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Nigeria: The Banking Sector and The 2016 Recession

The year 2016 saw Nigeria fall into recession after showing a negative growth in the GDP for two consecutive quarters and a continuous decline through to the 4th quarter leading to an annual growth rate of -1.30 which meant that we were in a recession.

Although the economy contracted during the period, most banks posted some impressive figures in the period under review. The financial statements of some of these banks were reviewed and they showed an increase in revenue from the previous year.

According to the Financial Stability report of the Central Bank Of Nigeria, CBN During the period under review, credit risk trended higher as the industry wide Non Performing Loan ratio moved from 11.7 per cent to 12.8 per cent at the end of 2016 and non-performing loans grew to N2,084.92 billion at end-December 2016 from N1,678.59 billion at end-June 2016.

 

This begs the question of how the increase in income arose as the major source of income for commercial banks is interest income from loans. The following are possible reasons for the increase in revenue:

  1. Devaluation of Naira: In keeping with standard accounting practices, the devaluation of the Naira will have led to foreign exchange gains on Naira devaluation.
  2. Purchase of Government Bonds and Treasury Bills: According to the Financial Stability Report “Net claims on the Federal Government increased to N4,808.04 billion at end-December 2016 compared with N2,893.19 billion at end-June 2016, representing an increase of 10.6 per cent. The development reflected significant growth in holding of government securities, especially Treasury bills and FGN bonds, which grew by 28.9 per cent and 42.7 per cent, respectively.”

 

With the Oil and Gas combined with the Government Sector having 38% of the total credit given by the Commercial Banks while Agriculture, Power and Energy, Transportation, Construction, Finance and Insurance, Real Estate and ICT sectors were given a combined 29% of the total credit; another factor which could have led to banks not being affected by the recession is that banks insulated themselves from risks of default by giving a high volume of credit to the sectors which are least likely to default.

In conclusion, increased efficiencies in the banking sector could have led to the very remarkable growth in the banking  sector which enabled it whither the storm of he recession but there are still a lot question marks as to how this cold have been in a period when non-performing loans increased to 14%(from 5.3%) of the gross loans during the period.

BY: ABIODUN OGUNSANYA

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