Obinna Chima

Pan African credit rating agency, Agusto & Co. has stated that the emergence of financial technology (fintech) companies in the country was accelerating the adoption of digital banking.
The agency, however, noted that while fintech companies may not be a threat to the Nigerian banking industry in the short-term, they are potential long-term threat to the sector.

Agusto & Co., which stated this in its latest Banking Sector Report made available to THISDAY, therefore supported ongoing strategies by “proactive players in the banking industry to either partner with these fintech companies or create an alternative form in-house.”

The report observed that banks with net interest spread (NIS) consistently above the Industry average of 59 per cent in 2017, garnered a large pool of stable, low cost deposits through investments in technology to enhance digital services in their retail banking strategies.
Therefore, it pointed out that financial inclusion strategy aimed at capturing the informal and unbanked portion of the Nigerian populace, which accounts for about 47.5 per cent of Nigerians, remains an avenue to get low-cost funds into the system.

“This is achievable though mobile and agency banking. The young populace, particularly “millennials” are available targets that can be on boarded into the banking system through digital solutions.
“The idea behind technology is to grow low cost deposits efficiently, so that the Industry’s spread is preserved as it focuses to top tier corporates for risk asset creation.
“In addition, the use of digital platforms reduces the marginal (or additional) cost of serving customers, thereby maintaining profitability,” Agusto & Co. stated.

According to the agency, with 198 million Nigerians and 148.8 million active mobile (GSM) telephone lines as at March 2018 (Tele density of 75.4%), the potential for financial inclusion via technology was enormous. Although it highlighted key drawbacks to this to include infrastructure deficit in terms of internet connectivity and cell towns outside major cities, the report stressed that opportunities still exists to increase transactions on e-banking platforms and grow service fees.
“The Industry’s e-banking income generated from payment platforms and electronic channels has been on the rise and was the largest contributor to fees & commissions at 24 per cent in 2017.

“Mobile money and ATM transaction trends show growing usage of electronic payment platforms which increases opportunities for banks to earn service and transaction commissions.
“With increasing transactions on these digital platforms, the Industry is able to grow commissions and the 24 per cent contribution will rise further overtime.

“The margins of the Nigerian banking Industry are under threat due to the weak economic climate which continues to impact asset quality and regulatory constraints caused by a tight monetary policy stance aimed at protecting exchange rates.
“The adoption of digitalisation strategies can enable banks raise low cost retail deposits, while reducing the costs of servicing these customers.

“The future of banking in Nigeria lies with the retail market and with banks ensuring that this segment of the market is well served using digital solutions. This will ensure that cost of funding is low and operating expenses are minimised in the medium to long term,” it added.
According to the firm, regulation continues to squeeze funds available to the banks for lending, thereby, increasing cost of funds.

Apart from regulatory liquidity requirements which demands banks to reserve a minimum of 30 per cent of assets in liquid or ‘near cash’ assets, the cash reserve requirement (CRR) is also a major drag on profitability, Agusto & Co stated.
The Central Bank of Nigeria’s (CBN) official CRR currently stands at 22.5 per cent (or 27.5% for banks that are unwilling to lend to sectors prioritised by the CBN).

“However, the effective CRR for some banks is as high as 31 per cent given CBN’s tight monetary policy stance. This implies that the industry has only about 47.5 per cent of its deposits available for lending. “Banks preferably lend these funds to top tier large corporates (with a concession on rates) to avoid further deterioration in asset quality,” the report added.