[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
                    THE GLOBAL FINANCIAL CRISIS AND 
                      FINANCIAL REFORMS IN NIGERIA 

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON

                         INTERNATIONAL MONETARY

                            POLICY AND TRADE

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                           NOVEMBER 16, 2010

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-165

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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
        Subcommittee on International Monetary Policy and Trade

                  GREGORY W. MEEKS, New York, Chairman

LUIS V. GUTIERREZ, Illinois          GARY G. MILLER, California
MAXINE WATERS, California            EDWARD R. ROYCE, California
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GWEN MOORE, Wisconsin                DONALD A. MANZULLO, Illinois
ANDRE CARSON, Indiana                MICHELE BACHMANN, Minnesota
STEVE DRIEHAUS, Ohio                 ERIK PAULSEN, Minnesota
GARY PETERS, Michigan
DAN MAFFEI, New York


















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    November 16, 2010............................................     1
Appendix:
    November 16, 2010............................................    19

                               WITNESSES
                       Tuesday, November 16, 2010

Moss, Todd J., Vice President and Senior Fellow, Center for 
  Global Development.............................................     8
Oteh, Arunma, Director-General, Securities & Exchange Commission 
  of Nigeria.....................................................     5
Sanusi, Lamido, Governor, Central Bank of Nigeria................     4

                                APPENDIX

Prepared statements:
    Meeks, Hon. Gregory..........................................    20
    Moss, Todd J.................................................    25
    Oteh, Arunma.................................................    27
    Sanusi, Lamido...............................................    40


                    THE GLOBAL FINANCIAL CRISIS AND
                      FINANCIAL REFORMS IN NIGERIA

                              ----------                              


                       Tuesday, November 16, 2010

             U.S. House of Representatives,
                      Subcommittee on International
                         Monetary Policy and Trade,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 3:10 p.m., in 
room 2128, Rayburn House Office Building, Hon. Gregory W. Meeks 
[chairman of the subcommittee] presiding.
    Members present: Representatives Meeks, Driehaus; and 
Miller of California.
    Chairman Meeks. This hearing of the Subcommittee on 
International Monetary Policy and Trade will come to order.
    We will have opening statements for the record, and without 
objection, all members opening statements will be made a part 
of the record.
    We have some extraordinary witnesses here today.
    I will recognize myself for the first opening statement, 
and we will move on. I hope that we are not interrupted by 
votes, but we will try to do as much as we can as we are trying 
to wrap up the 111th Congress. So there is a lot that is going 
on.
    But, before I begin, I would like to thank Representative 
Miller for working hard and helping organize and bringing this 
critical hearing on the financial crisis impact on Africa and 
the reforms being implemented by Nigeria. He has been an 
extraordinary partner in the 111th Congress, and I look forward 
to continuing to work with him in the reverse roles in the 
112th Congress.
    Mr. Miller of California. Absolutely.
    Chairman Meeks. I think that how we have worked and 
conducted ourselves on this subcommittee is an indication of 
what America wants, folks working together. You have been very 
cooperative, and we have been working very closely together, 
and I look forward to continuing to do that.
    I would also like to thank our distinguished witnesses for 
agreeing to testify before Congress today. In particular, I 
would like to thank Governor Sanusi and Director Oteh for 
traveling all the way from Nigeria to testify before the 
subcommittee.
    It is quite uncommon for senior government officials from 
another country to agree to testify before the United States 
Congress, but these are unusual times in which we live in. The 
global financial crisis from which the world is only beginning 
to emerge continues to hang over many nations' recovery plans. 
Most emerging markets, including Nigeria, were adversely 
impacted by the secondary effects of the crises in the form of 
collapsing demand and prices for their primary exports as well 
as dramatic decrease in remittances.
    Over the past 2 years, I have been privileged to lead two 
bipartisan congressional delegations to the continent of 
Africa. These bipartisan delegations focused on the impact of 
the financial crises and global recession in Africa, the 
programs implemented by the multilateral institutions to 
prepare African nations for the expected effects of the crises, 
as well as the support the continent received to cushion the 
impact of the crises.
    In February of 2010, Chairman Melvin Watt and I co-led a 
bipartisan delegation to Nigeria where we had the privilege of 
meeting with Mr. Sanusi, the Governor of the Central Bank of 
