Nigeria's banking system is more resilient now, but the International Monetary Fund isn't letting its guard down. In a fresh assessment, the IMF warned regulators to watch closely for rising bad loans threatening the sector's stability.
The Fund acknowledged progress made through the Central Bank's recapitalisation drive. Yet it said risks remain serious and demand constant attention.
"Directors welcomed that the financial system remains resilient, helped by the recent recapitalisation of banks, while encouraging continued vigilance of rising NPLs and the sovereign-bank nexus," the IMF noted in its Article IV consultation report on Nigeria.
Bad loans, or non-performing loans, have become a growing headache. So has the amount of government debt sitting on bank balance sheets.
Banks have certainly strengthened their ability to weather shocks. But loan quality concerns haven't disappeared, the IMF said, and exposure to government securities presents fresh dangers.
There's another problem. Nigerian banks raise lending rates quickly when the central bank tightens monetary policy but drag their feet cutting rates when conditions ease.
The pattern shows a clear unfairness to borrowers and savers. "Interest rate transmission displays a clear 'rockets-and-feathers' pattern, with borrowing rates adjusting upward rapidly during tightening cycles but declining only gradually when policy is eased," the Fund explained.
Banks amplify the pain during rate hikes. During rate cuts, they move at a snail's pace to pass savings along.
Two years of aggressive rate increases by the Central Bank have crushed borrowing costs across Nigeria's economy. The IMF's finding highlights a troubling dynamic in how banks respond to policy shifts.
The "sovereign-bank nexus" is another area drawing IMF scrutiny. This describes how deeply banks are entangled with government debt holdings.
Such heavy exposure can magnify danger during fiscal crises. Banks and governments become locked in a risky embrace.
Bismarck Rewane, a prominent financial analyst and head of Financial Derivatives Company, recently painted a stark picture of banking sector divisions. The stress tests, according to him, have created two distinct banking classes.
One group has strong balance sheets. The other struggles under heavy capital and provisioning demands.
"Nigeria's banking sector is increasingly divided between lenders with strong enough balance sheets to reward shareholders and those struggling with heavy provisioning requirements following the Central Bank of Nigeria's stress-testing exercise," Rewane told attendees at the Lagos Business School Breakfast Session.
He noted that moderate corrections have rippled through the sector since stress testing began. Some institutions weathered the storm better than others.
Regulators face a balancing act. They must keep pushing for stronger banks while preventing a two-tier system from destabilising the entire sector.
