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Banking Sector

The Banking Industry Would Have Recorded an ROE of 31.6% If Not For The Aggressive Implementation of The Cash Reserve Policy in 2020



Agusto&Co- Investors King

Agusto & Co. Limited, Nigeria’s foremost research house and rating institution recently released its flagship 2021 Banking Industry Report, which is the most current and comprehensive report on the banking industry in Nigeria based on the review of the financial statements of twenty commercial banks and five merchant banks. The report reviewed the Industry structure, financial condition, the regulatory environment in addition to the macroeconomic environment and its impact on the Nigerian Banking Industry.

According to the report, the COVID-19 pandemic brought about an extraordinary test for the global community. Although the global COVID mortality rate stands low at about 2.2%, casualties increased from less than 3,000 in December 2019 to about 3.9 million as at 30 June 2021. Nigeria’s mortality rate stood comparably lower at about 1% as at the same date. However, the local economy had its fair share of pandemic-related adversities. However, leveraging lessons from the 2016/2017 economic recession, the Nigerian banking industry was better prepared in 2020. Proactive measures in the form of forbearance granted by the Central Bank of Nigeria CBN), enabled banks to provide temporary and time-limited restructuring of facilities granted to households and businesses severely affected by COVID-19. There was generally a cautious approach to lending in the Industry, given difficulties in the operating environment. Although gross loans and advances grew by 12%, loan growth was negative when the 19.3% naira devaluation is considered. Underpinned by the forbearance and proactive measures adopted by banks, the NPL ratio improved to 6.6% (FYE 2019: 7.6%).

The reliability of business continuity measures was tested in 2020, considering the movement restrictions that lasted for months. Most banks showed resilience through innovative measures including remote work arrangements and upgrade of network infrastructure to accommodate higher traffic on digital channels. These arrangements also provided support during the mandatory curfew elicited by the civic unrest that followed the #EndSARS protests in October 2020. Indeed, the pandemic brought to the fore, technology’s crucial role in deepening financial services as some banks recorded as much as a 50% increase in digital banking transaction volumes. However, these gains were limited by the CBN-induced reduction in bank charges, which took effect in January 2020. As a result, electronic banking income declined by 27.3%, accounting for a lower 13.2% (FY 2019: 21.1%) of non-interest income.

The CBN’s policies targeted at lowering interest rates have persisted especially given the dire need to stimulate the economy following adversities created by the pandemic. However, given the need to moderate inflation amidst efforts to maintain a stable exchange rate, the cash reserve requirement (CRR) was increased and standardised to 27.5% for both merchant and commercial banks. The standardised CRR was implemented alongside discretionary deductions. As at FYE 2020, the Industry’s restricted cash reserves exceeded ₦9.5 trillion and translated to an effective CRR of 37%. It is noteworthy that Nigeria has the highest reserve requirement in sub-Saharan Africa. South Africa, Kenya and Ghana all have CRR’s of below 10%. We believe the elevated CRR level moderated the Industry’s performance and liquidity position during the year under review. Assuming the sterile CRR was invested in treasury securities at 5%, ₦482 billion would have been added to the Industry’s profit before taxation. This would have increased the Industry’s return on average equity (ROE) by 11% to 31.6% in the financial year ended 31 December 2020.

Table 3: Impact of Restricted Funds (CRR) on the Banking Industry’s Profitability in FY 2020

Cash Reserve Requirement  Estimated interest income forgone assuming 5% return
Zenith Bank Plc 1,370,619,000 68,530,950
Access Bank Plc 1,275,279,265 63,763,963
First Bank of Nigeria Ltd 1,230,974,871 61,548,744
United Bank for Africa Plc 1,072,094,000 53,604,700
Guaranty Trust Bank Plc 1,008,748,051 50,437,403
Fidelity Bank Plc    540,129,000 27,006,450
Ecobank Nigeria Plc   406,043,000 20,302,150
Standard Chartered Bank Nigeria Ltd 362,542,981 18,127,149
Union Bank of Nigeria Plc 356,452,000 17,822,600
Stanbic IBTC Bank Ltd 368,357,000 18,417,850
First City Monument Bank Plc 311,746,155 15,587,308
Wema Bank Plc 246,974,959 12,348,748
Sterling Bank Plc 228,791,000 11,439,550
Citibank Nigeria Ltd 209,236,306 10,461,815
Polaris Bank Plc 204,832,000 10,241,600
Unity Bank Plc 91,130,360 4,556,518
Providus Bank Plc 89,567,141 4,478,357
Coronation Merchant Bank Ltd 72,327,019 3,616,351
FBN Merchant Bank Ltd 39,370,061 1,968,503
Nova Merchant Bank Ltd 35,170,012 1,758,501
FSDH Merchant Bank Plc 27,061,559 1,353,078
Globus Bank Ltd 25,999,790 1,299,990
Rand Merchant Bank Ltd 22,899,811 1,144,991
Jaiz Bank Ltd 22,590,165 1,129,508
Titan Trust Bank Ltd 22,521,705 1,126,085
9,641,457,211 482,072,860

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Banking Sector

CBN Extends Letter of Credit Issuance Timeline Amid Forex Crisis

Move Aims to Address FX Scarcity Challenges and Enhance Customer Service



Central Bank of Nigeria (CBN)

The Central Bank of Nigeria (CBN) has announced an extension of the timeline for issuing letters of credit from 24 hours to five working days, according to the newly approved 2023 service charter.

