In the context of ongoing reforms to the Nigerian banking sector, numerous publications have been released to help solve the numerous challenges that the industry faces. I remember vividly an article that was published this year, I attempted to make clear the possible economic and financial consequences of the bailout money injected by Central Bank of Nigeria. My view was that the bail out could create the situation of excessive liquidity in the banking sector and in the economy as a whole.
My argument was based by the reality that the infusion of bailout money wasn’t backed up by genuine economic activity and thus in terms of economics, it does not have any real worth. The result of the intervention funds is more of an improvement in quantity of money available for circulation, coupled with a significant increase in the confidence of depositors. More effort is needed for the reform to have an overall effect. My opinion was that measures and procedures needed to be devised to make sure that the intervention funds result in a positive impact on economy and industry.
As the latest information is filtering out from banks, it is apparent that the majority of banks have excess liquidity, but the borrower community is facing a serious credit problems. The principal purpose behind the financial intermediation that banks exist has been eliminated. There is evidence that suggests that the majority of bank executives are now more cautious about risk and would prefer to invest in secured , short-term financial instruments instead of providing loans to customers. Conditions for lending to customers are so strict that it’s almost impossible to obtain the loan of banks. The result is that banks are left with excess liquidity at closing of business on a weekly, daily or monthly schedule.
However, the drawback of this scenario is that because too focus has been paid on the liquidity aspect of banking, there could have a negative impact on the profitability aspect. As time passes it is highly likely that the majority of Nigerian banks will see a decline in profits. It will be apparent at the zonal, branch as well as regional level of operations in banking. The general metrics that are used to evaluate performance could be revealing poor results, despite the effort that is put into by the employees of the unit or branch.
The recent drop in interest rates will also mean bank executives must find new and more inventive methods to make ends meet. Banks need to stay clear of money that is considered to be costly and therefore unattractive under the current economic climate. However it is CBN Central Bank of Nigeria has an obligation to encourage banking lending to the actual economic sectors. While the reforms that were initiated by the CBN have succeeded in maintaining depositors’ faith in their financial systems, they have also succeeded in reducing bankers’ trust in lending. Bankers generally feel more secure keeping the money they have instead of loaning it to companies.
That’s where the problem is in the hands of regulators. Maybe some kind of loan guarantee scheme could be needed for certain sectors in addition to other options.
Bank managers should be aware that profitability and liquidity operate together. The more liquidity you hold the less profit you can earn. Thus, good financial management is always seeking the balance Cross Crunches between profitability and liquidity. The issue that business owners confront is that both liquidity and high profits are desired. But, the greater of one you are looking for you, the less of the other.
For the executives of banks in the Nigerian banking sector It is now time to pay close attention to profitability since the long-term viability of any business venture is dependent on this. Business models must be evaluated carefully in context of the current situation and, if remedial action is required, the appropriate decisions must be made in this regard.