Financial Services
Quick Take: SWOT analysis of Nigeria’s financial sector according to Fitch Solutions
The Coronavirus pandemic is top on the list of factors weakening the Nigerian financial sector.
Nigerian banks, insurance firms, and other financial services providers have the potential for long-term growth in Nigeria which is undoubtedly Africa’s most populous country. This is one of the top strengths of the Nigerian financial services sector, according to a SWOT analysis carried out by Fitch Solutions Country Risk & Industry Research.
The Strengths
Contained in a new report titled “Nigeria: Banking & Financial Services Report Q3 2020”, the SWOT analysis also identified improvements in the regulatory environment as another top strength.
In the meantime, there is an immense opportunity for growth in the Nigerian insurance sub-sector, especially as it pertains to life insurance. As the report explained, this is another major strength for the financial sector, because there is evidence to show that foreign investors are attracted to the country’s insurance sub-sector. Recall that in early March, Nairametrics reported that German-owned InsuResillience Investment Fund had completed the acquisition of 39.25% equity stake in Royal Exchange General Insurance Limited, a subsidiary of Royal Exchange Plc.
The Weaknesses
The Coronavirus pandemic is top on the list of factors weakening the Nigerian financial sector. This is mainly because the pandemic has caused a drastic decline in the demands for loans, even as there is now a high possibility that non-performing loans will skyrocket. This position is similar to one detailed in a recent report by The World Bank, as reported by Nairametrics.
Meanwhile, other weaknesses bedeviling the Nigerian financial industry, according to Fitch Solutions, include the following:
- Continued lack of major multinational competitors in the wider banking and financial services sector.
- The limited capacity of a broad section of Nigerians to spend on traditional insurance products due to poverty.
- The prevalence of fraud is another problem, especially so in the motor insurance sector.
- The COVID-19 pandemic and lowered oil price are said to have heightened liquidity concerns in the Nigerian financial sector.
The Opportunities
Thanks to reforms imposed by regulators such as the Central Bank of Nigeria, accounting practices are said to have improved considerably, thereby increasing the transparency level, especially in the banking sector.
Still on the opportunities, employers in the financial service sectors are now required to provide group life insurance coverage. This is said to provide an opportunity/improve knowledge of insurance in the country.
Meanwhile, Nigeria’s mostly young population provides immense growth opportunities for current players in the sector as well as future entrants; including foreign investors.
The Threats
- If the economic recovery doesn’t begin until later in 2021 then domestic demand for banking and financial services will remain muted.
- Perceptions of the Nigerian banking sector were badly damaged by the crisis in 2009 and have yet to fully recover.
- Expected higher inflation will weigh on credit demand.
- Nigeria’s economy remains overly dependent on oil price fluctuations, impacting the potential of the market’s banking and financial services sector.
Financial Services
Era of backlog of unsettled claims is over – NAICOM boss
NAICOM has stated that it will monitor and sanction insurance companies who fail to settle claims as at when due.
The National Insurance Commission (NAICOM) is out to seriously sanction any insurance companies with huge unsettled claims.
This disclosure was made by the Commissioner for Insurance, Mr. Sunday Thomas, at the on-going 2020 Insurance Directors’ Conference, jointly organized by NAICOM and the College of Insurance & Financial Management (CIFM), held at the Oriental Hotel in Lagos.
READ: EFCC gives reason for unspent N4 billion in 2020 budget
Mr. Thomas reiterated the need for the operators, post-pandemic, to appropriately strengthen their human and financial capital for effective participation in big-ticket risks to take advantage of the obvious gains of the domestication policy in the Nigeria Content Development Act 2010.
In his words, Mr. Thomas stated, “More businesses especially in the oil and gas and the Aviation sectors are now being reinsured abroad. Of more concern is the declining participation of life companies in the annuity business, which is the emerging business for our industry.
READ: SEC issues pre-notice on cancellation of certificates of 157 inactive CMOs
“These are the areas where the industry can impose itself on the economy through the control of funds for national development. The industry must invest handsomely in technology, one of our key drivers for developing the market.
“The Institutions should be prepared to digitalize their processes, procedures, and systems, in order to make their operations seamless and real-time. The Commission is investing heavily in automating its processes and expects nothing less from the insurance institutions. An industry Information Technology Guideline has been issued for the operators and the Commission requires your support and cooperation for effective compliance.”
(READ MORE: FG seeking FDI to develop Special Economic Zones – Trade Minister)
Why this matters
Prompt settlement of claims should be a top priority for the insurance operators in achieving an excellent and responsive customer service experience. Settlement of claims has been a serious nightmare for quite a number of customers, resulting to the abysmally low insurance culture in Nigeria.
READ: Fidelity Bank Plc must cover the chink in its curtains to keep rising
Customers are more likely to patronize the insurance companies that are prompt in claims settlement and by extension improve the industry penetration in the market.
