2019 events in the banking sector
As the year 2019 comes to an end, there is need to review developments in domestic economies that shaped the all-important banking sector. CHIMA NWOKOJI in this report, reflects on interesting activities that played up during the year from both the regulators’ and the operators’ end, in the sector.
THE Nigerian banking sector play a significant role in the activities of individuals, businesses, and the nation’s economy. The sector serves as one of the key engine rooms, offering direct and indirect jobs as well as finances to borrowers for investments to grow the overall economy. Although the stance of monetary policy remained largely, non-expansionary in the beginning of the year, the banking sector in 2019 operated in an economy characterized by weak operating environment. However, at the tail end of the year, the apex banking sector regulator has been able to turn around the situation through the Loan to Deposit Ratio (LDR ) directive to banks and the Global Standing Instruction (GSI) which aims to reduce credit risk.
Generally speaking, the year 2019 saw a very assertive Central Bank of Nigeria (CBN) play a larger role in the overall economy, not just in exchange rate and price stability policy, but also in lending and trade policy. Other activities that shaped the 2019 banking sector landscape are carefully reviewed in this piece.
Basel 3 and IFRS 9
From January 2019, financial institutions in Nigeria started reporting with the International Financial Reporting Standard 9 (IFRS 9) and the implementation of Basel 3 to meet with global standards.
This development has shaped the activities of Nigerian banks as they had to raise fresh funds to increase their capital base to meet up with regulatory capital adequacy requirements.?
Basel 3 led to more capital adequacy ratio. The essence of the Basel 3 is to strengthen the regulation, supervision and risk management of banks.
Diamond Bank/Access bank merger
In December 2018, Nigerian lenders, Diamond and Access Bank agreed to merge and create Nigeria and Africa’s largest retail bank by customers.
The merger involved Access Bank acquiring the entire issued share capital of Diamond Bank in exchange for a combination of cash and shares in Access Bank via a Scheme of Merger.
Based on the agreement reached by the Boards of the two financial institutions, Diamond Bank shareholders received a consideration of N3.13 per share, comprising of N1.00 per share in cash and the allotment of two (2) New Access Bank ordinary shares for every seven (7) Diamond Bank ordinary shares held as at the Implementation Date. The Court Sanction of the Merger was obtained on March 19, 2019,”
Inflation, Foreign Exchange and Interest rates
The CBN’s three nominal challenges are Inflation rate, foreign exchange rate and interest rate.
So far, the CBN has kept a tight lid on inflation growth, until recently when border closure and limited access of importers of food items to the official foreign exchange market has led to a rise in domestic food prices. There was uptick in headline inflation (year-on-year) from 11.24 in September to 11.61 per cent in October 2019. This was anticipated as part of the seasonal end-of-the year uptick in prices; but was further accentuated by the border closure, an expected temporary food supply shock which will adjust over the medium-to-long term as the economy increase investments in food production. Consequently, food inflation rose from 13.51 to 14.09 per cent in September and October 2019 regarding the naira exchange rate, most analysts agree that its stability has been the central driving force of the current recovery. The CBN has successfully kept the naira to US $ rate at roughly N360/$ over the last eleven months; this has built predictability in investor’s expected market returns in dollars and given importers and exporters a solid anchor for taking business decisions. Local and international economists have viewed this approach to exchange rate management with suspicion, but so far, the CBN appears to have been able to sustain the tactic. Given that interest rates have started to moderate and banking industry non-performing loans (NPLs) trending towards the regulatory 5.0 percent level, money market activities could only be expected to buoy in months ahead. Domestic interest rate has started to decline but remains at double digits. Indeed, lending rates in Q4 2019 fell to between 17 per cent and 19 per cent as against 19 per cent and 23 per cent in Q2 2019. The fall in interest rates reflect a slower rate of “crowding out” of private sector borrowing by the fiscal authorities.
Re-introduction of cashless policy
Two years after he suspended the cashless policy, the Governor of Central Bank of Nigeria (CBN), Mr. Godwin Emefiele in April unveiled plans to extend it nationwide. “We had to wait a while because we felt that there was need to be sure that the rate of financial inclusion in Nigeria has effectively penetrated all the nooks and crannies of the country for us to proceed on cashless banking. Very soon all the structures that have been put in place would improve banking services in Nigeria,” Emefiele had said.
It was introduced to reduce the amount of physical cash used in business transactions in the economy as well as encourage more electronic-based transactions. Following reactions that traiked the re-introduction, the CBN quickly clarified an earlier confusion surrounding the new charges on withdrawal and deposits. According to the policy, a withdrawal above N500,000 on an Individual account attracts 3 per cent penalty while deposit above N500,000 will attract 2 per cent . The charges do not apply on the first N500,000 for individuals and N3 million for corporate bodies. They will apply on the excess amount.
Differentiated Cash Reserves Requirement
In August 2019, the CBN issued guidelines for the release of funds to banks for lending from their Cash Reserve ratio and the issuance of longer-term corporate bonds.
The apex bank stated that it would lay emphasis on projects targeted at backward integration and those that would enhance Nigeria’s import substitution strategy.
Under the Differentiated Cash Reserves Requirement (DCRR) Regime, deposit money banks interested in providing credit financing to greenfield (new projects) or brownfield (new/expansion projects) in the real sector (Agricuture/Manufacturing) may request for the release of their funds from their Cash Reserve Ratio (CRR) to finance the projects subject to the banks providing evidence that the funds shall be channeled towards projects approved by the CBN. Loan-to-Deposit-RatioA month after the Central Bank of Nigeria’s directive to all commercial banks that their loan book should be 60 percent of total deposit, the apex bank jacked up the ratio to 65 percent. In a letter sent to all deposit money banks, the apex financial institution said each bank must attain a new minimum ratio by December 31, 2019.
