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Managing short-term foreign currency obligations, a challenge for banks in 2015

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The key challenge that the banking industry may face in 2015 is how it can manage short-term foreign currency obligations, according to Razia Khan, managing director, head – Africa Macro Global Research, Standard Chartered Bank.

With oil prices expected to undershoot considerably in first half of the year, the willingness of offshore entities to extend credit lines to Nigerian banks may be tested.

Traditionally, Khan says this has always been strongly correlated with the price of oil. The Monetary Policy Committee (MPC) noted in its last meeting that unlike in previous episodes, the current downturn in oil prices was not transitory but appeared to be permanent; being a product of technological advancement.

To Khan, given the recent preference among Nigerian borrowers for borrowing in foreign currency, this may slow the pace of intermediation in the near-term.

It would be recalled that to ensure that foreign exchange risks and other risks are well managed and avoid losses that could pose material systemic challenges, the Central Bank of Nigeria (CBN) in October 2014, issued the prudential and hedging requirements for banks. Consequently, the aggregate foreign currency borrowing of a bank, excluding inter-group and inter-bank (Nigerian banks) borrowing, should not exceed 75 percent of its shareholders’ funds unimpaired by losses.

Following the trends in 2014, Nigerian banks will continue to wade through tides, finding ways to thrive amid changes in the regulatory and business environment – with the outcome of each bank’s strategic response becoming more quantifiable, Chukwuka Monye, managing partner, Ciuci Consulting, said in an e-mail response.

With significant strains on commissions and fees income, competition in the banking industry will become stiffer and banks will continue to wrestle for low-cost deposits, even as it is anticipated that Commission On Transaction (COT) rates will drop to a maximum of N1 per mille in 2015, and zero per mille in 2016. While customer retention and acquisition remain critical to success, the need to develop more customer-centric products, provide satisfactory service experience and maximise customer value will be more emphasised.

He said as retail bank customers become more and more tech-savvy, they will demand speed in processing transactions and convenience when performing day-to-day banking activities. They will want to purchase products through varied channels and access real-time summaries of their transactions at all times. All these will have to be provided at the best possible cost and with utmost customer care.

“Banks must therefore gain greater insights into their customers’ needs and behaviour, and design their operations and processes with the goal of achieving maximum customer satisfaction, not just raising their bottom-line,” he said.

According to him, banks that choose to develop their strategy and operational tactics by up-to-date customer intelligence will increase their competitive advantage. They will also realise higher levels of customer loyalty, grow their customer base exponentially and sustain their leadership position.

 

HOPE MOSES-ASHIKE