The past five years have been a time of change for Nigeria’s banks but not all of it for the good. In a recent report on the sector, analysts at Ecobank Research, part of the pan-African banking group, say strategies being pursued by Nigerian banks are no longer sustainable and they must find a new growth story to boost thin lending margins and match the return on equity of their regional peers.
It has not all been bad. “Key” consolidation took place in 2005-2006 and, after the 2009 financial crisis, banks have got better at generating deposits.
But, thanks to the crisis, they have been highly averse to risk and largely stayed away from lending to retail customers, which now makes up an average of less than 10 per cent at the five banks studied. They are Access Bank, FirstBank, GTBank, UBA and Zenith Bank, which Ecobank says make up 52 per cent of Nigeria’s banking industry in asset terms and are “very representative of the sector and its trends”.
Indeed, the report argues, banks in smaller economies with lower lending capabilities such as neighbouring Ghana or Kenya in the east are generating higher returns on shareholder equity, especially in Kenya with its more balanced ratio of wholesale to retail banking and fairly sophisticated systems. Banks in Ghana and Kenya delivered 33 per cent and 25 per cent ROE respectively at the end of Q3 2013, outperforming Nigeria’s 22 per cent.
There are other problems, too. The lack of national identity cards in Nigeria, Africa’s most populous nation of about 170m people, has created chaos for the sector, while a poor credit referencing system weighs down on progress.
But it is the over-dependence on wholesale banking that is most constraining profitability at Nigeria’s banks, says George Bodo, head of banking research at Ecobank Group.
“One of the factors holding the Nigerian banks back from the retail banking sector is their risk averse tendency,” he told beyondbrics. “Before the financial crisis in 2008-9, lending was not properly documented, the credit process was generally weak. So after the crisis they decided to shed retail business and focus on corporate. However, in order to generate much higher returns to shareholders, they need to risk getting back to retail, but in a more structured way.”
Of the five, he notes that GTBank and FirstBank do have strong retail businesses but are going about it the wrong way.
“The problem is that they are running this as a liability-driven business, because there is a huge emphasis on collecting deposits. This needs to change to issuing loans as well. Such a move would see margins shoot up,” he says.
Net interest margins at the five Nigerian banks averaged just 7.8 per cent at the end of September 2013, the report says, compared with 11 per cent at the top six Kenyan banks – which, the report notes:
had exposures of 44 per cent and 41 per cent respectively to corporate and retail lending, all on average terms. Additionally, even funding of these assets was equally distributed between wholesale and retail banking units.
The Kenyan market, Bodo concedes, is much smaller than Nigeria’s but benefits from a more structured legal frame work, with systems for solving financial disputes, and a robust identification framework, by which every citizen aged 18 or over must have a unique identity card.
“The Nigerians are only rolling this out now,” Bodo says, “but don’t yet have it fully in place, and it is a huge problem.
“The sector can be chaotic and it lacks sophistication. In Nigeria today there are cases where an individual has 20 different bank accounts with 20 different names. So you chase someone for a certain loan or product, but if you dig further you find that a similar entity has a loan in another bank. In addition, there is no robust legal mechanism for resolving financial disputes within the courts, which is a huge setback.”
What’s more, Nigeria’s credit referencing is “too generic and of little use in risk pricing,” with banks being obliged to submit only the names of defaulters. “What they have in place at present can’t rate someone who has never borrowed or is approaching the banks for the first time.”
Nigeria’s government is making moves to tackle some of the problems, albeit late in the day. It is rolling out a national identity registration system. Separately, the central bank (CBN) is working on a Bank Verification Number (BVN) for bank customers, partly to address the theft of personal identification numbers. The Ecobank report notes that: “It is still not clear which of these two projects can effectively prevail in addressing the underlying issue.”
Beyondbrics approached the central bank and the five banks named in the report for comment. The central bank and FirstBank responded.
A FirstBank spokesman said “the issues that need to be addressed are very valid ones,” and that the central bank’s BVN project would at least provide a unique, biometric-based identifier for all holders of bank accounts. “If done properly, it will provide good insight into the number of actual banking customers as against customer accounts, as we all have multiple accounts,” the spokesman said, adding that mobile banking, which is still in its infancy in Nigeria, could help deepen penetration further.
A CBN spokesman replied:
Any country that has been through the kind of crisis we went through in 2009 to 2011 with the attendant huge costs, would be in no hurry to sacrifice safety for unsustainable returns… Risk aversion is not peculiar to the Nigerian banking industry in the aftermath of the global crisis. If you look at what obtains in Europe you will discover that an ROE of 22 per cent is not that bad.
He added that credit reporting in Nigeria had “improved substantially” over the years, three privately-owned credit bureaux had been licensed and, since 2010, the number of records of registered borrowers had gone up more than 400 per cent. He said banks had internal models for pricing risk, and reports from the credit bureaux served as “a very useful input to these models.”
As for the lack of legal mechanisms, “the CBN and the Nigeria Deposit Insurance Corporation have been working with Judges to improve this,” he said.
Irene Madongo
Join BusinessDay whatsapp Channel, to stay up to date
Open In Whatsapp
