Building an International Financial Centre:
A Panel Discussion on the Occasion of the 50th
Anniversary of Central Bank of Nigeria
By
‘Tayo Fakiyesi
1.0 What is an International Financial Centre?
There are many dimensions to an International Financial Centre, with various
factors integrating to provide the necessary infrastructure to support
international financial business.
Characteristics of an International Financial Centre include:

A centre from which international financial business can be conducted
profitably, easily and efficiently.
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A centre with skilled management and intellectual talent covering Business,
Finance and interdependent services such as legal and accounting, to
provide multi-disciplined teams that facilitate large cross borders
transactions in the shortest possible time frame.
1.0 What is an International Financial Centre?
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A centre with deep liquid and sophisticated capital market and world
competitive tax and regulatory regimes with foreign investment and
offshore business flow.
A centre that can add significant value to financial services provided from
it, through a workforce that can respond promptly and in an innovative
manner.
A centre with the World’s best telecommunications and IT capacity and
imbued with plentiful, well educated, multilingual workforce.
A centre where all facets of financial services: CEOs; senior traders,
regional headquarters, treasury operations, data processing, support
functions and call centers, can be located efficiently.
A centre with convivial and alluring environment for business
1.0 What is an International Financial Centre?
The above is inclusive of offshore financial centre which essentially
provides financial services by banks and other agents to nonresidents, including the bank intermediation role of taking deposits
from non-residents and lending to non-residents. Other services
provided include fund management, insurance, trust business, asset
protection, corporate planning and tax planning.
Amongst the many definitions of Offshore Financial Centers
(OFCs), perhaps the most practical characterizes OFCs as centers
where the bulk of financial sector transactions on both sides of the
balance sheet are with individuals or companies that are not
residents of OFCs, where the transactions are initiated elsewhere,
and where the majority of the institutions involved are controlled by
non-residents.
1.0 What is an International Financial Centre?
Thus many OFCs have the following characteristics:
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Jurisdictions that have financial institutions engaged primarily in
business with non-residents;
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Financial systems with external assets and liabilities out of
proportion to domestic financial intermediation designed to finance
domestic economies; and
More popularly, centers which provide some or all of the following
opportunities: low or zero taxation; moderate or light financial
regulation; banking secrecy and anonymity are regarded as offshore
financial centers.
1.0 What is an International Financial Centre?
The role of a financial system is to promote economic wellbeing
through financial intermediation, i.e., acting as conduits of savings
into investment, and the provision of financial infrastructure for
effecting financial transactions. In promoting the effective
performance of this role by the financial system, the Governments,
Regulatory Authorities, as well as regulations in place are very
pivotal. The role of government must be enabling with minimum
and only necessary controls. Such government involvement in the
financial system must be reduced to the minimum, except where the
private interests of financial market participants do not align with
the public interests as well as for reasons of competitive fairness or
commercial viability.
Prerequisite for Building an IFC
The Government should formulate specific policies to promote
the efficient functioning of the financial system in the following
manner –
a. Policies concerning financial infrastructure should aim to
mitigate risks, increase efficiency and enhance market
transparency and liquidity, thus supporting the safety and
soundness of the financial system.
b. Policies concerning financial intermediation should aim to
promote the stability, integrity, diversity and efficiency of the
financial system.
Prerequisite for Building an IFC
c. Policies concerning the regulatory regime should aim to
provide a regulatory framework that promotes the stability of
the financial system, provides an appropriate measure of
protection to users of financial services and facilitates
competition, and is consistent with the standards and practices
of major international financial centers.
Prerequisite for Building an IFC
An international financial centre is a place where financial
institutions from many different jurisdictions come together to
carry out financial intermediation of an international dimension.
The Government through the Central Bank must therefore seek to
enhance policies that will pave way for an efficient Nigeria financial
sector to metamorphosis into a host that is capable of supporting a
dynamic international financial centre. Towards this end, the
Government should (i)
maintain an appropriate economic and legal environment for an
open, fair and efficient market;
(ii)
enhance the international competitiveness of Nigeria’s financial
services through promoting international financial intermediation
and attracting foreign savings and investments into Nigeria;
Prerequisite for Building an IFC
(iii)
develop payment, clearing and settlement systems to facilitate the safe
and efficient conduct of international and cross-border financial
activities in Nigeria; and
(iv)
Strengthen corporate governance standards with a view to fostering
international confidence in our financial markets.
