Nigerian banks have proven to be highly profitable. Last year alone, the publicly listed Nigerian banks are projected to surpass N3.5 trillion in profits for 2023, more than doubling their earnings from 2022.
Indeed, commercial banks have not only been profitable but have also consistently grown their profits by at least 15% annually over the past five years, according to Nairametrics research.
These banks are profitable enough to return capital to their shareholders annually through dividends, while still retaining at least 60% of their profits to fund future growth.
Despite their profitability, the Central Bank of Nigeria (CBN) insists on their recapitalization to ensure they have adequate buffers to absorb risks associated with supporting the government’s economic growth plans.
This suggest profitability alone does not indicate a bank’s financial health and why regulatory bodies like the central bank utilize metrics such as the capital adequacy ratio and non-performing loan ratios, among others, to assess a bank’s condition.
Periodic stress tests are also conducted, acknowledging that these ratios sometimes fail to reveal the resilience of a bank in the face of severe financial crises. Such regulatory scrutiny is crucial for Nigerian banks.
Recommended reading: CBN mandates microfinance, mortgage banks and DFIs to submit financial returns monthly or risk sanctions
Better oversight for challenger banks
Recently, the banking landscape in Nigeria has evolved. The traditional categorization into tier 1 and tier 2 banks has given way to the rise of challenger banks or neobanks, which operate quite differently.
These digitally enabled banks do not require physical branches to serve their customers, offering top-notch services that, once experienced, customers find hard to abandon.
Moreover, they are largely free from the costs associated with more traditional banks.
While they can serve customers comfortably via smartphones, little is publicly known about their financial standing. These banks do not publish audited accounts, and only the central bank might be aware of how much customer deposits they hold or how much of these deposits are lent out.
Banking fundamentally involves receiving deposits from customers and lending them out, earning a margin on the difference between deposit and lending rates.
Banks also generate revenue from fees and commissions, but since challenger banks rarely charge these, they likely do not contribute significantly to their revenue streams.
The financial opacity of these banks raises questions. If they handle depositor’s money, shouldn’t they be required to make their financial statements public? Shouldn’t they also publish their financial ratios, just like traditional banks?
Providing this information could enhance the credibility of these banks and give their customers the assurance they need to continue banking with them. Perhaps one reason for the lack of public financial disclosures is that many of these banks are not yet profitable.
Reports suggest that most are unprofitable, incurring losses in exchange for critical investments intended to drive rapid growth, necessitating continued investment of shareholder funds to cover deficits.
While this approach may be justified from a tech innovation perspective, banking is somewhat different. In banking, the primary asset is customer deposits, which are then lent out to borrowers. Profitability, while not a guarantee of success, is the minimum requirement for a bank to continue operating as a deposit money bank.
Regulators such as the CBN and the Nigeria Deposit Insurance Corporation (NDIC) must ensure that all financial institutions accepting deposits from the public publish their annual audited accounts. This level of transparency is the least that should be expected from a deposit money bank.
We should not have to wait for another banking collapse before regulators take appropriate action.
Recently, the Republican First Bank in Philadelphia became the first U.S. deposit money bank to fail in 2024, shuttered due to challenges with bad loans exacerbated by high interest rates.
While we may not anticipate a similar scenario in Nigeria, the current economic challenges in the country necessitate that banks make their financial health public. Nigerians deserve to know who the shareholders are and how much capital has been expended to keep these banks operational.
It might be argued that these are private companies, and therefore not obliged to disclose their financial statements. However, banks operate under a different set of rules, and private banks do publish their financial statements.
Some might categorize them as microfinance banks, but as long as they accept deposits, they should be subject to public scrutiny.
Technology should serve as a leveler. As much as it enhances customer service, it should also enable transparency in financial performance.