This adjustment comes as the country grapples with foreign exchange scarcity, impacting local and international trade.

The 2020 service charter initially stipulated a 24-hour timeline for the issuance and management of letters of credit, but the updated charter now reflects a timeline extension to five working days.

Also, the CBN has prolonged the timeline for the registration of Form M and NXP from 24 hours to two working days.

The move follows the CBN’s unification of all forex market segments in June 2023, aimed at promoting liquidity and stability.

However, this measure appears to have led to increased market instability, with the naira losing nearly a fifth of its value.

Reports indicate that foreign suppliers are now rejecting letters of credit from Nigerian businesses, affecting the importation of goods and services.

Letters of credit are crucial for the payment of visible goods imports, wherein a bank commits in writing to pay the exporter a specified sum within a defined timeframe upon receipt of proper documentation from the customer.

The extended timelines for letters of credit, Forms M, and NXP in the service charter are seen as measures to manage cash flow and instill confidence in the process amidst the ongoing forex crisis.

CBN Governor Yemi Cardoso stressed the commitment to responsive and citizen-friendly governance through efficient, responsible, and transparent service delivery in the revised service charter.

The move is part of the CBN’s effort to comply with the Business Facilitation Act 2022 and enhance ease of doing business in Nigeria.

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Banking Sector

Unity Bank MD Advocates Policy Actions to Stem Gender-Based Violence in Nigeria



The Managing Director of Unity Bank Plc, Mrs. Tomi Somefun has called for comprehensive policy actions that will dismantle the structures that enable gender-based violence in Nigeria.

At the Ebony Life Cinema, the venue of the film screening in Lagos, Unity Bank supported the BECKMA movie premiere by ARDA Development Commuications Inc. which was held to highlight issues of Gender-Based violence and driving positive change in society.

Making the call, Somefun stated that the Bank committed to partnering with the movie premiere and putting the power of the brand behind BECKMA as the event brings sustainability and gender equality to the front burner.

Represented by Unity Bank’s Group Head of Compliance, Mrs. Patricia Ahunanya, Somefun noted that “9 percent of women aged 15 to 49 had suffered sexual assault at least once in their lifetime and 31% had experienced physical violence,” citing a recent study by UNDP in Nigeria.

Speaking further, Somefun said “Gender-based violence is not just a women’s issue, but a societal ill that demands our collective attention. It is high time for us to step forward and advocate for comprehensive policy actions that will dismantle the structures allowing such atrocities to persist”.

She added, “I urge policymakers to enact stringent laws against gender-based violence, ensuring swift and severe consequences for perpetrators. Our homes and various organisations must also be a catalyst for change, inspiring others to follow suit.”

While commending the ARDA Development Communications Inc. for their initiatives to promote gender equality and empowerment in line with SDG5, Somefun assured of the Bank’s commitment to sustainable initiatives and further collaborative initiatives and advocacy programmes for the elimination of gender-based violence.

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Banking Sector

Nigeria’s NIBSS Directs Banks to Disconnect Non-Deposit Financial Institutions from NIP System



Central Bank headquarters

Banks in Nigeria have received a directive from the Nigeria Inter-Bank Settlement System (NIBSS) to disconnect Switches, Payment Solution Service Providers (PSSPs), and Super Agents from the NIBSS Instant Payment Outwards System.

The circular, dated December 5, 2023, highlighted that including these non-deposit-taking financial institutions as beneficiaries on the NIP funds transfer channels violates the Central Bank of Nigeria (CBN) guideline on electronic payments.

The NIBSS emphasized that while Switches, PSSPs, and Super Agents might process outward transfers as inflows to banks, their licenses do not permit them to hold customers’ funds.

The circular referred to the CBN’s guidelines on electronic payment of salaries, pensions, suppliers, and taxes, dated February 2014, as the basis for this regulatory stance.

The directive also pointed to a circular dated May 11, 2018, titled “Permissible Services and Products of PSSP Operation in Nigeria,” reinforcing the need for compliance.

As a result, banks were urged to delist all Switches, PSSPs, and Super Agents from the NIP Outward Transfer channels while allowing their participation in inward transfers.

In Nigeria’s payment ecosystem, operators are required to obtain licenses such as Switching and Processing, Mobile Money Operations, Payment Solution Services, or Regulatory Sandbox from the CBN.

Only Mobile Money Operators (MMOs) have the authority to hold customer funds, according to the CBN’s regulatory framework.

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