Nigeria, whom I'm delighted to see here today.
    Our working lunch meeting with the Governor followed an 
overnight flight to Nigeria and no rest at all before engaging 
in an aggressive meeting scheduled that day. Jet lagged and 
tired meant that we were struggling to stay focused in some of 
our meetings. But as soon as the Central Bank Governor began to 
speak, every single person in attendance caught a second wind. 
We got pumped up, as they say.
    Our working lunch went well over the allotted time as we 
discussed and debated the impact of the financial crisis in 
Nigeria, the tough decisions he and his colleagues had to make 
as they evaluated the health of the nation's leading banks, and 
the political and economic pitfalls of bailing out failing 
financial institutions, as well as the initiatives to establish 
a so-called ``bad bank'' to acquire the toxic assets from these 
banks' balance sheets to get the banks lending again.
    It was also fascinating to hear how Nigeria held the 
leaders of the failing banks accountable in a way that many 
Americans wish had also been done here for the leaders of 
financial institutions that benefited from the taxpayer-funded 
bailouts.
    Governor Sanusi also engaged members in a great discussion 
about the need to reform the entire financial sector in 
Nigeria, which he will address in his testimony today.
    But one point in particular strikes me as something we 
struggled with here, also. Creating differentiated banking 
licenses allows specialized banks to emerge serving critical 
parts of the market with targeted products and services. Yet 
each such institution must be subject to appropriate oversight 
and strong regulatory framework so as to not trigger regulatory 
shopping or regulatory rates at the bottom as we arguably 
witnessed in this country. Increased capital requirements and 
more stringent risk management structures for the most 
systemically significant institutions will help Nigeria and 
Africa, as a whole, mitigate systemic risk going forward.
    Lastly, improved regulation of capital markets to promote 
transparency will be critical to attract the necessary capital 
to finance Nigeria's exceptional growth potential and private-
sector development needs.
    In many ways, the discussion we had in the hotel conference 
room in Nigeria reflects the debates we are having here in the 
United States as we consider necessary reforms to our own 
financial sector.
    Following the meeting, all members in attendance agreed 
that we had to invite the Governor and his colleague, Ms. Oteh, 
as well as the incredibly knowledgeable Mr. Moss from the 
Center for Global Development to testify before Congress and to 
tell Nigeria and Africa's story. Hearing this and listening to 
our witnesses today will better inform our support for 
assistance and reforms in emerging markets.
    In closing, I would like to point out that much of the work 
that we have done here in this subcommittee to push the 
international institutions seems to have yielded results, as 
Africa seems to have endured fairly well through the crises and 
may be on track to resume on the positive growth path it was on 
prior to the financial crisis.
    So, with that, I would like to once again thank our 
distinguished witnesses for making the long journey across the 
Atlantic to appear before this committee today, and I look 
forward to having a spirited and informative discussion. Thank 
you for your participation here today.
    I now turn over for an opening statement to my friend and 
colleague, Mr. Miller.
    Mr. Miller of California. I want to thank my friend, 
Chairman Meeks, for convening this hearing on reforms under way 
in Nigeria's financial system. And I say ``my friend'' because 
it is true. He is my friend. Politics should never be personal. 
In our case, it never has been; and it never will be. He is my 
friend, and I believe I'm his friend.
    Financial crisis has hit all nations. Many nations like 
Nigeria were victims of the follow-on effects of a recession as 
capital that once flowed to Nigerian institutions quickly left 
the country. This withdrawal harmed businesses and individuals 
in the country and exposed some remaining flaws in the 
financial services sector.
    Fortunately, there are individuals who have worked to right 
the system, bring stability to the country, and provide the 
foundation for prosperous economic growth going forward. I want 
to thank them for their efforts they have done, and I look 
forward to working with them in the future and hearing your 
insight.
    I'm looking forward to the witnesses today, and I'm not 
going to waste any more of our time. Thank you. I yield back 
the balance of my time.
    Chairman Meeks. I know that Governor Sanusi has given us 
previously a written statement, but he has also asked to have 
submitted for the record an appendix to his submission, and I 
ask that it so be submitted in the record without objection.
    We want to jump right into it. We really--for an individual 
whom I think for this subcommittee needs no more introduction 
than we talked, we were so impressed with him and what he has 
done as the Governor of the bank in Nigeria, and I would ask 
him to start off with an opening statement, and then we will go 
to Ms. Oteh. But for purposes of trying to save some time, we 
will go right to Governor Sanusi.

