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Nigeria’s banking system remains fragile

Nigeria’s banking system remains fragile

How did Nigeria avoid a banking crisis in the aftermath of the 2014 crude oil price crash?

In mid-August, two papers by the International Monetary Fund (IMF) highlighted the effect of commodity price shocks on the financial sectors of resource-rich countries. The first found a strong relationship between commodity shocks and financial fragility leading to banking crises in these countries.

The second found that banks tend to lend more to companies in the resource sectors during both commodity booms and commodity shocks, starving firms in other sectors of credit. The Economist wonders whether there is still risk of a banking crisis in Nigeria.

This is because when crude oil prices crashed in the past, a number of banks were casualties. In the aftermath of the 1998 oil price dip, for instance, 28 banks left the scene.

In 2009, 10 banks closed shop, with stability only returning to the financial system after the Central Bank of Nigeria (CBN) injected N620bn ($1.7bn) to ensure liquidity and forced changes in the leadership of eight banks.

Still vulnerable

As oil prices have now started to recover, after oil producing countries’ cartel OPEC implemented production cuts, the likelihood of another banking crisis seems to be greatly diminished.

That is not to say that Nigerian banks are without problems. Non-performing loans (NPLs), currently estimated at over N2 trillion, have more than doubled since the 2014 oil market crisis to 15% of total loans in 2017, from 6% in 2015, according to the IMF in August.

With dollar liquidity squeezed during the crisis, banks were hard pressed to fulfill their foreign currency debt obligations, although they were all largely able to meet them, with one recently tapping the Eurobond market for $400m. How potentially vulnerable they are came to light in June 2017, when talks over a $1.7bn loan between a consortium of lenders and the mobile telecoms company Etisalat Nigeria collapsed.

However, this did not prove to be systemically negative, as the affected banks were largely able to provision for bad debt without significantly undermining their strength. It turns out what could have actually caused a crisis had nothing to do with the oil price at all.

In August 2015, the then new Muhammadu Buhari administration ordered that all government revenues hitherto placed with commercial banks be transferred to a so-called Treasury Single Account (TSA) at the CBN. It took a while for some banks to adjust, with over N3 trillion in liquidity (about 10% of banks’ total assets) abruptly leaving their balance sheets. In any case, the banking system proved to be resilient.

Banks shun risk

Should the CBN be credited with this relative stability? To the extent that it would be blamed had something gone wrong, it should get some credit, some argue.

Andrew Nevin, chief economist at global consultancy firm, PwC, in Lagos, offers insights about how CBN reforms after the 2009 banking crisis may be credited for the relative stability this time around.

Back then, the oil price crash was just one of a number of factors responsible for the banking crisis. “Banks were in a very poor position due to a number of unsound practices, including insider lending, imperial MDs, margin lending [and so on],” he says.

In response, the CBN insisted on the rotation of managing directors, ordered the implementation of the IFRS 9 financial instruments standard, and set limits on insider lending. Unsurprisingly, “while there have been individual banks that have faced difficulties from NPLs in the power and O&G sectors, there are not the type of systemic issues the banking system faced in 2009”, he says.

The banks have been better run, some argue. Chief executives have not been as reckless as they once were.

“Banks have been largely risk averse in recent years, focusing more on investment securities”, says Tajudeen Ibrahim, head of research at Chapel Hill Denham, a Lagos-based investment bank. Their caution has been to the detriment of lending to the real sector, though, as a significant portion of their funds have instead been invested in government securities.

So, a banking crisis was probably avoided this time around because banks shunned risk. Also, NPLs could probably have been higher but for certain steps taken by banks in conjunction with the CBN.

For example, the names of major debtors were published on the pages of newspapers. It worked: affluent Nigerians are very sensitive to even the slightest impression that their flamboyant lifestyles are being funded by means other than their sweat.

CBN remains vigilant

More importantly, the CBN is not being complacent. At the IMF/World Bank meetings in Washington DC in mid-October, the fragility of the banking system was mentioned as one of the threats to the nascent economic recovery.

In response, CBN governor Godwin Emefiele says, “We are keeping our eye on the banking system to ensure that there are no significant threats that would alter the strategic health of the banking industry.”

Rafiq Raji

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Written by African Business Magazine

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