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 sterilized with the Central Bank of Nigeria (CBN).
The Directors claimed that while operators have access to around 50 percent of the money for lending and other investments, banks are required to ensure 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 CBN’s deposit proposition, known as the cash reserve ratio (CRR), 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.
He also questioned the contributions of banks to the Asset Management Corporation of Nigeria (AMCON)’s sinking fund, saying AMCON’s existence could be perpetual. There have been arguments against the contribution of banks, which are owned by private investors, to the funding of AMCON, a creation of the Federal Government.
Chike-Obi said the different impositions by the government and its agencies are killing the growth and profitability of the banks.
“Why do banks pay deposit insurance on money that has been sterilized at the CBN as CRR? At the very least, all discretionary normal CRRs held by the CBN should not be subject to deposit insurance calculation. This is saving close to N50 billion, he said.
But Managing Director of NDIC, Bello Hassan, said the deposit premium payment is important to enable the Corporation to fulfill its obligation to the sector in event of failure. He argued that certain banks pay much because of their high-risk level. He charged the directors to engage their respective management to justify their NDIC premiums.
In his keynote address, the Founding Managing Director, Agusto & Co, Olabode Agusto, also pointed at the activities of the regulators and the Federal Government constituted major risk factors to the sector.
He lamented the impacts of hostile regulation on return on equity (ROE) and profitability, stressing that the industry was barely surviving.
“The pre-tax return on assets (ROA) for Nigeria’s banking sector was 1.7 percent 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 percent in 2021.
Why is the profitability of Nigeria’s banking industry significantly below expectations? We estimate that the above-normal CRR, negative real interest rates, and AMCON levy reduce the banking sector’s ROA by about three percent.
“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 percent. By 2021, this ratio would have gone down to 10.4 percent.
“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 ROE that is below the rate of inflation,” Agusto explained.
