What the data from the banking sector mean for the economy

Nigeria’s economic growth as at the end of the third quarter of 2018 was below 2 percent. While this performance shows that we are not in recession, it also indicates that we are not too far off. Still fledgling out of the recession, Nigeria’s average growth rate since the beginning of the year hovers around 1.75 percent, which is well below the optimistic projection of 4.80 percent for 2018 in the Economic and Recovery Growth Plan (ERGP). High interest rate environment at 14 percent monetary policy rate, exchange rate pressures at N363 /$ and inflation pressures at 11.26 percent as at October 2018, due to election spending, all make it increasingly difficult for businesses to thrive.

Following the release of the Banking sector data for Q3 2018 to the third quarter 2018, BusinessDay Research and Intelligence Unit (BRIU) analysed the data to ascertain some economy-wide implication and the impact of past and recent policies on banks behavior and those of the public.

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Industry

Based on the analysis of the latest data on credits to the different sectors of the Nigerian economy as at the end of the third quarter 2018,oil and gas takes the lead, claiming a portion no less than 22.56 percent on average since Q4 2017, and reaching a high of 23.08 in Q3 2014. Manufacturing follows with 13.79 percent in Q3 from 13.16 in Q2 2018.

On the other hand, power & energy sub sector at 2.71 percent,and mining & quarrying at 0.04 percent, are the laggards behind agriculture which also got a paltry 3.80 percent in Q3 2018. Even though bank credit to the agricultural sector increased throughout the first three quarters of 2018, the average change is only 8.69 percent. The implication is that the banks are not placing huge bets on the mining sector and much of the progress touted about development in the agricultural sector is due largely to funds provided by development and agricultural (credit) banks such as the Bank of Industry (BOI), the Bank of Agriculture (BOA) as well as other agricultural credit guarantee scheme of the government.

Services

Interestingly, bank credit to government takes the lead, well above agriculture, power and energy in the industrial sectors. Bank credit to government hiked to 9.38 percent from 4.75 in Q3 in the final quarter of 2015 and has trended high since then, reaching an all-time high of 9.61 in Q2 2018. It fell slightly to 8.99 percent in Q3 2018. It is followed by oil &gas services at 7.78 percent;trade and commerce at 6.89 percent, and financial markets which got 6.77 percent.

Construction sub sector at 3.73 percent, power & energy received 2.09 percent; transportation& storage got 2.00 percent, and that leaves it at the bottom rung while education got the least percentage of total credit at 0.39 percent – all in Q3 2018. This distribution of credit reveals the preferences of banks and the implication for socio-economic development.

Deposits

Total deposits have increased albeit at a decreasing rate. For demand deposits, private sector deposits with commercial banks take the most of the total. However, there has been slight and consistent decline in demand deposit since June 2018: from June to September 2018, total deposits declined by 7.23 percent. This may be due to a combination of economic hardship as perceived by many and the low rate of financial inclusion.

Time deposits on the other hand, recorded some increase in the last one year (September-to-September) by 22.28 percent. Between Q2 and Q3 2018, total time deposits increased by 3.48 percent despite growing political uncertainties due to the forthcoming elections. Even more interesting is to see that a significant proportion of time deposits are foreign currency deposits. The proportion of foreign currency deposits with commercial banks alone was 35.23 percent at Q3 2018, a slight increase from 34.89 percent in the previous quarter.

Payment Channels

The volume and value of transactions through non-cash channels are increasing as the number of alternative payment channels increase. Transactions through Automated Teller Machines (ATM) recorded the highest volume of transactions throughout the year. The value of transaction stands at N1.6 trillion as at Q3 2018 a 13.2 percent decline from N1.83 trillion in Q4 2017. Interestingly, transactions through Point of Sales (PoS) have maintained an increasing trend: it increased by 81percent from the levels in Q4 2017 to Q3 2018. Between Q2 and Q3 2018 alone, the volume of transactions via PoS increased by 27.98 percent.

This development is attributable to the growing adoption of the technology by market traders and the improving internet connectivity in many urban centres across the country. This represents a positive indication for cashless policy.Nonetheless, Transactions over the internet, like other electronic platforms (NEFT, NIP) are still minimal, however increasing through the year by 44.9 percent.

Non-performing loans(NPLs)

According to the Basel definition, a loan is considered non-performing when the borrower is 90 days or more behind on the contractual payments or when the obligor “is unlikely to pay its credit obligations to the banking group in full, without recourse by the bank to actions such as realising the security.”

NPL data shows that banks in Nigeria have been experiencing a rising trend in their NPL portfolio. The upward trend began in the final quarter of 2015, spiking in 2016 through 2017 due to the slow-down in growth during the period. The graphics above show some easing in the NPL from its peak in Q3 2017 into the first and second quarters of 2018 by17.74 percent. This improvement which can be attributed to growth improvements due to counter-cyclical activities seem to be short-lived. The rate of NPL is beginning to trend upward again, rising by 13.73 percent between Q2 and Q3 2018 to N2.25 trillion. Exchange rate, interest rate, Inflation rate and GDP growth rates are macroeconomic factorsthat can worsen the loan performances aside from other idiosyncratic factors of the banks.