CBN Warns on Emerging Threats in Banking System

Industry’s capital adequacy ratio drops

Obinna Chima

The Central Bank of Nigeria (CBN) has warned commercial banks to guard against emerging risks in the financial system, saying the sector’s resilience appears to be receding.

The Deputy Governor, Corporate Service Department of the bank, Mr. Edward Adamu, stated this in a statement at the September 2018 Monetary Policy Committee (MPC) meeting obtained wednesday.

He also noted the rising non-performing loans (NPLs) ratio in the sector, which he said was driven essentially by oil sector exposures.

Equally of concern to Adamu was the decline in capital market indices.
The ongoing interest rate normalisation in some advanced economies, which has resulted to reversal of capital flows, has been a concern to policy makers in Nigeria.

Continuing, Adamu said, “There is no gain saying that monetary policy cannot mitigate all of the current risks to economic stability. However, it remains the proximate tool for achieving price stability.

“The deceleration in inflation and stability in the naira exchange rate in over a year have been mainly as a result of the tight monetary policy stance.

“This is why the urge to further tighten the policy stance given the extant risks to price stability continues to be strong.”

Also, another MPC member, Mr. Adeola Adenikinju, expressed concern over the lack of fiscal buffer in the midst of high oil price, the high debt service revenue ratio, unpredictability in the release of capital votes as well as the continuous fall in the Nigerian Stock Exchange (NSE) All-Share Index.

“Furthermore, the reducing level of foreign reserves, due partly to efforts aimed at stabilising the naira exchange rate, may affect the opportunity to maintain robust foreign reserves at a time of high oil price.

“It is not by coincidence that external reserves declined from a height of US$47.43 billion end- April 2108 to US$43.91 billion on September 20, 2018.

“I am also not unmindful of cloud of uncertainties that continues to hang over the economy which would require careful manoeuvring of the fiscal authorities,” he added.

These, according to him, include, the persistent farmers-herders’ clashes, effects of flooding on agriculture, trade and services, clamour by labour for increase in minimum wage rate, anticipated election spending, release of capital budget in a manner that may affect liquidity in the economy and significant cash grants currently being injected into the economy for economic empowerment.

On her part, the Deputy Governor, Financial System Stability, CBN, Mrs. Aishah Ahmad, revealed that the NPLs ratio in the industry which had earlier declined in June 2018 rose marginally in August 2018, amidst moderated return on assets and equity.

“Whilst Bank Staff offered further insights into the rise in NPLs due to the implementation of the new IFRS 9 provisions, which requires significant increases in expected loss provisions, there is clearly a need to further incentivise the banking system to support the required boost in economic activities.

“The rise in NPLs partly reflected in the observed decline in new credit – a concern the CBN has continuously highlighted in view of its implications for real sector growth.

“On the whole, the banking system remains resilient and the CBN is committed to providing the needed impetus to drive the sector’s contribution to overall economic performance,” she added.

Another MPC member, Dahiru Hassam Balami, disclosed that banking sector’s Capital Adequacy Ratio (CAR) fell from 12.08 per cent in June, to 10.79 per cent in August 2018.

This, according to him was below the prudential requirement of 10 per cent and 15 per cent for banks with national authorisation and international authorisation, respectively.

He said, “The Nigerian banking sector registered a low CAR when compared with her pairs like Turkey, South Africa and Malaysia. On the other hand, the asset based soundness indicators showed that the NPLs ratio had risen from 12.45 per cent in June 2018 to a high of 14.7 per cent higher than the maximum five per cent prudential requirement, compared to Turkey, South Africa and Malaysia with 2.8 per cent, 3.1 per cent and 1.6 per cent respectively.

“The high NPL ratio may not be unconnected with poor credit administration of the Deposit Money Banks (DMBs) as well as high interest rate in the economy.

“Again macroeconomic challenges affecting the obligor’s cash flow particularly in the oil sector where credit concentration is high may also have been responsible for the high NPLs ratio. The good news is that about 82 per cent loan loss provision has been made in the books as at August 2018.

“The liquidity ratio on the other hand has marginally increased from 46.09 per cent in June to a high of 46.68 per cent in August as against a minimum of 30 per cent as required by the prudential requirement.”