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The Problems with Nigerian Banks

The Problems with Nigerian Banks

Sponsored by Bailout Nigeria , October 02, 2018

Category: Corporate Business
Target Amount: NGN0.00

The story

NIGERIAN banks are in the news again, and for the wrong reasons. Last week, two banks, Ecobank and Diamond Bank sacked over 1060 staff citing economic downturn as reason for the cut.The recent sack has increased the number so far chopped off from the salary block in the industry since one year ago to about 8,500. Before Ecobank and Diamond bank which recently sacked 200, First City Monument Bank (FCMB) had laid off 700 workers earlier in the year while Fidelity Bank sacked 100 late last year. FBN Holdings, the parent company of First Bank of Nigeria Limited, recently said it would prune the number of its employees by 1,000. While Ecobank has allegedly closed down its 100 branches in Nigeria, some other banks are said to be planning to cut down the size of their workforce. Many are wondering why Nigerian banks are so hard hit by the prevailing economic situation in the country?

The problem of the banks is hydra-headed. The economy at present is faced with weakening oil sector which has seen the reduction in earnings. This, coupled with the imple­mentation of the Treasury Single Account (TSA), which has reduced drastically the take home of many banks; the foreign exchange crisis, inflation, abolition of commissions on turnover (COT) and other economic headwinds, have dragged the banks into unplanned financial crisis. For one, the Nigerian banking industry is heavily exposed to the oil and gas sector, which contributes over 70 percent of govern­ment revenue and 90 percent of all exports.

With the fall in global oil prices by nearly 60 percent from $115per barrel to about $44 per barrel in the past 23 months, thus resulting in lower government revenues, and thereby decreasing banks’ takes. With a high level of exposure to the oil and gas sector, which unfortunately is facing a sustained period of low oil prices, non-performing loans in Nigerian banks have reached alarming proportions. This has continued to significantly lower banks’ revenue and profits especially in 2016.

TSA implementation

Again, the implementation of the Single Treasury Account (TSA) by the Federal Government presented additional chal­lenge to banks. With the introduction of the TSA, about N2.9 trillion of government funds were withdrawn from the banks and moved into the Central Banks of Nigeria (CBN) vaults. This sudden withdraw caught the banks napping as over the years, they have been beneficiaries of cheap federal govern­ment deposits.

Full abolition of COT

Nigerian banks are also faced with significant pressure from the abolition of commissions on turnover (COT), which came into force on January 1 this year. COT alone contributes over 60 percent of the fees and commissions of banks. Thus, Nigerian banks are losing about N100 billion (out of N550 billion) in annual revenues as a result of the

implementation of the zero COT policy. Instead of COT, the CBN directed banks to introduce a “nego­tiable” current account maintenance fee to replace the Commission On Turnover (COT). In a circular issued to banks, the apex bank directed banks to charge a fee not exceeding N1 per N1,000 in respect of all “custom­er induced debit transactions. The directive is targeted at easing the pressure on Nigerian banks. But how far this has been achieved is still under conjecture.

Arrest of bank MDs

To complicate the woes of the banks, the Economic and Financial Crimes Commission (EFCC) has recent­ly beamed its searchlight on Nigerian banks, leading to the arrest of some bank managing directors. The arrest was based on the allegation that they helped the past administration launder public funds of over $115m into private pockets. As a result, some banks were forced to return some undisclosed amounts of money to the fed­eral government. This has further depleted their purses.

Hope for recovery of the banking system

Despite these threats facing Nigerian banks this year, it is widely expected that they will weather the storm and grow much stronger. During her visit to Nigeria, Christine Lagarde, the Managing Director of the In­ternational Monetary Fund, admitted that the Nigerian banks are generally well-capitalized and more resilient” compared with the period of the global financial crisis in 2008/2009 that resulted in several bank failures around the world.

The optimism derives from the growth outlook of the Nigerian economy. From 3.8 per cent GDP growth of 2015, Nigeria is expected to grow by 4.2 per cent this year. This growth outlook is expected to improve busi­ness confidence in Nigeria and boost the performance of the banking sector. Additional source of optimism for the banks is the active role they would play in financing the deficit of the federal budget. President Muhammadu Buhari plans to finance half of the N2.2 trillion budget deficit through domestic bonds.

While the growth outlook for the Nigerian economy and that of the banks are predicated on the non-oil sec­tors activities, a dramatic improvement in the outlooks could come about if oil price makes unexpected, strong rebound in the course of the year. This would help strengthen the naira and support the exchange rate, which has partly made foreign portfolio investors to remain on the sidelines of investing in Nigeria.

Head of Research at Afrinvest, Ayodeji Ebo, has recently noted that the banking sector is on the path of recovery especially in the light of the policy pronouncement by the Minster of State for Petroleum Resources on the liberalization of the Petroleum Down­stream sector.

According to him, there is a need for a complemen­tary policy from the Monetary Authority, particularly in terms of foreign exchange administration.

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