By Babajide Komolafe
THE banking industry recorded sluggish growth within the first two years of the President Buhari administration. Even that marginal growth was mired by phenomenal increase in non-performing loans, NPLs, occasioned by combination of naira depreciation, high inflation and downturn in economic activities.
Growth in assets and increased patronage: Within the first two years of the administration, the banking industry assets and liabilities grew by 14.2 per cent per cent, as against average annual growth rate of 25 per cent.
According to the Central Bank of Nigeria, CBN, total assets/liability of banks rose to N32.1 trillion in February from 28.4 trillion at end of June 2015.
Lending to the private sector
The industry’s lending to the private sector of the economy rose marginally to N22.4 trillion in February 2017, about 16 per cent from N18.9 trillion as at June 2015.
However, the industry also recorded increased patronage from Nigerians during this period. Data from the Nigeria Interbank Settlement System, NIBSS, revealed that 18 million new bank accounts were opened as the number of bank accounts rose 98 million by the end of March 2017, from 80 million at the end of June 2015. The number of active bank accounts also rose by 24 per cent to 67 million from 54 million during the period. Statistics also showed that banks were able to attract more savings from Nigerians, as the number of savings account rose to 70 million at the end of March 2017 from 56 million at the end of June 2015.
Also the banking industry enjoyed boom in epayment business in 2016. Statistics from the Central Bank of Nigeria showed that the volume and value of epayment transactions in 2016 shot up by 132 per cent and 82 per cent respectively, to 942 million transactions worth N71 trillion.
Naira depreciation and high inflation
The banking industry, however, faced two major challenges during the first two years of President Buhari’s administration, namely high inflation and Foreign exchange crises.
With dwindling crude oil prices translating to fall in foreign exchange revenue and decline in external reserve, the country experienced severe dollar shortage which triggered sharp depreciation of the Naira.
As at the end of May 2015, the Naira exchange rate stood at N198 per dollar and N217 per dollar in the interbank market and parallel market respectively. But by February 17, 2017, the Naira had depreciated to N305 per dollar in the interbank market and N520 per dollar in the official market, translating to 54 per cent depreciation and 139 per cent respectively in each market, the steepest in history of the local currency. This also marked the widest parallel market premium so far in history.
However, an easing up of the currency market policy by CBN in the last three months has narrowed the official-parallel market gap while helping the Naira value up to N380/USD as at last week. The banks have already suffered massively from the initial shocks.
According to the Deputy Managing Director, First Bank of Nigeria Limited, Mr. Gbenga Shobo, scarcity of foreign exchange posed a major challenge to banks during the year (2016). In an interview with Vanguard, he said, “Lack of foreign exchange has been the major problem since we import almost everything in the country. Factories have to bring in raw materials. As far as there is no money to bring in those raw materials, capacity utilization for some of these manufacturers has dropped to about 35 percent and this will definitely reduce banks turnover.”
The sharp depreciation of the Naira coupled with the scarcity of foreign exchange rate led to steady increase in prices of goods and services which culminated to 26 months high inflation rate. Data from the National Bureau of Statistics, NBS, show that inflation rose steadily from 9.0 per cent as at end of May 2015 to 18.72 per cent in January 2017 before dropping for three consecutive months to 17.24 per cent in April.
Widespread increase in bad loans
The sharp depreciation of the Naira and high inflation rate combined to trigger decline in economic activities, which resulted into Nigeria’s worst economic recession in 25 years. This occasioned increase in loan default as many borrowers could not repay their loans. “The economic headwinds have adversely impacted bank borrowers, resulting in rising NPLs which required additional provisioning by banks”, the CBN stated.
As a result bad loans recorded by banks tripled to N2.1 trillion at the end of December 2016 from N628.54 billion as at June 2015 to. This represented increase of 234 per cent, again the worst record in the industry history.
Also the industry’s NPL ratio rose from five per cent at end of June 2015 to 14 per cent in December 2016. This was far beyond the regulatory threshold of five per cent.
Explaining the factors responsible for this sharp increase, the CBN in its Financial Stability Report for 2016 stated: “The deterioration in asset quality was largely attributed to the rising inflationary trend, negative GDP growth, and the depreciation of the Naira.”