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Central Bank of Nigeria: Monetary Policy, 2002 & 2003 (Posted 11th Mar, 2002) Tell your friends about this page! Email it to them.

1.0 Introduction 

The Central Bank of Nigeria (CBN) will, with effect from 2002 fiscal year, adopt a medium term perspective monetary policy framework. Unlike earlier programmes, which were designed for one year, the new programme is for a two year period, beginning January 2002 to December 2003. The shift is in recognition of the fact that monetary policy actions affect the ultimate objectives of policy with a substantial lag. Thus, the current shift will free monetary policy implementation from the problem of time inconsistency and minimize over-reaction due to temporary shocks.

This circular outlines the Monetary, Credit, Foreign Trade and Exchange Policy Guidelines applicable to banks and other financial institutions in Nigeria in 2002/2003. In particular, monetary and credit policy will be implemented within the framework of the medium-term programme. The guidelines will be subject to fine-tuning in the light of developments in monetary and financial market conditions, as well as the performance of the economy, which would be conveyed to the relevant institutions in supplementary circulars as necessary. The circular contains four major sections and four appendices. Following the introduction, which is section 1, section 2 reviews the developments in the economy and policy environment in 2001 and thus provides the background to the policy measures for 2002/2003. Section 3 outlines the monetary and credit policy financial institutions in fiscal 2002, while the foreign trade and exchange policy measures are highlighted in section 4. The appendices contain prudential guidelines for licensed banks and reporting format.

2.0 Section Two

Review of Macroeconomic And Policy Environment in 2001.

2.1 Macroeconomic Developments Major economic indices indicated mixed macroeconomic performance in 2001. The environment for the continued expansionary fiscal operations of the three tiers of government, as a result of the monetisation of the excess crude oil receipts and the proceeds from the GSM license later in the year, as well as the monetary financing of fiscal deficits. This resulted in large injections of liquidity into the economy, which induced rapid monetary growth and intensified inflationary pressures. Interest rates were influenced by the state of bank liquidity as well as policy actions aimed at addressing the problem of liquidity overhang. The average Naira exchange rate at the official market, however remained relatively stable for most of the period, while relative improvement was observed in agricultural and industrial production. The outcome of external sector developments remained favourable up to the third quarter of the year. The fourth quarter, however, witnessed a slide in the export price of crude petroleum, with negative implications for export earnings and government revenue.

Growth in real Gross Domestic Product (GDP) was estimated at 3.8 percent during the first half of 2001, compared with the 5.0 percent targeted in 2001. The growth in output reflected the increase in both agricultural and industrial production. Aggregate manufacturing capacity utilisation rose marginally by 0.3 percent point over its level in the first half of 2000 to 3.5 percent, but was 0.2 percent point lower than the level in the preceding half year. The upward pressure in inflationary trend, observed since July 2000 continued in the fourth quarter of 2001, with the inflation rate at 18.9 percent in November, compared with 5.8 percent in the corresponding period of 2002.

The provisional balance of payment for the first half of 2001 indicated an overall surplus of N51.1 billion (US$458.9 million) compared with N78.3 billion (US$782.5 million) in the corresponding period of 2000. This development reflected the surplus in the current account, which more than offset the deficit in the capital and the financial account. The current account position was buoyed mainly by enhanced earnings from crude oil exports, occasioned by high prices of crude oil in the international petroleum market. The value on non-oil exports, however, fell sharply from N14.8 billion in 2000 to N9.3 billion in June 2001. Gross external reserves increased from US$9.9 billion (N1,032.5 billion) at end-December 2000 to US$10.6 billion (N,167.8 billion) in June 2001, and declined marginally to US$10.4 billion (Ni,152.2 billion) by November.

The Naira exchanged rate vis--vis the U.S. dollar was relatively stable in the IFEM for most of the year. After the depreciation in the first months, from N110.5 to N113.59 = US$1.00, the average IFEM rate appreciated steadily from N113.07 = US$1.00 in May to N111.60 = US$1.00 in September and remained at that level in October 2001. The rate, however depreciated marginally to N111.99 = US$1.00 in November. Similarly, the average parallel market and bureaux de charge rates depreciated from N123.38 and N137.48 = US$.100. respectively, in May before appreciating consistently. The relative stability achieved was attributed destination import inspection at the ports.

The growth in monetary aggregates accelerated rapidly in the first eleven months of 2001, exceeding the prescribed target for the year by wide margins. Provisional data indicated that broad money (M2) rose by 26.8 percent, as against the programmed target of 12.2 percent for the year. The expansion in M2 reflected growths in both the narrow money (M1) and quasi-money components. M1 expanded by 19.9 percent compared with the 4.3 percent growth stipulated for the whole year. Monetary growth during the period was driven by the increases in bank credit to the domestic economy and foreign assets (net) of the banking system, following the continued monetisation of excess crude oil export proceeds.

Aggregate bank credit to the domestic economy rose significantly by 77.8 percent, as against the 15.8 percent growth target for fiscal 2001. The rise reflected the growth in credit to both the government and the private sector. Net claims on Government rose by 132.8 percent as against the target expansion rate 2.6 percent for the entire year. Similarly, credit to the private sector rose by 37.3 percent compared with the target of 22.8 percent for the whole year. The growth in credit to the private sector was, as in the previous year, largely driven by developments in the foreign exchange market.

