Economic activities in Nigeria’s finance and insurance sector rose at the fastest pace in at least 13 years largely on the further devaluation of the naira and record hike in the benchmark interest rate by the Central Bank of Nigeria (CBN).
According to BusinessDay analysis of the latest GDP report by the National Bureau of Statistics, the sector rose to 31.2 percent in the first quarter of 2024 from 21.3 percent in the same period of last year.
“The stellar performance in the finance sector can be linked to the CBN’s enforcement of the 65 percent loan-to-deposit ratio (LDR) for deposit money banks (DMBs) and the depreciation of the naira, both of which facilitated banks’ asset expansion,” analysts at Cordros Securities said in a recent note.
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Under the leadership of Olayemi Cardoso, the Central Bank’s governor, the interest rate increased by a combined 750 basis points. At the monetary policy committee meeting held last month, Nigeria’s lending rate was hiked by 150 basis points to 26.25 percent, marking the third straight time this year.
The finance and insurance sector also recorded its highest contribution to the GDP growth in at least 13 years.
The liberalisation of the foreign exchange regime in Nigeria which led to a devaluation of the naira has had positive and negative impacts on the performance of different sectors of the economy.
Banks topped the list of companies that benefited from the naira devaluation, with some recording huge foreign exchange revaluation gains that drove up their profits.
Analysts say the spike in the commercial banks’ earnings was largely fueled by the growth in interest income, driven by effective asset repricing in response to the elevated interest rate environment.
“The increase in interest income was the major driver for most of the banks’ profit. If you check their loan books for 2023, it expanded significantly, also year to date we are seeing very significant expansion in loan books,” Olumide Sole, sub-saharan banking research analyst at Vetiva Capital Management, said.
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Analysts at Agusto & Co, also said that the insurance industry benefited from the drive to reprice premium rates upwards and the persistent naira devaluation as foreign currency-denominated premiums became bloated upon translation to naira.
The GDP growth rate of the finance and insurance sector is expected to continue in the second quarter of 2024 owing to the sector’s increased financial capacity to hedge against risks.
“The banks’ and insurance companies’ balance sheets have improved significantly which means their hedge capacity has also improved. But the more assets they have, the more profit they can make,” Sole said.
Femi Oladele, policy analyst at Meristem Securities Limited, said there has been a lot of activity in the financial space, especially with the increased premium price in the insurance sector. “So, the sector’s growth is not unexpected. For the insurance sector, the growth should be steady for Q2.”
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