NIGERIA: An Introduction to Banking & Finance

The Nigerian economy faced a few headwinds in the wake of the pandemic, leading to an initial decline. However, a recovery in recent months has seen the country record a 3.3% growth in GDP in 2022. Indeed, in its latest economic outlook for 2023, the International Monetary Fund (IMF) projects a 3% GDP growth in the Nigerian economy and a continued decline in inflation to 17%.

Along with ripple effects from the global financial squeeze, the Nigerian economy grapples with inflation, a foreign exchange liquidity crisis, rising interest rates, and uncertainties surrounding the outcome of the 2023 general elections. Notwithstanding, the banking and finance scene is witnessing significant innovations, increased technology adoption, expansion into new business frontiers and heightened regulatory scrutiny. This overview examines the significant developments and potential headwinds likely to shape the Nigerian banking and finance sector in 2023.

Trends and Developments 

Regulatory interventions 

The Money Laundering (Prevention and Prohibition Act) 2022 (“the Act”) was enacted to provide a comprehensive legal and institutional framework for combating money laundering and other related offences in Nigeria, in line with global standards. Key provisions of the Act include the recognition of virtual asset service providers as finance institutions and the exclusion of attorney–client privilege in transactions bordering on sale of properties or businesses and management of client accounts, trusts, assets and client’s monies. Also notable is the inclusion of legal practitioners as designated non-finance institutions, which comes after the prior exclusion was repealed under the Act following a court order.

In 2022, the Central Bank of Nigeria (CBN) issued the Guidelines for Regulation and Supervision of Credit Guarantee Companies, which provides a framework for the operations of credit guarantee companies, in order to improve access to credit by micro-, small and medium-sized enterprises (MSME), reduce risk for finance institutions, lower interest rates and more flexible collateral requirements by finance institutions.

Regulation of digital assets 

While the CBN continues to bar financial and banking institutions from transacting or dealing in cryptocurrency, one notable policy improvement is the Securities and Exchange Commission’s new Rules on Issuance, Offering Platforms and Custody of Digital Assets. Among other things, this sets out the institutional framework for the issuance of digital assets as security, registration of digital assets, the offering of platforms and digital asset custodians, and the operation of a digital assets exchange.

Foreign exchange regulation and administration 

In 2021, the CBN discontinued the sale of foreign exchange (FX) to Bureau De Change operators as a response to the alleged diversion of funds allocated to them by the CBN. A similar discontinuance of FX sales to banks is yet to be implemented, although it has been announced. However, the CBN expects banks to source FX from non-oil sectors and export proceeds from 2023 onwards. In order to support banks’ efforts in this regard, the CBN launched the Race to USD200 Billion FX Repatriation Programme for the the purpose of facilitating FX inflow through non-oil exports, which saw USD4.8 billion come into the banking sector in 2022.

Uncertainty in economic and political conditions has increased FX risks on industry activities. Despite this, the industry continues to present growth/investment opportunities through expansion into new favourable markets, investment in technology and diversification across currencies. There has been an increase in derivative and structured finance transactions between Nigerian banks and international finance institutions, which is expected to continue in 2023. We expect businesses/individuals to regularly assess exposure to foreign currencies and plan accordingly. Most established finance institutions employ currency hedging tools to mitigate the risk of FX fluctuations and are utilising the African Continental Free Trade Agreement to diversify.

Digital lending 

Delays in accessing bank loans and a growing need for financial inclusion have given rise to alternative lending arrangements such peer-to-peer lending and crowdfunding over the past three years. These developments present multiple opportunities for investors and businesses, with a total of USD 507 million invested in fintech in Nigeria as of the third quarter of 2022.

The growth in the digital lending market has, however, raised some ethical concerns and led to interventions by the Federal Consumer Protection Commission (through the publication of a regulatory framework for digital lending) and the National Information Technology Development Agency (through the imposition of sanctions on defaulting digital lending businesses).

