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CBN’s interventions drive banks’ credit to private sector growth

MPC expected to hold but no members, meeting calendar

Nigerian banks’ total lending to the private sector increased by 18.6 percent year/year to N34.51 trillion (USD83.1bn) in October 2021 from N29.09 trillion in the corresponding period (October 2020), data from the Central Bank of Nigeria (CBN) show.

The growth in banks’ credit to private sector of the economy was driven by the continued rollout of the CBN’s intervention schemes for specific economic sectors via banks’ balance sheets; and aggressive growth strategies employed by banks to offset the sector-wide decline in asset yields, according to EFG Hermes, Investment Banking and the leading financial partner in Frontier Emerging Markets (FEM), in its latest report.

In the nine-month period (9M) of 2021, banks’ Electronic Payment System (EPS) for four of the five Tier-1 banks (a good proxy for the entire sector) increased 11.7 percent on average as they were able to offset margin pressure by growing their loan books and increasing contributions from non-interest revenue sources (specifically e-banking revenue), the report stated.

“Robust earnings momentum should continue in Full Year (FY) 2022, as we expect strong loan growth; good Nominal Interest Rate (NIR) growth as banks continue to roll out digital banking products, and average asset yields to be higher in FY22 estimate relative to the very low base in full-year 2021 (FY21).

“With the pandemic, the adoption of digital banking channels recorded a significant rise. Even with the relaxed restriction, this trend has continued,” Victor Ndukauba, deputy managing director of Afrinvest West Africa, said while presenting the 2021 Banking sector report by Afrinvest West Africa, recently.

Read also: CBN loans to banks rise 145.8% on cash crunch

“We expect the growth in digital banking channels to be sustained in 2021 and beyond as increased internet and mobile penetration would result in higher transaction volumes and income from digital channels,” he said.

To capture the full benefits of digitization, banks have to increase investments in technology infrastructure, resulting in higher costs of maintenance which Afrinvest expects would mute savings from operational expenses.

The report stated that tussle with Fintech players in terms of innovation and volume would hinder banks’ earnings potential.
Godwin Emefiele, governor of the CBN, said a key focus of the Central Bank of Nigeria under his leadership has been enabling the buildout of a robust payment system in Nigeria, that will provide cheap, efficient, and faster means of conducting payments for most Nigerians.
With the growing pace of digitization globally, he said it was essential to leverage digital channels in fulfilling the objective.

Total transaction volumes using digital channels more than doubled between 2018 and 2020, as volumes rose from 1.3bn to over 3.3bn financial transactions in 2020. Digital payment channels also help to support continued conduct of business activities during the lockdown.

“Our robust payment system has continued to evolve towards meeting the needs of households and businesses in Nigeria. Reflective of the confidence in our payment system, between 2015 and September 2021, about $900m has been invested in firms run by Nigerian founders,” he said.

Afrinvest report said banks’ earnings performance will remain resilient, adding that fees and commission income would cushion the impact of low yield as banks drive higher transaction volumes.
Amidst the tough macro and tight regulatory environment, Afrinvest report said banks remained resilient.

This is evident in banks delivering a 15.6 percent and 6.8 percent year/year growth in total assets and profit respectively in the first half (H1) of 2021 despite elevated Cash Reserve Ratio (CRR) debits and compulsory Loan to Deposit Ratio (LDR) levels.

With the pandemic, the Nigerian banking sector vulnerability heightened which required swift policy responses from the CBN. Consequently, the CBN rolled out stimulus packages to critical sectors with significant loan exposure, reduced interest rate on intervention facilities (from 9.0% to 5.0%), and granted banks the forbearance to restructure loan exposure. As a result, real GDP growth in the financial institutions’ sector grew by 13.3 percent y/y.