Business
New regulations may impact growth in Nigerian bank sector
New regulations in Nigeria that will reduce fee income and raise reserve requirements could curb growth in the financial sector.
Nigerian banks enjoyed a prosperous 2012, coming off a productive period of recovery that saw a wave a consolidation in the sector and the Asset Management Company of Nigeria (AMCON) soaking up N4.5 trillion (US$27.8 billionn) in toxic assets.
Banks in the Francophone region have remained stable due to the strict polices of the CFA franc zone.
The list of the top 200 African banks features 18 Nigerian banks, with US$130 billion in assets. Nigerian banks dominate the West Africa region and hold 62 percent of the assets in the top 200.
Nigeria’s banking sector is expected to see some strain as its neighbors continue along the path to prosperity and healthy competition.
A number of new regulations to strengthen the sector and make it more accessible to individuals and businesses are, according to ratings agency Fitch, “likely to constrain profitability over the next 18 months” and erase some of the gains made in recent years.
The Central Bank of Nigeria has mandated a phasing out of commission on turnover, a customer transaction fee, by 2016.
In March, the central bank published a circular on changes to a wide range of bank charges.
The cuts to commission on turnover, which applies to customers’ debit transactions on current accounts, began in April when banks reduced the charge by 40 percent. Fitch says this move will have a major impact, specifically on banks with large retail operations.
Adesoji Solanke, a banking analyst for Renaissance Capital, agrees: “If you look at the percent of commission on turnover, it’s as much as 50 percent of fee income for big banks like the Zenith International Bank” (currently at position 16 of the top 200 African banks).
While trying to make up for the loss of this revenue, banks will have to contend with higher AMCON levies, which Nigeria’s central bank raised to 0.5 percent of total assets earlier this year from 0.3 percent.
A regulation from Nigreia’s central bank that took effect in July also requires a 50 percent cash reserve requirement on public sector deposits.
This is likely to restrict liquidity, as those funds will sit at the central bank rather than collect interest.
First Bank of Nigeria (currently at position 15 of the top 200 African banks) reported that 27 percent of its deposits come from the public sector, approximately US$5 billion. The move is expected to cause banks, particularly smaller ones, to push up interest rates.
Fitch also says that Nigerian banks can boost volume, widen other fee-based products and focus on low-cost deposits to offset earnings pressure, pointing to AMCON bond maturities in December 2013 and October 2014 as a source of additional liquidity.
The largest banks already seem to be withstanding the headwinds and expanding their reach in the region and beyond.
Guaranty Trust Bank (at position 24 of the top 200 African banks) announced plans to buy a 70 percent stake in Fina Bank in Kenya in July, and First Bank is looking for opportunities.
Others, like United Bank for Africa (at position 19 of the top 200) and Access Bank (at position 23 of the top 200), are disposing of assets abroad.
There is some downward movement on interest rates among banks operating in the Union Economique et Monétaire Ouest-Africaine (UEMOA), thanks to competition by banking groups challenging “the old guys – BNP, Citibank, Société Générale and Standard Chartered”, says Magatte Diop, chief executive of the US- and Senegal-based Peacock Investments.
The arrival of Moroccan banks such as Attijariwafa Bank (position 7 of the top 200 African banks) and Banque Centrale Populaire has driven activity. Lenders talk about risk factors pushing up interest rates, particularly for small and medium-sized enterprises (SMEs), but the rates are not justifiable.
Senegal is under-banked, as is Côte d’Ivoire (Ivory Coast), with penetration rates hovering between 15 percent and 20 percent in Senegal, however, the situation is changing as growth rates are rising and people are earning more.
Source: The Africa Report