THE DEVELOPMENT OF AN INTERNATIONAL FINANCIAL CENTRE IN NIGERIA By Foluso Akinsola University of Lagos, Department of Economics akinfolu@yahoo.com or fakinsola@unilag.edu.ng 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. A centre with skilled management and intellectual talent covering 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.

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 in an innovative manner. A centre with the Worlds best telecommunications and IT capacity and a 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.

The role of a financial system is to promote economic wellbeing through financial intermediation, i.e., the channeling 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 Government should adopt a free market approach and keep its involvement in the financial system to the minimum, except where the private interests of financial market
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Foluso Akinsola University of Lagos, Department of Economics

participants do not align with the public interests, or where the infrastructure is a public good that it may not be possible or appropriate to provide through the market, for reasons of competitive fairness or commercial viability. 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.
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. 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 of Nigeria should enhance policies that will pave way for Nigeria financial sector to metamorphosis into an 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 Nigerias financial services through

promoting international financial intermediation and attracting foreign savings to Nigeria;

(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.

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Foluso Akinsola University of Lagos, Department of Economics

We categorise IFCs in four ways; i.e. as: Global (GFCs ): These are centers that genuinely serve clients from all over the world in the provision of the widest possible array of IFS; Regional (RFCs) :they serve their regional rather than their national economies examples of such Dubai, Hong Kong; 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 might be to call them national IFCs although that term is an awkward one because its two defining adjectives are contradictory; 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. 2.0 VISION AND OBJECTIVES OF AN INTERNATIONAL FINANCIAL CENTRE (IFC) A well-diversified and competitive financial system is vital for the long-term economic growth and development to ensure that risks in the economy are well distributed among the various subsectors. 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 support to the domestic economy, and more importantly, that are increasingly more efficient, competitive, sound and stable 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. 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
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Foluso Akinsola University of Lagos, Department of Economics

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. 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 that has been secured thus far, 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: 2.1 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. 2.2 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.
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Foluso Akinsola University of Lagos, Department of Economics

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. Corporate governance could be enhanced through improving the quality and accountability of the board of directors and management of financial institutions. 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. 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).

Foluso Akinsola University of Lagos, Department of Economics

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 note the constraints in building IFC:

Strong commitment by Federal and state Governments to promoting Financial Centre;

International

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; Well established international stock exchange, futures exchange and clearing houses; The most 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 cuts in the 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 WHAT WE NEED TO DO? One of the fundamental objectives of the Financial System Strategy 2020 is to make Nigeria as Africas financial hub by facilitating the development of an international Financial Centre. We recommend Lagos to be used as one of the locations of IFC. Lagos has been identified as an industrial area that contains better infrastructure than many others states in Nigeria. 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. For instance, by the relative performance of
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Foluso Akinsola University of Lagos, Department of Economics

existing Global Cities, New York is Americas main financial center and its economic hinterland is far larger than Londons (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 worlds 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)). We agree that 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. 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 faceto-face interaction (such as private banking). A successful financial/business center is defined by its ability to continuously innovate. However, innovation does not mean chaos, and a system is needed to ensure that these economic activities are properly regulated and that all parties are treated fairly. The trick is to balance the need to control with the freedom to innovate. Therefore, there is an urgent need for the our financial system to be organized as a financial hub to attract the world. 4.1 Lagos has the following advantages: 1. Lagos is an international metropolis with more than 30 years international business experience, so it will be easier for a foreign company to set up business in Lagos since there is no big difference for culture and business rules. 2. Lagos has a geographic advantage since it is an important hub for logistics and import/export 3. Lagos is one of the leading international finance centers with strong finance competence in Africa 4. Lagos has a free economy. There is no regulation on foreign currency exchange.

