Increasing importance of remittances as bailout for Nigerian banks

The global decline in oil prices and the unwillingness of the Nigerian government, through the Central Bank of Nigeria (CBN) to devalue the naira amid constrained reserves, continue to worsen the forex liquidity position of Nigerian banks.

Feedback from the banks shows that the CBN has been unable to meet FX demand, with estimates of the backlog at $2-5 billion and rising. The banks have therefore significantly slowed the issuance of new letters of credit (LCs), further hurting the general businesses.

It is not a secret that Nigeria is dependent on imports, which Nigerian banks facilitate via the opening of letters of credit (LC). With the CBN struggling to provide sufficient FX to meet importers’ demands and banks prevented from accepting FX deposits, a fresh challenge facing banks today borders mainly on how to find new and/or innovative sources of FX revenue and growth.

Nigerian banks have continued to reduce their customers’ international payment and ATM limits, with many reducing the limits to $5-15k annually (from $50k), $1k monthly and as low as $100 daily. This has been necessary because customers’ international transactions create open-ended FX exposure for the banks, as they have to source FX to settle with MasterCard/Visa.

Given the CBN’s inability to sufficiently meet banks’ demand for these settlements and the losses the banks could face if a devaluation occurs while their positions remain unsettled, the situation has never looked more daunting; calling for higher level of innovation and creativity as a means of sourcing FX on the part of banks.

An industry insider recently noted that remittances are now a key source of non-funded income for most banks, with many recording significant revenue inflows. This means on the strength of recent FX challenges in the economy, banks are increasingly relying on remittance businesses as key sources of FX.

Within this context, some banks seem to be pushing forward rapidly, with clear leadership shown by First Bank of Nigeria, UBA, Ecobank and Skye Bank. Industry feelers indicate that Fidelity Bank and Access Bank are rapidly growing in this path as well.

International remittances have been recognised as an important driver of the economy of most developing countries. It plays vital roles in poverty reduction, income redistribution and economic development, especially in rural areas. Nigeria is the largest recipient of remittances in sub-Saharan Africa, with the country receiving nearly 65 percent of officially recorded remittance flows to the region and 2 percent of global flows. Nigeria is among the top 10 remittance corridors in the world and a key migration destination, especially in Africa.

The recent improvements effected by the Central Bank of Nigeria have made the Nigerian remittance industry more lucrative. Most notable of these is the enhancement of structures to enable customers send money out of Nigeria on formal Money Transfer Organisations (MTOs) services.

The formal MTOs and largest market players are Western Union, RIA and MoneyGram. However, while MoneyGram and Western Union control the largest market share, industry watchers have noted that MoneyGram seems to be more poised for growth in the market.  MoneyGram is the only MTO with a full office in Nigeria, based in Lagos. It offers a more flexible and easier to access send product and recently launched a seamless Cash-to-Account service that allows customer receive money into their account directly, at no cost. Today, it has aggressively grown its network to be at par with Western Union, in terms of reach.

In 2016 and even beyond, remittances are forecasted to continue to grow, on the back of increasing migrant flows and favourable, forward-looking central bank regulations. In recognition of this, MTOs like MoneyGram have continued to explore ways of deepening their operations in the market. This means Nigerian banks can look forward to improved opportunities to address their FX worries in this growing industry.

 

LOLADE AKINMURELE