Monetary policy and naira redesign 

The Monetary Policy Committee of the CBN raised the Monetary Policy Rate (MPR) four times in the course of 2022 as a result of rising inflation. The MPR has again been raised from 16.5% to 17.5% in January 2023, as part of the increased efforts to curb inflation and support economic activity. The CBN has also implemented a redesign of the national currency and set an end date of 10 February 2023 for the use of the old naira notes. One of the reasons for the currency redesign was to bring in the NGN2.7 trillion held outside the banking system. The CBN has so far recorded a 75% success rate on this, with about NGN1.9 trillion mopped up since the commencement of the exercise.

Domestic card scheme 

In order to integrate the underbanked into the formal financial services system, the CBN launched a national domestic card scheme in collaboration with the Nigerian Inter-Bank Settlement System in January 2023. Upon full implementation, all domestic card transactions in Nigeria will be effected through the national domestic card, which is expected to broaden the payment ecosystem and reduce transaction costs from foreign card payment providers.

Restructuring and diversification 

As part of the banking sector’s response to the influx of fintech players into the sector, banks in Nigeria are restructuring their operations into group structures with a key fintech offering embedded in the service offerings. Two leading commercial banks in Nigeria completed their restructuring into a holding company structure in the course of 2022, while a few divestments were also completed. One of 2022’s notable corporate deals was the Titan Trust Bank Limited (TTB)’s acquisition of a majority stake in Union Bank Plc through a mandatory takeover for NGN191 billion, in one of the largest acquisition deals of the banking industry. The acquisition is timely and allows TTB to compete with other Tier 1 banks for an improved and technologically advanced financial system.

Other developments 

The Pan-African Payment and Settlement System (PAPSS) was launched in January 2022 by the African Union in collaboration with Afrexim Bank and the African Continental Free Trade secretariat. PAPSS aims to address challenges with cross-border payments across Africa, reduce transaction costs and decrease FX liquidity concerns. As of the end of 2022, eight central banks, 28 commercial banks and six switches have been onboarded on the system across Africa (including Nigeria), and continued efforts are geared towards further expansion to other African regions.

Relatedly, in April 2022, the CBN approved a payment service bank licence for MTN Nigeria’s fintech subsidiary MoMo Payment Service Bank Limited (MoMo). MoMo’s service offerings broaden the range of digitised payment services offered to Nigerians and will remove the bottlenecks in everyday payment, as well as improve access to payments from any country.

Proposed Regulatory Interventions 

In July 2022, the CBN issued an exposure draft of the Guidelines on Digital Financial Services Awareness in order to address the gaps in customer awareness and foster transparency among digital financial service providers, with the aim of ensuring customers are equipped to make informed decisions on financial services products.

In October 2022, the CBN also published exposure drafts of proposed Guidelines for the Regulation of Representative Offices of Foreign Banks in Nigeria (GRROFBN) and Guidelines on Contactless Payment in Nigeria (GCPN). Under the GRROFBN, a foreign institution seeking to open a representative office in Nigeria must be duly registered in Nigeria and its parent company is required to enter into a Memorandum of Understanding with the CBN before obtaining the CBN’s approval.

The GCPN provides for the responsibilities of various stakeholders in the contactless payment ecosystem, as well as for the standards and principles that govern their operations – including modalities for obtaining the CBN’s approval to offer novel or value-added services.

Potential Headwinds 

Growth in the sector is expected to be impacted by high interest rates, leading to increased cost of borrowing and causing businesses to explore alternative funding from the capital markets, etc. Similarly, uncertainties around the 2023 general elections may influence an overly cautious approach as businesses in the financial services industry seek to manage risks and buffers against the aftermath of the election.

The CBN’s implementation of the Basel III Guidelines in order to enhance the stability of the banking system has forced banks to shore up their capital base through local Additional Tier 1 capital (AT-1) raises in the capital markets so as to better absorb economic shocks – the first of which was successfully issued by Access Bank Plc in September 2021. We anticipate more AT-1 issuances by other commercial banks during the year. The Basel III implementation is also driving demand for products and systems around risk management and compliance.

Conclusion 

The continued growth of the Nigerian economy rests on the facilitation of the required capital, which creates an impetus for stakeholders in the banking and finance sector. Promoting financial inclusion also presents opportunities for investors and operators in the sector. It is, however, expected that regulation will keep pace with innovation in the sector while some resilience will be required to weather the storms that lie ahead.