The Nigerian banking market is facing serious headwinds from slow GDP growth, falling FX reserves/ availability and regulatory pressures. The regulatory pressures on banks include:
- Stricter regulatory oversight on SIBs (Systematically Important Banks) which increases the pressure to meet regulatory requirements (e.g. CAR)
- Slower deposit growth fueled by lack of economic growth and public sector developments such as TSA
- Slowdown in lending with liquidity constraints and deteriorating macro environment
- Inflation and growing risk premium, which drives interest rates.
However, our banking industry needs to refocus on the fundamentals of our trade,
- Offer seamless services to all Nigerian individuals and enterprises
- Drive further the digitalization of our banking services
- Eliminate the historic high cost to serve from the branching network
- Retain highest standards on the management of credit
In the latest study of Bain & Company, the consulting firm, of what drives the selection and retention of banks, customer services was the overwhelming driver for bank clients (6 times as important as location, products and even 15 times more important than brand reputation). It is a well-known fact that about 60 million Nigerians do not have bank accounts, and a significant number of enterprises are not being served.
Digitalization provides great opportunities to drive even greater levels of self-service in withdrawals, call center usage and digital channels for problem resolution.
The industry needs to eliminate historic high costs of service as only the top players in the market are currently winning economically. In terms of Economic Profit, Nigerian banks barely manage to cover their cost of the regulatory required capital with their profit after tax. Part of the reason are the notorious high cost of service due to the excessively expensive infrastructure.
In the long run, only those institutions that retain high professional standards and who train their staff in recognition of all credit requirements will prevail.
When our industry does the above, it will be best placed to benefit from the expected revenue growth that Bain & Company expect over the next five years at 15% p.a. on the back of: GDP growth, increase of lending/ intelligent products, financial inclusion and money supply growth.
Beyond the efforts of the individual banks, the industry will require policies support and interventions of Government to improve the economic environment for banks to operate effectively. We cannot afford a banking crisis atop our current GDP growth situation.
We welcome the recent managed floating of the rate of the Naira and the various reforms undertaken by the CBN
The CBN will require our patience and support for the market to settle and achieve the desired objectives of the new regime. Hopefully the rates at which the market will settle will ultimately result in improve liquidity in the FX market.
It is expected that the FX market reforms will resolve the issues around the official FX market but the gap between that market and the parallel market may still remain at unacceptable levels. The CBN should consider lifting the FX ban on the 41 items currently excluded from the official market. It is an appropriate time to effect this, as the items will be funded from other autonomous sources outside of the CBN. Following on the back of this, all capital controls that were introduced on the onset of the FX rate crisis should be lifted. This will encourage entry of foreign investors as capital is a coward and stays on the sideline when there are doubts on its exit from any territory.
However, it may be necessary to place a one-year minimum tenor on repatriation of all CCI (Certificate of Capital Importation) transactions to discourage entry of hot money. More so, when we have forward/futures products in the FX market.
Oil Marketers Receivables
There is currently a backlog of payments due to the downstream oil and gas companies and these receivables, which were funded by banks, are now past due in the books of most banks. This is compounded by the recent devaluation which has impaired the capacity of the customers to pay on outstanding trade obligations. On the part of the Government, their ability to clear the payments is limited by the dwindling earnings being experienced.
In resolving this situation, the Government may consider floating a bond programme to cover the backlog including FX differentials to date and the banks will be made to subscribe to the extent of their exposure to the oil marketers, thereby switching the relevant risk assets to liquid assets to improve their balance sheets. The Government will then introduce petroleum products tax that will be used to fund the redemption of the bonds.
Currency Redesign, Reprint and Redenomination
The payment system in the country has improved significantly with high volumes of transactions being undertaken electronically. The cashless policy of the industry has a gone a long way in driving the improvements in the payment system.
Despite the improvements highlighted, there remains significant amount cash outside the banking system and very low banking penetration in Nigeria. Measures of penetration such as deposit to GDP and Credit to GDP remain low at below 30% whereas the BRICS countries are averaging about 50%.
The Government should consider redesigning and reprinting the Naira, which will be exchanged for the old notes within a reasonable time. The outflow of the currency from the banks will then be subject to existing cashless policies. The benefits of this process will be as follows
- Reduction of cash in circulation
- Reduction in the costs of transaction in the economy
- Reduction in crimes associated with cash
- Enhance financial inclusion as bank accounts will be necessary in a cashless environment
- Ease of tracking flow of funds for money laundering activities
- Curbing of corrupt practices as proceeds could easily be traced for several years after
The Government could also use the opportunity to redenominate the Naira by removing two zeros and enhance the psychological value of the Naira.
The other area that banking can support growth in the market is with mortgage lending. Similar to support given to the power sector and SMEs, the CBN should provide intervention funds to allow banks to offer single digit mortgage loans. In this situation, the banks would bear the full credit risk, but the government provides liquidity to enable the banks lend at below 10% pa interest rate. The demand for property stock would increase and this will drive rapid growth of the construction industry to supply property stock for the demand that is being created. The construction industry itself will spur growth in terms of employment and increased activities with attendant multiplier impact on the economy.
This is an excerpt from a paper delivered by Emeka Onwuka, Chief Executive Origins Capital and former Managing Director of Diamond Bank on the occasion of the book launch “Dynamics of the Nigerian Financial System”, Essays in Honor of Phillips Oduoza, who retired as the Group Managing Director and CEO of UBA Plc on July 31, 2016.