The beginning of the financial year for Nigerian Banks has become a comparison of which bank closed with the largest balance sheet for the previous year; a simulation of which one of the tier-1 banks would outdo the others in the $1billion dollars profit pursuit, and which bank would pay the most dividends to its shareholders.
Every so often, financial analysts employ the use of important indices to decipher areas where these financial institutions need to shore up their numbers and employ their resources to align with the fiscal and monetary policies of the government. These Analysts are usually ignored. Consequently, is the poor policy implementation of the CBN and an ever-widening chasm between the fortunes of Nigerian banks and the economy in which they operate.
A major area where most analysts have faulted Nigerian banks in recent times is in lending – lending to the real sector of the economy.
The expectation and the reality
On July 3rd 2019, in a letter to all banks, the CBN through its Director of Banking Supervision announced “REGULATORY MEASURES TO IMPROVE LENDING TO THE REAL SECTOR OF THE NIGERIAN ECONOMY”. A laudable directive that was to see banks maintain a Loan to Deposit Ratio (LDR) of 60%, wherein SMEs, retail, mortgage and consumer lending would be assigned a 150% weight in the computation of this LDR, and stiff sanctions of additional CRR of 50% of the lending shortfall will be levied against unyielding banks.
This regulation fuelled the expectation of substantial gains in the real sector given the relative availability of funds. Banks jostled and made a show of dishing out these loans, but as records of CRR debits for LDR failure began to hit the news, it became apparent that most banks were still stuck in their reality of doing business in Nigeria.
The reality being that Nigerian Banks have managed to stay amongst the most profitable banks in Sub-Saharan Africa while largely ignoring the real sector. A review of the earnings of 10 top Nigerian Banks between 2009 and 2019 showed that a sizable portion of their profit growth came from non-client driven activities, even as income from core banking activities of these banks shrank from accounting for 85% of their profits in 2009 to 65% of their increasing profit in 2019.
Perhaps this goes a long way to explain the 2020 H1 profits posted by these banks amid a pandemic and looming recession.
A case of once-beaten?
In fairness, Nigerian banks already got their fingers burnt in the real sector oven once before, and the existence of AMCON is a constant reminder of this fact. The Banks’ attempts to adhere to the new regulation most likely contributed to a rise in the industry’s NPL in H1 2020 notwithstanding CBN’s best intentions with the loan restructuring freedom banks were given to protect themselves from the crippling effect of the pandemic. There doesn’t seem to be a way out for Nigerian banks.
Navigating the waters of necessity
With all the modernization around the banking process, banking at its root has remained unchanged over the centuries. It still entails receiving from areas of surplus to fix deficits. The real sector of the Nigerian economy has been in severe deficit as the nation directed its attention, and finances, to the oil sector which has been the sustenance of a potentially diverse economy like ours for far too long.
If Nigerian banks are to navigate the nation’s economy from oil before the rest of the world completes the move, then they will have to pay more attention to real sector lending in 2021. This can be done through the following:
- Understanding the necessity
Real Sector lending should no longer be viewed by banks through the lens of meeting regulatory requirements only, their importance to the Banks’ balance sheet should be understood. In the near future, it is unlikely that banks will be unable to earn as much from derivatives as uncertainty caused by the pandemic continues to cause spectacular swings in some markets coupled with a wider acceptance of crypto over fiat which may shrink some markets.
Also, further ignoring the real sector market by commercial banks inadvertently means that Fintechs and their MFBs continue to ramp up the profits in these markets, and may someday be big enough to compete favorably with the commercial banks. Mergers and acquisitions will hasten this process.
- Having an action plan
As an action plan, real sector lending (not just the creation of risk assets) should be incorporated into the KPIs of relevant members of staff. Also, the banks should actively pursue sectors of the economy where they have comparative advantage by virtue of their expertise, customer base, technological advantage and/or branch network.