(v)
Reduce uncertainties and consequent noise effects of intended
some unintended policies and actions;
(xi)
Necessary physical infrastructure must not only be in place they must be
efficient and well maintained
and
Categories of International Financial Centre
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Global (GFCs ): These are centers that genuinely serve clients from all
over the world in the provision of the widest possible array of IFS;
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Regional (RFCs) :they serve their regional rather than their national
economies examples of such Dubai, Hong Kong;
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Non-global and non-regional, ordinary international IFCs: These are
centers like Paris, Frankfurt, Tokyo and Sydney that provide a wide range
of IFS but cater mainly to the needs of their national economies rather than
their regions or the world – one may call them national IFCs and
Offshore (OFCs) These are centers that are primarily tax havens for
wealth management and global tax management rather than providing the
full array of IFS.
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2.0 Vision and Objectives of an International
Financial Centre (IFC)
A well-diversified and competitive financial system is vital for the longterm economic growth and development of a forward looking country.
Such ensures that risks in the economy are well distributed among the
various sub-sectors. In this increasingly globalized world, the future of the
financial system lies in its ability to create a dynamic set of financial
players, which are able to provide the needed support to the domestic
economy.
It creates more importantly, a core of more efficient, competitive, sound
and stable skills that would facilitate the economic transformation process.
The goal of the monetary authority in Nigeria should be geared towards
developing a more resilient, competitive and dynamic financial system with
best practices, that supports and contributes positively to the growth of the
economy through the economic cycle, and has a core of strong and forward
looking domestic financial institutions that are more technology driven and
ready to face the challenges of liberalization and globalization.
2.0 Vision and Objectives of an International
Financial Centre (IFC)
While opportunities have emerged in this new environment, threats of the
global marketplace are becoming more intensive, as global players and
technology advancements are having an unprecedented impact on the
approach of banking and financial businesses. Against this background, it
is vital for the financial system, particularly the domestic financial
institutions to be resilient and efficient if Nigeria is to ensure that its
financial sector remains effective and responsive in the face of a more
globalized, liberalized and a more complex domestic economy.
In the new environment, the ability of the financial institutions to deliver
products and services in the most efficient and effective manner will be the
key to determining performance and relevance.
2.0 Vision and Objectives of an International
Financial Centre (IFC)
The soundness of individual institutions will be a key factor in order to
maintain the stability of the overall financial system. In the banking sector,
despite the achievements of the domestic banking system in the country,
the Nigeria banking institutions need to strive to enhance their capacity and
capability so that they will be at par with global players in terms of
efficiency, effectiveness and financial soundness. Against the backdrop of
socioeconomic objectives of the country, the vision is for the development
of a well-diversified financial sector that is defined based on five main
characteristics, namely:
2.0 Vision and Objectives of an International
Financial Centre (IFC)
2.1 Efficiency
The range of financial products and services should be offered at the lowest
cost to both institutional and individual consumers, namely, borrowers,
investors, depositors and risk managers. In this regard, improvement in
productivity and higher returns on assets for the financial institutions will need
to be realized through greater penetration of efficient and low cost delivery
channels, access to scale advantages in processing, procurement and other
back-office functions, and leveraging on world-class skills. This operational
efficiency can be achieved through greater investment in technology and skill
enhancements.
2.0 Vision and Objectives of an International
Financial Centre (IFC)
2.2 Effectiveness
The availability of a broad range of products and services is essential to
meet the needs of customers that can be expected to be increasingly more
demanding and sophisticated. The degree of innovation of the financial
institutions will determine the range of products and delivery channels
offered. While Nigerian institutions do offer basic banking and insurance
products, there is significant room for advancement in meeting the new
requirements of the new economy, in particular, highly differentiated
financial products which are tailored to meet specific demands of the
consumers and the corporate sector. In an increasingly competitive market,
innovation and improved services will be introduced through the existence
of innovative players and a more conducive operational environment.