Reported bank lending rates were generally high during the year, while the deposit rates remained low. By November 2001, the spread between the weighted average deposit and maximum lending rates was 11.6 percentage points while that between the average savings deposit and maximum lending rates was 26.1 points. Most deposit rates remained negative in real terms as inflation rate accelerated. During the year, the CBN tightened its monetary policy to stem the liquidity surge, arising from the expansionary fiscal operations of governments. The bank progressively raised its minimum rediscount rate (MRR) by 650 basis points, from 14.00 percent in January to 20.5 percent in September. Similarly, both the cash reserve requirement (CRR) and statutory minimum liquidity ratio (LR) were revised upward from 10.0 and 35.0 percent to 12.5 and 40.0 percent, respectively, during the same period. The CBN also introduced its own intervention instrument, the CBN Certificate, in February 2001, to complement the traditional treasury bills in addressing the problem of liquidity overhang in the banking system.

Outstanding Macroeconomic Problems and Policy Challenges for Fiscal 2002/2003

The effect of fiscal federalism exacerbated the problem of excess liquidity with adverse implications for domestic price, exchange and interest rates. The persistence of structural bottlenecks in the economy also continued to constrain economic recovery in 2001. While some macroeconomic indicators showed marginal improvements in 2001 relative to 2000, the overall performance of the economy remained below its potential.

Poverty level remained high as the government's poverty intervention programmes had yet to be fully implemented during the period. Although, satisfactory progress has been made in the restoration of normal fuel supply, the full rehabilitation of power plants and other infrastructural facilities were still on-going, while public utilities remained deficient, constraining performance in the productive sectors of the economy. The international crude oil market witnessed a lull during the fourth quarter, as a result of the slow-down in economic activities in the industrialized countries and terrorist attack on the USA-the world leading economy. This and the poor performance of the non-oil sector had implications for the overall performance of the domestic economy.

Again this background, monetary, financial and external sector policies, as well as other economic policy measures have been formulated to ensure price stability and reverse the upward trend in inflation rate, to a desirable single digit, recognizing that price stability id critical for a sustained long term economic growth and poverty eradication. In fiscal 2002/2003, the CBN will endeavour to keep the growth in monetary aggregates within targets and sustain the relative stability of the exchange rate. The Bank will also continue to support the Federal Government's poverty reduction initiatives by ensuring adequate credit to the productive sectors, encouraging financial savings and private sector investment growth and improving financial market environment.

3.0 Section Three

Monetary and Credit Policy Measures in 2002/2003 

Objective and Strategy of Policy.

The primary of monetary policy in 2002/2003 is the achievement of price and exchange rate stability. Specially, monetary policy shall seek to subdue inflation to a single digit over the two- year period. Consequently, the central focus will include effective control of anticipated liquidity injection that may arise from excessive government spending during the pre-election years of 2002/2003 in order to minimize their negative effects on domestic price and exchange rate. The stance of monetary policy will be non-accommodation, while a more competitive financial environment will be fostered to enhance greater access to credit for the real sector. Furthermore, continued effort will be made in improving the payments system in order to further strengthen the effectiveness of monetary policy. The broad measure of money supply (M2) shall continue to be the intermediate target of monetary policy. An average growth in M2 of about 15.2 per cent during the two-year period, which translates into 15.3 percent in 2002 and 15.0 percent in 2003, shall be maintained.

Policy Measures

The conduct of monetary policy will continue to rely on a market-based technique in the management of CBN's balance sheet. The primary instrument of policy will continue to be Open Market Operations (OMO), supported by reserve requirement and discount window operations for enhanced effectiveness. The conduct of OMO will be proactive and will require the co- operation of the Federal Ministry of Finance to ensure consistency between monetary and fiscal policies as well as the stability of the financial market.

Open Market Operations 

Open Market Operations (OMO) will be conducted weekly in the secondary market, mainly in short-term government securities of varying maturities, in order to meet the various preference of participant in the market. OMO will be complemented by reserve requirements and discount window operations, including Repurchase Agreements (REPOs) while discount houses will continue to play the role of principal dealers in the market.

Reserve Requirement 

Reserve requirements shall continue to serve prudential and liquidity management policy objectives.

Cash Reserve Requirement (CRR) 

As in the preceding years, the cash reserve requirement will be used to complement OMO in achieving monetary policy objectives. In this regard, the authorities recognize the need to reduce the current high CRR in order to moderate banks' cost of funds and thus bring down bank lending rates. However, this can be achieved only in the medium to long-term when the monetary conditions would have improved. Meanwhile, the existing ratio of 12.5 percent will remain in force in 2002. As in 2001, the calculation of the CRR will be based on deposit money banks' total deposit liabilities (i.e. demand, savings and time deposit), certificates of deposit promissory notes held by the non-bank public, and other deposit items. The CBN will continue to ensure efficient administration of the CRR. In this regard, the lag for debiting banks' account to meet the specified CRR will not exceed two weeks. For this purpose, the mid-month returns by banks will complement the monthly returns. As amended in 2001, all deposit money banks will be subjected to CRR in 2002. The CBN will continue to impose strict sanctions for non- compliance. However, in order to moderate the adverse effects of CRR on cost of funds of banks, the current policy of payment interest on deposit above the 8.0 percent rate shall be retained.

