Nigeria’s banking industry has faced a turbulent macroeconomic environment recently, with strong headwinds that have generally impacted industry profitability and performance. However, the banking industry has demonstrated a reasonable level of resilience and the macroeconomic shocks have had little impact on the overall stability of most banks who have maintained strong prudential fundamentals.
The recent strong headwinds faced by Nigeria’s banking industry can be attributed to oil price shocks and its implications on Nigeria’s economic activity which has slowed significantly from 6.2 percent growth to a forecast of negative growth of 1.8 percent in 2016 (IMF). Responses by the government include withdrawal of public sector funds (which is a source of low cost deposit and contributed 4.25 percent to the overall deposit base of banks) and delayed flexible exchange rate policy impacted the banking industry significantly with overall industry return on equity falling from 20.3 percent to 11 percent.
Furthermore, gaps in the supply and lack of liquidity in the foreign exchange market (resulting from the lower oil price and the Central Bank response) has also significantly slowed trade and transaction banking volumes and adversely impacted the related income for the banking industry. The industry’s performance has been affected by the crystallization of non-performing loans and elevation of cost of risk from the significant exposure (about 25 percent of total industry loans) to the oil and gas sector as well as other sectors impacted by the economic downturn. In response to this threat to their profitability, the banking industry has implemented various tactical initiatives to reduce cost on channel and staff rationalization as applicable.
However, sustainable growth and liquidity is dependent on growing the customer base, especially in the retail space. Demand for optimal service delivery is now a critical pillar of the banking industry as customers have become more conscious of their rights and are leveraging social media platforms to express dissatisfaction. This heightened demand and sophistication of customers, coupled with the Central Bank’s increased focus on fair treatment, makes customer service a critical requirement for success in the Nigeria banking space. The banking industry is expanding its drive for financial inclusion, aided by an improved regulatory framework which addresses agency banking requirements as well as increased leverage of mobile money platforms. The banking industry has also embraced digital innovation with the continuous introduction of additional channels and processing platforms to improve convenience and turnaround time for transactions.
Given the evolving macroeconomic and market environment, it is clear that success in Nigeria’s banking industry will largely depend on the capacity of players to compete in the retail and the small-to-medium enterprise (SME) segments of the market. Nigerian banks will need to remain innovative and adopt a number of key initiatives such as scenario-based strategic planning and data and analytics to enable them address future uncertainties, deepen share of wallet of their existing customer base and ultimately continue to differentiate themselves in their market.