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The Bank Directors Association of Nigeria (BDAN) has demanded that the required laws be reviewed in order to stop deposit money banks from providing insurance on deposits that have been sterilised with the Central Bank of Nigeria (CBN). 

The directors claimed that while operators have access to around 50% of money for lending and other investments, banks are required to insure all of their total deposits. They urged the Central Bank of Nigeria (CBN) and the Nigeria Deposit Insurance Corporation (NDIC) to urgently start the process of amending the rules to protect banks from having to pay premiums on risk-free deposits.

At the Bank Directors Annual Summit 2022, which took place last week in Lagos, the stance was advanced. The proposition of deposit maintained by the CBN, known as the cash reserve ratio (CRR), was increased last month from 27.5 to 32.5 percent. However, according to experts, the effective CRR is only about 50%, indicating that banks may only use 50% of bank deposits for lending and investment. 

Banks could no longer guarantee non-trading deposits, according to Mustafa Chike-Obi, the President of the Governing Council, BDAN. He questioned the need for insurance on the money since it was safe and secure in the apex bank’s vault.

Additionally, he questioned banks’ contributions to the sinking fund of the Asset Management Corporation of Nigeria (AMCON), claiming that AMCON might always exist. There have been objections against the Federal Government-created AMCON receiving funds from banks, which are held by private investors. 

According to Chike-Obi, the government’s and its agencies’ various regulations are stifling bank expansion and profitability. 

Why do banks pay deposit insurance on money that has been sterilised at the CBN as CRR? If the cash ratio has been sterilised by the CBN, there is no reason to insure it and so at a minimum, all discretionary normal CRR that are at CBN should not be subject to the calculation of deposit insurance. This is saving close to N50 billion,” he said.

However, Bello Hassan, the managing director of NDIC, stated that the deposit premium payment is crucial to allow the Corporation to perform its duty to the sector in the event of failure. He suggested that specific institutions pay a lot due to their high level of risk. The directors were tasked by him with asking their respective management to defend their NDIC premiums.

Olabode Agusto, the founding managing director of Agusto & Co., mentioned in his keynote speech that the Federal Government and regulators’ actions were significant risk concerns for the industry. 

He bemoaned the adverse effects of regulation on profitability and return on equity (ROE), emphasizing that the sector was barely surviving.

The pre-tax return on asset (ROA) for Nigeria’s banking sector was 1.7 per cent in 2021 and the same percentage is projected for 2022. In Ghana, a country that has the same long-term rate of inflation as Nigeria, pre-tax ROA was 4.6 per cent in 2021. Why is the profitability of Nigeria’s banking industry significantly below expectations? We estimate that above-normal CRR, negative real interest rates and AMCON levy reduce the banking sector’s ROA by about 3%. These rules, therefore, impair the ability of the banking sector to build capital from internally generated profits. Because of this, capital buffers in the banking industry are thinning. In 2017, the banking sector had an equity capital to assets ratio of 14.2 per cent, by 2021 this ratio had gone down to 10.4 per cent. Can the banking industry shore up its capital by raising additional capital from the markets? Yes, but at a great discount. Investors will surely be wary of investing in an industry that is seen as under-performing because it delivers a ROE that is below the rate of inflation,” Agusto explained.

He encouraged the regulators to reconsider their approach to supporting the industry’s capacity to raise cash through internal profits immediately. While arguing that the effective CRR had reached 50% as opposed to the official criterion of 32.5%, he provided the regulators with important guidelines for maintaining reserves and other factors. 

His recommendations include lowering the cash reserve requirement to 15% or paying interest on CRR above 15%, and making sure that the AMCON levy does not last longer than the additional five years. The risk-free rate is calculated as the average yield on 364-day Treasury Bills, and it should be at least 100 basis points higher than the long-term inflation rate, which he estimated to be 12%.

However, Agusto asserted that in order for the banks to keep the transaction money earnings, they would have to cash in on fintech. Customers desire effectiveness, decreased transaction costs, and financial security, he claims. Fintech, he observed, provides the first two in spades while enhancing the third, posing a danger to unresponsive traditional institutions. 

Will the structure of the banking industry in Nigeria be fundamentally altered by these newcomers?

“They can certainly use technology to scale and customize products for their customers, Nigeria has a young population that will embrace their services, they are not burdened by the costs associated with brick and mortar but do they have the discipline and capacity to manage large businesses?” he asked.

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