There have also been major economic consequences, like declining oil prices, reduced remittances from abroad, and job losses that have made it difficult for customers to repay loans and mortgages. However, every challenge also presents an opportunity. COVID-19 has accelerated the adoption of digital banking channels and forced banks to rethink their business models. Overall, the pandemic has been an unexpected stress test for Nigeria's banking sector, demonstrating both its resilience and vulnerabilities.
Operational Challenges During Lockdown
The COVID-19 pandemic caused major operational challenges for Nigerian banks during the lockdown period.
• Physical branch access was limited, forcing many customers to adopt digital banking channels for the first time. This accelerated the digital transformation of Nigeria’s banking sector, with banks rapidly improving their digital offerings to meet increased demand.
• Strict social distancing measures and reduced staffing made it difficult to serve customers in person. Banks had to implement appointment systems, limit branch hours, and space out seating to comply with guidelines. Staff also had to work in shifts or teams to minimize contact.
• There were disruptions to cash handling and ATM servicing. Cash shortages occurred at some ATMs as banks struggled with limited staff to transport and load cash. Additional safety procedures for cash handling also slowed the process.
• Loan processing and account openings were delayed. With most staff working from home, banks could not easily verify customer documents in person or conduct property valuations for mortgages. This slowed down new account openings, loan approvals, and other banking transactions requiring in-person verification.
• Cyber threats increased as more customers banked online. Banks had to strengthen their cybersecurity measures to protect against rising COVID-19 themed phishing attacks, scams, and malware. Additional investments in security technology and staff training were required.
In summary, the COVID-19 crisis presented operational difficulties for Nigerian banks but also accelerated their digital transformation. By improving their digital offerings and adapting to new ways of working, Nigerian banks were able to continue serving customers during an extremely challenging time.
Digital Banking Experiences Record Jump
The COVID-19 pandemic has accelerated the adoption of digital banking in Nigeria. According to a 2020 survey by Enhancing Financial Innovation & Access (EFInA), over 63% of Nigerian adults have adopted digital financial services since the start of the pandemic.
Digital banking provides contactless and remote access to financial services via online platforms and mobile apps. This allows customers to conduct transactions safely from home, reducing virus exposure risks. Major Nigerian banks have upgraded their digital banking services to meet increased demand.
• Access Bank Plc launched an improved mobile banking app with enhanced security and more self-service options.
• First Bank of Nigeria introduced an upgraded mobile banking app with new features like cardless ATM withdrawals.
• United Bank for Africa Plc (UBA) recorded a 44% increase in new mobile banking customers between March and May 2020.
The increased use of e-banking is a positive development that can boost financial inclusion in Nigeria if sustained post-pandemic. However, cybersecurity risks must be addressed to build customer trust in digital banking. Banks should invest in advanced fraud detection systems and offer regular cybersecurity training for customers.
The COVID-19 crisis has demonstrated the importance of digital banking as a tool for business continuity in times of disruption. Banks that provide convenient and secure e-banking services will be better positioned to meet the demands of customers in a post-COVID world. With proactive risk management, Nigeria's banking sector can leverage digital transformation to expand access to financial services nationwide.
Credit Risks on the Rise
The Covid-19 pandemic has significantly impacted the Nigerian banking sector, increasing credit risks for both banks and their customers.
Rising Loan Defaults
With many individuals and businesses facing economic hardship, loan defaults have risen sharply. According to the Central Bank of Nigeria, the ratio of non-performing loans to total loans increased from 6.6% in December 2019 to 6.9% in June 2020. This modest increase obscures the challenges in some sectors like oil and gas, where loan defaults have spiked. Banks have had to restructure many loans to avoid higher default rates.
Declining New Loans
Banks have become more cautious in approving new loans due to uncertainty about borrowers’ ability to repay, especially for small businesses. The total value of new loans declined in 2020, limiting access to credit for those who need it most during this crisis. Tightened lending standards, while prudent for banks’ stability, further weaken pandemic-impacted sectors of the economy.
Government Intervention
To support the banking sector, the Central Bank of Nigeria has taken several measures, including reducing interest rates, lowering banks’ cash reserve requirements, and establishing a N50 billion targeted credit facility for affected households and small businesses. The government has also provided N1.8 trillion in intervention funding and loan restructuring options for banks. These steps aim to ease credit risks, increase lending, and spur economic recovery, though their impact has been limited so far.