2.0 Vision and Objectives of an International
Financial Centre (IFC)
2.3 Stability
A safe, sound and stable financial system that is able to withstand sudden
adverse economic and financial shocks that emanate from within and
outside the system without significantly disrupting the intermediary
function and the functioning of the economy. To have a stable system,
there must be efficient, effective and robust financial institutions, strong
prudential regulations and supervision, and efficient and reliable
infrastructure. Robust financial institutions that would have strong risk
management capabilities and credit skills as well as sound corporate
governance. Improvements in credit skills and risk management among
financial institutions would be demonstrated among others by the greater
use of financial models and application of risk management framework that
is more comprehensive.
2.3 Stability
Corporate governance could be enhanced through improving the quality
and accountability of the board of directors and management of financial
institutions. Again there may be need for effective monitoring of offshore
centers to protect the host financial system from contagion effects.
2.0 Vision and Objectives of an International
Financial Centre (IFC)
2.4 Prudential regulations
While the foundation of a strong financial system is the implementation of
effective prudential regulations and supervision, this needs to be balanced
with the need to provide an environment which is conducive to the
development of an efficient and innovative financial system. A major issue
in existing offshore centre (Bermuda, British Virgin Island, Cyprus,
Leichtenstein, etc.) has centered on Prudential regulations and effective
supervision.
2.0 Vision and Objectives of an International
Financial Centre (IFC)
2.5 Infrastructure
The availability of strong infrastructure is crucial to ensure
overall stability of the financial system, with a core of strong
domestic institutions and an efficient and stable payments
system forming the backbone of the financial system. This is
to ensure domestic institutions will continue to have a
prominent role in the financial system. This will be achieved
through institutional development and capacity building,
increasing the competitive environment, the continuous
improvement in the existing payments and financial markets
infrastructure, and instituting a more market-driven consumer
protection framework (including deposit protection).
3.0 WHAT ARE THE CONSTRAINTS TO
BUILDING INTERNATIONAL FINANCIAL
CENTRE (IFC)?
Nigeria has a potential to develop a formidable and well
established International Financial Centre. To maximize our
potential as an International Financial Centre, it is important to
address the following constraints.
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Strong commitment by Federal and state Governments to
promoting International Financial Centre;
A multilingual professional financial services workforce that
can flexibly respond to changing business conditions and
independently add value to services;
Low cost and efficient communication and information
system;
Political and economic stability;
3.0 WHAT ARE THE CONSTRAINTS TO
BUILDING INTERNATIONAL FINANCIAL
CENTRE (IFC)?
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Well established international stock exchange, futures
exchange and clearing houses;
A very sophisticated and deregulated domestic banking
system;
Competitive cost, including general living expenses,
commercial rents and a high quality social infrastructure;
A commitment to business tax reform, with an internationally
responsive corporate tax rate and capital gains tax initiatives;
A strong, stable and transparent legal and regulatory system;
and
The Government must place itself in a position to respond
quickly and flexibly to emerging opportunities and threats.
4.0 The need for a Financial and Business
Hub.
Cities have historically existed because people have needed to gather for a
variety of reasons – administration, religious pilgrimage, defense, maritime
commerce and so on. After the Industrial Revolution, cities grew ever
bigger because manufacturing needed of the late of infrastructure and
labour. In contrast, the information technology revolution of the late
twentieth-century allowed people to interact and collaborate over large
distances. This should have meant that cities gradually dissolved as people
moved away from congested and expensive urban areas. This is precisely
what was being predicted by many observers in the early nineties. Recall
how inner cities in the West were in steady decline from the sixties to the
eighties. Many observers thought that advances in communication would
make cities irrelevant.
4.0 The need for a Financial and Business
Hub.
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Yet, in the first decade of twenty-first century, we have found that some
cities seem to have revived and thrived like never before. Real estate prices
have spiraled out in cities like London and New York, suggesting that
people are willing to pay ever larger premiums to stay in these urban
centers. It turns out that cities continue to be relevant for two important
reasons:
One of the fundamental objectives of the Financial System Strategy 2020 is
to make Nigeria as Africa’s financial hub by facilitating the development of
an international Financial Centre.
The success of a hub is based on concentrating a certain kind of business
activity. In turn, it is about human capital and interaction. The development
of the financial system and the financial hub are obviously linked but they
are distinct goals.
4.0 The need for a Financial and Business
Hub.