 STATEMENT OF LAMIDO SANUSI, GOVERNOR, CENTRAL BANK OF NIGERIA

    Mr. Sanusi. Thank you very much, Chairman Meeks and Ranking 
Member Miller. I would like to thank this committee for being 
kind enough to invite us to testify. It is an honor for us as 
representatives of the Nigerian Government to come and speak to 
the U.S. Congress on what has been happening in Nigeria.
    Chairman Meeks has, of course, referred to the meeting we 
held in February 2010. A lot has happened since then; and I 
would like to, for purposes of completeness, simply briefly go 
over the impact of the crisis on Nigeria and the steps we have 
had to take as regulators. I will try to avoid saying much 
about the capital market, because Ms. Oteh will handle the 
capital market side of the reforms.
    As mentioned, the Nigerian economy was affected by the 
second round of impact of the global financial crisis. The 
Nigerian financial markets were not fully integrated into the 
world economic system, but certainly we have an economy that is 
very much dependent on volatility of oil, government revenues, 
and exchange rates. The level of foreign reserves was 
intricately tied to the price and volume of oil.
    In 2007, as the committee will recall, oil price ranged up 
as high as $145 to $147 a barrel, and Nigeria was pumping more 
than 2 million barrels a day. This led to an increase in 
government revenues and building up of an excess crude reserve, 
but it also created a lot of liquidity that could not find its 
way into the real economy and went instead into nonpriority 
areas, particularly the capital markets. The result was that 
the Nigerian Stock Exchange grew by more than 5 times, which in 
2004 and 2007, the banking sector alone had its value 
multiplied by over 900 percent in 3 years.
    A lot of that was driven by margin lending. It was also 
driven by a lot of proprietary position hidden in MOF loans, 
and there was a lot of share price manipulation and fraud by 
bank executives who set up SPVs to trade on the Stock Exchange.
    When the price of oil crashed--and in Nigeria, you will 
recall we then had the Niger Delta crisis, so we had a double 
whammy, a collapse in price and a collapse in output--the 
liquidity was taken out of the system, and the stock market 
crashed. This was after the collapse of Lehman Brothers, and 
that exposed inherent weaknesses in the Nigerian banking 
system.
    It soon became clear that a number of banks had deep and 
serious liquidity problems that were structural in nature. The 
Central Bank reacted like all other central banks with 
quantitative easing, reducing cash reserve requirements, 
reducing liquidity ratio requirements, and opening up an 
expanded discount window, but none of that addressed the 
problem.
    As I said, I became Governor in June 2009, and it was clear 
that we had to look much deeper at the root of the problems. We 
sent in examiners; and, as I briefed the committee, we 
discovered a number of things.
    First of all, we discovered that there were huge 
concentrations by the banks in the capital market and to all 
marketing. We also discovered serious governance issues and had 
to try a number of chief executives. As of October of this 
year, we have been able to secure the conviction of one of the 
chief executives and to recover assets taken from the bank 
worth about $1.2 billion. These assets were real estate assets 
in the United States, in South Africa, in Dubai, and in 
Nigeria.
    We have set up an asset management corporation. We--the 
board has been approved. The AMCON has already announced it is 
going to purchase 2.2 trillion naira worth of bad loans from 
the banks, and that will clean up the banking system. We have 
received a lot of support from the IMF, the World Bank, IFC, 
Ex-Im, the European Investment Bank, and ADB, as documented in 
the paper and appendix.
    We have had to review the universal banking model and 
create and insist that banks restrict themselves to banking 
business. The details of that should come into testimony on 
exactly how it is going to work.
    We have different levels of authorization for the banks, as 
rightly mentioned--international, national, and regional. We do 
have specialized banks for mortgages, development, financial 
institutions, noninterest banks; and this is all in there for 
healthy development of the Nigerian financial system.
    Finally, as we are running out of time, at the heart of the 
problem with financial crisis is the lack of integration of the 
financial economy with the real economy; and we have focused on 
making sure that banks actually lend to the real sector, as 
opposed to lending for capital markets and speculation. And 
with AMCON, clearly, as indicated in our appendix, we have 
gotten the banks to agree to put aside 30 basis points on their 
balance sheets for 2011 for 10 years. So the banks are, in 
essence, going to pay the cost of the bailout, and there will 
be no addition to the fiscal deficit, and that is going through 
legislation in Nigeria at this moment.
    This I think highlights the key features of the 
intervention of the Central Bank, and there are others that 
will be taken by Ms. Oteh, and hopefully in discussions we will 
go into detail. Thank you very much.
    [The prepared statement of Governor Sanusi can be found on 
page 40 of the appendix.]
    Chairman Meeks. Thank you. Thank you for your testimony.
    Now, we have Ms. Oteh, who is the Director General for the 
Securities and Exchange Commission of Nigeria. Welcome.

