How Nigeria’s Financial Sector Scoured 2023 Amidst Reforms
Nume Ekeghe writes that despite a tumultuous year fuelled by global economic headwinds, inflation, currency volatility, and cybersecurity threats, the Nigerian financial sector demonstrated resilience, a pointer to what to come in 2024
Amidst global economic slowdowns and domestic political tensions, the banking sector displayed remarkable stability in the outgone year. Loan-to-deposit ratios remained healthy, capital adequacy ratios hovered above regulatory requirements, and the Central Bank of Nigeria’s (CBN) interventions helped temper currency volatility. This resilience highlighted the inherent strength of the Nigerian financial system, and its ability to weather storms and maintain a crucial role in driving economic activity.
The year saw enhanced fintech and digital payments. The adoption of fintech solutions and digital payments continued to accelerate in 2023. Also, mobile money transactions saw significant growth, driven by increased smartphone penetration and greater awareness of the convenience and security offered by cashless alternatives. With this, the CBN proactively issued several regulations aimed at fostering innovation and promoting responsible financial inclusion. These included guidelines for Open Banking, licensing frameworks for digital lenders, and regulations for cryptocurrency operations.
Challenges and Mishaps
Inflationary Pressures: Inflation remained stubbornly high throughout the year, reaching a peak of 28.20 per cent in November 2023. This eroded disposable incomes and dampened consumer spending, impacting businesses across the board. This impacted banks’ loan portfolios and profitability, necessitating adjustments in lending practices and interest rates.
Cybersecurity Threats: The financial sector remained a target for cyberattacks, with phishing scams, social engineering, and malware posing significant risks. The CBN and financial institutions invested heavily in cybersecurity measures to mitigate these threats. It was recorded that electronic fraudsters stole N9.5billion from banks and payment systems in seven months.
Giving insights into E-fraud data in 2023, at the Nigeria Electronic Fraud Forum (NeFF) Q3 general meeting earlier in the year, the Managing Director of Nigeria Inter-Bank Settlement System (NIBSS), Premier Oiwoh noted that the industry in 2023 recorded its highest actual loss value of N2.7 billion in January while June 2023 had the lowest value of over N800 million.
He added that the highest fraud count recorded in 2023 was recorded in May 2023 with 11,716 records while the lowest count was in June 2023 with 6,240.
Represented by the Chief Risk Officer, NIBBS, Temidayo Adekanye, he said: “Recently, we had the cashless policies from CBN, which was incurring a dramatic increase in the volume of transactions in the industry which variably as the impact of the volume of fraud in the industry itself. Now, the increase and efficiency have also meant that fraud has dramatically increased across the industry. For Q1 2023, the total fraud reported through the industry forum portal was at N5.1 billion.
“For fraud trends over the last five years, in 2019, we’re looking at about N3 billion and currently 2023, we are looking at about N9.5 billion to date. Fraud losses have increased dramatically over the last five years.
“So, as you can see also from the current perspective, from January to July 2023, there has been a slight jump between June and July, a 39 per cent increase with 8649 with the actual fraud losses in July 2023, we’re looking at N1.2 billion which is a 54 per cent increase over the period. Now as you can see from January in general, we recorded about N2.7 billion in actual fraud losses.”
On her part, Managing Director of Fidelity Bank Plc, Mrs. Onyeali-Ikpe highlighted that the gradual escalation of E-Fraud is beginning to erode customers’ trust in the financial system.
She emphasised the need for a swift and decisive approach to address E-fraud within the financial sector.
She said: “As technology continues to advance at an unprecedented pace, our reliance on digital transactions have grown exponentially. However, with the rise of these digital interactions, the threat of E-fraud has become a significant challenge affecting individuals, businesses, and the industry. The data we have from the NiBBS is that the volume of electronic payment transactions in Nigeria increased by 298 per cent Year-on-Year.
“The banking industry lost a total of N14.3 billion to electronic fraud in 2022 up from N12.7 billion in 2021. As a Q1 2023 is about today is N5 billion and then the problem here is that the trend so far shows that if this continues unchecked, it would rise to N20 billion for the full year.”
During the year, the CBN revoked licences of 186 financial institutions in what it described as a bid to maintain the stability and integrity of the Nigerian financial system and addressing non-compliance, inactivity within these institutions.