Financial Services
Total credit to the economy rose to N19.54trillion – CBN Governor
The CBN revealed during the MPC meeting that the total credit to the economy rose to N19.54tn as of the end of November 13.
The CBN Governor, Godwin Emefiele, has disclosed during the Monetary Policy Committee meeting that the total credit to the economy rose to N19.54tn as of the end of November 13.
According to him, the aggregate domestic credit grew by 7.6% in October 2020 compared with 7.35% Month-on-Month in September.
READ: MTN Nigeria revenues rises to over N100 billion monthly in 2020
In his words, “Total gross credit by the banking industry stood at N19.54tn as at 13th November 2020 compared with N19.33tn at end-August 2020, an increase of N290.13bn. When compared with N15.56tn at the commencement of the LDR policy in May 2019, total gross credit increased by N3.97tn.”
According to Emefiele, the composition of the loans are N738bn to Manufacturing, General commerce N874bn, Agric and forestry N301bn, Construction N291bn, ICT (N231bn), etc.
READ: CBN urges banks to ‘support’ media, aviation industries to avert growing job losses
In the month of October 2020, he stated that 86.23% of the total loans granted to over one million customers by banks were at interest rates considerably below 20% per annum.
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Bottom line
The MPC was quite optimistic and favorably disposed about the future impact of the disbursements from agri-business/Small and Medium Enterprise Investment Scheme of the sum of N92.90bn to 24,702 beneficiaries; Anchor Borrowers Program – N164.91bn disbursed to 954,279 beneficiaries; and COVID-19 Targeted Credit Facility to household and SMEs, with the sum of N149.21bn to 316,869 beneficiaries.
READ: Nigeria imported over 55% of cooking gas consumed in October 2020
Financial Services
Despite CRR debits, Nigerian Banks record higher net interest income
Banks are recording higher net interest income, despite the CBN’s frequent CRR debits chalking off significant amounts of their cash.
Some of the top banks in Nigeria posted a total net interest income of N403 billion in the third quarter of 2020 compared to N369.5 billion in the same period in 2019.
In the first 9 months to date, the banks have reported a combined net interest income of N1.2 trillion compared to N1.1 trillion same period last year.
READ: Aviation: Nigerian ground handling firms count revenue losses due to pandemic-induced plunge
Nairametrics collated these figures from the following banks, FBNH, UBA, GT Bank, Access Bank, Zenith Bank, Fidelity Bank, Stanbic IBTC, Sterling Bank, and Union Bank. The banks recently released their third-quarter interim results.
Deposit money banks have complained bitterly over the central bank’s frequent CRR debits chalking off significant amounts of cash that they could have earned on.
READ: Union Bank releases Q1 2020 result, records 14% profit increase
A Nairametrics report indicates banks suffered CRR debits of over N1.9 trillion in the second quarter of 2020, taking the total amount of customer deposits held by the CBN at about N6.5 trillion.
The figure is likely higher now as more CRR debits have occurred in the third quarter of the year. Nairametrics reported banks were debited N226 billion CRR debit in a recent update provided by reliable sources.
However, as the above report indicates, the banks still earned more this year compared to 2020. Where banks may have suffered dips is in net interest margin, a measure of the percentage of income banks earn after netting off the cost of funds.
READ: Nigerian Banks issue N3.3 trillion in new loans in June 2020
However, this has also been largely mitigated by low deposit rates even as banks maintain most of their lending rates.
Despite the rise in net interest income for the collection of banks under our review, some banks individually faired worse in 2020 compared to 2019. FBNH, Stanbic IBTC, and Access Bank all recorded lower net interest income in the first 9 months of 2020 compared to the same period in 2019. Significant gains over the prior year were however recorded with the other banks.
READ: Access Bank Plc posts N102.3 billion profit in 9M 2020, up by 15.7% YoY
What is driving Margins
Banks are recording higher net interest income largely because interest rates on deposits are at near-record lows.
This drive down in the cost of funds helps boost the income of banks because they are also yet to significantly drop their lending rates.
In the first 9 months of the year, the banks reported total loans and advances of N1.6 trillion, 14% higher than the N1.4 trillion reported at the end of 2019.
READ: FBN Holdings Plc posts Profit of N21.9 billion in Q3 2020
Banks have also reported generally improved pre-tax earnings, posting a combined N737 billion in the first 9 months of 20120 compared to N723 billion in the same period last year.
The better than expected results has triggered a boost to their share price. Banks have also seen their share price rally in recent weeks as investors finally recognize their low valuations amidst strong earnings.
The Banking sector index is up 14.72% year to date and only fell last week after investors embarked on cashing out their profits.
Explore Data on the Nairametrics Research Website
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Abdullahi Bilal
June 28, 2020 at 2:24 pm
I wonder how insecurity couldn’t make part of the threat to the economic and financial growth.