Africa Finance Forum Blog

Financial Services Regulations – Nigeria vs USA

12.11.2010Vincent Nwani

There is a wide gap between the US and Nigeria’s level of financial development. Yet, they share many puzzling features, including regulatory trends, structural transformation and response to shocks. For instance, the banking industry in Nigeria has experienced marked changes over recent years, characterized by a decline in the number of banks, growing concentration and increasingly international focus. Like many of their American counterparts, the largest banks transformed into full-service financial firms offer diversified range of products and services to retail and corporate clients.

Growth of non-interest revenue is a noticeable trend; technology is also transforming banking business (among other things) in the decline in paper-based payments, and the emergence of very large financial service firms has continued to mirror the developmental  trend of US financial services. Regulators have had to face challenges in adapting to this new domestic environment by paying attention to domestic credit market, potential shocks from securities and insurance business.

We here analyze the commonalities and the co-movement between the US and Nigerian’s financial service regulations.

  • Regulatory Trends: Recent events in the Nigerian financial services landscape suggest that the Nigerian financial services regulators usually mirror the domestic financial services supervisory frameworks after the American example (viz: a broad range of elements of Sarbanes–Oxley entering Nigeria’s Corporate Governance tenets, introduction of “Universal Banking” in 2000, following the repeal of the US Glass-Steagall Act in 1999, and, a decade later, the ongoing scrapping of the Universal Banking following the introduction of the “Volker Rule”, aimed at limiting the banks' trading and investment capabilities, by President Obama in January this year). Also, the extant delineation of commercial bank’s margin lending limits echoes similar restrictions in the US jurisdiction.

  • New Capital Requirements: They are hard-coded into regulation, with references to US$50billion-asset financial firms (investment or commercial banks) described as being “systematically important” to the US financial services industry. Similarly, the new capitalisation requirements for international, regional and merchant banking delineate the level of scrutiny that they will attract in Nigeria. For example, the systemic dangers of banks may raise differing red-flags at differing times unlike the experience of the “rescued banks” in August 2009.

  • Financial Stability Oversight Council: The US council is mandated to specifically scrutinise emergent risks to the whole financial system. Indeed a specific “Vice Chairman for Bank Regulation” has been established to report to the US Congress. Similar responsibility is echoed in the ongoing resuscitation of Nigeria’s Financial Services Regulation Coordinating Committee (FSRCC), promulgation of Asset Management Corporation of Nigeria (AMCON) Act, and support for CBN’s financial services reforms.

  • Stress Tests: Like the US Supervisory Capital Assessment Programs (sensitivity, scenario-tests to forecast capital adequacy), stress tests will soon become regular occurrences instead of dramatic one-offs. They will be more akin to stop-checks and will be an expansion of the type of special examinations of (historic) books that the Central of Nigeria (CBN) carried out in mid-2009.

  • “Living Wills”, as coined by Bloomberg Markets journal: Like an expanded, more elaborate (and more structured) form of Nigeria’s exercises, and as being practiced in the US, systematically important banks may find themselves subject to detailed distressed-sale measures which would reduce the risk and financial burden on trading partners in case of untoward market movements or developments.

As outlined above, and in many other respects, the Nigerian financial services regulation appears to follow similar trend with the US financial services regulation. While leveraging on other jurisdictions’ regulations is not a new phenomenon, adaptability of such regulations to local political and socio-economic realities is critical for success. This is in addition to regulators’ involvement of other stakeholders in the debate on such adaptability. Nigeria appears to have recognised this as demonstrated in the process that led to the banks’ new prudential guideline and AMCON Act.


Vincent Nwani is Head of Research at First Bank of Nigeria. The article has been co-authored with Tunji Inaolaji, Research Associate at First Bank.


African financial sector in times of Global Crisis – What lessons have we learned?

29.10.2010Thomas Losse-Müller

The global financial crisis posed new challenges for policy makers in Africa and around the world. Its scale and complexity lacked precedents that could have guided decision making and the evaluation of potential risks for the region.

On the whole, African banks stayed the course through stormy weather. Most financial sectors were in the middle of a pronounced growth phase when the financial crisis took hold of international financial markets. This expansion peaked as late as the third quarter of 2008, well into the unfolding global crisis. But even during the crisis, average growth in credit to the private sector stayed above 10% per year and is picking-up again. Bank portfolio quality held up nicely, with a couple of important exceptions concentrated in a few countries. Stock markets fell drastically when international investors withdrew from most African markets, but they recovered most losses since then, as domestic and foreign investors are coming back forcefully. So, what happened? Why did the crisis spare African banks? What can we learn about the vulnerabilities of banks and capital markets?