Liquidity Ratio (LR) 

The existing minimum liquidity ratio of 40.0 percent for all deposit money banks also retained, but would be reviewed in line with developments in monetary conditions during the programme period. The base of calculating the LR requirement will, as in the previous years, comprise all deposits liabilities (demand, savings and time) as well as certificates of deposit (CDs), promissory notes held by the non-bank public and other deposit items. Placements with the takings from Discount Houses shall be offset against each other and any surplus of assets or liabilities shall be applied as the case may be in computing the LR requirement. Only interbank placements, which are fully collateralized by eligible instruments and readily rediscounted at the CBN, shall qualify as eligible instruments liquid assets. Uncollateralised placement s as well as money-at-call shall not constitute part of liquid assets, but shall continue to be treated as loans and advances. The mandatory deposits with the CBN to meet the CRR shall not qualify for inclusion in computing the LR. The requirement that discount houses should invest at least 60.0 percent of their total deposit liabilities in treasury bills will continue in 2002.

Discount Window Operations 

In line with the objective of maintaining monetary stability and promoting the development of the money market, the CBN shall, in 2002 and 2003, continue the use of discount window operations as a policy instrument to signal the desired direction of interest rates and in accordance with its role as lender of last resort. Transactions will be conducted in the form of short-term overnight loans, collateralized by the borrowing institutions' holdings of government debt instruments and other eligible instruments as stipulated by the CBN. Changes in the rediscount rate will continue to be made in a dynamic manner to complement other policy initiatives and to reflect developments in the money market.

CBN Certificate 

CBN Certificates were issued for the first time in 2001 to mop up the excess liquidity, which was generated by the rapid monetisation of the windfall gains from crude oil receipts. In 2002, CBN certificates will be issued as the need arises, to complement traditional monetary policy tools to contain growth in liquidity to the desired level.

Interest Rate Policy 

In 2002, interest rates will continue to be market-driven. In this regard, the CBN will influence the level and direction of interest rate movements through changes in its Minimum Rediscount Rate (MRR) to reflect the prevailing market condition. The current spread between the deposit and lending rates of banks is unacceptably wide and has serious implications for savings and investment growth. To address this problem, a more competitive financial environment will be engendered, through improved enlightenment of the investing public on alternative investment opportunities in the financial market. Furthermore, the CBN shall vigorously pursue initiatives to strengthen community banks, finance houses and development finance institutions (DFIs) with a view to enhancing the efficiency and public confidence in those institutions for the promotion of finance savings.

Specific procedures on interest rate policy to be observed by banks in 2002 are as follows: 

  • Banks shall continue to pay interest on current account deposits at rate of interest negotiated between them and their customers. Where deposits for special purposes are held for more than seven days, banks shall pay interest on such deposits and the rate of interest shall also be subject to negotiation between them and their customers. 
  • The reducing balance method shall continue to be used for calculating interest charges on loans repayable instalmentally. The use of any other method, whatsoever, for loans payable in agreed installments such as the discount methods or the simple interest straight line method that would result in a higher effective rate than the contracted rate, is disallowed. 
  • Statements of account to each current account holder shall be rendered promptly on monthly basis and shall include the following: Commission on turnover (COT); and  Rate of interest on over-drawn accounts, the amount and the period. 
  • Interest on savings accounts shall continue to be calculated on the customer's account as at the end of each quarter and accrued interest paid shall be reflected at the time of calculation. 
  • The amount of deposits in a personal savings account on which the interest is payable shall not be subject to any ceiling. 
  • Banks shall continue to design their pass books in such a way that the following information will be clearly shown when calculating the interest earned on savings deposits: interest applied, the amount of savings on which the calculation is based and the period for which interest is calculated. 
  • The Inspectorate Department of each shall continue to have the responsibility of cross- checking bank charges and interest rates payable on deposit accounts. Where the Inspectorate Department of a bank discovers non-payment or under-payment of interest and bank charges, a return thereon shall be made to the Central Bank. Under-payment and/or excessive interest and other charges shall be refunded with interest at the prevailing CBN minimum rediscount rate, along with a letter of apology to the customer within two weeks. Any bank which fails to refund excess charges or under-payment of interest on deposits within two weeks of the discovery of such error shall, in addition to the refund to the customer, be liable to a penalty amount to 100 percent of the amount involved.
  • Banks shall, in accordance with the provisions of BOFI Act No.25 of 1991, as amended, and amendments to Monetary Policy Circular No.30 of 1996, continue to display at their offices their current lending and deposit rates, as well as publish such rates in the national newspapers.

