The sorry state of lower denomination currencies
It is no longer news that the bulk of lower denomination currencies circulating within our economy are worn-out. The presence of these shabby looking currencies, particularly in a predominantly cash-based economy such as ours, should be a major cause of concern to all stakeholders. The problem of worn-out currencies has long plagued transactions in petty items within our economy.
However, in recent times there has been a noticeable increase in the volume of tattered Naira notes, particularly lower denomination currencies. While this affects all lower denomination currencies in the economy, the N100 note appears to be the worst affected, with a significant quantity of N100 notes in use appearing worn-out.
The circulation of significant quantities of worn-out notes has several detrimental effects which are highlighted in the latter part of this article. It also runs contrary to Nigeria’s ambition to be one of the easiest places to do business in the near future.
The 100 Naira note – a case in point
In the past, 5, 10, 20 and 50 Naira denominations featured prominently among worn-out currencies in circulation in the economy as they were the most commonly used denominations in high volume petty trades. However, in recent times there appears to be a significant surge in the amount of worn-out N100 notes in circulation.
It is my opinion that the increase in these notes circulating in the economy is a reflection of its increased role in facilitating petty trading of some of the country’s commonly traded goods and services. According to the Central Bank, the country has been experiencing double digits food-indexed inflation since June 2015. With food prices rapidly rising, there has been an upward shift in the denominations commonly used to facilitate the trade in petty goods and services, from other lower denominations to higher denominations including the N100 denomination. The reality is that the velocity of the N100 has increased significantly. The knock-on effect is an increased usage of N100 notes.
Why the situation persists
While the increased usage of N100 denomination is a major factor contributing to the increased wearing-out of the N100 notes, it is the alarming failure of a system designed to regulate the quality of notes in circulation that has led to the continued increasing circulation of worn-out currencies.
Why action is necessary
Besides the stain on the country’s image arising from the circulation and continued use of tattered currency notes, there are a number of less subtle consequences of this situation.
Worn-out currency notes may be outrightly rejected as legal tender during exchange for goods or services. The situation where a significant amount of denominations in circulation may be rejected in a transaction calls into question their continued use and acceptability as legal tender. This impedes the exchange of goods and services and may be borne as a loss by currency holders who are unable to spend it.
Another disturbing pattern arising from the growing scarcity of “clean” Naira notes, particularly the N100 notes, is the growth in black market trading of the currency.
Black market traders essentially exchange higher denomination currencies for “clean” lower denomination notes for a fee which is usually deducted at source. The scarcity of clean notes provides an incentive for increasing black market trading. Black market trading has the unfortunate effect of making lower denomination currencies a commodity itself rather than a medium of exchange, promoting hoarding and racketeering.
Scarcity of “clean” Naira notes, particularly the N100 notes, also creates inflationary pressure as sellers and producers tend to round up the prices of goods and services for which acceptable lower denominations may not be readily available. This does not spell well for a country trying to rein in inflation.
A failing currency management system
As with every monetary system, a system exists to regulate the quality of currency notes in the country. Under the current template, the Central Bank of Nigeria has mandated Deposit Money Banks (DMB) to collect worn-out notes from customers at no cost to customers. The banks are expected to remit same to the Central Bank at the rate of N12,000 per box.
However, it is clear that the current system at the very least does not work as it is supposed to. The banks are reluctant to accept them from the customers (or collect to reissue it to another customer) and the Central Bank charges any bank delivering notes for re-issuance a fee.
To be fair, the Central Bank of Nigeria has shown some appreciation of the situation at hand and instituted a number of schemes directed at various stakeholders. On January 2, 2018, the Central Bank opened a three-month window (starting January 2018) for banks to turn-in worn-out 5, 10, 20 and 50 Naira notes (not including the N100 note) at a discounted rate of N1,000 per box. The Central Bank also runs public campaigns encouraging proper use of the Naira and urging users to turn in worn-out Naira currencies to the Bank.
If the success of these schemes were to be measured by the extent to which worn-out denominations are still circulating in the economy, the schemes can largely be adjudged to have failed.
Who is to blame?
There is no shortage of blame about the current situation. The Central Bank has blamed Deposit Money Banks for failing to turn in worn-out notes. Both Banks also blame the manner in which some users handle the Naira for the current situation.
