Recession: Banks critical in ensuring economy recovery – Economist

As Nigeria continues to look for how to exit current economy recession, a Professor of Financial Economics, University Uyo, Leo U. Ukpong, has said Deposit Money Banks (DMBs) operating in the country are critical in ensuring proper workings of the Nigeria’s economy.
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A review of the recent Gross Domestic Product (GDP) figures released by the National Bureau of Statistics (NBS), show a contraction of -1.30 per cent in the fourth quarter of 2016, translating into an estimated economic growth rate of -1.51 per cent for the full year.

While speaking exclusively with the Daily Times, the professor, noted that economic performance and banks’ performance is a two-way relationship, stressing that well managed banks, through their lending activities, would help in stimulating the economy towards healthy and sustainable growth.

He explained that considering adverse global macroeconomic challenges, that commercial banks performance, vis-à-vis monetary policy channels, depends on domestic and international financial and macroeconomic conditions.

“In other words, the CBN Governor statement on level of resilient of the Nigerian banking sector implies that weak international macroeconomic conditions have adverse effects on the health of Nigerian banks. Simply put, when global macroeconomic performance declines, banks portfolio (credit or default) risks increases, too. The likelihood that loan and interest repayments will be defaulted increases”, he explained.

Furthermore, weak global economic situation reduces household income, which in-turn reduces income of firms, and ultimately reduces the demand for new loans by both household and businesses.

“With respect to the firm rating agency, Fitch, I do agree that with the current Nigerian and global economic outlook, combined with the slow implementation of the 2016-2017 economic growth stimuli, some of our banks will struggle through the next couple of years”, he affirmed.

To help reverse the “bearish” banking sector outlook, aggressive reduction in interest rates is necessary, and focused fiscal policy with short term infusion of cash into sensitive economic sectors is necessary, as well as a long-term industrialization policy to generate long term sustainable growth and reduce our import dependency.

It would be recall that Fitch in its new ratings last Wednesday affirmed that Nigerian banks will continue to face challenges in 2017, following an extremely difficult 2016.

The new ratings, also disclosed that Non Performing Loans (NPLs) ratio in Deposit Money Banks (DMBs) could rise between 10 per cent to 12per cent by end of first half of 2017 (H1), a total percentage lower than the Central Bank of Nigeria (CBN’s ) reported figure for the entire sector.

However, it stated that banks faced multiple threats from the operating environment in 2016, including Nigeria sliding into recession, the economy continuing to suffer from low oil prices and severe shortages of foreign currency (FC).

The report, also pointed out that commercial banks struggled with declining operating profitability (excluding translation gains), sluggish credit growth, fast asset quality deterioration, tight FC liquidity and weakening capitalisation, putting increasing pressure on their credit profiles.

But indications have emerged that the Nigerian economy is on its way out of recession considering the 2016 overall and last quarter GDP reports by the NBS.
Also, latest statistics showed that the Nigerian economy actually performed better overall last year as the growth rate was higher with a contraction at -1.5 percent than the -1.8per cent predicted by the International Monetary Fund (IMF).