Remittance of VAT and Duty Collections

It has been observed that some banks do not comply with the requirement that they should remit VAT and customs duties collected on behalf of the Federal Government of the CBN within the stipulated seven days. These sources of cheap funds have influenced banks to discourage small savers by insisting on unrealistic minimum deposit base while constituting a leakage in the monetary transmission process. With effect from 2002, banks which keep these deposits for more than the stipulated seven days shall pay interest on such deposits as directed by the CBN. In addition, such deposits which are not remitted within the stipulated period shall form part of bank's deposit base for the purpose of computing their cash reserve requirement CRR)

Framework for Determining Banks' Cost of Funds 

In accordance with best international banking practice, banks are required to adopt the weighted average cost of funds computation framework from 2002 fiscal year. Thus the existing simple average method of computing cost of funds is hereby discounted. The cost items in the new frame will include banks' from the inter-bank funds market, payment in respect of deposit insurance premium and cost due to cash reserve requirement. For the avoidance of doubt, the new framework excludes banks' overheads. The guidelines for the computation of weighted cost of funds framework will be issued in due course.

National Saving Certificate 

The introduction of the National Savings Certificate (NSC), a medium to long-term security, will be vigorously pursued in 2002. The NSC, whose yield will be market-determined, is intended to broaden and offer alternative investment options to the investing public, including banks and the non-bank public, thereby supplementing current efforts at managing, on a more sustainable basis, the persistent excess liquidity in the economy, while facilitating savings and investment growth.

Federal Government Development Stocks 

Initiatives to resume the floatation of Federal Government Development Loan Stocks, suspended since 1980s, shall continue to be explored. Besides, the reintroduction of this instrument would encourage government to source its long term financing need from the capital marketing.

Minimum Balances on Personal Savings and Current Accounts 

The minimum amount required for savings account by most banks has remained unduly high and out of tune with present personal income realities in Nigeria. The observed trend has the potential to discourage savings and the banking habit, and is inconsistent with the desired macroeconomic objective of promoting savings and investment growth. Although the CBN has since discontinue with the policy of stipulating a mandatory minimum amount for opening a savings deposit account in line with the prevailing deregulated financial market environment, there is an urgent need to prevent a reversal of the progress made over the years to promote savings and enhance the saying culture Banks are, therefore, enjoined to reduce their minimum savings deposit required to N5,000.00 from 2002 fiscal year.

Other Policy Measures

Financing the development of SMEs 

The role of Small and Medium Scale Enterprises (SMEs) in employment generation, skill acquisition, output growth, enhancement of local technology and the mitigation of rural-urban drift cannot be over-emphasized. In this regard, the Federal Government initiated and actualized some policy measures for the attainment of these goals. These include the establishment of sector specific development finance institutions (DFIs). During year 2001, the Federal Government approved the merger of the Family Economic Advancement Programme, People's Bank of Nigeria and the Nigerian Agricultural and Co-operative Bank (NACB) into a single bank-Nigeria Agricultural, Co-operative and Rural Development Bank (NACRDB) and Nigeria Industrial Development Bank (NIDB), Nigeria Bank for Commerce and Industry (NBCI) and National Economic Reconstruction Fund (NERFUND) into a new Bank for Industry.

In addition, the Bankers' Committee decided that 10.0 percent of profit before tax of every bank would be set aside and channeled to equity investment in small and medium scale industries. To ensure the effectiveness of the programme, banks are expected to identify, guide and nurture enterprises to be financed under the scheme. The Small and Medium Industries Equity Investment Scheme (SMIEIS) was launched in August 2001. The activities targeted under the scheme include agro-allied, information technology, telecommunications, manufacturing, educational establishments, services, tourism and leisure, solid minerals and construction. With the introduction of the scheme, it is expected that improved funding will facilitate the achievement of higher economic growth. Banks are required to render to the CBN, on quarterly basis, their investment report under the scheme.

CBN Rediscounting and Refinancing Facility (RRF) for Medium to Long-term Credit

Available statistics on the maturity structure of deposit money banks' credit to the domestic economy revealed that the bulk of aggregate credit was short-term, and such loans were channeled mainly to general commerce and trade. The need to encourage medium to long-term lending to the productive sectors of the economy is to be expanded and diversified.

In this regard, and consistent with the provision of Section 27 (1) (c&d) of the CBN Act 1991, as amended, the CBN will, with effect from January 2002, adopt a refinancing facility at concessionary interest rate to support medium to long-term bank lending to the productive sectors of the economy.

Under the facility, deposit money banks can issue Promissory Notes, based on their loans and advances with maturities of not less than 5 years, for agricultural production, semi-manufacturing and manufacturing, solid minerals and information technology. The characteristics of the RRF are as follows: 

(i) The Promissory Notes shall be issued by ranks that have complied fully with prudential requirements. (ii) The Notes shall have a maximum maturity of 90 days, exclusive of days of grace from the date of acquisition. (i) The Notes shall be rediscountable at the CBN at a rate, which is two-percentage point below the minimum rediscount rate (MRR). (ii) The Notes shall bear two valid and authorized signatures acceptable to the CBN. (iii) The banks shall access up to 60.0 percent of qualifying loans. (iv) The RRF will apply to loan portfolio that must have been held for not less than one year. (v) Access to the facility shall be limited to once in 12 calendar months.

The RRF is designed to provide temporary relief to banks, which face liquidity Problems as a result of having committed their resources to long-term financing of the specified productive sectors.

