The Nigerian Banking Sector – Signs of a Credit score Crunch Amid Extra Liquidity
Within the wake of ongoing reforms within the Nigerian banking sector, a number of publications have been made on rising from the myriad challenges dealing with the sector. I vividly keep in mind that in an article printed final yr, I attempted to attract consideration to the seemingly monetary and financial implications of the bailout funds injected by the Central Financial institution of Nigeria. My place was that this might result in a scenario of extra liquidity inside the banking sector and the financial system as an entire.
My argument was based mostly on the truth that the injection of bailout funds was not backed by any actual financial exercise, so in financial phrases has no actual worth. The web impact of intervention funds is basically a rise within the sum of money in circulation coupled with a major enchancment in depositor confidence. Past that, far more effort is required for the reform to have a holistic impact. My view was that methods and mechanisms wanted to be developed to make sure that response funds had a constant constructive impression on business and the financial system.
With the current information filtering out of the banking system, it appears like we’ve got a situation the place most banks have extra liquidity and but the borrowing neighborhood continues to be experiencing a extreme credit score crunch. The first goal of monetary intermediation for which banks exist is as such virtually defeated. It’s claimed that the majority financial institution managers have grow to be threat averse and like to spend money on secured short-term monetary devices fairly than lending cash to debtors.
Lending situations to debtors are made so strict that it’s virtually unattainable to get a mortgage from a financial institution. The web impact is that banks find yourself with an excessive amount of money on the shut of enterprise on a every day, weekly and month-to-month foundation.
However the draw back of the above situation is that since an excessive amount of consideration has been targeted on the liquidity facet of banks, there might be a unfavorable impact on the profitability facet. Over time, it is vitally seemingly that the majority Nigerian banks will expertise a decline in profitability. All of this might be evident on the department, zone and regional ranges of banking operations. Mixture metrics used to measure efficiency can reveal poor outcomes regardless of the exhausting work of department or unit employees members.
The current fall in rates of interest additionally means financial institution executives have to search for extra artistic and revolutionary methods to interrupt even. Banks must keep away from funds which might be thought of costly and subsequently unattractive within the present scenario. Nonetheless, the Central Financial institution of Nigeria has the duty to advertise financial institution lending to the true sectors of the financial system. Whereas the reforms initiated by the CBN have succeeded in sustaining depositors’ confidence within the monetary system, they’ve additionally succeeded in eroding bankers’ confidence in lending. Most financial institution managers really feel safer retaining the funds they’ve fairly than lending them to firms.
That is the place the problem for the regulator lies. Maybe some type of mortgage assure scheme is likely to be wanted for precedence sectors, amongst different measures.
Financial institution managers ought to notice that liquidity and profitability work at cross functions. The more money you retain, the much less profitability you notice. Thus, good monetary administration at all times seeks a steadiness between liquidity and profitability. The dilemma that every one enterprise house owners face is that top liquidity and excessive profitability are fascinating. Nonetheless, the extra you search one, the much less you get the opposite.
As for the leaders of monetary establishments within the Nigerian banking sector, it’s time to pay severe consideration to profitability as a result of the long-term survival of any enterprise enterprise is dependent upon it. Enterprise fashions should be fastidiously evaluated in gentle of the prevailing circumstances and, the place corrective motion is required, choices should be made on this regard.