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Banking & Finance - August 12, 2022

Top 5 Challenges in Nigeria’s Banking Industry

Any country’s ability to prosper economically depends on having a stable financial system and a strong banking system. The significant challenges affecting Nigeria’s banking industry have made it impossible for the country to have a stable financial system. 

According to a report from Renaissance Capital, Nigerian banks are still on the radar to face some difficulties in 2022, which include increased effective tax rates, historically low-interest rates, and competition from telcos and fintechs.

The report claims that 2022 will likewise be a difficult year for the Nigerian banking sector. Due to the risks they may encounter, banks find it difficult to provide earnings growth.

The numerous challenges that Nigerian banks are facing include.

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1. Competition from fintechs and telecos, shaking Nigeria’s banking industry 

Source: Nairametrics

The rivalry from telcos and fintechs is a significant risk that Nigerian banks are dealing with. The report from Reniassance Capital states that e-banking income increased significantly in 9M21, increasing by an average of 50% YOY.

Stanbic announced plans to establish a fintech subsidiary, GTCO completed its transition into a holdco. Access bank has also completed its transition to a holding company and has been relisted under a new parent company known as Access Holdings PLC,  and FBNHoldings has also transformed too.

2. Political risks are another challenge in Nigeria’s banking industry 

The Renaissance Capital report projects that as the elections in 2023 approach, political risks to banks will increase.

“We raised our risk premium by 50 bpts to reflect the heightened political risk in the run-up to the general elections in February 2023,” they say.

3. The Treasury Single Account’s (TSA) implementation

Several countries around the world employ the treasury single account as a financial strategy. 

The federal government of Nigeria implemented it in 2012, similar to other third-world nations, to combine all influxes from all governmental departments into a single account at the Central Bank of Nigeria (CBN).

This concept creates a unified structure, as recommended by the International Monetary Fund (IMF), in which all public money are accumulated in a single account. This would, among other benefits, lower borrowing costs, expand credit, and enhance governmental fiscal policy.

4. Poor capitalisation

Source: Vanguard News

The CBN ordered all Nigerian banks to increase their capital base from 1 billion naira to at least 25 billion naira by December 31, 2005, as of a few years ago.

Most banks at the time lacked the capital necessary to achieve the 1 billion naira requirement. In Nigeria, this resulted in the foreclosure of 89 banks, or more than 70% of them, since just 25 of them emerged as strong banks and had the necessary 25 billion naira.

Some banks became mergers. With a weak capital base, most banks can rarely make loans and conduct business internationally.

5. Professionalism and morals

The CBN has recently taken action to look into cases of fraud, greed, insider exploitation, etc. These were the consequences of unethical action by bank management and workers.

Bank distress is a result of unethical behaviour. And it appears that the penalties for these unprofessional actions are insignificant.

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