The Nigerian Banking Industry – Symptoms of a Credit Crunch in the Midst of Excess Liquidity

In the wake of the ongoing reforms in the Nigerian banking industry, several publications have been made on the way out of the myriad of challenges the industry is faced with. I recall vividly that in an article published sometime last year, I tried to draw attention to the likely financial and economic implications of the bail out funds injected by the Central Bank of Nigeria. My position was that it could lead to a situation of excess liquidity within the banking industry and the economy at large.

My argument was premised on the fact that the injection of the bailout funds was not backed by any real economic activity hence in economic terms has no real value. The net effect of the intervention funds is basically an increase in the quantum of money in circulation coupled with a significant boost in depositor’s confidence. Beyond that much more effort is required for the reform to have a holistic effect. My view was that strategies and mechanisms needed to be developed to ensure that the intervention funds lead to a consequent positive impact on the industry and the economy.

With the recent information filtering out on the banking system, it appears we have a scenario where most banks have excess liquidity and yet the borrowing community is still experiencing serious credit crunch. The primary purpose of financial intermediation for which banks exist is as such almost defeated. It is argued that most bank managers have become risk-averse and would rather invest in secured short-term financial instruments rather than lending money to borrowers.

Lending conditions to borrowers are made so stringent that it is almost impossible to get a loan from a bank. The net effect is that the banks end up with too much liquidity at the close of business on a daily, weekly and monthly basis.

But the downside of the above scenario is that since too much attention has been focused on the liquidity side of banking, there will be a negative effect on the profitability side. Over time, it is very likely that most Nigerian banks will experience shrinking profitability. This will all be evident at the branch, zonal and regional levels of banking operations. The overall metrics used to measure performance may reveal poor results despite the hard work put in by members of staff of a branch or unit.

The recent downward dive in interest rates also mean that bank managers must seek out more creative and innovative ways to break-even. Banks will need to avoid funds that are considered expensive and thus unattractive in the present dispensation. However, the Central Bank of Nigeria has a responsibility to promote bank lending to the real sectors of the economy. While the reforms initiated by the CBN succeeded in maintaining depositor’s confidence in the financial system, it has also succeeded in eroding banker confidence for lending. Most bank managers feel safer holding on to the funds they have rather than lending it out to businesses.

This is where the challenge lies for the regulator. Perhaps some form of loan guarantee scheme may be required for priority sectors amongst other measures.

Bank managers must note that liquidity and profitability work at cross-purposes. The more liquidity you keep, the less profitability you make. Hence, sound financial management always seeks a balance between liquidity and profitability. The dilemma all business managers face is that both high liquidity and high profitability is desirable. However, the more of one you seek to, the less of the other you get.

As for the managers of financial institutions in the Nigerian banking industry, it is time to pay good attention to profitability as the long term survival of any business enterprise is based on this. Business models need to be carefully evaluated in the light of the prevailing circumstances and where remedial actions are necessary, decisions should be taken in that regard.


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