For instance, by the relative performance of existing Global Cities, New
York is America’s main financial center and its economic hinterland is far
larger than London’s (London is not even a fully-integrated member of the
Euro-Zone). Similarly, the New York Stock Exchange is far larger than the
London Stock Exchange. Yet, over the last decade, London has replaced
New York as the world’s leading financial/business hub. This is because
London has been more successful in attracting talent from across the world
(note how some of the richest Indians, Arabs, and Russians live in London.
(Deutsche Bank (2007). Nigeria needs an efficient financial system for a
number of good reasons. However, this is not the same thing as developing
the financial cluster in Lagos into an IFC.
4.0 The need for a Financial and Business
Hub.
A successful financial Centre will attract international skilled man-power
all over the world. Furthermore, for a city to facilitate the development of
IFC, the city-state should concentrate on improving the quality of
immigration, tertiary education, entertainment facilities and global
linkages. Even when it intervened in the financial sector, it systematically
focused on areas that involve people and face-to-face interaction (such as
private banking).
4.0 The need for a Financial and Business
Hub.
In line with the Vision 20:2020 and the fundamental objectives of the
Financial System Strategy 2020 to make Nigeria as Africa’s financial hub
by facilitating the development of an international Financial Centre, we
must be able to identify suitable location for IFC in the country.
The success of such a hub must be based on its ability to concentrate on a
certain kind of business activity. It must engender the core necessary for
human capital development and interaction. The development of the
financial system and the financial hub are obviously linked but they can
only be achieved by two distinct but related goals.
5.0 Financial System strategy (FSS) 2020
The FSS 2020 is a strategic plan by the Central Bank of Nigeria which is
expected to synchronize and integrate with the ongoing economic reforms
and harness the gains to ensure that Nigeria becomes Africa’s financial hub
and joins the league of top 20 world largest economies by 2020.
The goal of CBN is to position Nigeria as the safest and fastest growing
financial system among emerging markets. The objectives of FSS 2020
include, but not limited to, the following:
• Developing financial market structures and strategies that align fully with
the strategic intent of the overall economic system;
• Developing a partnership with all key stakeholders for the implementation
of the strategy with performance management framework; and
• Establishing a communication and collaboration environment for the
development and delivery of the strategy
5.0 Financial System strategy (FSS) 2020
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The CBN with the government and private sector must therefore, in a
deliberate and concerted efforts strive to ensure that all elements of the
vision are achieved. To assure this, the government at the centre has three
important prerequisite pillars to surmount:
T o ensure that the right legal and institutional(Dani Rodrik) environment
are in place:
To fill all the existing gaps of economic infrastructure – power/energy, rail,
and road as well as effective utilization of our waterways;
To address the issue of macroeconomic stability and the implication of the
anomaly of the macroeconomic(constitutional) responsibility of federal
government and the enormity of funding power in the hands of the state
and local governments.
5.0 Financial System strategy (FSS) 2020
The CBN on the other hand also to continue to strenuously pursue its
strategy towards achieving the FSS 2020 vision which includes among
others:
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Strengthen domestic financial markets;
Enhance integration with external financial markets; and
Build International Financial Centre.
5.0 Financial System strategy (FSS) 2020
If the foundations above are well laid, then, the strategy of FSS can
enthrone a robust and integrated financial system which will in turn
become the catalyst for the ultimate emergence of an international financial
centre in the country. Then, the various segments of the financial market,
such as trade finance, real sector and SME finance, mortgage finance,
capital market, insurance and foreign exchange market can then be
expected to be the drivers of the evolution of a virile international financial
centre in Nigeria.
Some notable progress: It is very easy to see some measurable progress in
the strategic agenda of the financial system reforms. These include the
following:
5.0 Financial System strategy (FSS) 2020
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With perhaps the exception of recent ratings of S and P and Fitch (April
2009) Nigeria’s rating has been rising indicating increasing confidence of
foreign investors in the country’s banks. The recent situation can be traced
to the impact of the global financial crisis. Before then, many Nigerian
banks were attracting foreign partnerships as well as both portfolio and
Foreign Direct Investment flows to the banks and other industries;
Nigerian industries now have access to more foreign credit facilities
through large inflows of confirming lines to banks;
There has also been an increasing wave of portfolio investment inflows
through the banks into the economy;
The stock market has been deepened as a result of the activities of banks in
the primary market and the stock market is gradually recovering from the
downturn of the GFC;
5.0 Financial System strategy (FSS) 2020
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Interest rates have gone down considerably, meaning that a lot more money
is now available to the economy at cheaper cost; and there is a measure of
exchange rate stability even after the second round of the impact of the
GFC, hence there is every likelihood that we may return the pre=GFC
experience in not too distant future the impact on inflation may not be as
damaging as it originally indicated.