On their part, the banks have bemoaned charges imposed by the CBN for the replacement of notes. It has also been suggested that Deposit Money Banks are mindful of the additional administrative and cost burden of indulging in such activity.
The blame by users depends on who you ask, but it appears that a large number of users see the situation as a failure of the Federal Government and its regulatory agency (Central Bank).
Ascertaining who actually bears the blame for the failing regulatory system is a subject of contention. However, only concrete actions taken to rectify the faltering system can save the dire situation of the N100 note.
Call to action
The bone of contention between the Central Bank and Deposit Money Banks appears to be who bears the cost for the sorting, collation and destruction of worn-out Naira notes.
Without recourse to who should bear the blame, the CBN as the apex financial regulatory body is statutorily tasked with ensuring that the monetary system works with a healthy supply of usable lower denomination currencies to facilitate transactions (CBN Act of 1958).
Also, with a net operating income of N446 billion (2014 financial year), the Central Bank appears to have some legroom to foot some additional costs relating to its statutory mandate. Quite surprisingly, the Bank recorded a 43% Y-o-Y7 decrease in currency issue expense during this period.
We have lost the 50kobo, N1 and possibly N5 denominations to inflation; the Central Bank must act swiftly with unwavering determination to ensure that we do not loss the N100 denomination due to the scarcity of trade-acceptable notes.
This article may as well be seen as a call to save petty trading and secure the livelihood of millions of Nigerians who rely on the healthy circulation of usable low denomination naira notes.
About the author: This article was written by Rotimi Akintade, a tax specialist in one of the Country’s leading FMCGs.
Email – [email protected]
Strong performance from Stanbic IBTC, despite weak retail banking position
Will Stanbic IBTC be able to generate profit from its personal banking division by full year?
Stanbic IBTC made a profit after tax of N45.2billion, growing its profit by 24.7% when compared with this period last year.
The feat is remarkable; given that a majority of financial institutions responded as expected to the economic downturn triggered by inflationary pressures, oil price instability, and lack of notable business activities, necessitated by the corona-virus pandemic that has characterised the 2020 business calendar year.
These other organizations reflected positions worse off than their escapades in 2019. In cases where improvements in bottom-line were seen, it was only marginal.
Stanbic IBTC was not exempted from these economic trials, their immensely diversified business portfolio boosted their numbers on multiple fronts. Robust presence in Asset Management paid off, as commissions and fees represented a massive 62% of general fees and commission income. It’s Corporate and Investment division continues to produce astoundingly, contributing the highest and growing profit after tax of 49.2%.
This focused and efficiently monitored diversification, is turning Stanbic IBTC into world-beaters, reflecting in the expansion of its gross earnings by 7.8%, from N117.4billion in HY’2019 to N126.6billion so far this year.
This position could have appeared even better; had STANBIC been able to demonstrate in its personal and business banking segment, the same excellence, noticeable in its other business segments (Wealth, Corporate and Investment).
It’s Personal banking (generally regarded as Retail banking), encompasses the provision of banking and financial services to individual customers and SME’s (Small and Medium scale enterprises), mortgage lending, leases, card products, transactional and lending activities such as telephone banking, ATM’s, etc. The segment suffered this year, closing with a loss of N3.2billion, despite being responsible for over 58.4% of general staff costs. This poor position was sponsored by a reduction in income levels, especially non-interest income from fees and commission.
Unsurprisingly, given CBN’s policy at the start of the year to implement a much-reduced transfer fee rate, an increase in Non-performing loans is another causal factor for its loss this half-year. STANBIC cannot afford to bask in the euphoria of the massive successes of its Wealth and Corporate segment, at the expense of Retail banking.
Retail banking is fundamental to any bank looking to be a force, or preserve its going-concern status in this critically competitive economic environment. It has been the subject of immense research in the last decade, with many banks devising strategies to acquire a large chunk of the market share in this business segment. The banking landscape is evolving amidst growing competition, such that a bank that generally does well in its retail banking segment, is perceived as strong by the public. This has an underrated capacity to effortlessly attract more customers. Banks need to revisit the drawing board and re-embrace their sacred purpose of serving the basic and pure needs of their individual customers.
Michael Lafferty, Chairman of the Lafferty Group, whilst describing Retail banking said, “Retail banking is the foundation on which global banks are built,” It is a vast retail and consumer banking market, pointing out that the world’s biggest banks built their financial empire from the mass market.
