The Nigerian banking sector has seen robust growth in recent years despite the impact of the Covid-19 pandemic, Russia’s invasion of Ukraine, rising inflation and exchange rate volatility. Driving this has been a combination of high-tech innovations from the financial technology (fintech) industry and a low-tech, traditional policy that has kept banks well capitalised and buffered against external shocks.
This combination has led to growth in profit, credit and assets in the last few years that has come alongside efforts to bring more people into the formal banking system and e-banking. The latter has benefitted from developments in fintech, with mobile banking a major tool in overcoming long-standing low penetration rates in the sector. Standalone payment service banks (PSBs) and other developments are an example of the heightened competition among traditional lenders and also a major opportunity.
Regulation and supervision are often updated to keep pace with such innovations. However, large parts of the population cannot access these products fully due to uneven technological rollout. Financing rural sectors such as agriculture, which is dominated by smallholders and family-based enterprises, is challenging yet vital. Loans to small and medium-sized enterprises (SMEs) – the bedrock of economic activity – require new ways to assess bankability and sustainability. Despite the challenges, these are times of robust growth and major change in the Nigerian banking sector, and there is room for further progress.
Structure & Oversight
The Central Bank of Nigeria (CBN), which was established by an act of Parliament in 1958, is the sector’s oversight and regulation authority. The 1958 act establishing the bank was amended in 1991, 1993, 1997, 1998, 1999 and 2007, with the 2007 act giving it control of the federal government’s monetary and financial sector policies.
The Banks and Other Financial Institutions Act of 2020 added further responsibilities to the CBN’s portfolio, including ensuring high standards of banking practice and financial stability in the sector, along with the promotion of an efficient payments system. The CBN also issues bank notes, and the bank began to distribute redesigned N100 ($0.24), N200 ($0.48), N500 ($1.2) and N1000 ($2.4) bills in December 2022.
The CBN supervises and regulates a banking sector that consists of a wide variety of institutions, including commercial banks, merchant banks, microfinance banks (MFBs), non-interest – or Islamic – banks, primary mortgage banks (PMBs) and PSBs. The central bank is also responsible for overseeing non-bank financial entities such as finance companies, holding companies, discount houses and bureaux de change.
Sector Breakdown
As of December 2022 the central bank’s website listed 887 MFBs, 34 PMBs, 24 commercial banks, six merchant banks, three non-interest banks, and three PSBs; the Nigeria Deposit Insurance Corporation (NDIC), for its part, listed five PSBs. The CBN website lists six development finance institutions (DFIs), the largest of which is the Bank of Industry, a government-owned entity that gave out some N1.2trn ($2.9bn) in low-interest loans to over 2m firms from 2015 to 2021, and has raised around $5bn in funds from international markets since 2018. The other DFIs listed by the CBN are the Federal Mortgage Bank of Nigeria, the Nigerian Export-Import Bank, the Bank of Agriculture, the Infrastructure Bank and the Development Bank of Nigeria.
Despite the plethora of players in the sector, a few large institutions tend to dominate. As of the first half of 2021 six banks accounted for 68.8% of deposits and 66.4% of assets, according to the CBN, with the share of the largest single bank adding up to 14.5% of total deposits and 15.6% of total assets.
Although Nigeria does not have any banks that qualify as global systemically important banks, as defined by the Basel Committee on Banking Supervision, the CBN does designate certain lenders domestic systemically important banks (D-SIBs). This label is given to a bank if it is determined to have had at least 5% of total sector assets and 6% of total credits and deposit liabilities of an industry over the six months prior to the point of measurement. D-SIBs must also maintain an additional 1% capital surcharge to their capital adequacy ratio (CAR), and this ratio needs to be fulfilled using Tier-1 capital. In addition, D-SIBs and banks or banking groups with international authorisation have to maintain a minimum CAR of 15%, compared to 10% for banks with national or regional authorisation and the minimum CAR under the Basel III accord’s guidelines of 10.5%. In 2021 the seven D-SIBs were Guaranty Trust Holding (GTCO), formerly Guaranty Trust Bank; Zenith Bank; Ecobank; FBN Holding; Access Bank; Fidelity Bank; and United Bank for Africa (UBA).
