Weak economic growth in Nigeria has denied the country’s banking sector the supposed dividends of large and youthful demographics in Nigeria, analysts at Afrinvest have said in their Nigerian Banking Sector Report 2022, tagged ‘Brace for Impact’.
They note that over the last 10 years to 2021, real Gross Domestic Product (GDP) has grown by a cumulative average growth rate (CAGR) of 1.9% compared to 2.3% CAGR for the population.
They said that sadly, the result of the disparity has been a drop in real per capita income levels and a rise in unemployment from as low as 6.4% in Q4 of 2014 to a record-high of 33.3% in Q4 of 2020.
“In line with the decline in income level, poverty has risen to 40.1% based on national standards of annual real per capita expenditure threshold of ₦137,430. 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 investment banking house recommended that critical reforms be undertaken as matter of urgency to avoid a repeat of the negative trends seen in the last decade.
It stated: “Some 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 FX 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.”
What Afrinvest in saying:
- The last decade of banking in Nigeria followed directly after the post-global financial crisis (GFC) shakeup which culminated in the re-organization of banking operations.
- The rigorous post-GFC sanitation exercise by the CBN led to acquisitions such as Access Bank, FCMB, and ETI takeover of Intercontinental Bank, Fin Bank, and Oceanic Bank respectively.
- In tandem with these changes, the regulatory landscape evolved and naturally presented new opportunities and costs to lenders.
- Over the broad period since 2012, the CBN has introduced policies such as slashing banks’ electronic charges, raising the minimum loan to deposit ratio, limiting the tenure of bank MDs to 10 years, updating guidelines on internal capital generation and dividend pay-out ratio, amongst others. At the same time, Nigeria’s external and internal imbalances added to the policy dilemma of the CBN.
- The persistent rise in consumer prices over the past decade by 245.5% as of August 2022 and the Naira devaluation by about 62.2% between 2012 and 2021 have eroded the gains banks have made in real terms.
- For instance, our estimation shows that gross earnings, net income, and asset base of banks have weakened. At the same time, exchange rate volatility has harmed capital buffers.
- The fiscal challenges presented by weak FG earnings have contributed to the muddling of monetary policy and strong use of CRR debits as a subtle strategy, in our view, to compensate for the inflationary effect of ballooned overdraft to the FG.
- Meanwhile, in increasing its developmental financing role, especially in agriculture financing, the CBN risks crowding out banks and private sector financing which is more effective in de-risking the sector and incentivizing growth without moral hazards.