Recently, banks have been in the news for helping out in the battle against the coronavirus. Some have contributed isolation centers. Others have donated billions of naira for the procurement of medical equipment.
Letters bearing the signatures of Nigeria’s top banking CEOs have hit the email inboxes of millions across the country. Their messages express hope and promise support for customers through these trying times.
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These signals would have you think that Nigeria’s banks are strong enough to withstand the present economic situation. But are they? This article examines how vulnerable Nigerian banks are to the COVID-19 pandemic and the fallouts from it.
Is the Banking Sector at Risk?
Banks haven’t shut down completely. They are still able to dispense cash via ATMs and support customer account transactions on electronic platforms. These channels ensure that the banks are making some money from their customer-facing points, despite the current disruptions.
However, it’s far from what the banks would consider normal. Customer traffic going into physical bank branches still constitutes a huge portion of banking transactions. If they are not operating on this front, they will be missing out on a lot of potential revenues.
We can expect banks to weather the present economic storm if they only have to contend with scaled-down operations. But there’s more to worry about.
The major concern for banks in these times is their exposure to vulnerable industries. If they have granted a lot of loans to businesses that have been hit hard by the COVID-19 pandemic, those loans may not be repaid. And that’s a loss for the banks.
If this happens on a large enough scale, it could threaten the stability– and the very existence –of the banks involved.
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What Sort of Risks Are the Banks Exposed To?
According to KPMG, 31% of banking loans in Nigeria go to concerns in the oil and gas industry. It takes up by far the biggest share of loans granted in the country. Manufacturing loans constitute 15% of the total; the government takes up 9%.
These sectors are vulnerable to the impact of COVID-19 via an oil price crash. The oil and gas sector, in particular, gives many experts cause to be concerned. If oil prices continue on their negative trajectory, firms in the industry will struggle to repay their loans. Widespread defaults could imperil the banks they have borrowed from.
However, some analysts believe that sectors like trade and commerce, hospitality, and real estate will be hit even worse by the pandemic. The banks have a lower degree of exposure to these segments compared to oil and gas. But they will feel the impact of losses in these areas.
Banks that experience trouble with their finances could implement measures like shedding jobs. They did this in 2016, during Nigeria’s most recent recession.
Are the Banks Prepared for a Possible Economic Downturn?
The International Monetary Fund (IMF) forecasts that Nigeria’s economy will shrink by 3.2% in 2020. Most observers believe the country is entering into a recession, resulting in part from the coronavirus pandemic.
Are the banks prepared for the difficulties associated with poorer economic conditions?
In 2019, the CBN conducted a stress test on banks in the country. This evaluation showed that seven commercial banks didn’t have adequate funding to withstand a financial crisis.
It’s not clear that this picture has improved. Earlier this year rumors circulated of possible mergers in the banking industry. Unnamed sources claimed that the CBN had given its blessings to some of the merger plans.
One thing is clear: every bank will be affected to a certain degree.
How Banks Can Cope With the Present Risks
At some point, we may expect the CBN to step in and support banks if they show signs of being distressed. The apex bank has already shown willingness to assist businesses in the country with the aid they need to survive the present disruption.
In the meantime, they will want to scale back on their engagements with vulnerable sectors. Banks could also merge so that they attain the size that’s required to pull through an economic downturn.
Featured image source: Gbedu TV
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