Nigeria’s leading research and rating institution, Agusto & Co. Limited, recently released its flagship 2021 Banking Industry Report, the most recent and comprehensive report on the Nigerian banking industry based on a review of the financial statements of twenty commercial banks and five merchant banks. The report examined the structure of the industry, its financial condition, the regulatory environment, the macroeconomic environment, and its impact on the Nigerian banking industry.
According to the report, the COVID-19 pandemic brought about an extraordinary test for the global community. Although the global COVID mortality rate stands low at about 2.2 per cent, casualties increased from less than 3,000 in December 2019 to about 3.9 million as of 30 June 2021. Nigeria’s mortality rate stood comparably lower at about one per cent on the same date. However, the local economy had its fair share of pandemic-related adversities.
However, the Nigerian banking industry was better prepared in 2020, after learning from the 2016/2017 economic recession. Proactive measures, such as forbearance granted by the Central Bank of Nigeria (CBN), allowed banks to provide temporary and time-limited restructuring of facilities granted to households and businesses severely impacted by COVID-19. Given the difficulties in the operating environment, there was generally a cautious approach to lending in the industry. Although gross loans and advances increased by 12 per cent, loan growth was negative when the 19.3 per cent naira depreciation is factored in. Underpinned by the forbearance and proactive measures adopted by banks, the NPL ratio improved to 6.6 per cent (FYE 2019: 7.6 per cent).
The reliability of business continuity measures was tested in 2020, considering the movement restrictions that lasted for months. Most banks showed resilience through innovative measures including remote work arrangements and upgrade of network infrastructure to accommodate higher traffic on digital channels. These arrangements also provided support during the mandatory curfew elicited by the civic unrest that followed the #EndSARS protests in October 2020.
Indeed, the pandemic brought afore technology’s crucial role in deepening financial services as some banks recorded as much as a 50 per cent increase in digital banking transaction volumes. However, these gains were limited by the CBN-induced reduction in bank charges, which took effect in January 2020. As a result, electronic banking income declined by 27.3 per cent, accounting for a lower 13.2 per cent (FY 2019: 21.1 per cent) of non-interest income.
The CBN’s policies targeted at lowering interest rates have persisted especially given the dire need to stimulate the economy following adversities created by the pandemic. However, given the need to moderate inflation amidst efforts to maintain a stable exchange rate, the cash reserve requirement (CRR) was increased and standardised to 27.5 per cent for both merchant and commercial banks. The standardised CRR was implemented alongside discretionary deductions. As of FYE 2020, the industry’s restricted cash reserves exceeded ₦9.5 trillion and translated to an effective CRR of 37 per cent.
It is noteworthy that Nigeria has the highest reserve requirement in sub-Saharan Africa. South Africa, Kenya and Ghana all have CRR’s of below 10 per cent. We believe the elevated CRR level moderated the industry’s performance and liquidity position during the year under review. Assuming the sterile CRR was invested in treasury securities at five per cent, ₦482 billion would have been added to the industry’s profit before taxation. This would have increased the industry’s return on average equity (ROE) by 11 per cent to 31.6 per cent in the financial year ended 31 December 2020.