If the Central Bank of Nigeria, CBN, were to conduct a stress test on Nigerian banks today, most of them would likely fail because they are the life wire of business and a mirror of the state of the economy which is now belly up.
As a fall out of the slump in crude oil price; vandalism of oil assets leading to shut down of production and inability to export; the introduction of the Treasury Single Account, TSA, in one fell swoop instead of being done in stages; removal of fuel subsidy without providing palliatives like SURE-P to cushion the harsh effects on the masses; and the floating of the Naira exchange rate which has resulted in the devaluation of the currency from N199/$1 in June to about N400/$1 in the open market, the balance sheet of Nigerian banks have doubled in size without commensurate credit disbursement.
This is the reason most of Nigeria’s financial institutions are now hobbled with no funds to disburse to loan seekers and therefore little or no income is being generated for sustainability of the banks and by extension the growth of the GDP of the economy which recent data indicate is contracting at about -0.2% quarterly.
With Nigerian economy experiencing negative growth of -2% year on year and her population growing at 2%, the prospect of getting out of the current recession without drastic measures is slim because for an economy to experience economic growth,GDP must be growing faster than the population but the current situation in Nigeria is that while population is growing at 2% GDP is receding at 2% which is a jeopardy.
In the light of the foregoing, the inflow of surplus Japanese yen to the Nigerian economy that is in dire need of foreign exchange,FX life line in the form of foreign direct investments in infrastructure, would most certainly be a magic wand, elixir and antidote to the recession stricken Nigerian economy as banks struggle to remain within the limits of regulatory framework of the CBN.
The prevailing ‘financial crunch’ was obviously not anticipated by Naira devaluation proponents. This is because they had argued that the FX held by Nigerian and foreign businessmen and women waiting for the Naira to be devalued, so that they can earn quick yields, would immediately flood Nigeria, as soon as Naira devaluation exercise is carried out.
As it turned out, in a country fraught with policy inconsistencies due to lack of a grand strategy,such optimism without solid foundation, was bound to be nothing but a pie dream or mirage.
Obviously, the pundits did not reckon with the negative impact that the policy of scrubbing bank treasuries of funds via the the Treasury Single Account,TSA , would have on the monetary system, neither did they figure out that lack of clarity on govt’s policy on the Niger Delta on whether there would be a continuation or cessation of Amnesty for militants would lead to the rise of a new militant group,the Avengers with the mission and capacity to destroy oil/gas facilities to the extent of Nigeria losing as much as one million barrels of crude oil daily.
It may be recalled that president Muhamadu Buhari ,perhaps relying on his gut feeling which is probably derived from past experience (having had the privilege of being at the helm of a salvage team for Nigerian economy Dec, 1983/August,1985) dismissed the call for Naira devaluation for about one year into his administration before capitulating onJune 20, a couple of months ago.
Mr president’s justification for the delay in boarding the Naira devaluation train was that the arguments for it did not add up in his books especially since Nigeria did not have any other finished products to sell to the world (the most viable reason for currency devaluation) except crude oil whose price is fixed internationally and of which there is currently a global supply glut.
With Naira now trading at over N400/$1, president Buhari’s fears of the Naira spiraling out of control when floated is manifesting.
In an attempt to wriggle out of the monetary policy cul de sac, the CBN had increased the lending rate during the last MPC meeting by 2 percentage points from 12-14% amongst other measures aimed at attracting foreign equity portfolio managers, who by their very nature, would rush to trade in Nigeria’s bonds as soon as it is made attractive enough.
Little surprise then that Nigeria’s bonds and treasury bills are now trading at about 20% which is mouthwatering considering that a country like Japan which is currently in stagflation, offers her bonds at zero interest rate.
In fact , in some cases, Japan even pays to offload bonds to willing parties in order to induce growth in the economy but such practice is extended only to European firms and others in industrialized and stable economies.
That’s why banks in Europe can offer loan facilities for as low as 4% and African banks, particularly Nigerian ones,grant loans at outrageous rate of 26% or more.
At such an exploitative rate what type of business can a Nigerian entrepreneur possibly engage in and be able to pay banks 26% interest rate plus overhead cost (salaries etc) at 10% and utilities 4% respectively, which when added together puts the total cost of funds into a business venture at approximately 40% or more?
I may be wrong but l’m yet to see a genuine business that yields up to 40% profit except fraudulent and doggy Govt contracts.
In my view, the outrageous cost of funds is a recipe for loans going bad and the reason for high rate of business exit and mortality in Nigeria.
A while ago, the CBN and Nigeria Deposit Insurance Corporation, NDIC had reported that the non performing loan portfolio of banks in Nigeria was heading towards the N2.4 trillion Naira mark,which is a significant 10% of the N24.3 trillion credit speculated to have been disbursed to both the public and private sectors.
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