Nigerian Banking Sector On The Brink?
With Bank of America and Citi Group’s share prices in renewed meltdown mode, the risk of a further collapse of a major Western bank has again made international headlines. While far less publicised (yet by no means less important for the people concerned), I believe that there is also a potential banking crisis brewing in Nigeria.
Following consolidation in 2005, the Nigerian banking sector took off like a rocket, quickly becoming the largest sub-Saharan African banking sector outside South Africa, with Nigerian banks aggressively expanding, both in Africa and even into developed markets such as the UK. Without a doubt, the long-term outlook for the sector is buoyed by Nigeria’s fundamentals – oil wealth, solid growth forecasts and a large population (the biggest in Africa) with minimal access to financial services.
However, given the rapid deterioration of the global economy, notably the collapse in oil, which had previously pumped liquidity into the economy, I reckon a re-evaluation of the sector is in order, especially over the next two years. Indeed, despite the sector’s numerous strengths – it is well capitalised, has low leverage, and is relatively less dependent on foreign financing than other countries – I believe there is risk the sector could undergo a series of bankruptcies, bailouts and consolidations over the next two years.
Perhaps most importantly, Nigerian banks are facing a home-grown credit crunch due to excessive margin lending, whereby investors borrowed from banks to invest in Nigeria’s stock market. The central bank estimates that total bank margin loans amount to NGN716bn (US$4.8bn), but it is widely believed that the true extent of the loans could be NGN1.4trn (or 13.0% of total commercial banking assets at the end of 2007). If that is the case, then margin lending alone would have accounted for approximately 11% of the stock exchange’s total market capitalization at its peak, more than five times the limit typically imposed by other countries.
The key problem is that the Nigerian All-Share Index has slumped by more than 58% since its peak in March 2008, and I strongly believe that is has at least another 25-30% to shed. Against such heavy losses, some Nigerian financial institutions will never see their margin loans again and possibly face significant write offs in their assets. I assume that a few banks have substantially higher margin loan exposures, and if widespread defaults occur against a backdrop of falling oil revenues and tight international credit, it could be enough to push some banks into insolvency.
The dangers this could pose to the wider banking system, in turn, could be exacerbated by large amounts of interbank lending (or the sudden lack of, that is). Nigerian banks allegedly borrow large sums on the interbank market to shore up their balance sheets when reporting, a practice which is tenable since banks report at different times through the year. This problem was tacitly acknowledged by the central bank in 2008, when it instituted a requirement that all banks report their end-of-year figures in December, as simultaneous reporting would make it impossible for banks to bolster their balance sheets by borrowing from each other without detection by the authorities.
A high degree of opaque interbank lending means that the insolvency of a small number of banks that are important links in the system could pose widespread risks to the banking system as a whole. In such a scenario, an insolvent bank may default on its obligations to other banks which, in turn face liquidity or even solvency problems of their own. While I am not saying that a collapse of the Nigerian banking sector is a certainty, the unclear nature and scale of these issues mean that the risk cannot be discounted going forward.
January 28th, 2009 at 9:06 am
What a brilliant piece