Foluso Akinsola University of Lagos, Department of Economics

4.2 Advantages and Disadvantages of Lagos as an International Financial Centre Advantages: High investment potential stable economy low paid manpower good geographic location economies of scale English as the official language

Disadvantages: High tax Underdeveloped infrastructure Young banking system compared to other established IFC Insufficient market capitalization Criminality Heavy traffic

The call for creating an IFC in Lagos at this time is implicitly an imperative one that entails deregulating, liberalizing and globalising, all parts of the Nigeria financial system at a much faster rate than is presently the case. Raising the issue of an IFC in Nigeria now suggests that the pressing need for a new, more intensive phase of deregulation and liberalization of the financial system has been anticipated by Nigerias policy-makers and regulators The present global financial crisis is a good test of our financial sector in that it shows how open the sector is to the rest of the world as well as how it can absorb global shocks and threats. Furthermore our financial sector can be examined under these four main criteria:
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Foluso Akinsola University of Lagos, Department of Economics

How is supply of bank credit changing? What is the pace of structural pace? How is the risk facing the financial sector evolving, and how are they been managed? How are the policy to prevent systemic banking crises in place

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 Africas 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 The CBN is working with the government and private sector in a deliberate and concerted manner to ensure that all elements of the vision are achieved. The CBN is adopting a three-pronged strategy towards achieving the FSS 2020 vision, which are to: Strengthen domestic financial markets; Enhance integration with external financial markets; Build International Financial Centre.

Foluso Akinsola University of Lagos, Department of Economics

The FSS 2020 strategy has the financial sector as its bedrock. The strategy is aimed at enthroning a robust and integrated financial system which will in turn become the catalyst for the ultimate emergence of Nigeria as an international financial centre. The various sectors of the financial market, such as trade finance, real sector and SME finance, mortgage finance, capital market, insurance and foreign exchange market are expected to be the drivers of the evolution of Nigeria into international financial centre. 5.1 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: Nigeria is now rated BB- by Standard & Poors and BB- by Fitch as a result of increasing confidence of foreign investors in Nigerian banks; Many Nigerian banks are now attracting foreign partnerships for Foreign Direct Investment flows to 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; Interest rates have gone down considerably, meaning that a lot more money is now available to the economy at cheaper cost; and Exchange rate stability has also impacted positively on the inflation rate. 5.2 THE ECONOMY The Nigerian economy has been tagged sub-Saharan Africas locomotive. This description, no doubt, is apt considering that over the past eight years, the economy has witnessed some
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Foluso Akinsola University of Lagos, Department of Economics

remarkable growth. From a paltry 0.40per cent in 1999, real GDP growth rate today by official figures is 6.6per cent (6.3per cent on 5-year compounded annual growth). Key drivers of this growth have been the rising oil prices, which recently hit an all-time high of $135; institution of democracy leading to a stable polity; reforms across major sectors, which opened up the economy for foreign participation; transparent and better fiscal management by the government; and the reduction in the countrys debt burden (from $37 billion in 2005 to $4 billion today). The effect of the reforms is that the country now attracts positive ratings from international rating agencies. The confidence this has brought in the economy is reflected in the massive growth witnessed in major industries in the country partly driven by foreign funds. (Akingbola B.O (2008)). 5.3 THE BANKING INDUSTRY The banking sector has witnessed a period of unprecedented growth in the last three 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.

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Foluso Akinsola University of Lagos, Department of Economics

5.4 THE CAPITAL MARKET The Nigerian capital market reflects the strong GDP growth. Total market capitalisation has grown by over 4000per cent to N12 trillion in March 2008, up from N287 billion in August 1999. Among 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. It is expected to continue to achieve above-average growth rate in order to reach the 2020 targets. 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. 5.5 THE INSURANCE INDUSTRY The insurance industry has recently emerged from the similar recapitalization and consolidation wave as in the banking industry. Except for a few black spots in the regulatory handlings, the insurance reform was equally successful. 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. 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
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Foluso Akinsola University of Lagos, Department of Economics

private equity and debt flows to sub-Saharan 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. Akingbola B. O (2008). REFERENCES 1. Akingbola B.O(2008), Nigerias 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, Economic Special. 3. International Financial Centre British Columbic (2006). www. IFCBC.com 4. 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. 5. Ministry of Finance Government of India (2007), Report of the high powered export committee on making Mumbai an International Financial Centre. 6. Webster Robert (2000), Report of the Senate Committee on superannuation and Financial Services, International Banks and Securities Association of Australia. Asia

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Foluso Akinsola University of Lagos, Department of Economics