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. 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? 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 non-residents, 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: Jurisdictions that have financial institutions engaged primarily in business with non-residents; 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 and some unintended policies and actions; (xi) Necessary physical infrastructure must not only be in place they must be efficient and well maintained

Categories of International Financial Centre 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 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.

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 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. 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)? 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. 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 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: 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 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 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.

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 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.

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.