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You are here:Home>>Strategic Research & Analysis>>Nigeria Has Made Good Progress In Overhauling Its Banking System - S&P
Thursday, 01 March 2012 21:37

Nigeria Has Made Good Progress In Overhauling Its Banking System - S&P

Written by Standard & Poor's (S&P)
Nigerian banks Nigerian banks nigeriaplus

"Strong Regulatory Action Proves Its Worth For The Nigerian Banking System"

In a report published Feb 29, Standard & Poor's (S&P) Ratings Services examines the progress of Nigeria's overhaul of its banking system (see "Strong Regulatory Action Proves Its Worth For The Nigerian Banking System"). After more than two years of central bank support, Nigeria's commercial banks are again engaging with the domestic economy. Nigeria now has fewer, but larger, banks, with better corporate governance and regulatory oversight. In Standard & Poor's Ratings Services' view, however, the sector needs a longer regulatory track record before we stop considering corporate governance and regulatory oversight to be among its key risks.

 

In 2009, eight of the country's 24 banks had to be rescued after weak risk management and corporate governance lapses caused nonperforming loans (NPLs) to rise to more than a third of total loans across the banking system. The Central Bank of Nigeria (CBN) responded strongly, removing executive teams from failed banks, fully guaranteeing the interbank market, and setting up the Asset Management Company of Nigeria to purchase a large proportion of nonperforming loans from Nigerian banks. It also set up sizable intervention funds to support credits to the real economy. Finally, it is facilitating a series of mergers between failed banks and their stronger competitors.

As a result of the CBN's efforts, the industry and its regulation have improved significantly. Fewer, larger institutions have emerged following a succession of mergers triggered by the sharp rise in NPLs. In our opinion, risk management--particularly in higher-risk lending such as foreign currency loans and retail--and access to low-cost funding will be the key differentiators affecting banks' performance going forward.

 

In our view, long-term success for Nigerian banks will chiefly depend on them enhancing their risk management, improving their governance, diversifying their loan portfolios, and securing their funding profiles.

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