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‘Shashe Banking’ cost CBN N1.3 trillion in interest expense in 2017

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CBN Gov Godiwn Emefiele

The Central Bank of Nigeria (CBN) has booked an interest expense of N1.3 trillion for the year ended December 2017. This was contained in the Apexbank’s 2017 annual report.

The Central Bank of Nigeria released its 2017 draft annual report during the week, revealing a profit after tax of N107.3 billion for the year. The Apex bank’s profits were lower than the N124.4 billion it reported in recession-stricken year of 2016.

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Rate subsidy?

A closer look at the bank’s income statement, however, reveals that the CBN booked an interest expense of about N1.34 trillion for the year ended December 2017 against an interest income of N685.6 billion. In 2016, the CBN reported an interest income of N754 billion and N459.3 billion in interest expenses posting a net interest income of N294.7 billion. CBN reported a net interest loss of N659.2 billion in 2017.

Analysts who spoke to Nairametrics believe this is somewhat of an anomaly as financial institutions typically report net interest incomes and not losses. They suggests that the bank could only have booked such as astronomically high-interest expenses because of the higher rates it has paid on treasury bills and other CBN security instruments sold to banks in 2017.

Nigerian banks recorded massive profits in 2017 on the back of risk-free government securities obtained at rates as high as 20%. Bank profits from treasury bills and other government securities topped N600 billion in 2017 alone. The debt bonanza was thought to have been part of the CBN’s tactics at keeping interest rates high to ensure exchange rate stability.

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The Central Bank did not release notes to its accounts which may have provided a better explanation of the components of the interest expense. The CBN has since 2015 refused to provide detailed notes to the accounts for its annual report. Data frequently reported on the bank’s website are also hardly updated.

The high-interest expense appears to be a form of rate subsidy for the economy with commercial banks gaining massively at the expense of exchange rate stability, high-interest rates for the private sector, and crowding out of loans for the private sector borrowers.

An article in Nairametrics last year referred to this form of interest rate subsidy as Shashe banking. In other words, Shashe Banking is a process whereby the government borrows trillions of naira from Nigerian banks and pays them billions of naira in interest for the privilege.

Loan impairments rise astronomically

While the CBN grappled with higher interest rates, it also booked a whopping N370 billion as loan impairment charge for the period. We believe that this charge relates to the bank’s credit advances to intervention funds such as the Commercial Agriculture Credit Scheme, Power intervention funds, AMCON debts instruments etc. Compared to a loan impairment of about N74 billion in 2017, this is one of the highest loan impairments we have seen by any institution in the country.

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FX to the rescue

Despite the huge loan losses and high-interest expense, the CBN still posted a profit for the year. This was only possible via an income line classified as “Other operating income” in the financial statements. Other operating income amounted to a whopping N1.4 trillion during the year compared to N898 billion as at December 2016.

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A review of the classifications suggests this may be related to higher forex exchange gain on FX translation from dollar to Naira.

The CBN reported that it forex reserves rose from about $12.36 billion in December 2016 to about $39.35 billion a year later. The 46% rise in forex reserves largely contributed to the profitability posted during the period under review. Without it, the CBN may not have posted a profit for the year.

Rate tightening versus profitability.

The CBN’s annual report indicates the bank may have no choice but to cut interest rates on government securities and may need to liquidate some of its loans rather than roll them over. If it continues to lend at high-interest rates then it will likely book more interest expenses exposing the bank to a higher probability of reporting a loss during the year.

Analysts who spoke to Nairametrics believe that a repeat of the 46% rise in forex reserves recorded in 2017 may not occur again in the nearest future, so the CBN may not be able to rely on fx reserves to boost naira profits.

The bank was only able to cover the huge cost of borrowing at such a high interest rate because of its earnings from higher external reserve balances during the year.

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Nigerian banks have also taken a decision to increase their loan book during the year as treasury bills and other government security yields drop. They also claim the positive economic outlook indicates it is time that they focus on increasing private sector lending.

