57 years after: Whither Nigerian Banks?


After weathering the challenges posed by the economic recession, banks appear to be experiencing relief, with improving foreign exchange system and positive macro-economic environment. AYOBAMI ADEDINNI writes.

Over the years, the performance of banking industries in Nigeria cannot be over emphasized because of its contribution to the development of Nigerian business.

In Nigeria, the first indigenous bank was National Bank of Nigeria (NBN) which started operation in 1933 which was after the establishment of Africa Banking Corporation (AB) in 1892. British Bank of West Africa (BBWA) was then established in 1893 and started operations in 1894.

Then the African continental Bank PLC (ACB) followed in 1947 before other bank’s started to exist.

Nigerian banks have not performed up to their expectation over the years of their establishment. The system has experienced a lot of short falls, which will be highlighted in this write-up.

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 financial crisis.

Oil and Gas Sector exposure

For one, the Nigerian banking industry is heavily exposed to the oil and gas sector, which contributes over 70 percent of government revenue and 90 percent of all exports.

With the fall in global oil prices by nearly 60 percent from $115per barrel to about $44 per barrel in the past 23 months, thus resulting in lower government revenues, and thereby decreasing banks’ takes. With a high level of exposure to the oil and gas sector, which unfortunately is facing a sustained period of low oil prices, non-performing loans in Nigerian banks have reached alarming proportions. This has continued to significantly lower banks’ revenue and profits especially in 2016.

 Weak capital base

A few years ago, the Central Bank of Nigeria gave a directive to all Nigerian banks to raise their capital base from N1 billion to at least N25 billion by 31st December 2005.

As at then most banks did not even have sufficient money to meet the then N1 billion requirement. This saw the foreclosure of over 70 percent of Nigerian banks as out of 89 banks only 25 emerged solid banks and met the N25 billion  requirement.

Some banks became mergers and so on. With a weak capital base, most banks can scarcely grant loans and engage in international transactions.

TSA implementation

The treasury single account is a financial policy used in several countries all over the world. Like other third world countries, it was introduced by the federal government  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 Bank of Nigeria’s (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 financial 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 of 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 subdue 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.

Full abolition of COT

Nigerian banks are also faced with significant pressure from the abolition of commissions on turnover (COT), which came into force on January 1 this year. COT alone contributes over 60 percent of the fees and commissions of banks.

Thus, Nigerian banks are losing about N100 billion in annual revenues as a result of the implementation of the zero COT policy. Instead of COT, the CBN directed banks to introduce a “negotiable” current account maintenance fee to replace the Commission On Turnover (COT).

 In a circular issued to banks, the apex bank directed banks to charge a fee not exceeding N1 per N1,000 in respect of all “custom­er induced debit transactions. The directive is targeted at easing the pressure on Nigerian banks. But how far this has been achieved is still under conjecture

After weathering the challenges posed by the economic recession, banks appear to be experiencing relief, with improving foreign exchange system and positive macro-economic environment.

Ethics and professionalism

Ethics generally revolves around a set body of values, reformative guidelines and principles that embellish an individual with a sense of judgment and differentiation of right from wrong.

In recent times, the Central Bank of Nigeria has been intervening to investigate fraud, greed, insider abuse, etc. These were the succeeding results of unethical behaviour from both bank staff and management.

Unethical behaviour is responsible for distress in banks. And apparently, punishments for these unprofessional behaviors are trivial.

However, despite these threats facing Nigerian banks, it is widely expected that they will weather the storm and grow much stronger. During her visit to Nigeria, Christine Lagarde, the Managing Director of the International Monetary Fund, admitted that the Nigerian banks are generally well-capitalized and more resilient” compared with the period of the global financial crisis in 2008/2009 that resulted in several bank failures around the world.

While the growth outlook for the Nigerian economy and that of the banks are predicated on the non-oil sec­tors activities, a dramatic improvement in the outlooks could come about if oil price makes unexpected, strong rebound in the course of the year. This would help strengthen the naira and support the exchange rate, which has partly made foreign portfolio investors to remain on the sidelines of investing in Nigeria.