Cablegate: Nigeria's Central Bank Proposes New Clearing System

This record is a partial extract of the original cable. The full text of the original cable is not available.

241118Z Mar 04



E.O. 12958: N/A

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


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.

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