Financial sector contracted by 4.5% in Q2 despite banks resilience

Financial Institutions under financial and insurance sector contracted by -4.54 percent in the second quarter (Q2) 2021 from 0.15 percent in the first quarter (Q1) 2020 and 28.41 percent in Q2 2020, according to the Q2, 2021 Gross Domestic Product (GDP) report by the National Bureau of Statistics (NBS).
This is in spite of the resilience of the banking sector, which has been described as safe and sound following its strong financial indicators.

According to the NBS report finance and insurance sector consists of the two subsectors, Financial Institutions and Insurance, which accounted for 87.92 percent and 12.08 percent of the sector respectively in real terms in Q2 2021.
Growth in this sector in real terms totaled –2.48 percent, lower by –20.97 percentage points from the rate recorded in the second quarter of 2020 and -2.02 basis points from the rate recorded in the preceding quarter.

For the first half of 2021, growth in financial and insurance services stood at -1.47 percent year on year, compared to 19.63 percent year on year for 2020.
Quarter on quarter growth in real terms stood at -2.18 percent. The contribution of Finance and Insurance to real GDP totaled 3.72 percent, lower than the 4.00 percent recorded in the second quarter of 2020 by –0.29 percentage points, and the 3.77 percent recorded in Q1 2021 by -0.05 percentage points.

However, the Monetary Policy Committee (MPC) at its last meeting in July 27, 2021 applauded the continued resilience of the banking system in the face of severe shocks to both the domestic and global economies.
Covid-19 was one of the major headwinds that has disrupted the global economy and many other companies but the banking sector has shown resilience due to increased buffers thanks to the Monetary authority.

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Nigeria’s banking sector resilience was demonstrated in its strong Prudential indices and credit extension to the real sector of the economy, for which the members of the committee encouraged the banks to extend more credit to consumers and firms to enhance consumption and production activities necessary to strengthen the recovery.
The industry’s the Capital Adequacy Ratio (CAR) and the Liquidity Ratio (LR) both remained above their prudential limits at 15.5 and 41.3 per cent in June 2021.

Non-Performing Loans ratio (NPLs) of the sector at 5.70 per cent in June 2021 showed progressive improvement, compared with 6.4 per cent in June 2020. The Committee, however, urged the Central Bank to sustain its tight prudential regime to bring the NPLs below the 5.0 per cent prudential benchmark.
Reacting to the GDP report, Uche Uwaleke, financial economist/Professor of Capital Market at the Nasarawa State University Keffi, said, the Q2 2021 real GDP performance as reported by the NBS was cheering news for Nigeria that sends positive signal to local and foreign investors regarding the resilience of the Nigerian economy despite security challenges.

This is especially so in view of the fact that longer-term trends such as the 12-month growth rate are considered more important than short-term changes reflected in the quarter-on-quarter numbers which are often volatile. Given that GDP growth is a necessary condition for economic development, it also raises the prospects of inclusive growth- that which promotes job creation and poverty reduction in the medium-to-long term.
The challenge therefore should be how to ensure that this relatively strong GDP growth is not only sustained but is made inclusive.

“To many close watchers of the Nigerian economy, the recently published National Bureau of Statistics second quarter GDP report was an upside surprise; to some others, it was confounding to say the least”.
In it, he said the NBS had disclosed that ‘Nigeria’s Gross Domestic Product (GDP) grew by 5.01 percent (year-on-year) in real terms in the second quarter of 2021, marking three consecutive quarters of growth following the negative growth rates recorded in the second and third quarters of 2020’. While the surprise element is the unexpected and quantum leap from a weak 0.51 percent recorded in the previous quarter to over 5 percent in Q2 of 2021, the confusion stems from two seemingly contrasting statements in the report.