Despite a modest improvement in all regulatory indicators, increasing poverty that climbed to 40.1 percent has denied the Nigerian banking sector of exponential growth, according to the 2022 Afrinvest Banking Sector Report
The report noted that Nigerian commercial banks beat all the prudential guideline limits by the Central Bank of Nigeria (CBN), as seen in its assessment of the apex bank’s financial stability indicators, which showed that Industry Liquidity (Liquidity Ratio) and Non-Performing Loan ratios both improved by 130 basis points (up) and 75bps (down) respectively, to 42.6 percent and 4.95 percent.
Although the Capital Adequacy Ratio (CAR: 14.1 percent) underperformed the June 2021 level by 140bps, all the indicators beat the prudential guideline limits of 30 percent (LR), five percent (NPLs), and 13.0 percent (CAR) respectively, despite challenges in the business environment.
However, the report indicates that the banking sector could not tap the opportunities from the large youthful demographics owing to weak economic growth and increasing poverty.
Presenting the report during the launch of the 17th edition of the Nigerian Banking Sector Report and unveiling of Optimus, Afrinvest’s digital investment app, in Lagos on Wednesday night, the Deputy Group Managing Director, Afrinvest West Africa, Victor Ndukauba, said that the improvements are likely to be sustained over the coming years.
The report launch also marked the announcement of Afrinvest’s new subsidiaries and expansion of its leadership team as well as the unveiling of Afrinvest’s refreshed logo (brand identity).
According to the report, fiscal challenges occasioned by weak Federal Government earnings have contributed to the muddling of monetary policy and strong use of Cash Reserve Ratio debits as a subtle strategy to compensate for the inflationary effect of ballooned overdraft to the government.
However, the report warned CBN against crowding out banks and private sector financing while increasing its developmental financing role, especially in agriculture financing, pointing out that private sector financing is more effective in de-risking the sector and incentivising growth without moral hazards.
“Importantly, the weak economic growth has robbed banks of the dividend of large and youthful demographics. Over the last 10 years to 2021, real Gross Domestic Product (GDP) has grown by a compound annual growth rate (CAGR) of 1.9 percent compared to 2.3 percent CAGR for the population,” the report stated.
As a result of the decline in income level, poverty has risen to 40.1 percent based on national standards of an annual real per capita expenditure threshold of N137,430.
”For banks, this reality means that upscaling would be less efficient than in an economy where growth exceeds population expansion. Not surprising, Nigeria’s financial depth is weak as is for countries with high fertility rates and a fragile economic base,” the report stated.
To turn the tide, the BSR recommended that critical reforms be undertaken as a matter of urgency to avoid a repeat of the negative trends seen in the last decade.
The investments experts offered measures some measures the apex bank should adopt to weather through the rough patch including tapering of fiscal deficit financing, unifying exchange rates, and adoption of market-driven exchange rates.
“Some other measures advised include the tapering of fiscal deficit financing – credit to the government – to check money supply expansion, alignment of rates across windows, and the adoption of market reflective forex rate via the crawling peg regime. We believe that the outcome for banks in the coming decade would rely on the policy actions taken today to address the issues raised,” it said.
On exchange rate management, the report said CBN’s strategy (differentiated rates across market segments and capital control) failed the litmus test over the reviewed period, as anticipated in the 2021 report.
It said the value of the Naira depreciated further by 5.6 percent and 23.2 percent to N436.50/$1.00 and N712.00$1.00 (on 19/09/2022) at the NAFEX window and parallel market, respectively. It stated that near-term improvement in the exchange rate is not in sight, given forex supply constraints due to the self-inflicted injuries in Nigeria’s oil & gas sector (the largest source of FX accretion).
On the economy, the report said that in 2021, the Nigerian economy recovered markedly from the pandemic-induced strain of the prior year.
“Real Gross Domestic Product (GDP) grew 3.4 percent (2020: -1.9 percent), beating our projection by 0.4ppts.
“The recovery was mainly driven by the expansion of activities in the non-oil sector (up 4.4 percent), while the oil sector remained in a recession.
“This growth momentum was sustained into 2022 albeit with a wider divergence between the oil and non-oil sectors.,” it said.
The report suggested that only concerted fiscal and monetary policy efforts targeted at resolving insecurity challenges, optimizing exchange rate management, fixing structural loopholes, and curbing reckless fiscal spending would resolve the high inflation quagmire.
It, however, acknowledged that the CBN has taken the lead in the efforts at curtailing the runaway inflation rate as seen in the back-to-back hike of the Monetary Policy Rate in May, July, and September 2022 to 15.5 percent.