Afrinvest: Nigerian Banks Resilient Despite Economic Downturn 

Gilbert Ekugbe

The 2022 Afrinvest Banking Sector Report has revealed that despite daunting economic challenges, commercial banks in the country recorded modest improvement in all regulatory indicators.

The report, presented by Deputy Group Managing Director, Afrinvest West Africa, Mr. Victor Ndukauba, showed that the banks beat all the prudential guideline limits set by the Central Bank of Nigeria (CBN), demonstrating their resilience and strength during the year.

The report, which was launched at a ceremony to unveil Optimus, Afrinvest’s digital investment app, in Lagos, is the 17th edition of the Nigerian Banking Sector Report.

The occasion also marked the announcement of Afrinvest’s new subsidiaries and expansion of its leadership team as well as the unveiling of Afrinvest’s refreshed logo

The report’s assessment of CBN’s financial stability indicators showed that Industry Liquidity (Liquidity Ratio) and Non-Performing Loan ratios both improved by 130 basis points (up) and 75bps(down), respectively, to 42.6 per cent and 4.95 per cent. 

Although, the Capital Adequacy Ratio (CAR: 14.1 per cent) underperformed the June 2021 level by 140bps, all the indicators beat the prudential guideline limits of 30 per cent (LR), five per cent(NPLs), and 13.0 per cent(CAR), respectively, despite myriads of challenges in the business environment. 

The report said the improvement is expected to be sustained over the coming years.

It explained that the fiscal challenges presented by weak Federal Government earnings have contributed to the muddling of monetary policy and strong use of Cash Reserve Ratio debits as a subtle strategy, in our view, to compensate for the inflationary effect of ballooned overdraft to the government. 

It insists that in increasing its developmental financing role, especially in agriculture financing, the CBN risks crowding out banks and private sector financing, which is more effective in de-risking the sector and incentivising growth without moral hazards. 

“Importantly, the weak economic growth has robbed banks of the dividend of large and youthful demographics. Over the last 10 years to 2021, real Gross Domestic Product has grown by a compound annual growth rate (CAGR) of

In line with the decline in income level, poverty has risen to 40.1 per cent based on national standards of annual real per capita expenditure threshold of N137,430.

“For banks, this reality means that upscaling would be less efficient than in an economy where growth exceeds population expansion. Not surprising, Nigeria’s financial depth is weak as is for countries with high fertility rates and a fragile economic base.,” it said 

“Some other measures advised include the tapering of fiscal deficit financing – credit to the government – to check money supply expansion, alignment of rates across windows and the adoption of market reflective forex rate via the crawling peg regime. We believe that the outcome for banks in the coming decade would rely on the policy actions taken today to address the issues raised,” it said. 

On exchange rate management, the report said CBN’s strategy (differentiated rates across market segments and capital control) failed the litmus test over the reviewed period, as anticipated in the 2021 report. 

It said the value of the Naira depreciated further by 5.6 per cent and 23.2 per cent to N436.50/$1.00 and N712.00$1.00 (on 19/09/2022) at the NAFEX window and parallel market, respectively. It sated that near-term improvement in the exchange rate is not in sight, given forex supply constraints due to the self-inflicted injuries in Nigeria’s oil & gas sector (the largest source of FX accretion). 

On the economy, the report said that in 2021, the Nigerian economy recovered markedly from the pandemic-induced strain of the prior year. 

“Real Gross Domestic Product (GDP) grew 3.4 per cent (2020: -1.9 per cent), beating our projection by 0.4ppts. The recovery was mainly driven by the expansion of activities in the non-oil sector (up 4.4 per cent), while the oil sector remained in a recession. This growth momentum was sustained into 2022 albeit with a wider divergence between the oil and non-oil sectors.,” it said.

The report stated that, given the resilient half-year 2022 performance and expectation of sustained positive performance by key non-oil activity sectors in third and fourth quarters of the year, it reviewed the 2022 baseline growth forecast upward by 40bps to 3.3 per cent. 

However, it maintained that growth momentum in the medium term would remain short of the level that can meaningfully lift the average well-being of the citizenry due to persistent domestic and external headwinds. 

It said oil price level, domestic inflation rate has remained persistently high, averaging 14.3 per cent in the last six years.