Nairametrics is Nigeria's top business news and financial analysis website. We focus on providing resources that help small businesses and retail investors make better investing decisions. Nairametrics is updated daily by a team of professionals. Post updated as "Nairametrics" are published by our Editorial Board.

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Economy & Politics

Skills Africa needs for sustainable development

Over a billion people with 5 official working languages – Arabic, English, French, Portuguese and Swahili , will again celebrate Africa Day this year.

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From Addis Ababa to Durban, Lagos to Cairo, from the Sahara Dessert to the Nile River, over a billion people with 5 official working languages – Arabic, English, French, Portuguese and Swahili – will again celebrate Africa Day this year.
A day to remember, reminisce and celebrate successes recorded against the struggles for independence, freedom from apartheid and colonization. Although, with the new normal brought about by Coronavirus, the 2020 celebrations would be quite unlike previous years.

The Africa Union (Formerly OAU) has recorded good milestones in terms of political independence and self-governance. So now is a good time for Africa to reflect on our independence.

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On reading the objectives of the Africa Union (AU), words like independence, territorial integrity, human rights, security, cooperation are splattered across the pages. Significantly, none of the AU objectives seeks economic autonomy for Africa or her member states. This is a fundamental flaw which speaks directly to Africa’s issue of having a large population without the requisite skills for growth.

Our education is largely dependent on the western curriculum and narrative. There is hardly any major infrastructure, industrial or development project in Africa with 100% African content in manpower, materials or capital.

(READ MORE: Nigerian economy going into recession, might contract by -8.9% – Finance Minister)

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It is now well established and more evident that political independence without economic independence is like a car without an engine. Economic empowerment is the nucleus of national development. No fewer than 14 West African countries currently use CFA Franc, with some having used the currency for at least 75 years. This goes beyond nameplate as the Bank of France holds half of those countries’ currency reserves. This is effectively cutting their growth capacity by 50%.

Skill Up Africa for Sustainable Development

8 of those 14 countries will relinquish the CFA franc for the new ECOWAS currency, ECO (to be launched in July 2020). However, there is no indication that the affected African leaders would ask France for compensation for the years of economic sabotage to their countries. The introduction of the ECO was to bring a ray of hope, but we hope the real difference would not just be in the colour of the currency. This is because the ECO will not be autonomous but would be pegged against the Euro.

France is not alone in the economic sabotage of Africa, they are in the good company of the United Kingdom, the US and Belgium, to mention a few. However, are these foreign countries to blame? Africa got her independence, but African leaders refuse to be independent and the dependent mentality is also enshrined in the AU objectives.

One of the AU objectives states “to work with relevant international partners in the eradication of preventable diseases and the promotion of good health on the continent.” The statement looks good superficially, but it is enlaced with aid orientation, the lack of drive for self-reliance, and a beggarly mindset.

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(READ MORE: Sahara Group donates medical equipment to support fight against COVID-19)

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Let us educate Africa to pursue the development of its people, with core skills that are necessary to deliver the quality of the progress and growth that Africans desire. African construction companies should make African infrastructure and 100% African content should be the target in automobile engineering, healthcare, information technology,

Necessity is said to be the mother of invention. The need for Africans to lead Africa out of poverty, tyranny and underdevelopment is a matter of great importance, far beyond just necessity. Every African must desire to get skilled, and not just education, as we currently have it. We must have the competence to develop our agriculture system, mine Africa’s natural resources and add value by processing them locally.

Africa Day would only be truly worthy of celebration when African people and countries are skilled enough to accomplish our dreams of self-reliance and economic independence.

Article written by Olatunde Akintola. Olatunde is a Fellow of the Institute of Chartered Accountant of Nigeria and alumni of Manchester Business School. He writes from Lagos.

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Tech News

Tiktok’s In-App revenue surges amid lockdown

ByteDance Ltd’s brainchild, TikTok, together with Douyin ranking tops globally on mobile apps with the highest revenue generated for the month of April.

