Nigerian banks and the economy

The Central Bank of Nigeria (CBN), the banking sector regulator, last week announced a management shake-up at Sky Bank Nigeria Plc, Nigeria’s eight-biggest lender by assets. Consequently, Tunde Ayeni and Timothy Oguntayo were replaced as Chairman and Managing Director by Muhammad Ahmad and Adetokunbo Abiru respectively.

In its report, the CBN noted that ousting the chief executive officer, chairman and 10 other directors on the board of Skye Bank Plc has become “unavoidable in view of the persistent failure of Skye Bank Plc to meet minimum thresholds in critical prudential and adequacy ratios, which has culminated in the bank’s permanent presence at the CBN Lending Window. In particular, Skye Bank’s Liquidity and Non-performing loan Ratios have been 2 below and above the required thresholds, respectively, for quite a while.” Reports in the media has it that worse than the issue of not meeting prudential and adequacy ratios by the bank, it’s directors were its major debtors, collecting huge loans without collateral and without any intention of paying back the loans thus signalling insider abuses.

We commend the CBN for its timely “action to nip the steadily declining health of the bank in the bud and correct the situation” especially given that the bank is a “a Domestic Systemically Important Bank (SIB) with significant interconnectedness”.

It will be recalled that last year, the central bank gave three commercial banks until June 2016 to recapitalise after they failed to hit a minimum capital adequacy rate of 10 percent. There are now growing concerns that other banks may follow suite giving that they face similar challenges and have also crossed the CBN’s five percent threshold for non-performing loans (NPLs) in their balance sheets.

Beyond these however, it is an open secret that the naira devaluation and the waning crude oil prices has pushed up threats for Nigerian banks with high proportion of dollar denominated loans, high exposures to the oil and gas sector and rising None Performing Loans (NPLs).

According to a CBN report, NPLs in the banking system rose sharply by 78 percent year-on-year to N649.63 billion in 2015. At the end of H2 2015, the CBN said loans to the oil and gas sector accounted for 25 percent of the gross loan portfolio of the Nigerian banking system.

Furthermore, bank credit to the sector rose marginally by 2.8 percent to N3.31 trillion at the end of December 2015 compared with N3.22 trillion as of June 30, 2015.

Hard hit by their rising non-performing loans (NPLs) and capital erosion, Nigerian banks became risk averse and started cutting down on credit to the real, ICT and agriculture sectors – sectors with a capacity for growing the economy and boosting productivity in the country.

In March 2016, growth in private sector credit dipped 1.6 percent to N18.57 trillion, the lowest since a 6.0 percent contraction in 2011 to N9.46 trillion from N10.05 trillion in 2010, as deduced from Central Bank of Nigeria (CBN)’s website.

Analysts obviously attribute the decline to banks’ averseness given rising NPLs coupled with the private sector’s subdued appetite for credit facilities due to eroding profits.

Unfortunately, Nigeria is on the brink of an economic recession, and falling credit to the private sector will undermine economic recovery efforts. We urge the government to de-risk key sectors to incentivize investments and boost the confidence of banks to lend.