- 
 
¶12.  (U) The CBN, under Soludo's tenure, took over the management of 
the Nigerian Security Printing and Minting Corporation (NSPMC), "The 
Mint".  Before acquisition, the Mint was extremely inefficient, 
overstaffed and heavily in debt.  It did not print even a billion 
 
ABUJA 00000938  003.3 OF 003 
 
 
notes in ten years.  At the same time, the Nigerian government was 
massively importing notes and other security documents from abroad. 
In 2008, the Mint was able to print 2.6 billion notes without having 
to import a single note from abroad. 
 
Criticisms 
---------- 
 
¶13.  (SBU) Some industry analysts and members of the public charge 
that the recapitalization has not led to a substantial increase of 
credit to the real sector.  The CBN continues to receive 
condemnation over the recent depreciation of the naira. 
Manufacturers complain that the depreciation of the naira has made 
for significant foreign exchange losses through raw material 
imports.  Foreign currency denominated loans lost their value and 
adversely affected competitiveness with foreign imports.  The 
depreciation of the naira was dictated by the global financial 
crisis which in turn resulted in decreasing foreign exchange inflows 
from the sale of crude oil, non-renewal of foreign credit lines, 
lower inflow of foreign investment, and lower remittances from 
Nigerians abroad.  Some commentators dispute the phenomenal growth 
of the banks and the profits they declare as misleading in a country 
where majority of the citizens remain very poor. 
 
¶14.  (SBU) Some critics fail to recognize the role of an 
accommodating fiscal policy to drive the economy towards a desired 
goal.  In the Nigerian context, where fiscal policy continues to be 
expansionary and the lower tiers of government continue to run 
fiscal deficits, it will be difficult for the CBN's monetary policy 
to be effective in achieving stable interest, exchange and inflation 
rates. (Note: The lower tiers of government receive 50% of all 
government revenues.  During the higher oil prices era (from 
2003-2008), revenue increased markedly.  End Note). 
 
Challenges 
---------- 
 
¶15.  (SBU) Bank industry analysts complain about the poor 
supervisory capability of the CBN.  This is due to allegations that 
the banks do not present a true and fair view of their financial 
earnings by understating losses and rendering false returns. 
Notably, Soludo drew back from enforcing a common accounting year 
for the banks, though there are plans for this now to take affect at 
the end of 2009.  After the 2005-2006 bank consolidation, CBN 
introduced risk-based supervision in place of using prudential 
guidelines for supervising the banks. (Note:  Risk Based Supervision 
monitors management system processes on an ongoing basis, and is 
able to quickly determine any signs of deterioration.  Prudential 
Guidelines are compliance based supervision which focuses only on 
complying with regulatory guidelines and rendering only periodic 
reports. End Note).  Also, the CBN recently introduced daily on-site 
supervision of banks through the resident examiners.  The CBN admits 
that its supervisory capability needs to be enhanced through 
continuous training of its staff. 
 
Comment 
------- 
 
¶16.  (SBU) There is no doubt that Soludo changed Nigeria's banking 
industry for the good because of some of his initiatives and 
reforms.  The industry is on much more solid footing because of his 
policies and actions.  Credit to the economy has increased 
significantly, though mostly to the privileged formal sector.  But 
almost all of the steps he took towards these ends were in the first 
two years of his term.  In the second half of his present tenure, 
the CBN Governor's performance has been mostly flat.  Despite past 
progress, challenges remain, such as incorporating the informal 
sector into the credit arena and maintaining stable interest, 
exchange, and inflation rates.  There have been some concerns about 
his 2008-2009 policies being sporadic, inconsistent and favoring 
certain banks over others.  Moreover, Nigeria's huge infrastructure 
challenges significantly increase the cost of doing business which 
puts pressure on interest rates, inflation rate, and foreign 
exchange inflows.  And, while the real economy cries out for broader 
availability of credit and greater efficiency, concerns persist 
regarding financial sector transparency and accountability.  End 
comment. 
 
¶17. (U) This message was coordinated with Consulate Lagos. 
 
SANDERS