“The Central Bank of Nigeria (CBN) has noted the appreciable growth in the level of the industry gross credit, which increased by N829.40 billion or 5.33 per cent from N15,567.66 billion at end-May 2019, to N16,397.06 billion as at September 26, 2019, following its pronouncements on the above initiative,” the regulator wrote. However, there are speculations that this might be increased further to 70 per cent.
Finance Bill and Role of Banks
The Finance Bill, 2019 (the Bill), was presented by President Muhammadu Buhari alongside the 2020 Appropriation Bill to a joint session of the National Assembly on 8 October 2019. It has been passed by both the Senate and the House of Representatives. According to Section 2 of the Finance Bill, Every person engaged in banking in Nigeria shall require all companies to provide their tax identification number as a precondition for opening a bank account, or in the case of an account already opened prior to September 30th 2019, the bank shall require such tax identification number to be provided by all companies as a precondition for the continued operation of the bank account.
What this means is that Banks will be required to request Tax Identification Numbers (TINs) before opening accounts for individuals while existing account holders must provide their TINs to continue operating their accounts.
Emails are to be accepted by the tax authorities as a formal channel of correspondence with taxpayers.
Banks in Nigeria currently demand TINs; however, this was under the instruction of the Federal Inland Revenue Service (FIRS) mandating banks to demand the TINs.
With this law, the TIN is now a critical Know Your Customer (KYC) information required by banks, which inadvertently gives the FIRS access into the banking transactions of taxpayers. But the minister of finance has assured Nigerians that this may not take effect soon.
5 banks identified as top movers
The 2019 Nigeria banking industry customer experience survey report recently published by KPMG Nigeria showed that five banks were identified as top movers. According to the report, analysis of performance in the SME segment reveals dynamism in the 2019 ranking. Despite lower levels of overall satisfaction for SMEs, Fidelity Bank and Ecobank make the greatest improvements with both banks moving up more than four places into the top five banks. FCMB emerged 1st while Access Bank came 3rd.
performers have remained the same for the fourth consecutive year. GTBank replaced Zenith Bank as the top-rated bank in the 2019 ranking. Sterling Bank, First Bank and UBA are the biggest movers in 2019, coming in 3rd, 5th and 7th places respectively.
In the wholesale segment, Citi Bank and GTBank maintained top spots from previous year ranking while new entrants Standard Chartered and Access Bank make the top five positions at 3rd and 5th places, respectively.
The USSD controversy
In October 2019, some telecommunications network service providers sent notices to their customers that from Oct 21, they will charge N4 per 20 seconds for USSD access to banking services. The in a swift reaction, the banks quickly dissociated themselves from the new charges which MTN in particular claimed the it was in agreement with lenders. This followed a suspension order by the Nigerian Telecommunications Commission (NCC)In spite of the suspension order by the government, the controversy continues over MTN’s alert to its customers on the decision to commence end-user billing for banking services conducted through its network.
Since the announcement was not backed by any explanation, many saw the decision as another ploy by the telecommunication companies to rip them off.
Bothered by the likely consequences of an eventual collapse of the relationship between the parties, the NCC said it resolved to secure evidence-based but customer-friendly charges for the USSD services.
CBN’s commitment to consumer protection
In a move that looks like an end of year gift to consumers of financial products, the Central Bank of Nigeria (CBN), has set minimum standards on fair treatment of consumers, disclosure and transparency, business conduct, complaint handling and redress in order to protect the rights of consumers.The CBN on December 20, 2019 released two (2) regulatory guidelines- a revised Guide to Charges by Banks, other financial and non bank financial institutions, to replace the one issued in May 2017, and Consumer Protection Regulations to implement the principles prescribed in the Consumer Protection Framework issued in November 2016. The revision of the Guide to Charges and strengthening of the Consumer Protection Regulation was necessitated by continued evolution in the financial industry over the past few years, which has spurred innovation and the introduction of new products, channels and/or participantsAlso, the issue of payments of N50 charges by merchants who use Point of Sale (POS) machines for cashless transactions, was clarified with CBN insisting that nobody should pay extra N50 POS transaction charge on goods and services.
These and other complementary policy measures such as the Global Standing Instruction (GSI) to address willful default by serial borrowers in the banking system, Differentiated Cash Reserve Ratio (DCRR), Development Finance Initiatives in agriculture, micro, small and medium enterprises (MSMEs) were targeted at further strengthening the credit drive. The recent policy measure limiting participation in the OMO bill market to banks and foreign portfolio investors was expected to have a positive impact on both the fixed income and equities markets, creating supply of long term equity capital from domestic and foreign investors seeking improved yields, given the reduction in yield and supply of treasury products.The CBN directive on loans to deposit significantly increased credit to private sector, creating jobs, and spurring tax revenues. The CBN Foreign exchange ban list created incentives and opportunities for local import substituents, boosting SMEs, diversifying federation revenue base and reducing imports, thereby boosting the naira and fighting inflation. Outlook Analysts expect Q1 2020 to be uneventful in terms of policy initiatives, but a sharp change in the global oil market in the new year could put paid to a fixed policy outlook as the CBN attempts to rebalance the economy against external realities. The rise in VAT and greater efficiciency in public sector management, as well as the sell-off of idle public assets, could combine to reduce pressure on the monetary authorities in the coming year, all things being equal in the language of economists. Overall, the banking sector is also expected to experience further disruptions from the Financial Technology space.