- Using segmentation
Too much emphasis has been placed on “value chain” making banks feel the need to play in all aspects of a business. They practically provide funds for all aspects of the same business- from manufacturing to distributorship. Whilst an argument could be made on the need for synergy and the relative ease of monitoring value chain businesses, this type of concentration of funds puts banks at higher risk of loss when a part of the value chain defaults. However, focusing on a segment of a business could have its own benefits in limiting exposure.
- Revisiting VC, PPP and Loan syndication
Perhaps the next big business will not be a conventional textile mill nor will it be distributorship of FMCGs. Nigerian banks need to have a foothold in the businesses of the future by adopting VC models of investments and fundraising for these business ideas. Public-private partnership and Loan syndication should not also be limited to development of social amenities but to funding businesses in the real sector.
The real sector lending drive of the CBN has shown promise since inception, increasing the level of industry gross credit by N829b in its first few months between May and Sept 2019. The introduction of the GSI by the CBN from August 2020 is also a step in the right direction to protect banks from an increased default rate of personal loans.
Nonetheless, these policies will not upturn the Nigerian economy if Nigerian banks continue to treat real sector lending as an occupational hazard rather than the occupation itself.
Central Bank of Nigeria; resuscitating an ailing economy
Since the emergence of the novel coronavirus, the monetary authority has continued to introduce measures to support economic recovery.
Recently, the financial policy and regulation department of the Central Bank of Nigeria (CBN), in a circular announced the extension of the regulatory forbearance on its intervention facilities to Institutions impacted by the dampening economic effect of the lingering coronavirus pandemic for an additional year.
Though the country has exited recession according to the latest GDP report, the beneficiaries of these facilities still require regulatory support to completely get back to business before assuming the burden of servicing those facilities.
Earlier in 2020, the CBN had given the initial forbearance following the complete stall in economic activities brought about by the need to community transmission following the emergence of the coronavirus pandemic is nipped in the bud.
Consequently, the interest on the facilities was revised from 9.0% to 5.0%, with a one-year moratorium given on all principal repayments from 01 March 2020. Following the expiration of this forbearance, the CBN has announced the extension for another 12 months of the discounted interest rates for the CBN facilities. However, the rollover of the moratorium on these facilities will be considered on a case by case basis.
Since the emergence of the novel coronavirus, the monetary authority has continued to introduce measures to support economic recovery. The Bank has continued to extend support to industries that were hit by the negative effect of the coronavirus through the Anchor Borrowers’ Programme (ABP) Commodity Association, Private/Prime Anchors, State Governments, Maize Aggregation Scheme (MAS), and the Commercial Agricultural Credit Scheme (CACS), among others.
Yesterday, the CBN considering the impact of the economic frailties on the Nigerian poultries value chain and industries, released 50,000mtn of maize to cushion shortage of supply. Consequently, the price per metric tonne of maize has dropped to N180,000/metric tonne from N200,000/metric tonne, with an expectation that it would further plunge.
We acknowledge that farming activities have been significantly affected in 2020 due to covid-19 movement restrictions during the planting season as well as abnormal rainfall patterns which led to flooding of farmlands and the farmers/herders clashes which remain a significant threat to agricultural productivity.
These unfortunate events have led to a spike in food prices reflected in the food inflation rate of 20.57% in January 2021, according to the National Bureau of Statistics (NBS). Thus, we consider the provision of reliefs for farmers important to restore farming activities and output level back to pre-covid levels.
While we welcome these interventions given Nigeria’s current precarious economic situation, and how it has burdened businesses, we are of the view that the government needs to also keep an eye on resolving long-standing structural bottlenecks to truly maximise the full potential of Nigerian businesses.
CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.
Why NNPC should be commercialised
A commercialized NNPC with more committed employees would mean better accountability and transparency in its operations.
The Nigerian government is seeking efficient ways of positioning the country on its path to recovery and the petroleum industry which contributes about 90% of its exchange earnings would undoubtedly be critical on this journey.
