Economy

Nigeria @ 60: The Banking Sector and the Nigerian economy – Nairametrics

Nigeria celebrates 60 years of gaining her independence from the colonial masters. Six decades of diverse ideas and reforms, which helped build the financial service sector to the point where it stands. It is imperative to consider how far the industry has come, and the outlook for the sector.

Gone are the days, where it is compulsory for customers to visit their bank before opening an account or completing a transaction, now it can be done at the comfort of their homes. This is a function of continuous reforms implemented and adopted by the financial sector of the country, via embracing the use of internet as a medium of banking.

These reforms and ideas have propelled the Nigerian banking industry into a major economic driver of the nation, accounting for 34.2% of the total equities market capitalization of the Nigerian Stock Exchange (NSE).

A cursory look at historic data, reveals that the banking sector has witnessed significant growth over the years, starting in the 80s with the African Banking Corporation and the Bank of British West Africa, now First Bank of Nigeria, to a total of 23 commercial banks, and an aggregate asset value of N41.9 trillion as at December 2019, coupled with other variant financial services in the country.

Brief history

The origin of modern banking in Nigeria dates back to the 80s, but notably the establishment of the Central Bank of Nigeria, through the Central Bank Act of 1958. Ever since then, the apex bank has gone through a number of restructuring and Act amendments, to sail the banking sector to its current position.

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In 1997, an amendment made the Central Bank of Nigeria directly responsible to the Minister of Finance, with respect to the supervision and control of bank and other financial institutions, while extending the supervisory role of the bank to same.

Meanwhile, the current legal framework within which the CBN operates, is the CBN Act of 2007, which repealed the CBN Act of 1991 and all its amendments. The Act provides that the CBN shall be a fully autonomous body in the discharge of its functions under the Act, and the banks and other financial institutions Act, with the objective of promoting stability and continuity in economic management.

These amendments and many more, helped widen the number of commercial banks in the country, as well as other financial services firms such as Fintechs, Mortgage banks et al.

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The banking sector and the Nigeria economy

It is no doubt that the banking system in any given society is the artery, through which the economic lifeblood of the nation runs. Also, the economic well-being of the country will, to a very large extent, depend on the strength of the financial sector. This is evident in the Gross Domestic Product figures (GDP), which shows that financial sector grew by 28.41% (real terms) in Q2 2020, despite the economy contracting by 6.1%.

The financial sector contributed 3.6% in real terms to the total GDP in the second quarter of 2020, a positive movement from 3.1% recorded in the previous quarter (Q1 2020), and 2.63% in the corresponding quarter of 2019, a clear indication of steady growth and great resolve, despite economic downturn.

The banks play the critical role of mobilizing savings from the surplus economic units, while directing same to the deficit economic units for investment purposes, which in turn brings about economic development to the country.

This is can be seen from credit statistics report, that the banking sector contributes significantly to the effective functioning of other sectors of the economy. According to data obtained from Nairalytics – the research arm of Nairametrics, credit issued to various sectors of the economy increased by 40.1% in 5 years, indicating an additional credit of N5.38 trillion to stand at N18.82 trillion.

It is worth noting that the Oil and gas sector holds the highest share (26.27%), followed by the Manufacturing and General services sector with N3.07 trillion and N1.64 trillion respectively.

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Banking sector reforms

Over the past six decades, banking reforms have been articulated as means of enduring the stability of the banking system and ultimately, the attainment of economic growth. The financial system is more than just being an institution that facilitates payment and extend credit, rather it encompasses all functions that direct real resources to their ultimate users.

Mainly, banking reforms usually set to achieve macroeconomic goals of price stability, full employment, high economic growth, and internal and external balances. In Nigeria, the reforms have been directed towards financial intermediation, financial stability, and confidence in the system.

In Nigeria, the apex bank has the oversight role of managing financial institutions and dynamic role of manipulating financial related factors in boosting the economy. The strive for structural and economic development, has brought about the adoption of online banking, which has witnessed significant growth and acceptance since inception.

A look at the value of POS transactions in the country vis-à-vis that of cheque transactions, indicates an upward trend, while the later shows reduction. This can only mean that the Nigerian populace are appreciating the usage of online platforms, as means of banking rather than the traditional approach of hardcopy banking.

Also, between January and May 2020, the number of active bank accounts increased by 32.26 million in 5 months. Total bank accounts increased by 35.19 million in the same period, despite the restriction on movement across the country, indicating the likely usage of online and mobile account opening tools.

Outlook for the sector

Earlier in April, Nairametrics reported that Moody’s Investors service had projected a negative performance for the Nigeria banking sector, stating that the banks will face weakening loan quality and foreign currency liquidity challenges, as depressed oil prices and the global pandemic weigh on the Nigeria economy.

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However, the banks have shown resolve during the pandemic, as 13 listed Nigerian banks posted an aggregate profit after tax of N439.1 billion, increase of 6.67% when compared with N411.7 billion posted in the relatable period of 2019. This is a clear indication of the banking sector’s wit and innovation, even in a time of global economic pandemonium.

Owing to the recent reduction in monetary policy rate by the CBN, from 12.5% to 11.5%, bank net interest income is expected to come under pressure as observed in the first half of 2020. Meanwhile, Mr. Ugochukwu Obi-Chukwu, the Founder of Nairametrics, believes that net interest margins will however improve due to access to cheaper funds. He stated further, that banks profits are expected to be flat at the end of the year, due to lower than expected net interest income and higher non-performing loans.

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It is observed that some Nigerian banks are in pursuit of diversifying and restructuring into holding companies. This could be a strategic movement by the banks to explore other revenue sources, and branch into other territories in search of new market growth. However, it is to be noted that the best banks in Nigeria today are not Holdcos.

In conclusion, the banking sector in Nigeria has come a long way but with room for improvement, as financial inclusiveness still remains a hurdle to scale through, despite the fact that Nigerians have to a large extent, accepted online as a means of banking.

At 60, the Nigerian Banking sector is not in a bad position.

Happy independence!

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