Regulations
In 2013 the CBN announced it was implementing the Basel II and III accords, setting a range of minimum liquidity ratios (LR) and CARs. The bank’s LRs for January 2020 to December 2021 were 30% for commercial banks, 20% for merchant banks and 10% for non-interest banks. A six- to nine-month period during which Basel II and Basel III operated in parallel came to an end in May-August 2022, after which only the Basel III standards apply. As of October 2022 the industry-wide LR was 40.1%, while the CAR for the industry stood at 13.4%.
Foreign banks can obtain licences from the CBN to operate in Nigeria, both onshore and offshore, provided they remain within a designated free or special economic zone. They may also have a representative office outside such zones to interact and meet with clients. The foreign bank with the longest presence in Nigeria is Citi, which has been in the country since 1984. Other foreign outfits include the UK-based Standard Chartered Bank and South Africa’s Nedbank.
Another regulation has been the cash reserve requirement (CRR). Under this, banks must leave a percentage of their deposits with the CBN to help the central bank control liquidity and inflation. In October 2021 the CRR was 27.5%, significantly higher than in Nigeria’s banking peers in Africa, and it rose further in September 2022 to 32.5%. Despite pressure from banks, which say the high rate is curbing profitability and lending, the CBN seems likely to maintain the CRR at this level for some time to come, as inflationary pressures continue to mount. Indeed, the National Bureau of Statistics’ September 2022 figures showed the consumer price index (CPI) up 20.8% year-on-year, the highest inflation rate since 2005, according to Nigerian financial website Nairametrics.
Another government institution that is of key importance to the country’s banking sector is the NDIC, which was established by an act of Parliament in 2006. All of the institutions that are insured by the NDIC are required to submit returns to it, as the corporation plays both a supervisory and examinatory role in overseeing banks’ deposit liabilities.
Cryptocurrency
The CBN currently prohibits Nigerian banks from holding, trading or making transactions denominated in cryptocurrencies. In 2021 the central bank tightened this restriction to prohibit the facilitation of payments for cryptocurrency exchanges, while instructing banks to identify clients engaging in such activities and close their accounts. The CBN demonstrated its seriousness by fining four banks in April 2022 over their failure to fully abide by this directive. However, at the same time the Securities and Exchange Commission (SEC), which oversees the country’s capital markets, has some jurisdiction in this area, and has been pursuing a strategy to regulate it (see analysis).
Evidence suggests that Nigeria remains a major cryptocurrency market despite the CBN’s restrictions. Indeed, the country was the largest cryptocurrency market in Africa in 2019. An April 2022 report by KuCoin suggested that at least 33.4m Nigerians had invested in digital assets in the prior six months. Cryptocurrency remains popular with younger, less risk-averse Nigerians – 18.1 is the median age of the country’s 211.4m people – though cryptocurrencies have also been used to facilitate foreign trade. This is a particular concern in Nigeria, as it is a country in which the official exchange rate is tightly controlled while also host to a parallel market.
There are signs that the government could shift its stance. In December 2022 the CBN published the “Payments System Vision 2025”, a blueprint for digital payments development. The report outlined plans to create a regulatory framework for the implementation of cryptocurrencies. Cryptocurrency offers a hedge on exchange-rate risks, as evidenced by how the official naira-to-US dollar exchange rate depreciated by 10% between the end of 2021 and October 2022, while the unofficial rate saw a depreciation of around 30%, according to Bloomberg. Additionally, in May 2023 the press outlet reported that the SEC was considering authorising licensed exchanges for assetbacked tokens, although not for cryptocurrencies.
