Millions of Nigerians will not like to remember 2024. The economic turbulence of the year pushed well over 40 million Nigerians below poverty line.
It eroded the standard of living of many in the middle income bracket largely regarded as comfort zone. Many in that comfort zone were pushed perilously close to poverty level.
The naira lost 60 per cent of its purchasing power during the year. That development unleashed spiraling inflation on the economy. Trouble started when the Central Bank of Nigeria (CBN) unified the exchange rate of the naira in compliance with the strong recommendations of the World Bank.
The World Bank had argued vehemently that multiple exchange rates that the CBN was operating was an invitation to economic anarchy as it encouraged round-tripping of scarce foreign exchange and consequently the uninhibited depreciation of the naira.
President Bola Tinubu saw economic logic in the World Bank argument and ordered CBN to unify the exchange rates of the naira. The apex bank grudgingly obeyed but deliberately failed to monitor the activities of the banks that it authorised to sell forex to desperate users.
Consequently, banks hoarded the forex allocated to them for onward sale to users. The artificial scarcity created by the banks mounted enormous demand pressure on the underfunded parallel market.
Banks mischievously transferred their forex allocation to operators of bureau de change (BDC) at extortionist margins.
The artificial scarcity of forex fueled unprecedented depreciation of the naira and pushed inflation rate to 34 per cent, while food inflation stood menacingly at 40 per cent.
CBN responded to the bad news from the forex market and inflation rates by reining in liquidity as it erroneously blamed spiraling inflation on excess liquidity even as the apex bank itself complained that 93 per cent of the currency in circulation was not in banks’ vaults.
The apex bank pushed the monetary policy rate, (benchmark lending rate) to record 27.5 per cent, thus sending lending rates sailing perilously close to 40 per cent.
That development crippled the agriculture and manufacturing sectors and forced many firms in the distressed sectors into bankruptcy.
That is, in a summary, the performance of the economy in the turbulent year 2024. Ironically, 2024 was the best year for Nigerian banks. They recorded unprecedented turnovers and profit after tax (PAT).
Many economy watchers wonder why banks made humongous profits in a year that the productive sector of the economy was close to bankruptcy.
The truth is simple. CBN’s flawed tackling of spiraling inflation through persistent hiking of MPR and the apex bank’s failure to peg interest rate spread in the economy gave banks a blank check to exploit borrowers.
While MPR rose from 18.5 per cent to 27.5 per cent in one year, interest rate spread rose from six per cent in 2023 to 19 per cent in 2024. Interest rate spread is the margin between what banks pay as deposit rate and what borrowers pay as lending rate.
Currently, banks make a minimum of 19 per cent from any risk they create. Some years ago, CBN pegged interest rate spread at four per cent. It is difficult to determine the spread at the moment.
That precisely is why banks are raking in trillions of naira as PAT while the productive sector of the economy is deep in recession. The banking boom has inadvertently bankrupt manufacturing and agriculture.
Because of the failure to regulate interest rate spread, some of the banks had their interest income rise above 90 per cent in 2024 while firms in the productive sector are collapsing from high cost of funds.
Banks’ profit has defied exchange rate volatility, spiraling inflation and crippling infrastructure deficit that rocked the economy in 2024.
The result is that five banks in the first tier of the industry recorded unprecedented PAT of N3.3 trillion. GTBank made N1.2 trillion in PAT. Zenith Bank mustered N1.3 trillion. UBA trailed with about N800 billion in PAT.
Even low performers in the industry sprang surprises in 2024. Fidelity Bank shocked industry watchers with gross earnings of N1.04 trillion and PAT of N278 billion during the disastrous year. The bank’s interest income stood menacingly at N950 billion. Its PAT has suddenly risen from 10 to 12 digits.
The troubling aspect of the banks’ booming fortune is that it is happening at the expense of the productive arm of the economy.
Nigeria’s export goods are struggling in the global market because they are produced at prohibitive prices due to high interest rate and infrastructure deficit.
When Nigerian manufacturers and farmers factor the high cost of funds into the production cost of their goods, they stand no chance in the export market because they are too expensive.
Bank and insurance sub-sector (financial services) that dominate the economy contribute a miserable 6.7 per cent to Nigeria’s gross domestic product (GDP).
It grows at 3.79 per cent while agriculture that accounts for 24 per cent of GDP and employs 60 million Nigerians lumbers along at 1.4 per cent because of high cost of funds and crippling infrastructure deficit. If agriculture had grown at the rate of the financial services sector, Nigeria’s food inflation would drop drastically.
The truth is that the financial services sub-sector that spearheads the growth of Nigeria’s economy have limited job creation capabilities. Manufacturing and agriculture sectors not only create jobs but agriculture in particular will drive down food inflation if it is sufficiently empowered.
The N3.3 trillion PAT accumulated by five banks in 2024 will almost certainly slip into the pockets of their controlling shareholders.
Jim Ovia, the founder of Zenith Bank, will go home with N24 billion as dividend for his controlling shares in the bank.
Tony Elumelu, the chairman of UBA and controlling shareholder, will pocket N12.2 billion from the dividend declared by the bank.
Food inflation will surge along with unemployment if banks are allowed to thrive at the expense of the productive arm of the economy.