In the aftermath of the current reforms taking place in the Nigerian banking sector, numerous publications have been released to help solve the numerous challenges that the sector is facing. I vividly remember an article that was published this year, I attempted to make clear the potential economic and financial effects of the bail out funds that were injected by the Central Bank of Nigeria. My argument is that this could result in the situation of excessive liquidity in the banking industry as well as the overall economy.
My argument was based by the reality that the infusion of bailout funds did not come from any actual economic activity, and therefore in terms of economics does not have any real worth. The effect of the intervention funds is increasing the quantity of money available for circulation, coupled with a significant increase in confidence of depositors. In addition, more effort is required to allow the reform to have an overall effect. My opinion is that strategies as well as mechanisms had to be devised to ensure that the funds for intervention will have a positive impact on economy and industry.
The latest data that has been leaking out from banks, it seems we are in a situation where banks are flooded with liquidity, yet the borrower community is suffering from a severe credit problems. The principal purpose behind banking institutions to provide financial services for which they exist has been eliminated. The argument is that many bank managers are becoming more cautious about risk and would prefer to invest in secured , short-term financial instruments instead of loaning money to customers. The lending conditions for customers are so strict that it’s nearly impossible to secure the loan of banks. The result is that banks have excess liquidity at end of the business day on a weekly, daily as well as a monthly.
The downside to this scenario is that because too the attention of banks has paid on the liquidity aspect of banking, it will have a negative impact on the profitability aspect. In the future it is likely that the majority of Nigerian banks will see a decline in profits. This will be evident at the zonal, branch or regional scales of operations in banking. The general metrics that are used to evaluate performance could be revealing poor results, despite the effort performed by employees of staff at the unit or branch.
The recent decline in interest rates means bank executives must find new and more inventive strategies to achieve a break-even point. Banks must avoid money that is considered to be costly and therefore not attractive in the current climate. However CBN Central Bank of Nigeria has the responsibility of promoting lending by banks to the real areas of the economy. Although the reforms implemented by the CBN have succeeded in maintaining depositors’ trust in financial institutions, they have also succeeded in reducing bankers’ trust in lending. The majority of bankers feel secure keeping the money they have instead of lending them out to companies.
That’s where the problem is in the hands of regulators Cross Crunches. Perhaps a loan guarantee scheme might be needed for certain sectors, in addition to other options.
Managers of banks must be aware that profitability and liquidity operate in a way that is not mutually exclusive. The more liquid you have the less profit you can earn. Therefore, a sound financial management is always seeking the balance between profitability and liquidity. The issue that business owners have to face is that having both high liquidity and profitability are desired. But, the greater of one you want to get, the lesser of the other.
For those who manage banks in the Nigerian banking sector It is now time to pay close attention to profitability since the long-term viability of any business is dependent on this. Businesses’ models should be evaluated carefully in context of the present conditions and, if remedial action is needed, decisions must be made in this regard.