Revitalizing the Community Banks 

The community banking initiative is part of the intervention action aimed at redressing the lack of adequate and efficient facilities for mobilisation savings for productive activities among the less- privileged members of the society. However, the operations of the banks have been undermined by both endogenous and exogenous factors. In order to address these problems though proper institutional and regulatory framework, the CBN took some measures which included the creation of the other Financial Institutions Department {OFID}. Furthermore, the CBN will continue to support capacity-building in Community Banks by providing free training for their personnel from 2002.

Orderly Development of the Banking System 

The CBN will sustain efforts at facilitating the orderly development of the financial sector and will continue to involve the operators in the conduct of monetary policy, in support of policy objectives. To this end, the following measures shall apply in 2002 fiscal year.

(i) Increase in Minimum Paid-up Capital Requirement. The minimum paid-up capital requirement for new banks was raised from N1.0 billion to N2.0 billion in 2001 fiscal year. Accordingly, existing banks are required to raise their capital base to N1.0 billion by end of 2002 in order to strengthen their operations. 

(ii) Transparency in Banking Operations In order to promote. transparency in the banking sector, the CBN shall in 2002 intensify the process of regular monitoring of the operations of the banks to ensure compliance with regulations The CBN will continue to encourage self-regulation in the banking industry in order to enhance ethical standards and transparency in banking operations. It is hoped that the recently published code on banking ethics will facilitate the sanitisation of the system. Appropriate sanctions will be imposed on erring banks and other financial institutions in line with the provisions of BOFI Act and other relevant legislations. 

(iii) Moral Suasion. The CBN will continue to engage in moral suasion through regular dialogue with banks and other financial institutions, under the aegis of the Bankers' Committee and other communication channels, in order to encourage enhanced efficiency in the financial sector, especially with respect to interest and exchange rate management.

Improving the Payment System 

(i) Introduction of higher currency denomination 

In order to ease the problem of cash transactions in the economy, the CBN in 1999 identifies the need for adequate supply of fifty Naira (50) currency notes, as well as the introduction of higher denominations. Consequently, a one hundred Naira note (N100) was introduced into the system in the third quarter of 1999, while a two hundred Naira note (200) was launched in November 2000 and five hundred Naira note (500) introduced in the first half of 2001. The monetary authorities will continue to ensure that the security and quality of the notes are of high standards. 

(ii) Improving the Use of Cheques

As in 2001, the CBN will continue to promote the use of cheques towards the improvement of the payments system and enhancement of business transactions. Government will be encouraged to lead in popularizing the use of this instrument, by accepting cheques for debt settlements in all government ministries and parastatals. In this regards, the CBN will, in consultation with the Accountant-General of the Federation (AGF), encourage government agencies to accept cheques for services rendered as practiced all over the world.

Bank Credit Expansion 

Only banks, which meet the following criteria, shall be permitted to grant new credit facilities in 2002/2003:

(a) Specified cash reserve requirement; 

(b) Specified liquid ratio; 

(c) Prudential guidelines; 

(d) Statutory minimum paid-up capital requirement; 

(e) Prescribed capital adequacy ratio; and 

(f) Sound management policy. 

The position of each bank shall continue to be examined on a monthly basis with respect to above criteria, and banks that fail to meet the requirements will not be allowed to grant further credit until compliance is achieved.

Grace Periods on Loans to Agriculture 

Without prejudice to the to the on-going liberalisation in the financial sector, there is need for financial institutions to continue to observe appropriate grace periods on agricultural loans and in recognition of the differences in gestation period of various agricultural products. In this regards, banks are enjoined to always allow borrowers adequate grace period for repayment on agricultural loans.

Prudential Guidelines for Licensed Banks 

All the existing prudential guidelines on early recognition of losses and adequate provisioning for bad and doubtful debts shall remain in force in 2002 and 2003. Accordingly, banks are enjoined to continue to strictly observe the prudential guidelines outlined in CBN Circular No. BSD/DO/23/VOL.1/11 of 7th November 1990 and No BSD/CS/23/VOL.1/8 of 15th May, 1991. Also, the provisioning requirement (by which banks are required to make a 50% for classified credits) as contained in CBN Circular No. BSD/DO/VOL.1/2001/13 of 10th July, 2001, shall remain in force in 2002 fiscal year.

Capital Funds Adequacy

In keeping with international standards, the minimum ratio of capital to total risk-weighted assets shall remain at 8.0% in 2002 and 2003. Further, at least 50.0% of the components of a bank's capital shall comprise paid-up capital and reserves while every bank shall maintain a ratio of not less than one to ten (1:10) between its adjusted capital funds and its total credit net of provisions.

Abolition of Foreign Guarantees/Currency Deposits as Collateral for Naira Loans 

The abolition of foreign guarantees for Naira denominated loans as contained in the Monetary Policy Circular no. 23, Amendment No. 3 of April 1989 is lifted in fiscal 2002 and 2003. However, any request for such guarantees shall be subject to prior approval by the CBN.