   STATEMENT OF ARUNMA OTEH, DIRECTOR-GENERAL, SECURITIES & 
                 EXCHANGE COMMISSION OF NIGERIA

    Ms. Oteh. Thank you, Chairman Meeks, and other members of 
the subcommittee for the invitation to join Governor Sanusi and 
Mr. Moss to testify at this hearing on the global financial 
crisis and the financial reforms of Nigeria.
    I will focus my testimony primarily on the impact of the 
global financial crisis on the Nigerian capital markets and the 
reform agenda that we at the Securities & Exchange Commission 
in Nigeria have embarked upon since I assumed duty on the 7th 
of January of this year.
    This testimony is both timely and relevant to the 
challenges that we face in Nigeria, that you face in the United 
States, and that the rest of the world faces. It is auspicious 
also as we seek, as the Nigerian Securities and Exchange 
Commission, to seek to strengthen our partnership with the U.S. 
Securities and Exchange Commission. We believe a strong 
partnership with the U.S. SEC is critical to building a world-
class capital market and that it is mutually beneficial in the 
fight against financial crime, which knows no borders, and in 
our common objective of maintaining capital markets that are of 
the highest integrity.
    We do believe that for our country, Nigeria, despite its 
enormous wealth, that whether in terms of natural resources or 
in terms of human resources that we are yet to truly realize 
our potential as a country. We believe that world-class capital 
markets will clearly enable us to do so for a number of 
reasons. Because world-class capital markets foster a 
meritocracy, they foster good corporate governance, they 
encourage innovation and entrepreneurship, which in our view 
will create job opportunities that will harness the skills and 
entrepreneurial zeal of the many hardworking Nigerians that 
Nigeria has been blessed with.
    As the ethics regulator of the Nigerian capital markets, 
whose mandate it is to regulate and develop these markets, the 
goal of our reform agenda of the SEC is to build a world-class 
market that will enable Nigeria to diversify its economy, 
finance its huge infrastructure needs, and enhance its business 
climate and environment.
    What we consider a world-class capital market is one that 
always engenders investor confidence, that has the breadth and 
depth in terms of product offerings and is characterized by 
market integrity, and also has a strong regulatory framework 
and a strong and transparent disclosure and accountability 
regime. We believe that it is also one that is fair, it is 
robust and has an efficient marketplace.
    While the global financial crisis has been devastating, we 
believe that it has created an opportunity for us to refocus on 
building a world-class capital market and to leverage the 
lessons that we learn from our own experience as well as the 
lessons that other jurisdictions have had.
    The testimony that we have submitted outlines the impact of 
a crisis on Nigeria in general and then outlines the key 
elements of the reform agenda that we have embarked on. It also 
encourages and asks you to continue to support the relationship 
that your country, the United States, has with our country and 
to continue to encourage the multilateral agencies to support 
us in our endeavors.
    As Governor Sanusi mentioned, the global financial crisis 
was very multifaceted. It led to a dwindling of government 
revenues. It also led to a weakening of our currency. It 
exposed the weaknesses both in the banking sector and fueled in 
our mind an unprecedented stock market crash, undermining 
confidence in the financial sector. We believe that the effect 
of a crisis would have been worse had it not been some of the 
progress that our country has made with respect to a sound 
macroeconomic management, notably since 2003 when we set up the 
fiscal oil rule, when we embarked on a number of reforms 
including a very elaborate pension reform which enabled us so 
far to build up more than $10 billion in pension assets that 
are managed on a defined contribution basis.
    We believe that despite the fact that there was excessive 
risk-taking in our markets, despite the fact that both retail 
and institution investors did have huge losses, we feel that 
some of the measures that we have put in place today are 
clearly able to prepare our markets for what it should be. We 
feel that it is important to continue to show that our markets, 
whether it be the banking sector or whether it be the capital 
markets, that we will not tolerate anything that is improper. 
So, like the Governor of the Central Bank, my colleagues and I 
have been taking enforcement action that we consider has been 
unprecedented in the history of our stock markets; and I will 
mention a few of them.
    As a fallout from the crisis in the banking sector, we had 
a joint investigation between ourselves and the Central Bank 
which led us to identify a number of market abuses that 
happened in bank reform. As a result of those findings, we have 
taken 260 individuals and entities to our investments and 
securities tribunal. We are expecting that illegally gained 
profits will be dislodged and that, where possible, that 
investors will be restituted. We have also taken steps to 
strengthen the Nigerian Stock Exchange so that it can continue 
to play the role that it should play as the visible symbol of 
our stock markets.
    I will focus--I look forward to you reading the rest of my 
submission. But I do want to, through you, thank the U.S. 
Securities and Exchange Commission for the relationship that we 
have built in such a short time.
    One of the things that we were fortunate to have happen is 
to have a team from the U.S. SEC come and visit us very early 
in my tenure to evaluate and peer review our capital markets. 
Through the work that they have done and the recommendations 
that they have made, we are able to support some of our own 
work and our views on how we can build a truly world-class 
capital market. We are also leveraging our relationship with 
other international securities commissions and indeed have been 
a member of the International Organization of Securities 
Commissions for several years.
    I was recently elected as the Chairperson of the African 
Middle East Regional Committee of IOSCO, and we are proud to 
note that we are signatory ``A'' of the IOSCO memorandum of 
understanding.
    Like the Central Bank Governor said, we have also received 
great support from all the multilateral agencies; and indeed in 
building our fixed income market we have a resident adviser who 
was sponsored by the World Bank.
    I hope that my submission has contributed to an 
understanding of the impact of the impact of the global 
financial crisis on the Nigerian capital market. As I have 
indicated, while the impact of the financial crisis has been 
devastating, the silver lining is the opportunity that it gives 
us to build a world-class market, as this is critical to 
Nigeria's economic and social progress.
    Once again, I wish to sincerely thank this honorable body 
for the opportunity to give this testimonial and I look forward 
to your continued support. Thank you.
    [The prepared statement of Director-General Oteh can be 
found on page 27 of the appendix.]
    Chairman Meeks. Thank you so very much for your testimony.
    Now, we are delighted to have with us Mr. Moss, who is a 
Vice President and Senior Fellow at the Center for Global 
Development. Thank you for being here.

