By Dr. Suleyman A. Ndanusa - Professional Financial Advisersglobalmandateconsulting.com/.../08/The-state-of-Nigerian-banks.pdf · financial system Nigerian financial system is no

By Dr. Suleyman A. Ndanusa

The State of Nigerian Banks 9/17/2016 1

The Nigerian banking sector over the past 25

to 30 years has experienced boom and bust in

a cyclical pattern

After the implementation of the structural

adjustment program (SAP) in 1986 and the

deregulation of the financial sector, new banks

proliferated, mainly driven by attractive

arbitrage opportunities in the foreign exchange

market

9/17/2016 The State of Nigerian Banks 2

The roles of banks in the economic progress of

nations are strategic

Banks represent the heart of the national

economic life and the nucleus of the economic

survival around which other sectors are

tangential

The centrality of the banking sector also

makes the sector to attract much attention in

any reform process


Just as with Nigeria, several bank reforms have

taken place in Europe, America and Asia in the

last two decades

But the reforms and deregulations

notwithstanding, there is hardly any perfect

solutions in sight to the challenges and crisis

faced by bank

Generally, successful banks must survive and

break through in a constantly changing business

environment


Prior to the deregulation period in Nigeria, Many banks operated at a level that is less efficient and profitable leading to unsoundness or distress in the industry

International Journal for Research and Development notes that the sector was characterized by: Small sized banks with high overheads

Low capital base averaging less than $10million

Loss making

Heavy reliance on government patronage


In the light of the foregoing, commercial banks

were compelled by the Central Bank of Nigeria

to raise their capital base from N2 billion to 25

billion on or before 31st December, 2005

Most banks resorted to mergers and acquisition

as a survival strategy, which saw a reduction in

the number of banks from 89 to25

The capital base policy is one among several

reforms which has guided the sector to where it

is today


Given the rise in global economic and financial

challenges in recent times

And the need to have sustainable institutions

Periodic analysis of the performance and

efficiency of banks with the aim of projecting

ways of enhancing efficiency becomes

necessary

Evaluating the overall state of Nigerian banks

remain essential to all stakeholders.


The CBN recently described “all” Nigerian

banks as safe and healthy

This is in spite of the global economic

challenges emanating from the collapse of

major commodity prices

As such, deposits remain safe in any Nigerian

bank

Notwithstanding the good news, there are a

number of aspects requiring closer attention


A sound financial system should facilitate

economic growth and development necessary

for improved standard of living

They should be safe and stable enough to

contribute to the economic development of

any country

But how well have Nigerian banks satisfied

these conditions in the last one year???


The second half of 2015 witnessed a

combination of events that portended shocks

to the financial system

Decline in global growth coupled with

volatility in some of the major financial

markets threatened the stability of the global

financial system

Nigerian financial system is no exception

The banks inclusive


The strengthening US dollar also

continued to impact negatively on growth

in many emerging market economies

In the case of Nigeria, the economy

continued to witness a slowdown in

growth

The decline in the international price of oil

led to the decline in government revenue


The decline also impacted the quality of bank

assets owing to their exposure to the oil and

gas sector

The enforcement of the Treasury Single

Account (TSA) system and resultant

movement of federal government funds (over

1.3 trillion naira as at September 2015) from

the banks to the CBN had some impact on the

liquidity conditions of the banks


The TSA rule (liquidity squeeze) robbed banks

of a large chunk of money

Also sent them scrambling for more private

and corporate customers to make up for the

hole left by the huge withdrawals by

government ministries and agencies

For sustained performance, banks must adjust

to the changing conditions


The profitability records are

encouraging..

Notwithstanding economic headwinds,

naira volatility

And decline in profits

No bank recorded a loss in 2015

But how about the other aspects of

financial soundness and obligations


The financial institutions continue to record

impressive growth and profit figures

But do these figures directly reflect the

economic reality?

CBN financial stability report for the end of

2015 indicate some (marginal) movements

in performance of key indicators for

DMBs…


The quality of assets in the banking sector declined marginally in the second half of 2015

The decline in asset quality was attributed to the unfavorable macroeconomic environment in the review period

Capital adequacy also weakened during the period

Stood at at 17.5 per cent at end-December 2015 (1% lower than beginning of year)


The weakened capital adequacy was attributable to the fall in the level of banks’ general reserves

Savings deposit rate also fell from 3.59% by January to 3.58% in December 2015

But a stress test of the banking industry (same period) revealed that, it remained relatively resilient generally

Implying that the banks have adequate capital to absorb unexpected losses 9/17/2016 The State of Nigerian Banks 17

The ratio of tier 1 capital to risk weighted

assets stood at 17.4 per cent at end-

December 2015

2.2 percentage below the level achieved at

end-June 2015

The industry ratio of non-performing loans

(net of provisions) to capital increased to 7.4

percent at end-December 2015 from 5.5

percent at mid year


The balance sheets of most of the deposit money banks (DMBs) are bleeding badly as a result of the humongous debt overhang in form of non-performing loans (NPLs)

Credit Risk Rating indicates that Non-performing loans rose to N649.63 billion at end-December 2015, from N628.54 billion at end-June 2015

And N363.31 billion recorded at end-December 2014 9/17/2016 The State of Nigerian Banks 19

Oil and gas firms’ aggregate credit stood at

N2.3 trillion in February 2015 up from

N2.047 trillion as at December 2014

The exposure of many banks to the oil

industry is one of the key factors behind the

spiral in their NPLs

These NPLs have to be addressed and

curtailed, if the health of the banks is not to

be compromised 9/17/2016 The State of Nigerian Banks 20

The NPLs for 2015 alone constitute

slightly above one-tenth of our 2016

federal budget

Already, a few banks have NPL ratio

above the regulatory maximum limit of

5.0 per cent

Many of which were poorly collateralized

Large syndicated loans. Not hedged!


Despite the 30 per cent decline in new loans

granted by banks in 2015

18 out the 22 banks recorded increase in bad

loans

The number of banks that exceeded the

regulatory limit of five per cent for the ratio of

bad loans to total loans rose from three (3) in

2014 to eight (8) in 2015


The Cases of fraud and forgeries increased to

7,183 at end-December

Up from 5,917 reported at beginning of year

Although total amount involved in the cases,

however, decreased to N5.76 billion at end-

December 2015

From N11.98 billion recorded at beginning of

period


Notwithstanding the profitability index of the

banks, they are reeling with low deposits, bad

debt, high operational risks, declining asset

quality and liquidity

With the implementation of TSA policy, banks

liquidity has depreciated, making it difficult

for them to meet obligations to their customers

and stakeholders


Nigerian banks have been affected by a host of

external and internal factors:

Low and volatile oil prices

Weak output growth

Eroding investor confidence

Monetary policies (e.g the TSA) and uncertainties

But they have survived

No more excess loss making

No more over reliance on government funds


The Nigerian banking industry is not distressed

But the prevailing economic headwinds, which are yet to abate must be addressed

Some blueprint for reforming the Nigerian financial system going forward are as follows:

Customers and investors’ confidence must be sustained


The CBN must continue to promote financial stability

Regulatory authorities must encourage healthy financial sector evolution

Beyond implementing reforms, CBN should play key advocacy role

Stable profits for banks are good, but contribution to the real economy is great


Commercial banks should explore the

agriculture space

There are quite a lot of opportunities for

more banking penetration: Nigeria is

heavily under-banked


THANK YOU!!!


Documents

By Dr. Suleyman A. Ndanusa - Professional Financial Advisersglobalmandateconsulting.com/.../08/The-state-of-Nigerian-banks.pdf · financial system Nigerian financial system is no