The long-awaited Petroleum Industry Bill (PIB) which seeks to regulate the entire Nigerian Petroleum Industry and repeal a host of existing legislation is paramount in transforming the industry and introducing more efficiency particularly in its government-owned parastatals. The PIB has gained more traction in the current administration and is now awaiting deliberations by legislators.
A key highlight of the PIB is commercializing the State-run behemoth, Nigerian National Petroleum Corporation (NNPC). This move would see the NNPC incorporated as a Limited Liability Company and be known as NNPC Limited. This company would conduct its affairs on a commercial basis without resorting to using government funds.
While this might seem like a bold move by the government, it still should not come off as a surprise…
Owing to the fall in crude oil prices from over $100/barrel to below $50/barrel levels in 2020, Nigeria’s exciting story with crude oil slowed down but has picked up in recent months. The country’s heavy dependence on the volatile crude oil market and its ineptitude in diversifying during its “oil-rich” days have now thrown its growth story in jeopardy. The once 3rd-fastest growing economy with foreign reserves in excess of $40bn now wallows in rising inflation complemented and a weakened currency.
Why do we need to commercialize NNPC?
A core theme with a number of government-owned parastatals is the plague of inefficiency and obscurity in the way they are run. To give an idea of the NNPC’s lack of transparency, the corporation only published the group’s audited financial statements for the first time in its 43 years of operation in 2020. It’ll be right to commend this administration is pushing for transparency but you can go on to imagine what went on during those opaque years of operation.
As expected, the results were not impressive. The corporation reported a recurring loss, albeit 70% lower in 2019. The significant reduction in losses may prove the government’s will in improving the operations of the NNPC, however, comments on the report noted that “material uncertainty exists that may cast significant doubt on the Group and Corporation’s ability to continue as a going concern.”
Moving down to the State-owned refineries with a combined capacity of 445,000 bpd, capacity utilization well below 20%, and recurring annual losses in excess of ₦150bn, we can agree that the condition of these refineries is utterly worrisome. Despite the government’s annual budget for Turn Around Maintenance of these refineries, they have now been shut down with plans to undergo a Build, Operate, and Transfer (BOT) model.
Chief among the NNPC’s problems is corruption. A number of investigative reports have explained how subsidy payments, domestic crude allocation, revenue retention practices, and oil-for-product swap agreements are smeared with corruption. The Senate has initiated countless probes and new management seeking transparency has been introduced by the President, however, it just seems like the rot has eaten too deep into the system.
What does commercializing NNPC mean for the country?
The government-managed NNPC has proved to be inefficient and riddled with corruption. A commercialized NNPC with more committed employees would mean better accountability and transparency in its operations. The possible introduction of more shareholders would strengthen the amount of funding available to the NNPC and further shift the burden of being the sole-financier away from the government.
Exploring an NNPC IPO
An Initial Public Offering (IPO) would see the NNPC’s shares traded on Stock Exchanges and position the corporation to raise much more funding, build trust and endear to the international community. While this might seem like a daunting task, Nigeria can perhaps take a cue from Saudi Arabia whose National Oil corporation; Saudi Aramco began raising capital for its IPO in December 2019.
The Saudi Crown Prince; Muhammad bin Salman (MBS) announced a valuation of $2trn enticing the world’s largest investment banks, appointed a new set of leaders on the board of the corporation, and executed a highly engaging local marketing strategy. Although the valuation figure was brought down to $1.5 – $1.7 trillion by financial advisors, Saudi Aramco successfully achieved its IPO raising nearly $26 billion for 1.5% of Aramco’s value.
NNPC’s fundamentals might not support an IPO currently as investors might be wary of the high level of risks involved but we can’t deny the immense opportunities an IPO would present not just for NNPC’s transparency and performance but Nigeria’s economic reform.
The recurring performance of the corporation with several corruption allegations, inefficiency, and unclarity is indeed worrisome. It is time to have the NNPC turn over a new leaf and operate on a commercial basis. This would afford the government the ability to deploy funds into other segments of the economy and have the NNPC focus on being a commercially viable entity.
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