Nigerian banks may abandon their intermediation role by
seeking to gain arbitrage from the current devaluation that has made the
currency go beyond the N200/$ psychological level, leading to
dollarisation of the economy.
This is raising fears of sharp practices that could
further deny the economy of credit and cause a rise in banks non
performing loans and reduction in risk management oversight due to their
involvement in other quick profit ventures.
Adedoyin Salami, an economist at the Lagos Business
School, at the November Monetary Policy Committee meeting, warned of the
adhoc nature of some of the solutions proffered to high interest and
excess liquidity in the banking sector, while calling for a structural
and holistic monetary policy approach by the committee, to solve the
challenges in the banking sector.
“Beyond these, the threat of disintermediation rises as
currency substitution deepens. Systemic inefficiencies and perverse
incentives mean that various ‘games’ to take advantage of arbitrage
opportunities become irresistibly attractive –no matter how much moral
suasion regulators try. I have always struggled to understand the
effectiveness of moral suasion in a framework that is at best amoral,”
Salami said.
The impact of declining oil prices on the country has
brought about a fall in foreign reserves as export revenues drop;
currency comes under pressure as expectation of adjustments heighten
with the threat of inflation.
The development has given the economy another colouration,
with investors now expressing their preference for dollars in their
cash holdings. Meanwhile, dealers at the foreign exchange market are
exploiting the over N40 difference between the official N168/$ and a
parallel market hovering between N206 and N210 to a dollar.
This is beside the over 20 percent exposure to the oil and
gas sector by banks, throwing up comparisons with the 2008/9 banking
sector crisis, when oil price declined from $146/bl to $36/bl with the
attendant pressure on government revenues.
According to Fitch Ratings in their December note, “The
devaluation will be a drag on capital ratios as risk-weighted assets of
foreign-currency loans rise.”
Analysts at the FSDH say that besides challenges from the
fall in oil prices, the banks are also confronted with the adverse
effects of the CBN’s tight monetary policy. “Demand pressure at the
foreign exchange market could stifle lending activities of the banking
sector, as well as worsen the asset quality of the banks if not properly
monitored,” FSDH said.
Bismarck Rewane, chief executive officer, Financial
Derivatives Company, in a January 28 note from the Lagos Business
School, (LBS) Breakfast meeting in Lagos, said the recent policy
measures have heightened pressure on the naira, leading to a record low
of N210/$ at the parallel market, with the naira losing 17.9% (y-o-y) at
the interbank market. Rewane warned that the huge spread of over N35
between parallel and official rates is a major factor.
“Possible scrapping of RDAS and adoption of a pure
interbank market and increasing NOP to 1percent could be one of the ways
out for the banks,” Rewane said.
However, Fitch Ratings further warned that “Non-performing
loans in Nigeria’s banking sector will climb to between 5 percent and
10 percent by the end of 2015 from less than 3 percent now. Nevertheless;
the sector should avoid the bad loan crisis of 2009 which necessitated a
bailout from the CBN and the formation of an asset management company
AMCON.
Rewane noted that Nigeria could not afford a banking shock that would require another round of bail out.
“A bail out could be too expensive, as Nigeria cannot
afford a banking shock.CBN will most likely allow the banks ride out the
storm,” Rewane said.
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