Nigeria’s economy has spent much of 2016 in recession for the first time in over two decades. Unsurprisingly there has been speculation about the strength of its banking system.
Non-performing loans have already hit 12 percent of Nigerian banking assets. How could these institutions possibly survive?
Better regulation, as it happens.
Abysmally low oil prices and the effects of an artificially propped-up naira have shrunk the economy. Until April, Nigeria was the region’s top oil producer only to be overtaken by Angola.
Manufacturers, a key borrower in the economy, are hurting. Recent indicators point to a prolonged contraction in manufacturing output despite a slight uptick in recent months, and 90 percent of firms are operating below capacity.
Despite these pressures, in an assessment of the five largest banks – which account for nearly 50 percent of banking assets in Nigeria – ratings agency Moody’s found some positives. “The Nigerian banking system is actually very well regulated compared to the past,” says Akin Majekodunmi, a vice president at Moody’s Investor Service.
“There are differences in the banks’ abilities to withstand economic challenges, but all five banks remained technically solvent even in our stress test scenario.”
This is thanks in part to Nigerian capitalisation requirements, implemented after the 2008-2009 global financial crisis. A 2014 Ernst & Young study of major banking markets in sub-Saharan Africa found that Nigerian banks had the strongest capital adequacy ratios in the region.
While the Central Bank of Nigeria has been widely criticised for its recent handling of the naira, it has also been responsible for large-scale reforms to bank oversight. These may well save the industry from another crisis.
The Moody’s study did not analyse second-tier and smaller banks. Mr Majekodunmi notes that these institutions may not necessarily be as operationally resilient or diversified as the largest banks.
Still, Moody’s expects non-performing loans to peak at 12 percent of Nigerian bank assets. In the second quarter, NPLs reached 11.7 percent.
Different business sectors have struggled to varying degrees, but almost all have been touched by Nigeria’s economic woes. Oil and gas loans initially suffered the most, though the situation has stabilised due to loan restructuring efforts.
Manufacturers have also contributed to non-performing loans, given their lack of access to foreign exchange and a deteriorating situation for the consumers who buy their products. Indeed, a recent NOI Polls survey found that 78 percent of manufacturers have been affected by lack of foreign currency access.
And the government’s decision to implement the Treasury Single Account this year did not make things any easier for banks. The TSA aims to create greater transparency and consolidate government finances by setting aside all relevant funds in a single account overseen by the Central Bank.
However this pulled an estimated 2-4tn naira out of the banking system at a time that pressures for foreign currency and trade finance were at their zenith.
However, despite the remaining headwinds, there is light at the end of the tunnel.
Non-performing loans are not expected to increase significantly as banks and businesses find their footing. And according to analysts, the impacts of the TSA implementation are mostly in the past now while giving long-term transparency a boost.
An accounting regulation change may also help: this year, banks have been allowed to write-off their fully provided for non-performing loans (NPLs) immediately, rather than waiting the mandatory year.
Of course, this does not change the fact or the cost of NPLs. But this change allows banks to use their capital reserves to clear up their balance sheets.
Despite strains, it seems a banking crisis has been averted – for now.
While some banks, particularly smaller ones, are more likely to come under financial strain, on balance the Central Bank of Nigeria’s conservative capitalisation requirements have shown their worth in this challenging economy.
While many bank managers are almost certainly feeling the strain of a stormy economy regardless, their institutions are still looking seaworthy. - ThisIsAfrica