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Tier 1 Reclassification: When Credit Pushes Growth; Understanding the Banking Connections

Jun 22, 2022   •   by   •   Source: Proshare   •   eye-icon 2562 views

Emerging Roles of Tier 1 Banks in Economic Growth and Sector Development

Commercial banks play a key role in the process of capital formation which itself is a major catalyst for economic growth. By intermediating between economic units with excess liquidity and those in deficit, deposit money banks do not only serve the purpose of efficient allocation of economic resources but also create credit through the instrumentality of the money multiplier. The role of banks transcends the safekeeping of depositor’s assets, when banks fail and there is a run, the entire economy risks a collapse as was experienced during the 2008/2009 global financial crisis. The need for a strong and efficient financial system, capable of spurring sustainable economic growth brought about the consolidation of the banking sector in Nigeria in 2005. 


At the time, the Nigerian banking industry comprised many banks, a good number of which had unanswered questions about their soundness but perhaps more importantly about their capacity to support the economy with credit. As of June 2004, prior to the Nigerian banking sector consolidation, as many as 89 money deposit banks were operating in Nigeria, curiously, however, many of these banks had capital of less than US$10mn. 


The Nigerian banking sector was fragmented and could barely support any bold developmental plans. Prior to the consolidation, a certain South African Bank was as large as all 89 Nigerian banks. The Charles Chukwuma Soludo-led CBN supervised several mergers and acquisitions a process that required banks to raise their capital base to N25bn. At the end of the process, there were a total of 25 banks believed to be larger and better capacitated to support the real sector. While a larger capital base enhances the lending capacity of banks and reduces the risk of a bank failure, there were now fears that lending to small businesses lending could suffer as commercial banks grow. The fear did not materialize in the Nigerian case. Following the consolidation of the banking industry in 2005, IMF data shows that Domestic credit to the Private sector rocketed, and the ratio of domestic credit to GDP more than doubled from 8.11% in 2006 to 19.60% in 2009. The downward trend that started afterward and was sustained till 2012 is attributable to the Global Financial Crisis (see chart 24 below)


Chart 24: Domestic Credit to Private Sector by Nigerian Banks (% of GDP) (2002-2020)


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Despite the success of the consolidation programme which saw the emergence of new generation banks such as Access Bank, Guaranty Trust Bank and Zenith Bank as major forces to reckon with, Nigerian banks still did not rank in terms of size anywhere near some of their counterparts on the continent. For instance, as of 2011, no Nigerian bank made a list of 15 top African banks (based on Assets). As of the time, the top four on the list were all South African Banks, namely: Standard Bank Group, Absa Group, First Rand, and Nedbank Group. Collectively they held assets worth $456bn. First Bank of Nigeria was the highest-ranked Nigerian bank in the 16th position with assets worth $17.39bn. 


In 2009, the Nigerian Banking Industry once again witnessed a major intervention from the regulator, this time, it was as a result of the regulator’s concern about the risk management practices of some banks, a situation which saw the ratio of  Non-Performing Loans Ratios (NPLR) rise to as high as about 37.25% this development, as well as the global financial crisis, had begun to cause foreign portfolio withdrawal, this led to the AMCON Act and later on the establishment of the Asset Management Corporation of Nigeria (AMCON)- a body that will prevent the looming financial sector collapse in the country. At the time of inception, introduced a total of ₦736 billion liquidity to buy up the toxic assets of up to 10 banks, of these number only Keystone Bank, Mainstreet Bank, and Enterprise Bank were eventually acquired by AMCON and subsequently referred to as the Bridged Banks.


Current Areas of Lending Priority: Loans and Advances by Sector

The 5 largest banks in Nigeria have a major role to play in further diversifying the Nigerian economy. Even though we recognize the fact that commercial banks are in the business of lending to make a profit and maximize shareholders' wealth, they occupy such a vital position within the economy that makes it necessary for their appreciation of the long-term potential of the Nigerian economy. The fact that banks also engage in and make a lot of earnings from other businesses asides from lending raises a lot of questions. The same deep involvement of banks in foreign exchange trading and investment in government treasury bills is unhealthy and unhelpful to the economy.


A look at the loan books of the largest banks in asset size shows that most of the lending is directed to the Upstream and Downstream sectors of the Nigerian economy. This poses a peculiar challenge given that the Oil and Gas Sector has on average only accounted for 5% -7% of the country’s GDP, more so the Oil and Gas Sector has contracted in the last seven quarters. 

Downloadable Versions of Tier 1 Banks Report (PDF)

1. Executive Summary: Nigeria’s Banking Industry: The Case for Redefining Tier 1 Banks - May 28, 2022

2. Full Report: Nigeria’s Banking Industry: The Case for Redefining Tier 1 Banks - May 28, 2022

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