Group highlights risks to monitor in Nigeria’s financial sector

Agora Policy, an Abuja-based think tank, has highlighted major risks that need to be closely monitored in Nigeria’s financial sector, following the recent global banking crisis.

The think tank — founded by Waziri Adio, former executive secretary of the Nigeria Extractive Industries Transparency Initiative (NEITI) — made the recommendations in its latest report on Wednesday.

Titled, ‘what does the global banking turmoil mean for Nigeria’s financial sector?’, the report examined the recent collapse of the Silicon Valley Bank (SVB), and the potential implications for local financial firms.

Linking the collapse of the bank to a rise in prices, Agora Policy said severe disruptions to supply chain, as well as efforts by governments globally to support their economies and to minimise the effects of COVID-19 measures, led to a global spike in inflation.

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The organisation said the response to a high and rising inflation in many countries was to increase interest rates.

“A rising interest rate environment can have sometimes unforeseen impacts on banks through various channels. And because banks effectively run a lot on trust, negative sentiment can impact not just the bank in question but others as well, and of course can spillover on the real economy.”

Following a crisis of confidence in banks, the 167-year-old Credit Suisse, a Switzerland-based bank, has been facing liquidity issues.

But the Swiss authorities stepped in to stop a banking crisis in the country, after which UBS, a rival bank, agreed to buy the bank for a price of $3 billion Swiss francs ($3.25 billion).

Similarly, the New York-based Silicon Valley Bank (SVB) was shut down by the US Federal Deposit Insurance Corporation (FDIC) after experiencing a loss of $1.8 billion, and was acquired by HSBC Holdings Plc, a Swiss private bank.

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Analysing the local industry from the same prism, the agency said Nigerian banks have demonstrated that they learned from the banking crisis of 2008.

According to Agora Policy, whether it’s the 2015 oil price crash or the COVID-19 pandemic, almost all banks have been able to weather the multiple economic shocks that have hit the country’s economy.

“From increasing cash reserve ratios (both general and arbitrary) to actual increases in the monetary policy rate, the banks have had to manage a tighter interest rate environment.

“Although there is no room for complacency, the Nigerian financial system looks to be well prepared to continue managing the higher domestic interest rate environment.”

There are, however, some risks that still need to be assessed and closely monitored, it said.

The think tank group said as global interest rates rise, “the costs of servicing these loans will increase”.

“Anecdotal evidence suggests that most banks with foreign currency liabilities have taken measures to minimise that risk such as by getting into swap agreements with the Central Bank of Nigeria (CBN). Regardless, the risks should be taken note of.

“The external exposure is of course not limited to loans alone. It includes other kinds of foreign currency liabilities and assets that may be affected directly by higher global interest rates.”