 STATEMENT OF TODD J. MOSS, VICE PRESIDENT AND SENIOR FELLOW, 
                 CENTER FOR GLOBAL DEVELOPMENT

    Mr. Moss. Thank you Chairman Meeks, Ranking Member Miller, 
and members of the subcommittee. I appreciate the opportunity 
to appear before you today to discuss the effects of the global 
financial crisis on Africa and U.S. interests in Nigeria's 
future.
    In 2009, much of Africa saw a sharp slowdown in private 
capital inflows, and the region's growth rate fell by more than 
half. But this decline was mitigated and the outlook today for 
Africa is much brighter in large part due to the aggressive 
response of the multilateral development banks which 
accelerated lending to compensate for this drop-off in private 
capital. For this reason, my first point today for the 
subcommittee is that the multilaterals are critical to the 
recovery of the global economy and worthy of robust U.S. 
support.
    I would urge Congress to look favorably upon the soft loan 
window replenishments and the general capital increases for the 
African Development Bank and the World Bank in particular. 
These are investments that leverage U.S. contributions, build 
global markets, and help to expand the circle of prosperity.
    Now, turning to Nigeria specifically, I want to make just 
three points.
    The first point is that the global economic crisis may turn 
out to be a good thing for Nigeria. That country's banking 
troubles are largely local in nature, but the pressure of the 
crisis exposed the hidden problems and forced the actions of 
the Nigerian authorities. In the long run, I believe this will 
make Nigeria's financial sector stronger and more competitive.
    It is worth noting that real change was not a foregone 
conclusion. The actions of Governor Sanusi have been decisive, 
credible, and transparent.
    My second point is that, even while the steps so far have 
been meaningful, Nigeria's reforms are still incomplete. The 
Central Bank must contain the final cost of the bailout, sell 
off the seized banks in a fair and transparent manner, and 
enforce rules to prevent a repeat crisis.
    Yet the future of Nigeria's banking sector goes well beyond 
monetary policy. Reforming the oil and gas sector is critical 
to nurturing the domestic capital markets by allowing local 
banks to finally participate in joint investments that are--
much of which are currently financed through the budget.
    The fiscal situation is also urgent. Savings in the excess 
crude account stood at $20 billion just 20 short months ago, 
and now are almost completely depleted. For this reason, 
Nigeria's outlook was downgraded by the credit rating agencies 
last month.
    Success in banking ultimately depends in Nigeria on other 
steps to make the real sectors of Nigeria's economy more 
competitive. A broken electricity system must be fixed. The 
fight against corruption, which had been so promising a few 
short years ago, has waned badly over the last 3 years. This 
fight must be renewed. And of course, and perhaps most 
importantly, Nigeria needs a credible election in the spring. 
This is essential if the country is going to restore confidence 
and get back on track.
    And this leads to my final point, which is that Nigeria's 
success is undeniably in the U.S. national interest. The United 
States needs a strong, capable, and stable Nigeria. Nigeria is 
the key to regional security. It is the neighborhood enforcer 
in places like Liberia and other hot spots of interest to the 
United States. Nigeria is vital to U.S. energy security. It is 
not only the 5th largest source of U.S. oil imports, but 
instability in the Niger Delta can spike international oil 
prices, and this affects the wallet of every American.
    Nigeria is also the linchpin in our fight against the 21st 
Century transnational threats such as terrorism, disease, and 
arms trafficking. A weak Nigeria is a source of these dangers. 
A strong Nigeria can be an indispensable ally to contain these 
threats.
    Last Christmas was a stark reminder of the risks of a 
weakened Nigeria. The would-be bomber on Northwest Airlines 
Flight 253 was Nigerian. Yet during that emergency there was no 
partner for the United States on the other end of the line. The 
United States was under terrorist attack and President Yar'Adua 
was literally missing in action, leaving a power vacuum that 
was dangerous for Nigeria and dangerous for the United States.
    Now counterterrorism may seem disconnected from the 
financial sector issues that we are discussing today, but it is 
in fact closely linked to the capacity and credibility of the 
Nigerian Government. Banking is the vanguard of Nigeria's 
economy. Fixing the financial sector is a prerequisite if the 
country is going to modernize and join the international 
community as a responsible and dependable partner.
    Let me end my testimony with a quick pitch for a new idea, 
and this is one where Nigeria may be able to learn something 
from our own experience here in America. In the 1980's, the 
State of Alaska began paying dividends from earnings on oil 
savings directly to State residents. It did this as a 
deliberate way to check the power and wasteful spending of 
government.
    New technology like iris scanning and mobile banking now 
make it feasible and affordable for any government to make 
direct payments to their citizens. Cash transfers are now being 
used in Mexico, Brazil, South Africa, Bolivia, Mongolia, and 
elsewhere. They may be useful in the Niger Delta, too, where 
billions of dollars have been spent with few tangible benefits 
on the ground. This waste and corruption is one cause of the 
Delta violence today. The Government of Nigeria has an 
opportunity with some political courage and a little creativity 
to finally break that vicious cycle.
    Thank you.
    [The prepared statement of Mr. Moss can be found on page 25 
of the appendix.]
    Chairman Meeks. Thank you so very much for your testimony.
    I thought I saw my colleague earlier from Ohio. Steve 
Driehaus was here, and I was going to allow him to say a few 
words, but if he should come back, we will do that then.
    I guess we will just open it up to questions and have a 
little give-and-take back and forth, and I will start with 
Governor Sanusi by asking, could you please tell us more about 
the stress tests that you conducted on your banks and what 
support, if any, that you got from the IMF and the policy and 
the regulatory implications of the findings that you received 
from the stress tests that you implemented?
    Mr. Sanusi. Thank you, Mr. Chairman.
    When we were going to embark on the audits, it was very 
clear to us that there was a problem in the industry, but the 
problem was not evenly distributed. Some banks clearly had 
liquidity problems that were coming to the discount window. 
Other banks had a lot of money sitting in the Central Bank. So 
the interbank markets had collapsed. We had big banks that had 
a lot of money and a lot of capital but who didn't trust the 
other banks enough to place money with them. The money was in 
the Central Bank earning 1 percent.
    Now to make sure that as the result of examinations we 
identified the banks that posed the systemic risk, we worked 
with IMF based on bank balance sheets. What we did was to give 
them the 24 Nigerian banks without giving them the names of the 
banks and their financial statements, and they ran a blind 
stress test. And five banks came out as banks that were at risk 
in terms of poor asset quality, poor liquidity, and probably 
