With 6.3% NPLs, Nigeria’s banking system showing signs of stress, World Bank warns

With some 6.3 percent Non-Performing Loans (NPLs) sitting in the balance sheets of Nigerian banks, the system is already showing signs of stress, the World Bank warned on Tuesday as it raised doubts on the country’s 1.8 percent economic growth projection for 2021.

According to the World Bank, Nigeria’s financial system has escaped a credit crunch, but must continue to deal with the impacts of COVID-19 crisis, rising inflation, collapse of crude oil prices seen since the first half of 2020, a surge in unemployment, and a protracted disruption in the supply of foreign exchange.

Nigeria’s banking system is still well-capitalized, with a capital adequacy ratio (CAR) of 15.2 percent in February 2021, up about 30 basis points (bps) from a year earlier.

Despite abrupt dollar funding tightening in 2020, the system’s overall liquidity position appears comfortable; in February the 40.5 percent liquidity ratio was well above the prudential minimum.

Access to international capital market has equally opened up alternative funding for Nigerian banks, with two of them placing 5-year Eurobonds raising US$650 million in recent months which would help ease FX liquidity strains and extend funding maturities.

Expectations are also rife that more financial intermediaries in Nigeria will tap international markets to issue foreign currency denominated securities or syndicated foreign currency denominated financing in order to partially meet the growing foreign currency needs as well as upcoming foreign currency denominated maturities.

The World Bank is of the opinion that, the CBN’s policy initiatives and development-finance interventions so far have helped prevent a severe credit crunch in the private sector.