Stanbic IBTC must be conscious in its quest to provide universal banking and find a balance in product and service offerings across its business segment.
A summary of the performance parameters in its financial statement, shows growth in gross earnings, from N117.4billion to N126.6billion, and improvement in earnings per share from 342kobo to 419kobo.
Attention now shifts to the impact of the bank’s new super app, supposedly a one-stop-shop for its diverse offerings, including banking, investing, pensions, trading, and insurance, and how it affects the bottom line in subsequent quarters.
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Lastly, will Stanbic IBTC be able to generate profit from its personal banking division by full year? We await their H2’2020 results.
Is Zenith Bank thriving on the strength of sound financial indices?
Zenith Bank posts N103.8bn profit in half-year financial result.
Sound financial indices have made Zenith Bank one of the largest banks in the Nigerian banking Industry. It was recognized as the Most Valuable Banking Brand in Nigeria 2019, in the Global Banker magazine Top 500 Banking brands; and Best Commercial Bank in Nigeria 2019, by the World Finance.
Zenith Bank has successfully bolstered this narrative even further with the release of its Half Year 2020 Financial Report, where it closed with a profit of N103.8 billion.
Growing profit position in these perilous times, speaks remarkably of the suppleness and elasticity of any establishment. A lull in economic activity caused by inflationary pressures, precariousness of the market, and the coronavirus pandemic has forced most Deposit Money Banks (DMBs) to cave in, and reveal achievements worse off than their 2019 results y/y – but not Zenith Bank Plc. The institution has showcased beyond reasonable doubt, that the apparent limitations are incapable of distorting its active growth pattern.
Zenith Bank closed H1 2020, 16.8% better off than it did in 2019 y/y, in terms of profit after tax. Although this massive leap, hugely resulting from tax paid as profit before tax, noted just a 2.2% growth. Further analysis of its HY’2020 results, demonstrates more efficiency, a focused cost of fund optimization, and an aggressiveness in generating income across its business heads and segments. This strategy had begun since 2018, and was shared by the bank when it disclosed planned implementation of an improved core banking system, hoping it would ultimately enhance efficiency while reducing costs.
Zenith Bank has thrived on the strength of its sound business model, corporate governance, conservative risk management, and strategic corporate social investment. The bank has been very forceful in the market, improving massively across all of its income generating segments, despite the plausible and obvious hindrances. This is a testament to its superiority, and sponsors its claim for supremacy.
The bank made N22billion from foreign exchange revaluation gains and despite evidence to the contrary, it endeavored in operating expenditure (OPEX). OPEX may have grown by 7.7%, but disclosures and note to the accounts shows that in virtually every expense head, costs dropped. The 7.7% was triggered majorly by Information Technology related costs, fuel and maintenance, and an increase in the compulsory banking cost fund, set up for the Asset Management Company of Nigeria (AMCON) by the CBN.
Now, like every hero susceptible to their hubris, Zenith has its own problems, which questions its position at the top. Yes, the bank may have an amazing and constantly improving interest expense to interest income ratio, but it does not possess the finest result in this regard as of yet. HY 2019 interest expense took as much as 33.6% of its income, while HY 2020 dropped to 27.4%. This is good, but still considerably high, if we carry out a peer-to-peer analysis with Guarantee Trust Bank Plc (masters of low-interest expenses), whose ratio stands at 16% for HY 2020.
However, Zenith has sustained the momentum of positioning itself as the crème de la crème in the Nigerian Banking Industry for quite some time. The bank’s pattern of growth and performance, strongly indicates its capabilities to manage its interest expense in subsequent quarters. It will be interesting to see how this pans out by year end.
In summary, despite economic difficulties this year, with most bank’s bottom-line at a worse position than the corresponding period last year, Zenith posted improved profit yet again. Could this be enough to portray supremacy?
UBA Plc H1’2020 results, a true reflection of its rightsizing decision?
UBA’s H1 2020 result is yet another demonstration of the resilience of its business model.
The upward review in benefits of some employees and directors this year, coupled with the rising operational costs, constitutes the hot topics from the 2020 semi-annual results released by UBA Plc.
Widely regarded as the banking sector’s largest employer of labour in Nigeria, the bank in December 2019, embarked on a ‘rightsizing’ exercise, which partly resulted in new hires, as well as promotions, improved remunerations, and benefits for existing employees.
