[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
THE GLOBAL FINANCIAL CRISIS AND
FINANCIAL REFORMS IN NIGERIA
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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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U.S. GOVERNMENT PRINTING OFFICE
63-123 PDF WASHINGTON : 2010
For sale by the Superintendent of Documents, U.S. Government Printing
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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
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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
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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.]
A P P E N D I X
November 16, 2010
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