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TikTok announces $250 million pledge to aid combat coronavirus, Does YouTube stand a chance against TikTok?

The meme-making business has proven to be worth all the fuss, with TikTok, as well as its Chinese twin app, Douyin, ranking tops globally on mobile apps with the highest revenue generated for the month of April.

Sensor Tower, notes that just in the first quarter of this year, ByteDance Ltd’s brainchild, TikTok, together with Douyin which caters to the Chinese market, generated 315 million downloads globally, from the 187 million it had just a year earlier.

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The ranking, which was based on their in-app purchases, reveal a tenfold increase, as the companies garnered a whopping $78 million in revenue. The Chinese market is said to have contributed 86.6% of Douyin’s revenue, followed by the U.S market which contributed 8.2%.

This places them ahead of older names like Netflix & YouTube. As opposed to using subscriptions like these established brands, TikTok and Douyin allow users to purchase virtual currency to spend on their favorite content creators.

(READ MORE: Does YouTube stand a chance against TikTok?)

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While ByteDance is exploring the world of online commerce, it continues to rely on advertising as its primary income source. However, Emarketer projects that more than 75 million US social network users will make at least one purchase from a social channel in the year 2020.

 

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Business News

Sanwo-Olu to virtually inaugurate projects as he presents scorecard of first year in office

Some of the projects to be commissioned will be done virtually, while a few will be done on-site.

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COVID-19: Lagos State to begin curfew on Sunday to disinfect metropolis, Lagos state government discharges 7 more coronavirus patients, Lagos state will reverse to full lockdown, Sanwo-Olu to virtually inaugurate projects as he presents scorecard of first year in office

Lagos state governor, Babajide Sanwo-Olu, will virtually inaugurate housing, education, and road projects on May 29, as part of activities to mark his first year in office.

According to a report by NAN, the projects are part of the government’s efforts to renew infrastructure in critical sectors and to make the commercial centre a smart city.

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Some of the projects to be commissioned will be done virtually, while a few will be done on-site.

The projects

Lagos state Commissioner for Information and Strategy, Mr Gbenga Omotoso, listed some of the projects in an official statement. He said:

”In the education sector, Sanwo-Olu will conduct virtual inauguration of completed classroom blocks in Maya Secondary School, Ikorodu; Eva Adelaja Junior School, Bariga; and Saviour Primary School, Ifako-Ijaiye, among others. 

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“Virtual inauguration of completed works such as the Concrete Jetty in Baiyeku, Ikorodu, Aradagun-Ajido- Epeme Road in Badagry, and the Maryland Signalisation project also form part of the itinerary to commemorate the anniversary.”

(READ MORE: Lagos increases health workers’ allowances, commissions local production of face masks)

Omotoso also stated that the Governor would inaugurate the 360-unit Lagos Homes in Ikorodu, and then visit Igbogbo Baiyeku IIB Estate, Lekki, and the Courtland Villas on Femi Okunnu Estate during the week.

Plans for celebrating Children’s Day

 In a related development, Governor Sanwo-Olu will deliver an address on Wednesday May 27 to mark the children’s day celebration, and the 53rd anniversary of Lagos state.

Omotoso, however, noted that all celebrations would be kept on the low in reflection of the current challenges and realities of the COVID-19 pandemic.

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Presenting one-year scorecards

The activities for the week are expected to begin with press briefings at J.J.T Park in Alausa on May 27, where members of the State Executive Council will present their scorecards in line with the six pillars of the state’s T.H.E.M.E.S Agenda.

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(READ MORE: Lagos Medical workers call off strike, as IG sends strong warning to security agencies)

According to the information commissioner, there will be two sessions of press briefings daily from May 27 to June 3, as the Governor considers it expedient to render a stewardship account of the last one year.

“Three special publications highlighting the achievements of the Babajide Sanwo-Olu administration and testimonies of beneficiaries of various initiatives of the government are slated for presentation to the public by the governor and his Deputy, Dr Obafemi Hamzat,” he added.

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