Nigeria’s banking sector is a diversified one, in which the largest banks follow the universal banking model and a range of specialised actors tap specific niches within Africa’s largest economy. New trends include merchant banks, sector-specific lending vehicles, and from policymakers, increased focus on financial inclusion. These include microfinance, mobile tools, and the establishment of a network of mobile money agents to service this developing financial infrastructure.
For now, however, the banking sector features a slate of risks that leaves banks reluctant to lend to the private sector, and economic actors of most types suffer from inadequate access to finance. Many of the banks that had extended credit to the oil, gas and power sectors earlier in the decade have lost money on those loans, and are now cautious. This credit was extended before oil prices dropped in mid-2014, and at a time when plans for privatising and enhancing the utilities sector were expected to boost power supply and capacity and create a new group of credit-worthy electricity businesses. Visual evidence of that period of easier credit availability for energy entrepreneurs is still apparent at Lagos’ central business district, where the total of repossessed offshore oil rigs moored has grown from two to four as of the spring of 2018. Concerns over asset quality are not gone, but are diminishing thanks to an early-stage economic recovery in Nigeria as a result of a rise in oil prices in 2017 and early 2018.
Credit Demand
For financial institutions the least-risky course of action in Nigeria has traditionally been to lend to actors outside the private sector. Options pursued in recent times include servicing government clients, investing in public sector securities, and, in the mid- to late-2000s, margin lending to equities investors, often so they could buy shares of bank stocks. The latter practice led to a solvency crisis and bailouts, and since then the government and the Central Bank of Nigeria (CBN), the country’s banking regulator, have been working towards the right mix of law and regulation to protect the banking sector from instability and prevent the public sector from crowding out private sector credit demand. The goal is to make financial institutions more enthusiastic about lending to real economy actors, in hopes of driving long-term development and sector growth.
Size & Scope
As of October 2018 there were 21 commercial banks licensed by the CBN, a 75% drop from July 2004 when there were 89 – with the marked decrease being in part due to a consolidation programme. Licensees also include five merchant banks, six development finance institutions, five discount houses, 64 finance companies, 36 mortgage institutions and 1106 microfinance companies. “Nigeria now has more than 1000 microfinance institutions, many of which do not have the capacity to function adequately. The issue of consolidation should be the primary focus of the industry, along with ways to optimise the benefits of the ongoing digital revolution,” Godwin Nwabunka, CEO of the Grooming Centre, told OBG. The country also has 3048 bureaux de change and one Islamic bank, which follows a sharia-compliant approach to banking in which interest payments are neither charged, nor collected. Islamic banks instead charge fees for services, often calculated to be competitive with interest rates.
The sector is led by eight large banks, which are considered systemically important. These are referred to as Tier-1 banks and include sector players such as First Bank of Nigeria, Zenith Bank, Access Bank and United Bank for Africa (UBA). Together, these firms account for 70% of market share by assets. “Tier-1 banks lend to the choice customers and have the best retail platforms,” Chinedu Onyia, founder of Parsifal Partners, a Lagos-based management consultancy, told OBG. “They are looking to do current and savings accounts, and payments services, but not much retail lending.” The central bank introduced a regulatory framework that applies specifically to this group in 2014, including boosting both the capital adequacy ratio (CAR) as well as the liquidity ratio, but implementing those moves has now been deferred indefinitely. There are further divisions amongst the 21 main commercial banks that limit their geographical scope – 10 have authorisation from their central bank licence for international operations, whereas nine are domestic banks and two are limited to specific regions.
Foreign investment in Nigeria’s banking sector has been limited to a few early entrants, but the trend is positive. South Africa’s Standard Bank has established a presence in the form of Stanbic IBTC Bank, and the UK multinational Standard Chartered Bank has as well. South Africa’s FirstRand, Africa’s largest financial services provider, is present in the market with Rand Merchant Bank Nigeria. As of 2018 others interested in increasing their exposure included Atlas Mara, the London-based and Africa-focused investment vehicle owned by former Barclays CEO Robert Diamond. The company announced in June 2018 that it was increasing its stake in Union Bank of Nigeria from 48% to 49%. In addition, Barclays Africa CEO Maria Ramos said in March 2018 that the bank was eyeing the Nigerian market as part of an effort to boost its share of the African banking market from 6% to 12%.
Within the group of Tier-1 and mid-sized lenders, business models are tailored to Nigeria or have a regional strategy. In some cases, banks have been conceived with this focus in mind – Ecobank, for example, was founded in 1985 in Lomé, Togo, with the purpose of following a continental strategy and providing an African banking option at a time when the sector was dominated by foreign investment and profits repatriated elsewhere. The challenge for now is profitability: regional banks tend to generate lower returns and grow more slowly than those limited to one country, according to an October 2017 report “Remaking the bank for an ecosystem world” from the management consultancy McKinsey & Company.
Sector Organisation
The CBN, as regulator, plays a large role in shaping the banking sector, with several of the major changes and evolutions in recent years originating from the regulatory agenda. The first big change came in July 2004, when a capitalisation exercise was driven by then-governor Chukwuma Charles Soludo. The average capital base for a bank at the time was N2bn ($6.5m). Soludo’s reform programme mandated raising minimum capital requirements to N25bn ($80.8m), and that helped drive consolidation of the licensees. However, the move also helped shift banks’ attention to capital markets, as a way to raise funds and boost share prices, which in turn set the scene for a domestic banking crisis that manifested itself in 2009, independent of the global financial crisis at the time.
In subsequent years, following the crisis, banks realised that they could boost their capital through repeated share issuances. Even though adding to the existing volume of outstanding shares in an equity venture would upset existing shareholders, because profits were to now be split between a greater number of shares, the market move worked as long as share prices rose. Some banks were helped by investment managers and investment firms encouraging clients to buy bank shares and helping them arrange for margin loans in with which to do so.
The crisis was also a unique opportunity for Nigeria to rethink its economic priorities and the targets of its bank loans. “Banks have to play a greater role in the development of the economy by lending more outside the oil and power sectors,” Charles Kie, former managing director of Ecobank Nigeria, told OBG. To be continued
Source:www.Oxfordbusinessgroup.com