bubble capital.
    Now those five banks were exactly the five banks that were 
permanently at the expanded discount window. So there was 
already a process of self-selection. So when we sent in 
examiners to the first set of 10 banks, we made sure that those 
5 banks were included; and the findings were consistent with 
what we expected. If anything, they were much worse. Because, 
clearly, the problem was much deeper than we thought it was for 
a number of reasons.
    First of all, the asset quality problem was much more 
severe than we had thought, the level of exposure to capital 
market was much higher than the banks had previously disclosed, 
and what was sad was that a number of issues we then discovered 
were not just about asset quality or concentration but fraud.
    In the case of the CEO who was recently convicted, $1.2 
billion, that is the value of total depositors' funds taken 
through special purpose vehicles and basically used to purchase 
property in different parts of the world. On the books of the 
banks, they were loans, but it was actually money that was 
taken out of the banks. And we were able to trace the property 
in Dubai, some property here in Maryland, some property in 
South Africa, some property in Nigeria and get--of that 
property. But the IMF was extremely useful in helping us 
identify what were the most likely areas to look at first, and 
that helped us deal with the problem very quickly.
    Chairman Meeks. Let me ask this question. We have also made 
stress tests mandatory in our regulatory reform framework, 
especially Central-Bank-driven stress tests for the larger 
banks. And what we have also decided to do was to make the 
results of the test public, that it be mandatory so that we 
could give information or better inform the markets of the 
risks that they bear. Do you have any thoughts or any idea of 
implementing something similar in regards to implementing this 
in Nigeria?
    Mr. Sanusi. Yes. In fact, a few weeks ago, we had the IMF 
Financial Market Division come to Nigeria to do training on the 
stress testing for the Nigerian Central Bank officials and for 
Nigerian banks. We do hope as soon as the banks go through 
their mergers and acquisition to give them guidance on stress 
tests. This will be run on their December balance sheets and 
their March balance sheets. What we would like to do is, after 
the M&A do a stress test, then invite the bank to raise more 
capital and do a second stress test after 6 months to make sure 
that all the banks have been adequately capitalized.
    But I should add that in the case of American banks, there 
are other things that need to be done beyond stress testing, 
including looking at the root cause of some of those issues. A 
stress test, for instance, will not solve the problem of a 
rating agency that gives an investment grade rating to a bad 
loan. A stress test will not solve the problem of an investment 
bank that influences those ratings. So there are serious 
governance issues that need to be addressed.
    We have tried to address both the governance issues and the 
capital adequacy issues, and perhaps we are trying to avoid the 
mistake of thinking that capital alone will solve the problem. 
It is human beings, and of course we have to look at human 
beings who played a role in this crisis.
    Chairman Meeks. Thank you.
    Let me squeeze in a question to Ms. Oteh before I turn it 
over to Mr. Miller.
    I have had a number of individuals recently who have just 
come back from Nigeria actually, and they said that the first 
time--these are individuals--some are on Wall Street, some are 
friends--that they are looking at investing in Africa, and in 
Nigeria in particular, and they said they have been looking at 
it for a long time, but they now see that there is potential on 
the continent. But some are starting to look and feel there is 
also may be a speculative bubble. And I was wondering if you 
had any thoughts on whether Africa may in fact be experiencing 
somewhat of a foreign direct investment bubble and what systems 
you have in place to monitor and/or to react to the same.
    Ms. Oteh. Thank you, Mr. Chairman, for the issues that you 
raised.
    Our view is that this is really the ``Decade of Africa'' in 
the sense that over the last 20 years, across Africa, there 
have been first-generation reforms as well as second-generation 
reforms and some of what we are seeing are the dividends of 
those reforms. In Nigeria specifically, they are huge 
investment requirements. And I don't believe that the level of 
FDI is sufficient to either take advantage of the investment 
opportunities that we see across several sectors, whether it be 
in sectors--in infrastructure.
    You yourself had mentioned and Mr. Moss also mentioned some 
of the challenges that we face in the power sector. There are 
clearly opportunities both for private-sector investment and 
for additional aid going to other infrastructure.
    There are opportunities in the consumer goods sector that 
come for Nigeria from the size of its population. As you know, 
Nigeria's population is estimated to be about 150 million 
people.
    Some of the examples of what has happened in the telecom 
sector and how the telecom sector has evolved in Nigeria and 
other African countries show or give credence to the 
advantage--fast mover advantage which is those who are looking 
seriously at Africa, to Nigeria in particular, are able to 
observe. Thank you.
    Chairman Meeks. Mr. Miller.
    Mr. Miller of California. The economic peak of your economy 
was driven by oil revenue. How dependent is Nigerian oil 
revenue today and has the economy developed other sources of 
revenue since the drop in oil prices?
    Anyone can answer that.
    Mr. Sanusi. Thank you very much.
    It certainly is a big problem. Because if you take Nigerian 
GDP, 42 of gross domestic product is agriculture, but the bulk 
of agriculture is primary production, and we have not taken 
full advantage of agricultural policies or built a value chain 
and move us from primary production into processing, which is 
really what you need to do, move from primary production to 
processing to manufacturing. And I will give you a few 
examples.
    Nigeria is the world's leading produce of cassava, but we 
don't produce any starch or ethanol. The leather products in 
northern Nigeria, the leather is called Moroccan leather, but 
Nigerian tanneries produce what is called wet blue, which is 
the basic level of processing that gives them profits of 2 
cents per square foot. Whereas from Morocco, from the same 
leather base, companies are producing leather used by companies 
like Goodyear and Yves St. Laurent.
    We have crude oil. Our refineries are not working. So the 
real challenge of the economy is to fill those gaps and those 
externalities and economic policies geared towards that.
    Now building agricultural productivity and moving up the 
value chain and also fixing the issues of power and 
infrastructure are critical to building manufacturing base. 
Only 4 percent of GDP is manufacturing. And this basically ties 
again to Chairman Meeks' question. The potential for the 
Nigerian economy is so great, however, they have to be 
harnessed with the right economic policies. We don't have 
enough foreign direct investment coming in.
    But, historically, we have learned a lesson. We had huge 
inflows coming into the capital market, hot money. So there is 
a bubble. And I think what we want to do is make sure that we 
attract the right investment, turn investment into power, 