Much of the explanation goes back to lucky historical circumstances. The crisis came at a good time for Africa. Then and now, bank’s balance sheets are underleveraged, capitalization is high and banks have ample liquidity. There is too little, and not too much bank activity in Africa. Limited integration with global financial markets reduced exposure to toxic assets and failing international banks. Governments and banks had only started to enter global capital markets for foreign funding and were not exposed to the risks that come with mismatches between foreign currency borrowing and local currency earnings. This meant that currency devaluations did not have the devastating effects that triggered most financial crisis contagion in the Asian and Latin American crisis of past decades. And, maybe most surprisingly, banks didn’t have much risk exposure to commodity price volatility for the simple reason that African banks do not do much business with commodity producers. These international firms revert to domestic financial markets only for smaller working capital and local currency cash-flow requirements.

But, thinking about the future, all of this is likely to change. Banks will grow and leverage their capital more, put liquidity to work, fund themselves on international markets, integrate with global financial markets and compete with international banks for the big commodity business.

In preparation for this future, we need to draw the right lessons from the crisis. The nature of these lessons might be much more domestic than global. One important domestic lesson is that future financial sector growth needs to be built on strong risk management and good regulatory capacity. The biggest increase in non-performing loans in the past two years were not a result of the global crisis, but of home-grown factors like the collapse of margin loans in Nigeria or fiscal risks in Ghana. The other important lesson of the last two years is that domestic markets proved their potential to fund African development. When global investors withdrew from Africa, governments and firms could reliably turn to domestic financial markets to raise funding in a big way. Domestic resource mobilization - not external funding - should be the base for financing Africa.

Thomas Losse-Mueller joined the World Bank in 2004 where he works as a financial sector specialist focusing on Africa. He has worked on financial and private sector development projects in a variety of African and Eastern European countries, including Nigeria, Kenya, South Africa, Ethiopia, Sierra Leone, Turkey and Serbia. From 2008 to 2010 he led work on behalf of the German Government in supporting the establishment of the Partnership for Making Finance Work for Africa. Prior to joining the World Bank he worked in risk management for Deutsche Bank in London.  He holds degrees in economics from the School of Oriental and African Studies and the University of Cologne.

Is the current fuss about SME finance justified?

15.10.2010Christian von Drachenfels

The proposition that dynamic private sector development is essential for poverty reduction holds true especially for less developed countries in Africa. It is argued that small and medium enterprises (SMEs) constitute the backbone of the economy and are seedbed of innovation, thus holding the potential to raise nationwide productivity and create jobs: the comparative lack of competitive SMEs in several African countries, a phenomenon known as the “missing middle”, is therefore a constraint for economic development.

Constraints for SME development in Africa are manifold. Recently, however, there has been a stronger focus on the weakly developed financial systems and the resulting inefficient financial intermediation in several African countries. Empirical research and surveys among SMEs confirm that lack of access to finance is indeed clearly hampering SME development in Africa. This limited access to finance is often referred to as the “mesofinance gap”, the supply gap of finance between microfinance and the financing available to large enterprises.

The increasing efforts of governments, donors and private actors to address the “mesofinance gap” in Africa are therefore a welcome development. Such efforts range from governments’ use of partial credit guarantee schemes to donor-managed funds targeted at SMEs, and have been bolstered by private foundations’ focus on SME finance. These efforts are backed on the global level and most prominently by the G-20 commitment to increase support to improve access to finance for SMEs in developing countries.

As mentioned above, these activities are in general a welcome development. An important critique, however, remains: despite the wide-ranging discussions about SME finance, the debate about a common definition of “SME” continues to be absent, and the role of the sector in economic development is often inadequately understood. Policymakers justify SME policies on the basis of the assumptions described above; yet, when trying to define the target group, different quantitative criteria – ranging from the number of employees to turnover – are used to define SMEs. This quantitative definitions, however, do not tell us much about the competitiveness or the growth potential of specific enterprises in this segment. Addressing the problem of the “missing middle” in Africa does not mean that we need policies that aim at promoting enterprises with a specific number of employees and a specific turnover. The challenge is to promote and make finance available to those enterprises that are innovative, dynamic and competitive. These are the kind of enterprises that currently lack access to finance because of market failures, but can generate jobs and help reduce the productivity gap vis-à-vis the global benchmark.

So, are recent efforts just much ado about nothing? Clearly not. They are based on the important insight that the “missing middle” and the “mesofinance gap” are a serious problem for the socio-economic development of many African countries. Market failures lead to credit-worthy enterprises not being able to get access to the finance they would need for further development. Addressing these market failures is the key challenge for governments, donors and private actors. This is, however, a major challenge, and the risk remains that many current SME finance activities will be at least partly ineffective if they do not adequately deal with the challenge of disentangling the heterogeneous group of SMEs.


Christian von Drachenfels is a Research Fellow at the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE), Dept. V: "World Economy and Development Financing".



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