Rules for Currency Transaction Pursuant to the Provisions of section 21 of Foreign Exchange (Monitoring and Miscellaneous Provision) Act No. 17 of 1995

Persons who import currency up to US10,000 and above by cash and lodge such money in a domiciliary account with an authorised dealer, can only make cask withdrawals from the account. Also by virtue of the provision section 22 of the same legislation, no person in Nigeria shall make or accept cash payment, whether denominated in foreign currency or not, for the purchase and acquisition of landed properties, stocks, shares, debentures, all form of negotiable instruments and motor vehicles. Payments for those items shall be made by bank transfers or cheques drawn on banks in Nigeria. In order to ensure full compliance with the law, all banks are required, as in the previous year, to appoint compliance officers whose duty shall be to ensure that the provision is adhered to and shall report all breaches of the law to the CBN, through the Chief Executive Officer of each bank, in such a manner as the CBN may prescribe.

Responsibilities of Banks' External Auditors to the Supervisory Authorities 

Existing Central Bank directives to all banks to instruct their auditors to forward two copies of their domestic reports to the CBN not later than three months after the end of the bank's financial year shall remain in force in 2002/2003. In addition, reports on fraud and forgeries committed during the accounting year shall accompany the audited reports. Furthermore, each bank shall continue to communicate to the CBN, the appointment, re-appointment, termination and resignation of the bank's external auditors, stating the reason for such action. Where a bank fails to comply with this requirement, the CBN reserves the right to withhold the approval of such requests, thereby attracting the stipulated penalty for non-compliance. In recognition of the complementary role of external auditors, banks are required to ensure that their external auditors are in attendance at the presentation of the Bank Examination Reports to their Board of Directors by the supervisory Authorities.

Banks Operating Subsidiary Companies Offering Financial Service 

Banks with subsidiary companies offering financial and related services shall continue, as in the previous years, to report on the operations of such companies along with their Monthly Returns to the Central Banks of Nigeria.

Complaints Desk at the CBN 

The Central Bank shall continue to maintain a public Complaints Desk at its Head Office and each of its branches to enable the public to lodge any complaints they may have against their banks. Where the case against any bank is proved, the bank shall be required to make necessary amends and pay appropriate penalties. This measure is aimed at encouraging banking habit; promotion of efficiency in the delivery of financial services and thereby boost public confidence in the system.

Agricultural Credit Guarantee Scheme (ACGS) 

In pursuit of the developmental role of the Agricultural Credit Guarantee Scheme and to ensure the flow of credit to the agricultural sector, the authorised share capital of the scheme was reviewed upward from N100.00 million to N3.0 billion in 1999. Following the increase, the loan limits under the scheme were from N5,000 to N20,000 for unsecured loans to individuals, as well as from N1.0 million for corporate borrowers. The refinancing scheme adopted by the CBN to cater for the medium and large segment shall continue to be pursued in 2002/2003.

3.2.22 Returns from Banks 

All banks in the country are required to report accurately, faithfully and promptly on their activities in the prescribe formats for the mid-month, monthly, quarterly and semi annual returns. Such designated returns (in diskette and hard copy) shall be forwarded to the Banking Supervision, Bank Examination, Trade and Exchange and Research Departments of the CBN as well as the Nigeria Deposit Insurance Corporation (NDIC) not later than 5 days after the 15th day of each month for mid-month return, 10 days after the end of each of each reporting month in the case of monthly returns. Copies of the returns duly signed as applicable to the relevant departments shall be submitted to Directors of Banking Supervision, Research, Bank Examination Departments of the CBN and Director, off-site Supervision Department of the NDIC.

Banks are enjoined to send monthly returns on public sector account balances with them to the CBN Director of Banking Operations.

3.2.23 Penalties for Default 

As in the previous years, the CBN shall in 2002/2003, continue to enforce all the stipulated penalties for non-compliance with the Bank's guidelines and provisions of the CBN Act 1991 and Banks and other Financial Institutions Act 1991 as amended. In serious cases of default, the CBN may suspend or revoke any licences issued to the defaulting bank. The bank shall sustain its surveillance activities during the two-year period and invoke the relevant provisions of the existing laws, as deemed appropriate in order to enhance the safety, soundness and efficiency of the banking system. For the avoidance of doubt, sanctions shall be applied as follows:

i. Banks that do not meet the criteria for the expansion of credit ( item 3.2.12 of these guidelines) but expand their credit beyond the specified level as at 31st December 2001, or beyond the current level in the case of erstwhile healthy banks, shall in each case deposit an amount equivalent to the excess with the CBN. Such deposit shall earn no interest and shall not be eligible for inclusion in the defaulting banks' liquid assets holdings for the purpose of meeting the statutory cash and liquid ratios. Such funds shall be lodged on quarterly basis and held with the CBN for a minimum period of three months, and shall thereafter remain with the bank for as long as the default lasts.

ii. A bank whose Cash Reserves Ratio (CRR) falls below the stipulated minimum and any bank whose liquidity ratio falls short of the prescribed minimum shall be liable to appropriate sanctions under the CBN Act 1991, and the Banks and Other Financial Institutions Act 1991, as amended. Where a bank increases its loan and advances or credit facilities without the approval of the CBN during the period of deficiency in the respective reserve ratios, such a bank shall pay a fine as may be determined by the CBN within the provisions of the relevant Acts, as amended. In addition, the CBN shall withdraw all privileges or facilities that are normally accorded to the bank. 

