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Tuesday, June 21, 2016

Are Nigerian Banks Efficient?

    It was Charles Soludo, the architect of Banking sector consolidation, who championed the creation of mega banks in the Nigerian Banking landscape. The idea behind consolidation is to create 'too big to fail' banks with larger capital to support economic development. But, what we later have are banks that are too complicated and lack efficiency. Instead of using their capital to support development they ended up supporting share buy back and speculative investment of oil marketers. Instead of banks to relied less on public funds, due to their bigger capital base, they turn to monsters that depend on easier to get public money without paying equal return to the government treasury. By the time Soludo left CBN, Nigerian banks have return to the business as usual state they were before the consolidation with the exception that they are now very big in size with huge loads of non performing loan, the result of the bank wasted credit creation process and thieving CEOs.

     AMCON itself absorbed some N5.7 trillion of toxic assets in the aftermath of the banking crisis of 2009. A recent report on the banking sector show that five banks lose some N54 billion from their 2014/15 financial year. There was sharp increase in the non performing loans in the banking industry as CBN report showed an increased of 78.8% in the year 2015, a staggering figure ofN649.63bn. Between April 2015 to April 2016 the banking industry recorded a decline of  N154bn in its total assets, while gross credit to both public and private sectors declined by 0.3 percent. Of recent there were sharp increases in CBN loans to the banking industry which indicate that Nigerian banks are relying more on CBN to meet their day to day obligations and that banks are unwilling to lend to each other. 


The total toxic assets that were absorbed by AMCON at this time was N5.7trillion.

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The total toxic assets that were absorbed by AMCON at this time was N5.7trillion.

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         The level of innovation in the Nigerian banking industry is low compare to what obtain elsewhere, even for the little innovation we are seeing it is done by few banks who are in the forefront; and we can see the result of it in term of operational efficiency of these banks. For detail essay on innovation and efficiency in the banking industry see my article available at (see reference below). Due to weak revenue many of Nigerian banks have witnessed declining profit during the first quarter of 2016, hence the desperate moves by banks to cut cost through retrenchment of their workforce.The major blow to the Nigerian banks is government Treasury Single Account (TSA) policy which has deprive banks of the main source of their cheap funds and send them in other directions looking for funds. According to estimates, the TSA mopped in an excess of N1 trillion from the banking system back to the Central Bank of Nigeria.The decline in the price of crude oil in the international market also hit the banks hard, as they have issued loans to major oil marketers in the sector and the fact that lower oil price lead to cash crunch in the economy.

      With the introduction of the flexible foreign exchange policy, foreign investors are expected to return to the Nigerian market which will positively affect the performance of the banking industry. Already banking stocks have witnessed increases on the first days of the introduction of the flexible exchange rate, performing better than the NSE all shares index.Nigerian banks according IMF chief are in better shape than during the last global financial crisis. There are huge opportunities in other sectors of the economy that banks are neglecting to invest in such as agriculture, and infrastructures which are the focus of the current administration economic transformation agenda. Nigerian economy is hugely under bank which means that there is huge opportunity for grow in the industry. The Bank Verification Number (BVN) system has revolutionized the banking business in Nigeria, it has cut bureaucracy and reduce corruption as well as open the retail sector. It will indeed help the grow of consumer credit in the banking industry.Finally, the answer to the title of this article about the efficiency level of Nigerian banks, is simple: they are not efficient considering the opportunities available they fail to utilize and the wastage in the system.
Lagardeare in better shape than


WALKING ON A STRING: Bank management in a world upside down, in