KEY POINTS
- Nigerian banks face a 69-percent increase in impairment charges due to rising loan defaults.
- Economic challenges, including inflation and currency devaluation, are driving more businesses and individuals to miss repayments.
- Banks are adjusting strategies to mitigate future risks and prevent further financial strain.
The impairment charges are up 69-percent as more Nigerians default on their loans and Nigerian banks are struggling to cope with the increase. This trend is as a result of the country’s persisting economic problems such as high inflation rate, high interest rate and a declining naira.
As a result, not only corporate sector but even households are feeling this rising provision of inability to service debts and this has lot of pressure on the banking system.
Economic factors that give rise to loan default
Currently, Nigeria has stringent economic measures that are exerting pressure on the banking system of the country. Some borrowers have had problems of repaying the loans since the money value has inflated and the naira value has reduced with respect to the dollar.
As a result, more and more banks have non-performing loans (NPLs), and they have had to raise their impairment charges to cover the possible losses. These charges act as a precautionary provision against non-performing loans and the rise in these charges shows a rise in financial pressure throughout the economy.
As per Business day, the present recession hinders the process of loan recovery in banks. As defaults are growing in different fields, the banks face the necessity of changing their approaches to the management of the risky credits.
Banks’ strategic actions
In the light of the above, the Nigerian banks are realigning their strategies in order to reduce further impairment charges in the future. Some of the measures that can be applied are, One of the major activities is lowering the credit policies in approving loans to customers.
To this end, the current credit crunch is designed to make banks reject more of the risky borrowers in an effort to cut their losses. Furthermore, some of the banks are rolling over the existing loans since they offer better market conditions for borrowers who cannot honor their obligations and to mitigate risks associated with defaulting.
Credit standards are also being raised, with banks stepping up the evaluation of the creditworthiness of those who apply for loans. This anticipatory approach aims at reducing the impact of the current volatile economic environment on the performance of the banks.
The Central Bank of Nigeria (CBN) participates fully, implementing measures that will assist towards achieving this objective.
The CBN, in general, mainly focuses on controlling inflation rate and ensuring there is adequate cash in the banking industry. However, these measures have yet to fully address the root causes of rising loan defaults.
Impact on bank profitability
This rise in impairment charges is gradually imposing its toll on the financial performance of most Nigerian banks. More money is being retained as cushions against possible future losses on loans, and returns are declining, thereby limiting the availability of funds for development.
On the other hand, there are still banks which have proven reasonable on fee based income and foreign exchange trading income. However, the general outlook on the sector still remains bleak mainly due to the prevailing economic problems.
Looking ahead: challenges and opportunities
The future of the banking sector in Nigeria depends with the rest of the economy of the country. If inflation increases and the naira deteriorates the impairment charges could also elevate erasing the profits and potential for growth in the banking business.
However, if of course the economy had stabilized and the defaults on the loans decrease then the financial position of the banks may also improve.
In the short run the Nigerian banks are likely to persist planning other cautious credit policies in order to avoid more losses. Banks are thus seeking to approve loans more strictly and adjust current debt formats in an effort not to lose much in the current economic problems.
Nevertheless, it can be expected that the prospect obstacles will only strengthen the banking sector further. Nigerian banks can avoid future risks and enhance the stability of the financial system by adjusting the approaches used and obtaining knowledge from the present context.