The Covid-19 crisis has significantly elevated credit risks in the Nigerian banking system. However, government support and banks’ prudent risk management have helped contain the damage. Continued close monitoring of loan portfolios, targeted policy measures, and the overall economic recovery will be needed to bring credit risks back to pre-pandemic levels. With time and the right actions, Nigeria’s banking sector can weather this difficult period.
Government Intervention Provided Much-Needed Relief
The Nigerian government implemented several measures to provide relief for the banking sector during the COVID-19 pandemic.
The Central Bank of Nigeria (CBN) granted regulatory forbearance to banks, allowing them to restructure terms of facilities for households and businesses affected by the pandemic. The CBN permitted banks to suspend repayment of principal amounts on loans for one year, reducing non-performing loans.
Interest Rate Reduction
The CBN reduced interest rates on all its intervention facilities from 9 to 5 percent, and introduced a one-year moratorium on CBN intervention facilities. This provided relief to banks, as they could pass on lower rates to customers.
Additional Liquidity
The CBN introduced several liquidity injections and credit support interventions, making over N3.5 trillion available to banks to fund their operations. This improved banks’ liquidity positions and ability to continue lending despite economic difficulties.
Loan Restructuring
Banks were permitted to restructure terms of facilities for customers in affected sectors like oil and gas, agriculture, and trade. They could renegotiate interest rates and loan tenors, and grant additional moratoriums. This flexibility reduced default risk for banks and eased pressure on customers.
Temporary Suspension of Dividend Payments
The CBN directed banks to temporarily suspend dividend payments to shareholders. The funds were instead used to support operations and facilitate additional lending. This boosted banks’ capital buffers and capacity to withstand asset quality deterioration.
The government’s multifaceted approach provided substantial relief for banks. Regulatory forbearance, interest rate cuts, liquidity support, loan restructuring, and dividend suspension allowed banks to navigate challenges from the COVID-19 crisis while continuing to support households and businesses. Government intervention was crucial in mitigating the pandemic’s impact on the Nigerian banking sector.
The Road Ahead: Recovery and Adaptation
The COVID-19 pandemic has significantly impacted the Nigerian banking sector, forcing banks to adapt to changes in consumer behavior and preferences. Going forward, banks will need to accelerate digital transformation to meet new demands and ensure business continuity.
Accelerating Digital Transformation
With social distancing measures in place, more customers have turned to digital banking channels. Banks should fast-track investments in digital platforms and contactless technologies to improve customer experience. This includes enhancing mobile banking apps, online banking portals and electronic payment systems.
Revisiting Business Models
Banks will need to re-evaluate business models to build resilience. Diversifying revenue streams and customer segments can help mitigate risks from economic downturns impacting certain sectors. Partnerships with fintechs and telcos on digital lending, payments and wealth management can open new opportunities.
Cost Optimization
The challenging economic climate calls for cost efficiency. Banks can optimize costs through automation, process reengineering and branch rationalization. However, cost-cutting measures should not compromise customer service and experience.
Enhancing Risk Management
With rising loan defaults and non-performing loans expected, banks need to strengthen risk management frameworks. This includes closely monitoring loan books, restructuring loans where needed and making adequate provisions for impaired loans. Fraud risks also need attention as more customers go digital.
Supporting Customers
Banks play an important role in supporting customers through this crisis. Temporary loan repayment moratoria, reduced fees and restructured loan terms can ease the burden on customers impacted financially. Government stimulus packages channeled through banks provide much needed relief for businesses.
Overall, the Nigerian banking sector faces significant challenges navigating the road ahead. However, by accelerating digital transformation, revisiting business models, optimizing costs, enhancing risk management and supporting customers, banks can emerge stronger and better prepared for the new normal. Constantly adapting to changes will be key to recovery and continued success. (c) azaland.com
Conclusion
As you have seen, the Covid-19 pandemic has significantly disrupted the Nigerian banking sector. The sector has had to quickly adapt to the new normal of social distancing and remote working. Banks have invested heavily in digital channels to continue serving customers while branches were closed. Though the full impact is still unfolding, the sector has shown resilience in the face of this crisis. Going forward, banks must continue improving their digital offerings and operational efficiencies to thrive in a post-pandemic world. Customers too must embrace digital banking channels to access services while staying safe. Together, the banking sector and its customers can emerge stronger from this crisis. The pandemic may have changed how we bank, but it has not changed our shared goal of an inclusive financial system supporting Nigeria's growth.