Open Banking
In February 2021 the CBN issued a framework for open banking, which aims to facilitate greater data sharing across the sector and the payments system. This forms part of the bank’s recent drive to upgrade payment systems, a goal that has been in place since before the definitive Financial System Strategy 2020, the central bank’s long-term plan. In November 2021 the central bank granted approvals in principle to both MTN Nigeria Communications and Airtel Africa to operate their own PSBs in Nigeria. This duly happened, with both companies launching their respective services – MoMo and SmartCash – on May 19, 2022. Their offerings joined 9PSB, which was licensed in 2020; and Hope PSB and MoneyMaster PSB, which were registered in 2019.
Banking Rates
The use of telecommunications-based systems is helping to address the issue of low banking density in the sector in Nigeria. In 2012 the CBN adopted its National Financial Inclusion Strategy. A later review of this framework showed that in 2016, 38.3% of the country’s 96.4m adults were banked, while 10.3% were served by some other type of formal institution and another 9.8% by informal providers. “The financial services sector is dealing with the challenge of informal cash payment,” Anthony Edeh, managing director and CEO of Nörrenberger Financial Services, told OBG. “The CBN should provide policies that foster the expansion of financial services by forcing companies to pay employees through the banking system, thus encouraging them to participate in the formal economy.”
The review of the National Financial Inclusion Strategy led to a memorandum of understanding (MoU) signed in 2018 between the central bank and the Nigerian Communications Commission covering digital payment systems and the ongoing cooperation between the central bank and the Nigeria Inter-Bank Settlement System to develop a regulatory sandbox for innovative financial services. A nationwide network of 500,000 agents was also rolled out thanks to cooperation between the CBN, the Committee of Bank CEOs and private sector outfits. A further step taken in October 2021 was when the government unveiled the eNaira central bank digital currency, a multi-pronged strategy to boost financial inclusion, and facilitate the delivery of government social assistance and remittances (see analysis).
While the regulatory and policy framework for boosting inclusion has been in place for some years, increasing it further has been difficult. The National Bureau of Statistics reported that some 73m Nigerians were still “financially excluded” in 2020, with the percentage of people with bank accounts roughly similar to 2016. With much of the financial inclusion strategy depending on mobile banking, the country’s mobile network coverage and data speeds have become a key factor in the financial sector’s plans. A June 2022 report by the Alliance for Affordable Internet put the average level of smartphone ownership across Nigeria at around 44%. However, this number was 29.5% in rural areas, while 81% of the population did not have “meaningful connectivity”, meaning a reliable, daily and unlimited access point. As the network improves, mobile banking stands to expand further, widening access to formal banking services.
Performance
The Covid-19 pandemic affected the banking sector – and the national economy – significantly, coming on the back of several years of low oil prices, given that revenue from hydrocarbons is a significant part of Nigeria’s economy. Indeed, despite the fact that these receipts account for some 9% of GDP, around one-third of the federal government’s budget revenue in 2020 came from oil, and as much as 90% of the country’s foreign currency earnings.
Nigeria’s banks have displayed strength throughout these challenges. When the pandemic began, the CBN reacted by rolling out a series of monetary policy measures to ease the burden on borrowers and take on risk from SMEs in particular. The bank also cut the interest rate on its intervention facilities from 9% to 5%, while allowing banks to negotiate debt restructuring with clients in affected sectors. The CBN provided N1trn ($2.4bn) in loans to manufacturing and production in critical sectors. “Facilities for households, manufacturing, the medical sector and agriculture helped on both sides of the equation,” Segun Adams, a banking and capital markets analyst for Afrinvest, told OBG. “The CBN was very effective in providing support for both banks and the real sector.”
Conservative lending regimes prior to the pandemic buoyed the sector when the global health crisis began. These lending practices had been honed after the 2016 crisis, when the economy contracted by 1.6% from negative oil price and oil production shocks and banks’ overexposure to the power and oil and gas sectors. As a result, banks were able to maintain a stable level of non-performing loans (NPLs) throughout the pandemic, along with high CARs.
