As BusinessDay prepares for its maiden banking awards
this weekend, the International Monetary fund (IMF) has released its latest
assessment of the Nigerian financial industry and concludes that Nigerian banks
are in position to withstand significant shocks to their balance sheets. However,
what emerges from the IMF report also is the fact that banks remain dominant in
the Nigerian financial system, though pension funds are showing some muscle.
Some significant numbers in the IMF data stands out.
First, is the significant growth in the asset base of Nigerian banks between
2006 and 2011. Within the period, the total assets of the banking system has
tripled from N6.74 trillion to N18.5 trillion representing a growth rate of 174
per cent. The increase has not however come from an increase in the number of
banks as the number of banks in the financial system actually dropped from 25
in 2006 to 20 in 2011.
So what has happened within the period is that fewer number of banks have essentially grown
to be bigger taking on greater capacity to finance the Nigerian economy which
has also witnessed significant growth within the same period.
Banking dominance of the Nigerian financial system has
however dropped within the period. Banks in 2011 controlled 78.7 per cent of
the financial system asset compared to 90.5 per cent of the financial system
assets in 2011. The new elephant in the room muscling out the banking system
dominance of the Nigerian financial system are the pension funds. The pension
funds have grown from having just 4 per cent of financial system assets in 2006
to now having 12.1 per cent with total assets of pension funds rising from N300
billion in 2006 to N2.84 trillion in 2011.
This is good for the Nigerian economy as it represents
the significant emergence of alternative funding for economic growth. It is
even more significant considering that pension funds can conveniently provide
funds the long term which commercial banks are not structured to do.
Other players in the Nigerian financial system have
however not been able to match the significant growth rate recorded by pension
funds. The insurance sector is important sector of the Nigerian financial
system that is still lagging behind despite the significant growth in the
Nigerian economy. Though the IMF data does not have comparable figures for
2006, the Nigerian insurance sector controlled just 2.6 per cent of the total
financial systems assets of 2011. This is just slightly more than the size of
financial system assets controlled by the smallest bank in Nigeria. The
insurance sector is seen to be challenged by a general attitude by Nigerians
towards taking up insurance policies especially Life Policies as well as low
capital and lack of innovation by insurance companies.
Other Non-bank financial institutions control just 6.6
per cent of the financial system, up from 5.5 per cent in 2006. There are about
112 finance companies operating in the Nigerian financial system but they
control less than one per cent of the financial industry. There are also about
254 securities firms but the IMF has no data on their market share though their
market share is likely to be above one per cent either.
Fund managers are the dominant players in the non-bank
financial institutions make segment controlling 4.6 per cent of the assets held
in that segment of the market. Mortgage finance institutions and Microfinance
banks are also key players in the non-banking financial institutions category
but they control less than two per cent of the total financial industry assets
as of 2011.
The insignificant share of the non-bank segment in the
Nigerian financial industry means that banks have the burden of funding all
aspects of the Nigerian economy including funding sectors where they have no
clear expertise or even sectors that their balance sheets are not structured to
support.
The long term solution is boosting the capacity of the
non-banking financial sector to be able to provide alternative funding to
economy. Already, the different regulators are implementing several reforms in
the different sectors. For example, the no premium, no cover and compulsory
insurance initiatives by National Insurance Commission (NAICOM) will
significant boost the financial stability of Nigerian insurance companies if
implemented to the letter. Also, the CBN is pushing for the recapitalization of
Primary Mortgage Institutions (PMIs), an initiative that could see to the
significant reduction of the number players in the sector and hopefully result
in the emergence of stronger and more adequately capitalized players that can competitively
create more mortgage assets.
But while the reforms are still in progress, the banks
remain the dominant players in the Nigerian banking industry saddled with the
gains and risks of supporting all sectors of the Nigerian economy. The
implication is that they make all the profits in the Nigerian financial system
and carry all the risks. Hence, when the banks sneeze, the Nigerian economy
catches cold.
This article was first published in BusinessDay
