Nigeria’s banks turn a profit but fintechs are catching up

During a year of high inflation and mounting national debt, Nigerian banks registered a 26% aggregate growth in interest income in the first nine months of 2022, according to filings with the Nigerian Exchange Group, which runs the stock exchange. This saw the money earned from issuing loans and overdrafts rising to N3.1trn ($6.6bn) from N2.48trn in the same period a year earlier. 

Of course, fortunes differed from one bank to another, but altogether it was a strong sectoral performance that indicated that the banks have an assured income base just doing what they’re known for: lending money and charging interest on it. 

It’s also partly explained by the lenders making the most of the high interest-rate environment engendered by multiple rate hikes by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) last year in a bid to fend off soaring inflation.

The last increase in November took the MPC rate to 16.5%, raising the cost of funds across the board for all bank borrowers. In November, annual inflation stood at 21.47%, rising for the 10th straight month to the highest in almost two decades, providing further justification for further rate increases by the central bank.

Topping the list of the big interest earners was Access Bank, Nigeria’s biggest bank by assets, which recorded a 22% increase to N572bn ($3.77bn) from N471bn in the preceding year. It was followed by Ecobank with N485.8bn, a 9% increase from its last results.  

United Bank for Africa came in third with interest earnings of N420bn, a 22% jump from 2021, while Zenith Bank’s total rose 22% to N420bn. First Bank made a more dramatic 42% jump to N370bn naira. 

All this affirmed a general trend of increased interest income for banks, for whom it represented between 50% and 70% of gross income, marking it out as a most crucial income stream for the viability of Nigerian banks.

Key stress indicators point to the growing resilience of the banking system, with non-performing loans at 4.81% of total credit, a liquidity ratio of 40.14% and capital adequacy ratio at 13.39%, well within the prescribed prudential boundaries despite growing credit going to businesses, according to the CBN.

Borrowings by banks from the CBN’s standing lending facility and the repurchase lending facility fell 79% to N5.7trn ($5.76bn) in 2022 from N27trn in 2021, a further sign of improved health.

Still, critics of Nigerian banks remain sceptical, arguing that being assured of interest income has made many banks complacent and leery of risks, even where rewards are promising. “Many banks are just treading water, smug in the knowledge they’ll make money by avoiding all risks,” said Buloumbele Yemowei, a Lagos-based financial advisor. “This is where the fintech companies have caught them off guard.”

Fintechs to the fore

In recent years, several fintech companies have emerged to entice and win new customers by providing the innovation lacking in the big banks in services such as payments, wealth management, savings and investment as well as credit and lending.

Using information and communication technology, they’ve been able to run wholly digital operations that simplify the on-boarding process in a way that particularly appeals to younger people.

With the median age of the Nigerian population at 19 and youths making up more than 65% of the population, banks that fail to innovate to meet the needs of younger customers are at risk of losing out in the medium-to-long-term. 

It’s the same demographic largely behind the success of payment companies Flutterwave and Paystack, both founded in 2016. Flutterwave is currently valued at more than $3bn, while Paystack was quickly snapped up by US online payments giant Stripe for $200m in 2020 as a cornerstone of its African expansion.

African startups raised $5.3bn in 2022, slightly more than in the preceding year, with $1.3bn coming to Nigeria alone from venture capitalists. Virtually all of that money went to fintech startups encroaching into service areas that previously fell on the turf of traditional banks. Though the funding attracted last year was lower than the $1.5bn in 2021, due to looming global economic headwinds, it still underscores the level of interest in fintech prospects.

In the evolving labour market, banks contending with the new digital imperatives of innovation, now face a skills crunch as international employers hunt around the world for tech talent. In Nigeria, both the banks and the fintech companies are confronting a wave of emigration of key staff members that often has the affected companies scrambling for replacements. 

The blurring of lines between telecommunications and banking should be of concern to Nigerian banks after the top mobile-phone companies (MTN, Airtel, Glo and 9Mobile) acquired banking licences. Though mostly restricted to payments service banking, they are providing services of financial intermediation that a few decades ago were firmly the preserve of brick-and-mortar banks.

Investor confidence lacking

Despite the relative stability of the Nigerian banks, investors didn’t show the expected confidence by putting more money in their stocks. All the country’s top-five banks recorded a decline in market value in 2022 with Guaranty Trust Co losing 11.5%, Access Bank dropping 7.5% and United Bank for Africa losing 5%. Zenith Bank followed with a 1.6% loss of value while First Bank shed 0.44%.

In some ways, it reflects the unfavourable business environment in which Nigerian banks have had to operate, having faced two recessions in four years, compounded by a foreign exchange crisis as oil exports, the country’s main source of foreign income, collapsed.

A surge in new credit lines, including car loans targeting the middle class, was quickly cut short by most banks. Even burgeoning e-commerce, popular with young Nigerians, suffered as banks put restrictions on foreign purchases as a foreign-exchange shortage set in. The decimation of the middle class by the economic difficulties that ensued, eroded a key customer base of retail banking. 

The naira’s steep loss of value also weighed on their foreign-currency denominated liabilities, adding to existing challenges. An unstable global economy showing volatility in the markets made trade and export financing riskier than before, leaving the banks reassessing their strategies. Most chose caution.

For decades, Nigerian lenders were essentially government banks thriving on attracting the huge deposits that came from state and local government shares of federally allocated revenue, and trading them for high-interest revenue. Faced with difficult global and domestic challenges, many of them are rethinking the old business model.

Innovate or perish

What still makes the Nigerian banking and financial services sector attractive is the sheer number of people out of a population of more than 200m still left outside the financial system. This same factor is driving fintech growth that is also creating similar expansion opportunities for traditional banks.

It’s a dynamic that has been boosted by the emergence of the African Continental Free Trade Agreement (AfCFTA) that turns Africa into one vast market. More than a decade ago, many Nigerian banks had begun their African forays as the benefits of the business model embraced by Ecobank on its formation as a pan-African bank became apparent.

That has now coincided with the AfCFTA, leaving the banks poised to take advantage of the intra-African trade potentials. The introduction of the Pan-African Payment and Settlement System (PAPSS), spearheaded by Afreximbank, that enables seamless payments from one point in the continent to another, provides a framework for this expansion. It’s now left to the banks to apply the innovation that will realise the potential, or perish.