Nigeria’s largest bank by assets, Access Bank revealed it spent a whopping N18.7 billion in IT and E-Business related initiatives in 2020. The figure is nearly double (92% higher) the N9.7 billion spent in 2019. The same expense line cost it N11.39 billion in 2018.

The bank claims the expenses is in line with its “investments in IT capability with the focus of improving customer experience and to support digitization,” a strategy the bank believes will help it to compete better.

Access Bank reported a spike in revenue from its digital channels posting a revenue of N56.1 billion, a 58% increase from a year earlier. Income from digital channels were N36 billion and N14.2 billion in 2019 and 2018 respectively.

This year, the bank also invested about N10.2 billion on intangible assets out of which N8.49 billion went into purchasing software. Banks also rely heavily on software applications to service their customers and drive operations.

READ: Jobs at risk as digitalisation takes its toll on Standard Chartered expansion plans

Commercial banks in Nigeria have invested heavily in expanding their digital products amidst an onslaught of competition from FinTechs who are innovating faster and cutting into market share. However, big banks like Access Bank have the financial muscle to compete in this space as buttressed by Access Bank’s spending.

For banks like Access Bank, the focus is to drive financial inclusion and retail customer acquisition through channels such as USSD, Mobile Banking, TelCos and other forms of digital platforms. Access Bank claims these moves have yielded benefits as it recorded improvement across its financial inclusion initiatives.

Access Bank claims its total digital transaction value rose to N33.89 trillion in 2020 made up of 1.6 trillion transaction counts. It also opened 3.6 million new accounts via its Telco partnerships and that it now has 40 million customers out of which 17 million are mobile users (USSD & Mobile).

READ: USSD service disruption: MTN to use Flutterwave, Opay, Kuda, other payment channels

As the bank explains “our Retail Banking business has grown consistently across all income lines, driven by strong focus on consumer lending, payments and remittances, digitization of customer journeys, and customer acquisition at scale.”

The bank also claims it created 4 million digital loans in the year and it disbursed N105 billion in loans via its digital lending platform generating a 48% year on year growth. It generated N5 billion in revenue from digital lending a 49% growth year on year.

Access Bank is included in our Stock Select Recommendation Portfolio. Find out what our preferred entry and exit price is and what to look out for should you decide to own this stock.

Commercial banks in Nigeria suffered CRR debits of N8.3 trillion in the financial year ended December 2020. This represents a 59% increase from the N5.2 trillion debited in 2019.

Nairametrics confirmed this data from the financial statements of all commercial banks listed on the Nigerian Stock Exchange and excludes banks not listed, suggesting the amount could be closer to N9 trillion. Nigeria’s largest banks “FUGAZ” suffered the most debits with about N5.9 trillion in debits in 2020, over 70% of the total debits. Except for Unity Bank, all the banks have released their full-year earnings for 2020. 

READ: Analysis: GTB is minting profits but CBN is squeezing its cash

CRR Debits deducted from commercial bank deposits in 2020.
Source: Nairalytics Research.

Private-sector lending rises

The CRR is an abbreviation for Cash Reserve Ratio and is a monetary policy tool used by the Central Bank of Nigeria to control money supply in the economy. The central bank increased the CRR from 22.5% to 27.5% in January 2020 a decision it explained was because they wanted banks to lend more to the private sector. 

• The CRR empowers the central bank to sequester up 27.5% of customer deposits held by commercial banks, effectively restricting the banks from accessing the money. The restrictions impact significantly on the ability of some banks to generate interest income reducing the margins that banks can make in a given period.
• The CRR debits are derived via a complex calculation involving a balance between a minimum loan to deposit ratio banks are expected to achieve and what they have in their balance sheet as cash deposits.
• Banks that fall below the CBN’s loan to deposit ratio requirement of 65% have the full weight of the CRR imposed on them.

READ: CBN says bank credit grew by N290 billion in 6 weeks as lending rates drop

Banks have secretly complained bitterly about the level of CRR debits highlighting the effects it has on their bottom line especially Net Interest Margins. The year 2020 was also characterized by lower interest rate environment as banks earned much lower from Treasury Bills and other risk-free government securities.  

What they are saying

Despite the claims, Net Interest margins for the commercial banks under review blew past N2 trillion for the first time in 2021 as lower cost of funds helped cushion the effects of lower interest rate environment and limited access to OMO securities. For example, GT Bank remarked in its investor presentation that it was able to mitigate the impact of CRR from sources such as revaluation of its foreign assets.

“CRR increase of 127.4% (₦565.1bn), funded through improved Naira liquidity largely from OMO maturities impaired the Group’s ability to take maximum advantage of opportunities to optimize its earnings potential. The Bank was however able to cushion the impact of CRR on earnings through optimization of its US$ liquidity and Revaluation Gains. The Bank benefitted from the US$1.15bn long position owing to devaluation of Naira against US$.” GTB

READ: CBN reportedly suspends Paystack and other non-bank financial institutions from offering BVN validation services

Zenith Bank also confirmed the impact of lower yield environment on their net interest margin in 2020 when they released their 2020 full year results.

“This retail drive, coupled with the low-interest yield environment helped reduce our cost of funding from 3.0% to 2.1% and also reduced our interest expense. However, the low-interest environment also affected net interest margin, which declined from 8.2% to 7.9% in the current year due to the re-pricing of interest-bearing assets.” Zenith Bank

One of the reasons cited by the CBN for introducing this policy in 2019 was to reduce the amount of customer deposits commercial banks were channeling into treasury bills as against lending to the private sector. Since its introduction, lending to the private sector has increased to N30.6 trillion from N26 trillion, data from the CBN’s monetary credit stats reveal.

Another reason cited by experts as an impetus for the CRR is the CBN’s capital control strategy where it limits the amount of naira available for banks to engage in illegal forex roundtripping by arbitraging from the disparity between the parallel market rates and the official rates.

READ: CBN says bank credit grew by N290 billion in 6 weeks as lending rates drop

What CBN does with the money?

Despite the CBN’s official claims that the CRR is required to help stimulate lending to the private sector, critics believe there is more to it.

In conversation with Nairametrics, Critics of the central bank’s CRR Policy who prefer to remain anonymous suggest some of the CRR debited from the banks are used to fund the Federal Government’s revenue shortfalls via the controversial Ways and Means provision of the apex bank. According to the CBN over N10 trillion has been extended to the Federal Government via Ways and Means since 2019, the highest on record.

READ: CBN reportedly suspends Paystack and other non-bank financial institutions from offering BVN validation services

To repay the money, the CBN in collaboration with the Ministry of Finance announced the introduction of “Special Bills” a fixed income security that offers commercial banks a window to earn an income on their balances held by the CBN. Some of the features of the Special Bills include the following;

1. It has a Tenor of 90 days
2. It comes with Zero coupon, as the applicable yield at issuance will be determined by the CBN.
3. The instrument will be tradable amongst banks, retail and institutional investors.
4. The instrument shall not be accepted for repurchase agreement transactions with the CBN and shall not be discountable at the CBN window.
5. The instrument will qualify as liquid assets in the computation of liquidity ratio for deposit money banks.

Data from the FMDQ OTC reveals Special Bills maturing in 52 days are currently trading at a yield of 5.43% as of Friday.