Nigeria targets loan recovery to finance key sectors of the economy

The authorities have been working for years to ease the burden of non-performing loans (NPLs) on the financial system. In 2009, in part due to the global financial crisis, the Central Bank of Nigeria (CBN) bailed out eight distressed lenders by injecting $4bn into the market. The Asset Management Corporation of Nigeria (AMCON) was formed the following year to recapitalise distressed banks and provide a venue to sell off NPLs. As of November 2020 AMCON had taken over N3.7trn ($9.9bn) worth of bad loans from 22 lenders and recovered more than N1trn ($2.7bn). Scheduled to end operation in 2023, the body owes N4trn ($10.7bn) to the CBN, which acts as its guarantor.

Covid-19 Impact

Although these measures were intended to lower the rate of NPLs, the banking sector continued to struggle with non-payment in the months leading up to the Covid-19 pandemic, as well as during the health crisis. NPLs stood at N1.23trn ($3.3bn) in the fourth quarter of 2020, higher than the previous three quarters and more than the N1.06trn ($2.8bn) recorded in the final months of 2019, according to the National Bureau of Statistics. Among the sectors that saw the most significant year-on-year rises in NPLs in the October-to-December 2020 period were construction, information and communications, and health and social work, with defaults increasing by 97.4%, 38.3% and 24.2%, respectively. The oil and gas sector accounted for the largest share of NPLs that quarter, at N315.4bn ($842.1m), highlighting banks’ continued high exposure to the sector and deteriorating asset quality due to lower oil prices. NPLs in the sector rose by 43.7% over the course of 2020. In a bright spot, however, the government cleared all NPLs for public utilities in 2020, which stood at N18.3bn ($48.9m) at end-2019.

At the close of 2020 Nigeria’s NPL ratio was 6% – above the regulatory limit of 5% but down from 11% in April 2019, reflecting the CBN’s efforts to lower lending risk. It is likely the banking sector would have faced higher levels of NPLs were it not for efforts to restructure loans during the height of the pandemic. After placing a moratorium on interest charges and principal debt repayments, in July 2020 the CBN asked banks to restructure 65% of their loan portfolios. These measures were intended not only to help borrowers cope with the economic headwinds of the pandemic, but also to facilitate wider economic recovery through the distribution of credit. Godwin Emefiele, the governor of the CBN, announced that 41% of all outstanding loans – worth a combined N7.8trn ($20.8bn) – were already being restructured as of that month.

BOFIA 2020

In a bid to facilitate loan recovery and boost regulatory oversight of distressed lenders, the Banks and Other Financial Institutions Act of 2020 (BOFIA 2020) – passed in November of that year – established credit tribunals to handle bank lawsuits against borrowers who default. In addition to deterring defaults and recovering NPLs, the body will help banks shift credit to key sectors of the economy as the nation recovers from the health crisis. A revision to a 1991 law of the same name, BOFIA 2020 also created a resolution fund to assist distressed lenders. The CBN and the Nigeria Deposit Insurance Corporation will contribute N10bn ($26.7m) and N4bn ($10.7m) to the fund, respectively. Commercial banks, meanwhile, will give 10 basis points of their assets to the fund each year. The legislation aims to further boost transparency, accountability and stability in the financial system. It requires most financial institutions to be incorporated in Nigeria and hold a local licence; however, insurance firms and pension fund managers are exempt.

Importantly, BOFIA 2020 granted the CBN more authority to manage crises, with the regulator now empowered to intervene in the event that a lender cannot meet its obligations. Using powers granted by the law, in April 2021 the central bank replaced the board of First Bank of Nigeria, which was deemed to be a systematically important institution but in “grave financial condition”, and that of FBN Holdings.