…Capital adequacy issue remains despite recession exit
2017 has been an interesting year for the Nigerian finance services industry, in this piece AYOBAMI ADEDINNI examines critical developments in the banking sector in the year
In spite of turbulence occasioned by the liquidity tightening of the Central Bank of Nigeria (CBN) in the finance sector and the economic recession witnessed during the year, the year remains one that witnessed many activities in monetary and fiscal policies of government.
The problem of the banks is hydra-headed. The economy at present is faced with weakening oil sector which has seen the reduction in earnings.
This, coupled with the implementation of the Treasury Single Account (TSA), which has reduced drastically the take home of many banks; the foreign exchange crisis, inflation, abolition of commissions on turnover (COT) and other economic headwinds, have dragged the banks into unplanned finance crisis.
Weak capital base
It was in September 2017 that some members of the central bank monetary policy committee said four Nigerian banks are operating with too many non-performing loans on their books and with liquidity ratios below the minimum requirement.
Although they did not name the lenders, the four banks together according to them were equivalent to at least one systemically important bank.
Finance sector stress tests showed capital adequacy ratios for the industry in Nigeria worsened to 11.51 percent in June, from 12.81 percent in April, as against a regulatory minimum of 15 percent for lenders with international licenses.
“The financial performance indicators showed that when the four outlier banks were removed, capital adequacy, (NPLs) non-performing loan ratio as well as liquidity ratio are all above the prudential requirement,” another member, Balami Dahiru Hassan, said
The Treasury Single Account (TSA) is a finance policy used in several countries all over the world. Like other third world countries, it was introduced by the federal government of Nigeria in 2012 to consolidate all inflows from all agencies of government into a single account at the Central Bank of Nigeria.
This system establishes a unified structure as advised by the International Monetary fund where all government funds are collected in one account as this would reduce borrowing costs, extend credit and improve government’s fiscal policy, among other benefits.
The implementation of the Single Treasury Account (TSA) by the Federal Government presented additional challenge to banks. With the introduction of the TSA, about N2.9 trillion of government funds were withdrawn from the banks and moved into the Central Banks of Nigeria (CBN) vaults.
The implementation of the treasury single account in Nigeria poses a problem for Nigerian banks as states and other government parastatals that would normally fix deposit huge sums of money at once, no longer can as this money has to be rendered to the federal government for payment into the nation’s general treasury single account.
The banks would previously use this fixed deposited money to grant loans and engage in other finance transactions while generating interest for itself.
As the banks no longer have this source of capital at hand, their capital base drops and this poses a major challenge to the banks. Banks will no longer have access to floats provided by the accounts they maintained for the ministries, departments and agencies.
Deposit money banks are at a great loss from the implementation of treasury single account. This is due to the fact that public sector funds make up a large portion of commercial banks deposit.
This sudden withdrawal caught the banks napping as over the years, they have been beneficiaries of cheap federal government deposits.
Poor corporate governance practices
In the banking industry, proper governance is vital for improvement in company performance, attraction of investors and numerous more. Whistle blowing and business ethics which can be encouraged through moral corporate governance, would undoubtedly lead to reduction in fraud in money deposit banks.
Unfortunately, a substantial number of Nigerian banks lack moral corporate governance practices. The new code of corporate governance for banks is sufficient to minimize bank distress. But do banks adhere to this?
Over expansion, corruption of bank officials and improper risk management are the key causes behind the failure of banks. This is a major challenge faced by numerous banks in the Nigerian banking industry. Effective implementation of corporate governance would consequently result in proper functioning of banks.
Slow GDP growth
Banks encounter several threats from operating environment of which Nigeria sliding into recession is an inclusive factor. Low oil prices and also, the dwindling availability of foreign currency.
Banks face severely narrow foreign currency liquidity notwithstanding the authorities’ relentless efforts to regulate and perhaps normalize the foreign exchange interbank market and enhance the inflow of dollars.
Slower economic growth and lower risk appetite from banks will continue to translate to subdued credit growth and weak core earnings generation in the not too distant future. Nigeria had a dwindling economic growth since the end of 2015. The rate dropped to an estimated 3.0%. This in turn adversely affected the Nigerian banking industry.
Speaking MD/CEO, Enterprise Stockbrokers, Rotimi Fakayejo said; To a great extent, the CBN with its oversight activity in the money market has done considerably well in the area of stabilizing the foreign exchange rate.
“Although because of inflation, they have not been able to do much to step down interest rate and that definitely can’t be blamed on them
“I think because of the interest and inflation rate which has not allowed a lot of banks to do their core function which is lending to those fund users, I think at the same time, the liquidity issue caused within the system is more or less caused by the CBN in the areas of having to do OMO now and then in order for them to be able to create stability within the system.
“I think to an extent, the few banks that are having the issues, some of them have internal issues with respect to mismanagement of funds and all other things like Skye Bank but I believe also they will able to get out of this with the opportunities they have had from the CBN to shore up whatever liquidity gap they are having.
“In all, I think the finance sector has been able to keep above water during this period and there is every tendency that it might continue next year.
Could Nigeria’s digital-only banks conquer the market?
FinTech is an industry composed of companies that use new technology and innovation with available resources to compete in the marketplace of traditional financial institutions and intermediaries in the delivery of finance services.
Digital banking is certainly not a novelty anymore. Electronic payments have caught on quite rapidly: not only do customers have varied options presented by banks, but non-bank institutions also now provide myriad electronic payment solutions.
Street traders providing their customers with the option of paying by debit card are becoming a common sight in markets and elsewhere.
How disruptive are digital-only banks likely to be to a conservative industry?
Executive Director, SystemSpecs, Mr. Deremi Atanda in a chat with Nigerian NewsDirect said, “Government needs to use Fintech to lead Nigeria into the new economy. If citizens need it, then government should not miss this opportunity.
“For the economy to move forward, government needs to invest. Government should see investment in Fintech as seed not something that you expect to reap from immediately.
“So, whatever we are able to create here as disruptive Fintech, you can imagine the potential it has. If one of every five black people on earth is from Nigeria, it means a great potential. You can then imagine the foreign to local remittances.
“Nigeria as Africa’s largest economy, it very much aligns with global trends. In Fintech, your objective should be global economy.
“For me, distruption has become the new norm in human evolution more so with the speed at which disruption has in recent times. Imagine what’s happening with TSA now which is also a function of Fintech disruption,” he said.
On the recent digital currency rave, Atanda said it is a trend that has come to stay.
In his words, “We need to begin to see Bitcoin and other digital currencies less as technology but more as a need. Customers have a need to begin to make payments in a certain way that addresses what they want done.
“It is just a name that you have given to a need. it’s reflective of man’s needs to transact and so we need to pay attention and say how do we plug in?
“The truth is ideas whose time has come, there is nothing that can be done about it. We need to maximize the potential,” he added.