Nigeria’s banking system is showing signs of stress imposed on it by an economy in deep distress. The banking system takes the first pounding whenever the economy is in distress. The first sign of stress appears in the form of massive increase in non-performing loans known in the banking system simply as NPL.
The distress in the banking system is so disturbing that NPL is rising at an alarming rate. Between June and September 2018, banks’ NPLs jumped by a staggering N308 billion to N2.245 trillion. The figure for June was N1.937 trillion.
Nigeria’s economy lumbered out of recession in the second quarter of 2017. However, unemployment remains alarmingly high at an official rate of 22 per cent while youth unemployment cruises along at an intimidating rate of 50 per cent.
That automatically translates into low productivity and low purchasing power. Nigeria therefore parades a population of 197 million people with 114 million living below poverty line. A good chunk of the remaining 83 million has very feeble purchasing power and could be pushed down poverty line any moment.
The implication of the above repugnant economic picture is that with an alarmingly low purchasing power of the populace, those who obtained bank loans to produce goods and services for sale to consumers could not secure adequate patronage and could not pay back their loans.
That partially explains the rising rate of NPLs in the banking system. Banks’ worsening NPL is a contribution of many factors. Nigeria harbours thousands of high profile loans beneficiaries who obtain bank loans as their share of the so-called national cake. They have no plans to pay back in the first place.
The Asset Management Corporation of Nigeria (AMCON) complains that less than 400 Nigerians owe the corporation a staggering N5 trillion. Out of the intimidating debt sum, N902 billion is owed by those rated as delinquent defaulters. No one expects to collect anything from them.
AMCON’s delinquent defaulters are obviously not spirits. They are rich Nigerians with solid contacts within the banking system. They are robbing the system in collaboration with some directors of the banks.
Some of the loans were given with no intention to collect back. Huge loans were advanced to people with questionable characters without collaterals. The situation is so bad that addresses of some of the loan beneficiaries could no longer be traced. Some of the so called delinquent defaulters are bank directors who defied corporate governance rules and advanced loans to themselves without collaterals.
The Central Bank of Nigeria (CBN) knows most of the bank directors who have now metamorphosed into delinquent loan defaulters. Until the collapse of the defunct Skye Bank, the apex bank for political reasons could not call the high net worth debtors to order.
Unlike the days of Sanusi Lamido Sanusi as CBN governor when bank directors with NPLs were sacked and prosecuted, the CBN has maintained a curious silence over the troubling issue.
The federal government is another factor in the worsening NPLs in the banking system. The federal government owes pensioners, contractors, construction companies, exporters, electricity distribution companies (DisCos) generation companies (GenCos), state governments, judgment debts and petroleum products marketers a total of N5.6 trillion.
The domestic debt burden is directly responsible for the mounting NPLs. The contractors who raised bank loans to execute government projects but could not be paid, can therefore not service their loans.
Banks NPLs are bursting at the seams because of the inability of fuel marketers to pay back the loans they raised to import petrol at higher landing cost only to sell at lower official pump price decreed by the federal government. No one knows precisely how much the federal government owes the country’s dubious fuel marketers. Figures touted by creditors and the debtor as fuel subsidy range from N800 billion to N386 billion respectively. NPLs would reduce if government pays the marketers debt.
The massive capital flight now threatening the stability of the naira is of serious concern to banks and their embattled debtors with dollar-denominated loans. Between January and November 2018, the Nigerian capital market alone lost close to N5 trillion largely to fleeing foreign portfolio investors now seeking higher returns on investments in secured, developed markets where interest rates have inched up due to improvement in economic growth.
The foreign portfolio investors are also fleeing the uncertainty in Nigeria’s political horizon as the country’s general elections approach.
The capital flight has mounted so much pressure on the foreign exchange market that between January and October 2018, the CBN sunk $10.97 billion into the forex market in a desperate bid to shore up the fortune of the naira.
Now there are fears that with tumbling oil prices, the apex bank might not be able to defend the naira with such huge sums. Many firms that contracted dollar-denominated loans are converting them to naira for fear that they might have to pay back the loans they raised at N360 to the dollar at anything from N400 to the dollar.
The federal government can save the banks by paying a chunk of its N5.6 trillion in domestic debts. If the federal government pumps N1 trillion into the economy through domestic debts repayment, contractors, DisCos, GenCos and fuel marketers would service their loans and reduce the distress in the banking system.