iii. A bank shall be liable to appropriate fine, as determined by the CBN or such other penalties as provided under the CBN Act 1991 and the Banks and Other Financial Institution Act 1991 as amended for:

  • Failure to display at its banking hall and publish in the national newspapers its current lending and deposit rates or render information on such rates as specified from time to time by the CBN.
  • Failure to send its returns to the CBN 5 days after the 15th day of each month for the mid month returns, 10 days after the last day of each month in the case of monthly returns, and 14 days after the end of each quarter in the case of the quarterly returns. 
  • Failure, without good reason to supply information within the prescribed period in such a form as the CBN may from time to time direct, relating to or concerning matters affecting the economy of Nigeria. 
  • Rendition of false information or supplying information recklessly without regard for its accuracy and 
  • Publication of audited accounts by the Chief Executive Officer of a bank without prior authorization by the CBN. 

iv. Banks shall be penalised under section 60 (1) of BOFI Act 1991, as amended, if the credit status of a customer is not sought from the Credit Bureau, under the Credit Risk Management System (CRMS) before credit is granted or when credit is granted to a delinquent customer or if a delinquent credit is not reported.

3.3 Other Financial Institution 

The CBN, in 2001, established a department to oversee the onsite and offsite surveillance of other financial institutions. Finance Companies, Discount Houses, Mortgage Institutions, Development Banks, Commercial Banks, and Bureau de Change operating in the country are thereby reminded that, in conformity with existing regulatory provisions, it is mandatory for them to render regularly to the CBN, accurate and timely returns on their operations, and any other information as may, from time to time be, required by the CBN. The supervisory frame for these institutions will be further strengthened, while other complementary measures necessary to enhance the effectiveness of CBN surveillance activities, and the orderly development of the financial market, will be pursued in the current period. The institutions are also to render to the CBN their audited annual accounts for approval before publication, in accordance with the provisions of the CBN and BOFI Acts and other existing or revised operating guidelines. Specific guidelines that apply to these institutions are outlined below:

3.3.1 Finance Companies 

In 2002/2003, continued efforts shall be made to monitor the performance of licenced financed companies with a view to checking further spread of distress in the financial sector, as well as ensure the overall effectiveness of CBN monetary, credit, and financial policies. Consequently, all licensed financial companies in the country shall continue to submit to the CBN quarterly returns on their operations, including statement of assets and liabilities; total credit granted, with details of sectoral allocation utilisation; investments and money market transactions; non performing credits; and interest rate structure. A copy, each, of such returns shall reach the CBN Director of BOFI and Director of Research in Lagos and Abuja, or the Lagos Liaison office of the Research Department in Lagos not later than 14 days after the end of each quarter. Bi-annual returns shall also be rendered to the CBN Director of other financial institutions in Lagos not later than 14 days, following the end of each half-year. The directive to the effect that finance companies shall display their daily rates of interest in conspicuous places in their head offices and branches will remain in force in fiscal 2002/2003. Furthermore, finance companies are enjoined to comply with the prudential guidelines as contained in the revised guidelines of July 1993 and December 1994, respectively.

3.3.2 Discount Houses 

Discount houses shall, in fiscal 2002/2003 continue to render daily, weekly and monthly returns on their operation to the CBN, in line with existing operational guidelines as well as the provisions of the CBN Act of 1991 and the banks and other Financial Institutions Act of 1991, as amended. Every discount house shall display its daily rates of interests in conspicuous positions in all its offices. Discount Houses shall continue to invest at least 60.0 per cent of their total deposit liabilities in treasury bills.

3.3.3 Development Banks 

Development banks shall continue to render to the CBN their balance sheet statements quarterly as well as returns on their credit and interest rate operations. These returns, which shall be furnished accurately and in a timely manner on the prescribed forms, as well as other supplementary information, as may from time to time be required by the CBN, shall be submitted not later than 14 days after the end of each quarter to the Director of Research and other Financial Institutions, Central Bank of Nigeria.

3.3.4 Bureau de Change 

The operational framework of the IFEM shall be reformed in 2002 to allow bureaux de change to source their foreign exchange requirements for BTA/PTA from the IFEM. This further deregulation will enhance public access to foreign exchange and minimize speculative arbitrage. All licensed bureaux de changes are, therefore, enjoined to continue to adhere strictly to all existing and revised guidelines on their operations in 2002 to facilitate the achievement of desired objectives.

3.3.5 Primary Mortgage Institutions and Community Banks

The supervisory and regulatory framework for other financial institutions, including primary mortgage institutions and the community banks has been strengthened with the take-off of the Other Financial institutions Department (OFID) in CBN. Efforts will be sustained in 2002/2003 to ensure the viability and soundness of the institutions as well as their effectiveness.

3.3.6 Penalties for Default 

All institutions are enjoined to comply fully with the provisions of the relevant legislations and guidelines. Any financial institution that fails to comply with the existing and revised guidelines issued by the CBN as well as other directives as the CBN may issue from time to time, or fails to furnish within the stipulated time any statistical and other returns as the CBN may, from time to time prescribe, shall be liable to appropriate fines as determined by the CBN or such other penalties as provided for by the enabling law.