investment into infrastructure, into manufacturing, into 
agriculture, as opposed to investment into speculative asset 
price bubbles.
    Mr. Miller of California. Are you seeing capital inflow 
starting to increase recently? And if that is occurring, you 
have talked about reforming your financial sector and your 
banks. Are they allocating capital in the more transparent 
merit-based fashion they were before?
    Mr. Sanusi. Yes. We are, for instance, as regulators having 
a closer look on the type of inflows that are coming in. We 
have seen plans by, for instance, power companies to come in 
and set up a power plant; and that is the kind of investment 
that we didn't have 2 or 3 years ago.
    But, obviously, we didn't have those investments because 
the reforms of the power sector themselves had not taken place. 
So what we are pushing at Central Bank and as regulators is to 
get the right economic policies that will attract the right 
type of investment. Otherwise, we continue attracting hedge 
funds that just buy shares.
    Now, clearly, we have seen also investment in the capital 
market. Nigerian companies are really trading, many banks are 
trading at below book value. So there is a bargain in there. So 
many people actually see, with the resolution with the asset 
management corporation, with the mergers and acquisition, 
people see a big upside in buying bank shares now; and, 
therefore, we have seen some inflows in that area over the last 
few weeks. But we would like to see more money go into 
infrastructure, into power, into manufacturing; and that is 
really where the growth will come.
    Mr. Miller of California. It seems like foreign investments 
on your equity markets have been very volatile, especially 
recently. How do you plan to mitigate the impact of that in the 
future and stabilize it in some fashion? We have had the 
conversations about questionable graft or corruption that might 
be occurring that sends a perception that things are not stable 
enough to create investment that is worthwhile.
    Mr. Sanusi. Well, a number of things. First of all, we have 
to continue working on improving the transparency of the 
system; and I think once people understand that markets are 
transparent and disclosure is good and we are fighting 
corruption, they are going to have more confidence in the 
system.
    A lot of the volatility we saw in 2008 was out of 
recognition that perhaps people were not getting the true 
story. And I think what we have done both at the Central Bank 
and at SEC is to tell investors that this is the problem, we 
have disclosed the problem very openly and transparently; and 
we are dealing with it in a very effective manner. The fact 
that some of the most powerful bankers and powerful 
stockbrokers are actually being put in jail lets investors know 
that there is a lot of political support for this process and 
that the country as a whole is determined to clean it up, and I 
think this is the first and most important element.
    The second element, of course, is to broaden and deepen the 
markets themselves, because that is extremely important. There 
is a limit to how much money can come in to the capital 
markets. A bubble gets created, and then people start selling, 
and you have a bust. But if we actually opened up those areas 
that are in need of investment and fantastic returns are made--
we produce 3,000, 4,000 megawatts of power, and that is for a 
country of 150 million people. Now that is about what Ethiopia 
will produce in 2012. So just imagine the potential for the 
power. It is bigger than the telecoms. If you look at what MTN 
has done, what AT Satellite has done in Nigeria with 
telecommunications, power is potentially bigger than that.
    And the capital market that we have does not list the bulk 
of the economy. All companies are not listed. The telecom 
companies are not listed. Many of the large manufacturers are 
not listed and not the SMEs. So broadening and deepening the 
capital market and continuing economic reforms are, in my view, 
the way to attract investment on an ongoing basis.
    Mr. Miller of California. Mr. Moss, do you have a comment 
on that?
    Mr. Moss. I think that even if you had an ideal financial 
sector--and I think the other witnesses today have taken 
tremendous steps to try to right Nigeria's financial sector; it 
is wonderful to have an efficient financial sector--but you can 
only go so far with the financial sector if the real sector 
behind it isn't competitive. So until the oil sector reforms 
are implemented and implemented well, we are not going to 
really see the banking sector be able to take off in the way 
that it could.
    Similarly, with infrastructure, it would be great--the 
demand for power in Nigeria is tremendous. This should be a 
huge opportunity for domestic and foreign power companies to 
come in. Nigeria is still flaring a lot of its natural gas. 
There is no reason that couldn't be turned into power.
    But the environment is still so difficult. There is no way, 
given the uncertainties with tariff structure, and 
uncertainties with contract enforcement, that you would put 
billions of dollars into the power sector right now until you 
had some more clarity on what else was going, what else was 
going to happen. So, in a sense, I'm extremely--I have been 
watching from the outside extremely impressed with the steps 
the financial sector has taken, but there is only so far you 
can go with those reforms until the rest of the economy has to 
catch up.
    Mr. Miller of California. Thank you.
    Chairman Meeks. I saw Mr. Sanusi get very antsy, wanting to 
reply.
    Mr. Sanusi. Yes. I want to thank Mr. Moss. I want to give 
an update on what is happening with the power sector.
    The government has actually started the process of 
reviewing the tariffs. We have a new regulatory body in place. 
We are working with the World Bank, and the Minister of Finance 
is going to obtain partial risk guarantees for that sector, and 
therefore the reforms that were halted 3 years ago are actually 
on course.
    We believe the only reason that stopped people from 
investing at this moment is the other issue mentioned, the 
uncertainty over the elections. But in terms of the reforms 
themselves, all the right things have been done by President 
Jonathan; and we do think we are going to get a lot of progress 
in that very shortly.
    Chairman Meeks. Mr. Moss, let me ask you a quick question 
about your thoughts on how the ``bad bank'' model has been most 
effectively applied in the past crises. And I was going to ask 
this question to Mr. Sanusi, also, but let me start with you. 
What do you think Nigeria needs to do to get right to ensure 
that there is success in Nigeria, also?
    Mr. Moss. I'm not going to be so bold as to make banking 
regulatory advice with Governor Sanusi at the same table. I'm 
not a banking regulator.
    What I would say, though, is that the most important aspect 
from the outside if you are an investor considering putting 
money into the Nigerian financial sector is the credibility and 
transparency of the system. You know there were rumblings even 
before the crisis about lots of--we should call it what it is--
collusion between the banks to lend to each other. Even the 
push to try to harmonize financial reporting years was 
resisted, and the assumption from the financial community in 
London and New York was that is because there is at lot of 
lending going on between the banks to kind of boost the balance 
