Nigeria’s banking industry remains resilient with good fundamentals

As at the last Monetary Policy Committee (MPC) meeting in May 2020, the Nigerian banking industry remained resilient with relatively good fundamentals, according to Adamu, Edward Lametek, deputy governor, Central Bank of Nigeria (CBN).

In April 2021, the industry’s non-performing loans (NPLs) ratio moderated to 5.9 per cent and the capital adequacy ratio (CAR) rose to 15.8 per cent. Likewise, industry earnings have remained strong despite the macroeconomic shock arising from COVID-19.

This implies that the capacity of the banking system to create credit is high. From a regulatory angle, what is needed is a mechanism that ensures that growth/employment-elastic activities receive adequate funding from the banking system.

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This is essentially what most of the extant policies including the global standing instruction (GSI) are designed to achieve. “These policies should be allowed to run their full course,” Lametek said in his personal statement at the last MPC.

Aisha Ahmad, deputy governor in charge of financial system stability said the financial system continued to record strong growth with total assets increasing by N6.97 trillion from N46.20 trillion to N53.17 trillion between April 2020 and April 2021, driven mainly by the increase in credit.

Total credit increased by N2.84 trillion or 15.26 per cent between the end of April 2020 and end-April 2021, largely due to CBN’s Loan to Deposit Ratio (LDR) policy and increased credit demand by businesses and households as economic activities picked up following the lifting of COVID-19 restrictions.

“It is gratifying to note that the sectors powering output growth in the economy (manufacturing, agriculture, construction, general commerce and information and communication) attracted increased lending from the banking sector during the period under review,” she said.

Adenikinju, Adeola Festus, member of the MPC, said Financial Soundness Indicators (FSIs) have remained impressive despite headwinds occasioned by the pandemic.

Consequently, total assets and total deposits of the banking industry increased by 15.08 percent and 19.30 percent, respectively, (year-on-year).

In his view, the NPLs ratio noticeably improved to 5.89 percent at the end-April 2021 compared with 6.58 percent at the end-April 2020 on account of CBN strategies to manage NPLs, including the implementation of the GSI policy; approval of COVID-19 forbearance, and strengthening risk management practices.

Gross banking sector credit at the end of March 2021 stood at N23.53 trillion compared with N22.68 trillion at the end of December 2020, representing an increase of N0.85 trillion (year-to-date). The salutary performance of credit strengthens confidence in the efficacy of the Loan to Deposit Ratio (LDR) policy in improving financial intermediation.

Adeola raised concern on the need for a timely and orderly withdrawal of forbearance on loan restructuring granted to the banking sector. The growth in aggregate credit indicates that the CBN policy on Loan-to-Deposit Ratio (LDR) is working, and defaulting banks should be encouraged to keep to the LDR.

Asogwa, Robert Chikwendu, member of the MPC said the NPL ratios do not provide a full picture of the quality and risk level of the overall loan portfolio as the moratorium on COVID-19 restructured payments prevents debtors from defaulting on their debts to banks.

Records show that vulnerable borrowers benefiting from the CBN COVID19 forbearance hold about 37.72 percent of the entire banking industry loan portfolio and this surely represents a significant size for the banking industry.

However, the increase in the total assets and total deposits of the banking industry in April 2021 compared to the position in February shows that the system remains robust and characterised by a balanced funding structure despite the marginal deterioration in both capital adequacy ratio and profitability indicators between March and April 2021.