Nigerian Banks are facing one of the most serious threats to their international reputation according to reports from Reuters. Banks are now confirming what we had feared the most. They can no longer access forex to pay their financial obligations to foreign lenders.
According to Reuters, banks looking for dollars to repay letters of credit (LC’s) to their foreign lenders have been delayed for as much as a week compared to just a day or two in the past. Banks have attributed this to the Central Bank’s dollar rationing and strict capital controls which have restricted to flow of forex in and out banking system.
The implication of this is that commercial banks may soon start to experience significant defaults if this continues. According to the report outstanding LC’s could be as much as $500m. The CBN sells about $250 weekly compared to about $500m weekly before it imposed controls.
Here is an excerpt of the Reuters article that should be worrisome to analysts
Now, banks seeking dollars to repay letters of credit (LCs) to foreign banks have to submit bids to the central bank, imposing extra barriers to hard currency access – to the consternation of foreign institutions.
The central bank met commercial lenders this week to assure them it would sell them foreign currency to repay foreign loans, but told them they needed to pay off matured LCs first before negotiating new ones to prevent a backlog building up, bankers said.
If the amount of delayed repayments gets too big, bankers fear it might become impossible for the central bank to meet dollar demand, which would push the situation from a liquidity crunch to a credit crunch – and ultimately even a default.
Shares of Nigerian banks have been on a decline in the past year with the Banking Index down by as much as 10% this year alone. Most Nigerian banks took to foreign currency lending in 2014 as they rushed to shore up their capital base with medium term lending. The impact of not being able to pay these loans could posse negative consequences for the financial sector.