sheet just before the reporting period.
    So that is just one example where the credibility of the 
system has been broken and broken quite badly.
    So the greater transparency that the Central Bank and 
others can bring back to the system, then that will help 
rebuild confidence in the financial community in Nigeria.
    Chairman Meeks. Governor?
    Mr. Sanusi. Thank you very much.
    Two things on transparency. As we have said in our 
presentation, we have forced the banks to adopt a common year 
end. All banks now publish December 31st. We have pushed for 
IFRS, and that will start from 2012. We have also pushed 
through certain governance changes, change in auditors. 
Auditors have to be changed after a maximum of 10 years, and 
nonexecutive directors have to leave the board after 12 years, 
and CEOs cannot be there more than 10 years. So we have 
actually put in through changes that end up improving 
transparency.
    On the specific question of the ``bad bank,'' last year we 
studied the experiences of different countries, including the 
United States Resolution Trust Company, the Japanese experience 
with--Island, and the Asian financial crisis. And what we did 
with our own asset management corporation was to take two 
companies that are doing two different things in Malaysia, the 
Danaharta and the Danamodal, and put them in as one.
    So we have an asset management corporation that is unique 
in the sense that none has been done like that before anywhere. 
It does two things. On the one hand, it purchases nonperforming 
loans, but, on the other hand, it also is a recapitalization 
vehicle, a resolution vehicle in every sense of the word.
    The first stage is to purchase the nonperforming loans. But 
in the event that banks require capital after the purchase of 
the loan, then the asset management corporation can actually 
inject capital into the banks and then take them from there 
into a merger and acquisition situation. So AMCON is critical 
to resolving the problems of these eight to ten 
undercapitalized banks.
    We studied the Malaysian model. We talked to the Governor 
who, as Deputy Governor, was part of the process of setting up 
the two different companies. But because of the legislative 
process, what we did was, rather than to go for two different 
bills, went for one bill that gave us one company that would do 
all of this.
    We believe that AMCON will be a major part, and it will 
lead to--I think it would be--it is critical. Right now, we 
have about six banks that have reached advanced stages of 
discussion with merger partners. AMCON has already disclosed 
the basis of valuation, that transparency. It discloses that to 
lock up those assets for at least 2 years before selling. That 
is, again, transparency. And when AMCON is going to sell shares 
it will announce that it will sell and the terms and conditions 
of the sale the month it will be sold. So there is a process 
there that makes sure that we have a transparent and credible 
process all through.
    And on the board of AMCON we have the Director General of 
the SEC, we have the MD of NDIC, we have the Deputy Governor of 
Central Bank, the government Minister of Finance, nonexecutive 
director. So it is really a well-regulated institution.
    Chairman Meeks. I'm about to close, but I don't get this 
opportunity to have distinguished individuals come testify 
before the committee from all the way from across the Atlantic 
Ocean.
    But my final question is this, and this is a question that 
we always have. We have had recently here in the United 
States--it is an issue that comes up--and that is the tension 
that arises between consumer protection and safety and 
soundness of the institutions and whether or not a Central Bank 
can do both at the same time.
    And then I think in the special context with--in context 
with Nigeria, because of literacy rates being low and dealing 
with micro finance banks, I was wondering whether or not there 
was anything or any provisions being put in place so that you 
could protect the most vulnerable clients from any kind of bank 
fraud and/or abuse?
    Mr. Sanusi. Part of what is happening, the reforms, 
obviously, that we have looked at Central Bank itself and the 
weaknesses in the governance structures in the Central Bank and 
as is contained in my testimony we have set up a special risk 
management department in the Central Bank. We have also set up 
a special consumer protection department that is working with 
the banks to make sure that every bank sets up a consumer 
protection unit, and we take complaints.
    We are also working on reforming--on reviewing the Consumer 
Protections Act. Because a major problem, as rightfully 
mentioned, was consumers not knowing their rights and being 
taken advantage of by the financial institutions.
    Now should it be done by the Central Bank and is that a 
Central Banking role? In most developing countries you find 
that the resources for doing these things are within the 
Central Bank, and we are best positioned to tie it to our 
regulatory and supervisory role and call the banks to order in 
the event of exploitative practices.
    So we have put in place structures. We still have a long 
way to go. We haven't gone as far on the consumer protection 
and micro financial end as we have, for instance, on the 
financial stability end. But, obviously, we have been dealing 
first with the crisis and trying to bring us back from the 
brink of catastrophe; and then these are the building blocks 
for making sure there is no recurrence.
    Chairman Meeks. Mr. Miller, anything else?
    Mr. Miller of California. Without a doubt, Nigeria has 
regional influence, and I hope the reforms in your financial 
sector will have a benefit to your neighboring countries and 
Africa as a whole. I applaud you for your reforms. I ask you 
that you keep them up, and your efforts really will benefit 
your surrounding nations. I thank you for your testimony.
    Chairman Meeks. Let me also thank you for your testimony. 
Because, as indicated I think by Mr. Moss, the United States 
needs a strong Nigeria. In fact, all of west Africa needs a 
strong Nigeria. Because as Nigeria goes, so go many of your 
neighbors.
    And I just was delighted by the interest that I had in some 
American investors now looking at Nigeria. Whereas just 6, 7 
years ago, that would have been unthinkable. And it is just 
amazing. I had people calling me up saying, ``Hey, I just was 
over in Abuja and I'm thinking about putting money in there. 
What do you know?''
    And I happened to have told them we are having you here to 
testify, and I will tell them after our hearing was over, and 
I'm going back, as I did after we met in Nigeria, that reform 
is very much on the way and it is a place where we can look at 
investment and can really make a difference in having a sound 
partner in Nigeria and moving forward.
    So let me again thank you for your testimony. Some members 
I know that we wanted to be here are not here, so they may 
submit questions or have additional questions for this panel. 
Therefore, without objection, the hearing record will remain 
open for 30 days for members to submit written questions to 
these witnesses and to place their responses in the record.
    That being the case, I now adjourn this hearing.
    [Whereupon, at 4:00 p.m., the hearing was adjourned.]




















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                           November 16, 2010

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