Sign in Subscribe
Commercial banks

Nigeria's Banking Sector Faces Turbulent Times as Military Rule Comes to an End

Strategic Insights

— 1 min read

The handover of power in Nigeria from the military to an elected civilian government has had far-reaching consequences for the banking sector. As foreign donor communities hold off on debt relief and fresh loans, the outgoing government has turned its attention to the domestic debt market, forcing commercial and merchant banks to borrow compulsorily and purchase three-month treasury bills. This move has resulted in at least N80 billion being debited from the banks, used to defend the value of the naira and curb excess liquidity in the money markets.

Key Takeaways:

  • The Central Bank of Nigeria has instigated a regime of compulsory borrowing from commercial and merchant banks to purchase three-month treasury bills, resulting in at least N80 billion ($850 million) being debited from the banks.
  • The underlying motive for the CBN measures is to find a temporary plug for a deepening hole in the treasury, caused in part by the low world price of oil and extra-budgetary spending.
  • The budget deficit has leapt to double that forecast for the entire year, with foreign reserves tumbling from $7 billion to below $4 billion in the first quarter of 1999.
  • Interest rates have soared from 18% to between 30% and 40% in response to CBN borrowing, posing a threat to smaller commercial and merchant banks reliant on inter-bank loans.
  • The number of banks in Nigeria has fallen by 40% from the 120 reached in the mid-1990s, with 10 of the existing 70 banks slated for closure due to failing to meet a deadline for increasing their capital to N500 million.
  • The incoming administration will face the worst economic crisis since independence, with analysts predicting an acceleration and deepening of the shake-out in the Nigerian banking sector.

Statistics:

  • At least N80 billion ($850 million) was debited from the banks to purchase three-month treasury bills.
  • Interest rates have soared from 18% to between 30% and 40% in response to CBN borrowing.
  • Foreign reserves have tumbled from $7 billion to below $4 billion in the first quarter of 1999.
  • The number of banks in Nigeria has fallen by 40% from the 120 reached in the mid-1990s.
  • The budget deficit has leapt to double that forecast for the entire year.
  • Demand for foreign exchange has reached $170 million last week.

Sources:

  • Financial Times Limited, 1999. All Rights Reserved.

Read more