3.4 Policy on Transparency in Financial Transactions

In line with the statement of the Basle Committee on banking Regulations and Supervisory Practices, all financial institutions are required to continue to observe the following standards in the interest of transparency in financial transactions.

3.4.1 Customer Identification 

Financial institutions are enjoined to intensity efforts to determine the true identity of all customers requiring their services. In particular, financial institutions should not as a matter of policy, conduct business transactions with customers who fail to provide evidence of their identity.

3.4.2 Compliance with the Law 

Licensed banks and other financial institutions shall observe high ethnical standards as well as the laws and regulations governing their operations. In particular, banks are required to ensure full compliance with the Guidance Notes and other relevant circulars on Money Laundering Surveillance issued by the CBN, in order to enhance the effectiveness of the provisions of the Money Laundering Act, 1995. it has been observed that the level of compliance by the institutions with the provision of the Act had been unsatisfactory due largely to lack of understanding of the crucial role of the Act. Efforts should be made to ensure full compliance in terms of disclosure of relevant information of depositors as stipulated in the Act, including strict observance of the "know your customer" principle, to ensure that illegally acquired funds are prevented from being injected into the financial system. Appropriate sanctions have been put in place for breaches of this law.

3.4.3 Co-operation with Law Enforcement Authorities 

Banks and other financial institutions are required to give full cooperation to law enforcement authorities within the limits of the rules governing confidentiality. In particular, where financial institutions are aware of facts which lead to a reasonable presumption that the funds lodged in an account or transactions being entered into derive from criminal activity or intention, they should observe the stipulated procedures for disclosure of the suspicious transactions in reporting to law enforcement authorities.

Any contravention of the above-stated guidelines by any financial institution shall attract penalties as stipulated in the Banks and Other Financial Institutions Act, 1991, as amended, or the Money Laundering Act, 1995, as appropriate.

4.0 Section Four

Foreign Trade and Exchange Police Measures 

4.1 New Policy Measures for 2002

4.1.1 Inter-bank Foreign Exchange Market (IFEM)

In a continued effort to stabilise the exchange rate, as well as ensure a single exchange rate for the Naira, the IFEM is further deregulated in 2002. To this end, the operational framework of the IFEM shall be reformed to allow bureaux de change to source their foreign exchange requirements (in TCs) from the IFEM. Details of the reform package will be issued in due course.

Furthermore, incentives will be extended to non-oil exporters to boost autonomous foreign exchange supply. The current port reform and the re-introduction of destination inspection will not only ensure that goods imported into the country attract the appropriate duty rates; they are expected to diminish the incentive to patronise the parallel foreign exchange market as well as minimise the arbitrage premium.

The other new measures are as follows: 

i) The initial validity of form 'M' established in respect of plant and machinery made to specification shall be one year subject to extension for another 180 days by the processing bank without recourse to the CBN. Thus, the maximum life span of an approved form 'M' for importation of machinery, plant and equipment is one and half years (540 days). 

ii) Approval for duty exemption shall be obtained before shipment of relevant consignment to avoid unnecessary delay and transit of goods at the ports. 

iii) Payment of import duty and other charges shall be made through the processing bank provided that it is a designated bank.

4.2 Existing Policy Measures Retained/Amended in 2002

4.2.1 Two-way Quote System 

The two-way quote system introduced in October, 1999 shall remain in force in 2002 fiscal year.

4.2.2 Inter-Bank Foreign Exchange Market (IFEM) 

(i) The inter-bank Foreign Exchange Market (IFEM) shall continue to operate freely. However, no individual or organization shall deal in foreign exchange except as provided by the relevant laws and regulations. 

(ii) Foreign exchange purchased from the CBN at IFEM shall be used for eligible transactions and is not transferable in the Inter-bank Foreign Exchange Market. 

(iii) Mixing of funds purchase from the CBN with any other acquired from the IFEM shall be allowed provided they are duly segregated and properly recorded to ease reconciliation. Consequently, banks shall continue to render appropriate returns on sources of funds and utilisation to the CBN. 

(iv) Holders of ordinary domiciliary account shall continue to have unfettered access to funds in their accounts. In other words, the instructions of the account holder shall be sufficient to access funds in the account irrespective of the payment mode required. (v) utilisation of funds in the Non-Oil export domiciliary accounts shall continue to be subject to eligible transactions. 

(vi) All oil and oil service companies shall continue to sell their foreign exchange brought into the country to meet their local expenses to any bank of their choice, including the CBN. Monthly returns by both the oil companies and the banks on such sales and purchases shall be rendered to the CBN using the approved format. 

(vii) All applications whether or not valid for foreign exchange, visible or invisible trade transactions shall continue to be approved by banks, subject to stipulated documentation requirements, before remittance of funds. 

(viii) Current transactions involving the use of bills for collection shall be allowed provided relevant documents are passed through Authorised Dealers. Transactions executed on private sector initiative, shall carry no government guarantee or obligations. The remittances may be made through the IFEM subjects to the prevailing conditions for payment. For the avoidance of doubt, the use of Open Account is hereby abolished.

Source: Central Bank of Nigeria. Please note that we have made every attempt to ensure there are no mistakes in this report, either in spellings or grammar. Any mistake found is regrettable.

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