By the end of the first half of 2020 the banking sector’s NPL ratio was 6.4% – the statutory level is 5% – before falling to 5.7% in the first half of 2021 and to around 5% in the first half of 2022. The loan-loss provision also rose from 93.8% in the first half of 2020 to 98.5% in the first half of 2021. As for CARs, D-SIBs recorded levels well above the statutory requirements for 2021. UBA recorded a CAR of 24.9%, followed by Access Bank at 24.5%, GTCO at 23.8%, Stanbic IBTC at 21.1%, Zenith at 20.7%, Fidelity Bank at 20.1% and First City Monument Bank (FCMB) at 16.2%.
The sector’s profitability was initially negatively impacted by low interest rates, as well as by the high percentage of banking sector liquidity that had been sterilised by the CBN. However, this negativity eased over time as the economy rebounded after the worst of the pandemic had passed, while oil prices started to rise beginning in mid-2021.The country’s banks then registered a general upswing. “There’s been a definite improvement since the second quarter of 2022,” Muyiwa Oni, head of equity research for West Africa at Stanbic IBTC Bank, told OBG.
Profit Growth
The 13 banks on the Nigerian Exchange’s banking index had a total net profit of N887.1bn ($2.1bn) in 2020, with this rising to around N1trn ($2.4bn) in 2021. The first six months of 2022 saw that trend continue; the index recorded a net profit of N501.1bn ($1.2bn) in the first half of 2022, a 13.1% improvement when compared to the N443.2bn ($1.1bn) posted for the first half of 2021. Nairametrics calculated the value of the sector at N2.3trn ($5.5bn) in 2021, or around 3.2% of the country’s GDP.
Of the listed banks, Access, Zenith and GTB ank recorded the highest asset values, while FCMB had the highest profit after tax growth, at 80.8%. This was welcome news for listed banks, as the Nigerian Exchange’s banking board had a negative year-todate performance up to mid-2022. This was largely due to foreign portfolio investors exiting the market after the start of the pandemic, a trend that affected banks more than some other equities given the sector’s previous, preferred status among many foreign investors. At the same time, a stronger fixed-income market also weighed on the attractiveness of equities.
In September 2022 the CBN raised its benchmark rate by 150 basis points to 15.5% – its highest level since 2006 – after inflation gathered pace in August 2022 to reach 20.5%. The central bank raised the CRR from 27.5% to 32.5% to slow down credit growth and liquidity. Although these higher interest rates could have a positive impact on interest income and profitability, the higher CRR is likely to continue to restrict banks’ room to manoeuvre. As long as inflation continues to be high, it seems that the CBN is unlikely to reduce rates in the period ahead.
Outlook
With a reputation for agility and creativity, Nigeria’s fintech sector is set to continue to have an impact on banking (see analysis) both in terms of enabling the streamlining and widening of the services offered by conventional banks, and greater competition between conventional lenders and standalone fintech outfits. The latter factor should help increase access to financial services, which has been advancing in tandem with improvements in IT infrastructure. At the same time, the year ahead looks likely to see growth in profitability at many banks, as interest rates remain high and economic activity rebounds. There is still uncertainty in the global financial sector, with this possibly reflected in continued caution in the policies of banks and the CBN.
One issue facing Nigerian banks concerns the legacy loans made before the pandemic to oil and gas and power companies that became distressed in 2016. Although these debts have been restructured in the intervening years, they nonetheless weigh on provisioning and NPL ratios. The period ahead may see more efforts to address these problems. In other respects, banks’ asset quality and capital ratios are likely to remain strong as they maintain a conservative approach to credit growth. Indeed, having survived and prospered through both the pandemic and prior headwinds, Nigeria’s banking sector appears well prepared for the challenges and opportunities to come.
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