Menu

Nigerian banks and the economy in 2022 09 Feb 2022

Nigerian banks, like those of other countries, have been resilient to the economic fallout of Covid-19. So far, the pandemic has generated business and economic crises globally. But record-level fiscal stimulus and accommodative monetary policy have bulwarked the financial system against Covid-induced vulnerability. This is more so in the advanced and emerging market economies. Record-level public debt, which despite worries about it, has supported fiscal spending and to a lesser extent household income, and has also shielded developing economies’ banking sectors.

But it is necessary to go beyond these generalities to understand the resilience of the Nigerian banks, its limits, and the need for policymakers to be more considerate of the banking sector.

It is anticipated that the 2021 year-end results of the banks will be congruent with their half-year performances which showed annualised 15.6 and 6.8 percent growth in total assets and profit, respectively, according to the analysis by Afrinvest. But the positive performances were achieved in an adverse macroeconomic environment, featuring national poverty rate of above 40 percent, unemployment at over 33 percent, double digit inflation, continued depreciation in the value of the naira, and weak economic growth.

The elevated risk posed to the banking sector by these dismal statistics has stiffened macroprudential measures of the Central Bank of Nigeria (CBN) over the past few years. At its January 2022 monetary policy meeting, the CBN retained the Monetary Policy Rate at 11.5 percent, cash reserve ratio at 27.5 percent and liquidity ratio at 30 percent, mainly to contain upward inflationary pressure and further depreciation in the naira exchange rate. But by so doing, bank lending to SMEs is constrained – a long-term policy dilemma that has remained unresolved.   

The banking industry is also facing significant external competition from Fintechs. Two of the financial technology firms – InterSwitch and Flutterwave – have attained unicorn status of over $1 billion valuation. The traditional businesses of banks, especially payment, are being taken over by non-bank new entrants into the financial services sector, in a rapidly changing economic landscape.

Nevertheless, the resilience of the banks has been underpinned by their large balance sheets. Following the regulatory recapitalisation programme of the mid-2000s, which mandated a 1,150 percent increase in the paid-up capital of banks, the industry has continued to grow its capital and asset bases. When the 2008 global financial crisis severely eroded the capital of the banks, including systemically important ones, the CBN not only stepped in with robust doses of financial bailout, the Nigerian monetary authority and banking supervisor effectively designated the banks as too-big-to-fail (TBTF).

Notwithstanding the inherent strengthen of the banking sector, including business savvy leadership, competent mid- to senior-level managers, and depth in technology adoption – apart from operating in an economy of $450 billion in size – the resilience of the banks should not be taken for granted. In 2022, the third year of the pandemic, deterioration in bank asset quality may surface. In the prior two years, CBN-sanctioned forbearance on loans repayment may have masked the fact that credits booked to many businesses that became adversely impacted by Covid-19 disruption have become unserviceable.

To cushion their balance sheets, a scramble by the banks to raise capital in the international market is already underway. They are expected to be successful with their fundraising efforts amongst other reasons because of their track records in capital raising and repayment of matured obligations. The international development finance institutions are also looking to catalyse development impact and financial returns post-Covid-19. To improve their attraction for the funding, many Nigerian banks have taken sustainability more seriously by implementing environmental, social and governance (ESG) principles.

One risk to the fundraising outlook, however, is the likelihood of interest rate hikes by the US Federal Reserve, with one or two other major reserve banks also implementing broader monetary consolidation, given the growing agitation over high inflation. Another risk is associated with Nigeria’s next general election, now only 12 months away. 2022 may, therefore, be a year of one half for Nigerian banks and businesses as electioneering will likely make international funders to develop a wait-and-see attitude towards the country because of the 2023 presidential election in which the putative frontrunners are suboptimal choices.

But the trajectory of oil prices in the international market supports an optimistic view that, whilst the economy is not expected to cruise in 2022 – with IMF projecting 2.7 percent GDP growth rate for the country – it is not expected to crash-land from its low altitude either. The most important policy support for the banks and for the economy is for the government to manage the risks to the benign economic outlook of the year. This requires strong signals towards safe and free and fair election in 2023.

In the absence of a serious external shock and a return to Covid-19 restrictions because of a more virulent variant, the banks will maintain their impressive performance track record. Similarly, the economy will also maintain its low but certainly positive growth. Such nervy situation will, however, leave Nigerians wanting more.