5.0 Financial System strategy (FSS) 2020
The banking industry: The banking sector has witnessed a period of
unprecedented growth in the last few years, following consolidation in the
sector. It contributes 10percent to the GDP and represents 60per cent of the
stock market capitalisation. In specific terms, these are some of the
measurable progress that resulted from the banking industry reforms:
* While there was a reduction in the number of banks from 89 to 25, the
number of bank branches rose by 33per cent from 3382 in 2004 to 4500 in
2007; Total asset base of banks rose by 104per cent from N3.21 trillion in
2004 to N6.56 trillion by mid 2007; Capital and reserves rose by 192per
cent from N327 billion to N957 billion; Capital adequacy ratio rose by
42.6 percentage points from 15.18 per cent to 21.6per cent; and Ratio of
non-performing loans to total loans improved massively by 51.3 percentage
point from 19.5per cent to 9.5per cent. It is not impossible that some of
these impressive figures may have be affected by the recent effects of the
GFC.
5.0 Financial System strategy (FSS) 2020
The capital market: The Nigerian capital market reflects the strong GDP
growth. Total market capitalization has grown by over 4000per cent to N12
trillion in March 2008, up from N287 billion in August 1999. Among the
emerging markets, the Nigerian market remains one of the most viable in
terms of returns on equity. Historically, the market has delivered 28per cent
returns. As indicated earlier, this impressive turn-out has been affected by
recent effect. However, it is expected as we turn to the new-year, the
effects may be dwindling. However, we need a more robust regulatory
environment, especially for primary market and Over The Counter (OTC)
trades; stable secondary market environment to tame sharp swings and
meltdowns; further deepening especially in the second-tier segment; and
big ticket listings from upstream oil sector and utilities.
5.0 Financial System strategy (FSS) 2020
The insurance industry: The insurance industry has recently emerged
from the similar recapitalization and consolidation as in the banking
industry. The industry should however be bracing up for another round of
capitalisation and consolidation as the experience in the banking industry
has shown that until we are internationally competitive, the industry cannot
sustain domestic economic growth targets. The recapitalised indigenous
companies are not yet capable of taking full advantage of the available
opportunities even in the domestic market where foreign operators continue
to dominate. Low retention capacity is still a big challenge, especially in
the re-insurance sub-sector.
In all, the opportunities for growth in Nigeria are still strong as underlying
fundamentals driving the growth are still present. Most commentators have
said that the opportunities for business look increasingly rosy in the
country.
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The official economic outlook for the year is 7 per cent growth rate and 13
per cent in the next 12 years. International Monetary Fund (IMF) projected
a 9 per cent growth. According to the fund, Nigeria and South Africa got
close to 50 per cent of the $53 billion private equity and debt flows to subSaharan Africa in 2007. However, a high inflation rate (7.8 per cent by
March 2008 – Nigerian Bureau of Statistics) corruption, weak institutions,
particularly the legal system, are likely to hinder growth.
References
1. Akingbola B.O(2008), “Nigeria’s Financial System Strategy 2020:
Perspective On Building An International Financial Centre”, Tribune, June
2nd,2008
2. De Silva Charles (2007),”The Trinidad and Tobago International Financial
Centre, an environment for global and regional Investment.”
3. Deutsche Bank (2007), “Building an international Financial Center in
Mumbai”, Asia Economic Special.
4. International Financial Centre British Columbic (2006). www. IFCBC.com
5. IMF (2000) Offshore Financial Centers. The Role of the IMF; Monetary
and Exchange Affairs Department June 23. Washington.
References
6. Lemo Tunde (2007), “Re-engineering the Nigerian financial Sector”, a
paper presented at the first Nigeria-Canada business and investment forum,
Canada, November6-9, 2007.
7. Ministry of Finance Government of India (2007),” Report of the high
powered export committee on making Mumbai an International Financial
Centre”.
8. Webster Robert (2000), “Report of the Senate Committee on
superannuation and Financial Services”, International Banks and Securities
Association of Australia.