The Group Head, Media and External Relations, UBA Plc, Nasir Ramon commenting on this said, “over 5000 staff of UBA Plc, started the new year with a lot of cheer, as the bank promoted to new grades, coupled with salary upgrades. Beneficiaries of this exercise will receive up to 170% increase in their salaries and benefits, whilst a good number have been moved to higher grade levels.”
Directors saw their emoluments amplify by 177.7% (Fees and Sitting allowances) as demonstrated in the financial statements of the bank. Rising to N50million in June 2020, from N18million in 2019 y/y.
Now, Deposit Money Banks (DMB’s) might be adjudged to be honorable in all of their objectives, but the truth is they are neither self-sacrificing nor are they expected to be. DMB’s are established for profit, and would incessantly prioritize business good sense over social empathy, for the sake of their owners. The import of this is, UBA Plc expects its colossal investments in employees and directors to overwhelmingly reflect in its bottom-line.
Half-year 2020 results is clearly not in sync with this philosophy, as it reflects a weakened position compared to the corresponding period last year, despite the investments in human capital. Profit before tax dropped by 18.7%, from N70.3billion recorded in HY’2019 to N57.1billion in the current period. Profit after tax waned as well by 21.7% to N44.4billion from N56.7billion in HY’2019.
Interestingly enough, the top-line fared pretty well. Interest income and fee income showed improvements, albeit marginally by 0.3% and 6.7% respectively. This makes it illogical to attribute the entirety of the decline in profit to the recent austerity measures put in place by the CBN, reducing funds transfer fees and card maintenance charges.
The Coronavirus pandemic played a big role too, by widely stunting the economy in the second quarter of 2020, and negatively impacting profit. But even these do not provide substantial and sufficient convictions as to why the Tier-one bank did not hit the profit-bar it set for itself, from its truly emphatic 2019 financial year. Does this mean that UBA Plc got the decision wrong at the start of the year?
Six months seem too short a period to immediately class management’s decision to jack up the benefits and emoluments of its internal customers as a failed one. Although, no one anticipated the travails of COVID-19 and its resulting consequences, investments in human capital is widely proven to yield tremendous growth in the long haul. Besides the fact that it has given UBA Plc a solid reputation in the market place, it also makes the company very attractive to the very best of industry talents. Furthermore, employee engagements of this nature, foster brand loyalty which ultimately trickles down to how passionately these personnel undertake their tasks and deliverables. The true bearing of this investment is expected to reflect in due course, in subsequent quarters.
Commenting on the result, UBA’s Group Managing Director/Chief Executive Officer, Mr Kennedy Uzoka said, “Our H1 2020 results is yet another demonstration of the resilience of our business model in an extremely uncertain and tough operating environment. We recorded commendable growth in our underlying business in terms of customer acquisition, transaction volumes, and balance sheet whilst inflation, depressed yield environment and exchange rate volatility impacted our net earnings as anticipated.”
In today’s increasingly aggressive marketplace, where consistently generating revenue, is paramount to preserving the longevity and going-concern status of any establishments, costs must also be accorded as much attention and significance. Tightening and managing costs with the aim to improve and generate profit is genius strategy especially in today’s banking industry. The banking industry is under threat from ruthless competitions. Multifarious streams that had hitherto been available for generating income for DMB’s are being severely hindered by the ‘austere’ policies (from the perspective of commercial banks) from the apex bank, making effective cost management a survival mechanism.
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Employee benefits rose by 20% from N37.2billion in HY’2019 to N44.6billion in HY’2020, while Directors’ emoluments (Fees and Sitting Allowance) as earlier stated, surged by 177% from N18million in 2019 to N50million in 2020 y/y. The total operating expenses increased 22.6% in 2020. UBA Plc, unavoidably expended N22.4billion on Banking Sector Resolution cost trust fund, in compliance with the CBN’s requirement to contribute to the cause of the Asset Management Company of Nigeria (AMCON). Security and other payments for core services experienced increase as well compared to the preceding year.
Avoidable expenses like Penalties and Premises Maintenance Charge, should be extensively reviewed and extinguished wherever possible, to improve bottom line. UBA plc has forked out N565million in penalties so far in 2020, representing 6177.7% increase from just N9million in 2019 y/y. This is a prime example of the operational brick walls, UBA Plc must properly address to improve its fortunes in subsequent quarters.