Almost one year ago the Central Bank of Nigeria announced a bailout plan for banks in a move to prevent a credit crunch and system collapse that will hurt the Nigerian economy. This article will examine if the bailout ($4bn initially) achieved the stated objectives.
Let me begin by whetting your appetite with this report by Reuters which states that banks in Nigeria continue to be high risk, that risk management is still wanting and banks still depend on short term loans. Ratings for this sector (B) is also poor compared to banks in other parts of the world.
Nigeria is still suffering a credit crunch - albeit self imposed - and recovery from the global recession is slow compared to other countries (Ghana, Malawi, Mali) in the region. Nigeria is amongst the higher income countries (South Africa, Egypt) in the region that had greater exposure to the global credit crunch and therefore lags in recovery. At the same time the bailout of banks has exacerbated the credit crunch in Nigeria and negatively affected lending and growth.
WHY NIGERIAN BANKS ARE ARE STILL CONSIDERED HIGH RISK?
Poor infrastructure and operating environment means that lending rates will remain in double digits midterm or the next three to five years. Lack of power, roads, lack of consumer credit ratings forces banks to continue to lend money at high interest rates.
The link between central bank lending rates and commercial lending rates is tenuous at best so that monetary policy in Nigeria is ineffectual. This is due to structural problems (poor infrastructure) in the economy so that very low monetary rates in Nigeria will not spur lending in the short to midterm.
Risk management and expertise in this area is still very poor in Nigeria. Nigerian banks rely on short term funding which is bad for the health of banks and the economy. Banks normally thrive on providing long term loans for real sector projects.
Today, opportunities abound in healthcare, agriculture and infrastructure unfortunately Nigerian banks are not equipped to provide funding for such projects/investment. This is one reason the Nigerian economy hasn’t really taking off and these sectors continue to experience stunted growth. I must note here that the Central Bank has taken the right step in allowing foreign banks to move into Nigerian finance, the resultant competition will force local banks to improve practices especially in the area of risk management.
The Nigerian government also has to step up in providing basic infrastructure so as to reduce risks for banking operations.
Poor risk management following consolidation of banks caused the banking crises in Nigeria. The global recession dealt a death blow to this sector. How then could a bailout save this sector?
This video interview of the central bank governor Lamido Sanusi is very insightful and shows that a credit crunch still exists in Nigeria.
What is needed for life to comeback to banks in Nigeria is:
In conclusion the Nigerian finance sector contribution to GDP as well as growth rate is around 5%. This is very poor performance for this sector in a large country like Nigeria. It is also a clear indication that this sector contribution to GDP is clearly underweight and growth opportunities abound – if government, banks and central banks do the right thing
Click Here for more background about the problems that led to the crash in the banking sector and why a bailout might complicate or mask the underlying problems instead of fixing it. I also chronicled the various polices of the central bank (monetary stimulus) to rescue banks or make sure they remained solvent and extended credit.
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