US embassy cable - 04ABUJA513

UNCLAS SECTION 01 OF 02 ABUJA 000513 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, NI 
SUBJECT: NIGERIA'S CENTRAL BANK PROPOSES NEW CLEARING SYSTEM 
 
 
1. (U) Summary: On March 8 the Central Bank of Nigeria (CBN) 
announced a new clearing system aimed at strengthening the 
banking industry by preventing banks from overdrawing their 
CBN accounts.  The new system reduces the number of clearing 
banks from 21 to 7, is self-regulatory, and will likely 
preclude weak banks from participating in clearing.  The CBN 
expects to inaugurate the system on April 1, but the late 
passage of the FY2004 Budget may lead to a postponement.  End 
summary. 
 
---------- 
Background 
---------- 
 
2. (U) The industry's clearing system has been characterized 
by banks' habit of overdrawing their clearing balances at the 
CBN.  In the past, the CBN simply suspended defaulting banks 
from the clearinghouse, but public outcry over the 2003 
suspension of two banks, Societe Generale Bank of Nigeria and 
African International Bank, prompted CBN officials and 
Bankers Committee members (bank CEOs, the Central Bank 
governor, and key CBN officials) to rethink the system, 
particularly in light of the fact that the two banks had 
overdrawn their accounts by several billion naira.  Customers 
were taken by surprise and prevented from withdrawing their 
money, and the public blamed the CBN for failing to inform 
customers of the banks' financial health.  In response, CBN 
officials decided to construct a self-regulatory system in 
which banks use perceptions of financial health to decide 
whether to provide clearing services for their counterparts. 
------------------ 
Selection Criteria 
------------------ 
 
3. (U) To qualify for the proposed clearing system, 
participating banks must have facilities capable of clearing 
checks in Nigeria's 22 clearing zones; maintain a minimum of 
2.5 percent of deposits backing the total volume of checks 
cleared; and account for 2.5 percent of the total value of 
checks cleared.  In addition, they must jointly provide 
clearing collateral of 105 billion naira (usd 772 million). 
 
-------------------- 
The Settlement Banks 
-------------------- 
 
4. (U) The CBN first selected Nigeria's three old-generation 
banks, First Bank, United Bank for Africa, and Union Bank of 
Nigeria, for the clearing system and then increased the 
number of clearing banks to five, adding two new-generation 
banks, Guaranty Trust Bank and Zenith International Bank. 
After a December 23 Bankers Committee meeting, the CBN added 
two more banks, Standard Trust Bank and Afribank, and 
increased the banks' clearing collateral from its original 
level of 75 billion naira (usd 551 million) to 105 billion 
naira (usd 772 million). 
 
5. (U) Bankers Committee members agreed at the same time to 
periodically review the settlement banks' collateral to 
reflect transaction volumes, such that banks with the highest 
volumes will be required to set aside more funds as clearing 
collateral.  The CBN has advised weak banks unable to find 
settlement banks to merge with their healthier counterparts 
to ensure participation in the clearinghouse.  Banks that 
cannot merge or obtain clearing privileges will close. 
 
----------------------------------- 
Why postpone the commencement date? 
----------------------------------- 
 
6. (U) The CBN initially planned to launch the new system on 
January 1, but at the December 23 Bankers Committee meeting, 
officials postponed the system's inauguration to April 1 to 
allow time for banks to prepare for the change.  The Bankers 
Committee hinged the postponement on the passage of the Year 
2004 Budget, which it expects to be passed before the end of 
the first quarter. 
 
---------------------- 
Is it a laudable idea? 
---------------------- 
 
7. (U) Banking representatives welcome the proposed system, 
saying that it was long overdue.  According to Senator Faruk 
Bello, a former executive at Guaranty Trust Bank and now Vice 
Chairman of the Senate Committee on Banking and Currency, the 
proposed system will strengthen the banking industry and 
allow the CBN to spend more time focusing on its primary 
responsibility of shaping monetary and fiscal policy. Bello 
believes the CBN should focus on its area of competence while 
the banks handle clearing themselves. 
 
8. (U) Comment: There is a 50/50 chance that the FY2004 
Budget will not be passed before the end of the first 
quarter, so delays in the implementation of the new clearing 
system are likely.  Even so, the proposed settlement system 
is a welcome change that may strengthen Nigeria's banking 
industry by forcing weak banks to merge or die a natural 
death.  If the system improves the financial sector's health 
and efficiency, both depositors and business will benefit. 
End Comment. 
ROBERTS