An official gazette published on the website of the Central Bank announced the revocation of operating licences for 186 financial institutions. These institutions ceased conducting their licensed business activities in Nigeria for a continuous period of six months. It was also the same thing for primary mortgage banks which failed to fulfil or comply with the conditions of their licences or the obligations imposed by the CBN under the Banks and Other Financial Institutions Act (BOFIA) 2020.
Uneven Access to Financial Services
The financial inclusion gap persisted in 2023, with rural areas and marginalised populations having limited access to mainstream financial services. Addressing this gap remains a key challenge for the sector.
In its Access to Financial Services in Nigeria (A2F) 2023 survey, Enhancing Financial Innovation and Access (EFInA), said Nigeria’s financial inclusion soars to 74 per cent in 2023. The report revealed an increase in Nigeria’s financially included population from 68 per cent in 2020 to 74 per cent for 2023.
$1 trillion Economy Target
While banks were grappling with challenges, the Central Bank of Nigeria sent shockwaves to the financial sector with its pronouncements on bank recapitalisation. This policy promises to reshape the landscape in 2024, impacting everything from bank stability to economic growth.
The Governor of the CBN, Olayemi Cardoso noted that for Nigerian banks to steer Nigeria’s goal of achieving a Gross Domestic Product (GDP) of $1.0 trillion over the next seven years, it is imperative the banks recapitalise.
He said: “Indeed, despite the challenging global and domestic macroeconomic environment, Nigeria’s financial sector has demonstrated resilience in 2023, with key indicators of financial soundness largely meeting regulatory benchmarks. Stress tests conducted on the banking industry also indicate its strength under mild-to-moderate scenarios of sustained economic and financial stress, although there is room for further strengthening and enhancing resilience to shocks. Therefore, there is still much work to be done in fortifying the industry for future challenges, a topic that I will delve into later in my address.
“It is crucial for us to evaluate the adequacy of our banking industry to serve the envisioned larger economy. It is not just about the stability of the financial system in the present moment, as we have already established that the current assessment shows stability. However, we need to ask ourselves: Will Nigerian banks have sufficient capital relative to the financial system’s needs in servicing a $1.0 trillion economy in the near future? In my opinion, the answer is “No!” unless we take action. Therefore, we must make difficult decisions regarding capital adequacy. As a first step, we will be directing banks to increase their capital.”
Looking Ahead
The Nigerian financial sector is expected to continue evolving in 2024. Key areas to watch include further fintech innovation: The development and adoption of new technologies like blockchain and artificial intelligence are likely to accelerate, transforming the financial landscape.
CBN has identified its targets, which include addressing infrastructure and inclusion gaps by bridging the infrastructure gap and promoting financial inclusion through tailored solutions, which are crucial for sustainable economic growth and development.
This also includes the need for enhanced Financial Stability by Increasing capital buffers expected to bolster the resilience of the banking sector, mitigating systemic risks and safeguarding depositors’ funds. This will foster a more stable and conducive environment for businesses and investors.
CBN has observed that with stronger capital bases, banks will be better positioned to offer increased credit to businesses and households. This could stimulate economic activity, drive job creation, and contribute to overall GDP growth.
Lastly, the recapitalisation plan might trigger consolidation within the banking industry, as smaller banks might struggle to meet the higher capital requirements. Mergers and acquisitions could result in larger, more robust financial institutions with wider geographical reach and diversified risk profiles.
The CBN’s recapitalisation plans is said to hold immense potential for transforming the Nigerian financial landscape in 2024. While challenges exist, the anticipated benefits in terms of financial stability, economic growth, and financial inclusion promise a brighter future for the sector. Navigating the implementation process effectively and remaining adaptable to evolving market dynamics will be key for the CBN to steer the ship towards a robust and vibrant Nigerian financial system.
The Nigerian financial sector stands at a pivotal juncture. Embracing technology, adapting to evolving regulations, and tackling persistent challenges like inflation and financial exclusion will be paramount to its continued success. If navigated with agility and foresight, 2024 can be a year of not just resilience and reform, but also of sustainable growth and inclusive prosperity for the Nigerian economy.
