How Safe Is Your Money In The Bank?

What are the chances that banks can remain afloat when they are running out of cash because no economic activity is taking place, yet customers are making withdrawals every single minute?

Alhaji Umaru Ibrahim, Managing Director/Chief Executive Officer of the Nigeria Deposit Insurance Corporation (NDIC) / Photo credit: VON
Alhaji Umaru Ibrahim, Managing Director/Chief Executive Officer of the Nigeria Deposit Insurance Corporation (NDIC) / Photo credit: VON

There are hundreds of communities in Nigeria that are underserved when it comes to banking services.

Step out of any state capital into smaller towns, and try to use an ATM or make a cash withdrawal from the banking hall.

You will likely be met with long lines that could keep you there for hours.

But seeing those long queues outside of banks is now becoming a familiar sight in major cities like Lagos and Abuja, all because outbreak of a pandemic that forced a month-long lockdown and suspension of all economic activities.

Normally, in any part of the world, those long queues in front of commercial banks would be a sign of an impending recession and a collapse of the banking system.

That was exactly what happened in Greece back in 2015, right in the middle of a decade long financial crisis when the country couldn’t meet its international debt obligations.

The bank almost brought the country to its knees.

Things were so bad banks had to be closed for three whole weeks, and when they finally reopened, customers trying to withdraw their own money faced restrictions on how much they could withdraw at a time.

Zimbabwe too has regularly been confronted with liquidity problems, and in 2016 particularly, it was a severe one that bank customers were in queues that were so long, they had to spend the night in them.

Today though, the economic problems taking shape are self-induced because of public health concerns.

And at the extreme, the outbreak of the Coronavirus could wipe off as much as $8trn from the global GDP.

That is according to the estimate of the Asian Development Bank.

Even the International Monetary Fund (IMF), which has put the figure $2.4trn (three per cent of $80 trillion world economy); has said that is an optimistic outlook.

But behind the loss in earnings and productivity are thousands of companies across the globe, a disproportionate number of them in the developing world because of their dependence on commodity exports and tourism.

That is what makes the coming global recession different from past financial crises.

If there were economies that can’t spend their way out the shutdown, they are mostly in Asia, Africa and South America.

The International Air Transport Association is estimating the losses in Nigeria’s aviation industry could be up to $760 million and close to 100,000 in jobs

The 2008 financial crisis started with just one bank in the United States that had taken too much risk, and ended up exposing the entire world financial system.

The banking industry in Nigeria feeds off a handful of key sectors, three of which are faced with the threat of bankruptcy because of the COVID-19 pandemic; the oil sector, transport, which includes shipping and aviation, and the hospitality industry.

The International Air Transport Association is estimating the losses in Nigeria’s aviation industry could be up to $760m and close to 100,000 in jobs.

This is an industry already heavily indebted.

So, it will spill over to the banking sector.

The CEO of Zenith Bank, Ebenezer Onyeagwu, has already admitted that the drop in crude oil prices will adversely affect revenues of banks in the country.

He has also suggested that banks will have to restructure.

What that restructuring will look like, Nigerians have already gotten a glimpse of it from a leaked video of the CEO of Access Bank, Herbert Wigwe, in a town hall meeting with his staff proposing to cut as much as 75 per cent of their workforce.

The jobs he was talking about were the ones of the poorly paid; the cleaners and security guards.

He wants his bank to move towards providing more of its services on digital platforms.

What is clear is that the banks are thinking first of themselves and only themselves.

Without doubt, COVID-19 will have a greater impact on small businesses and self-employed individuals.

In other countries where there has been a sudden shift to digital platforms for banking services, the banks are removing all charges on digital platforms and are even going as far as giving out ATM cards cost-free to customers.

So, in a sense banks in Nigeria are pushing all of the cost from the covid-19 pandemic to either their customers who are small business owners, salary earners or the government.

Most these businesses are no longer generating revenue.

But depending on how long the economy remains partially closed, the banks could very easily face cash flow problems.

For now, the Cash Reserve Ratio has remained unchanged at 27.50 per cent throughout the health crisis.

That is a lot of assets commercial banks are forced to keep in cash compared to other countries where it is as low as four per cent.

It would suggest that the Nigerian banking system is not susceptible to a bank run even if everyone ends up trying to get their money out at the same.

But nothing in Nigeria is clear cut.

The response of both the private and public sectors in Nigeria is proving that low income workers will be the hardest hit from the pandemic

Even with regulations and cash reserve requirements, authorities may not act until it is too late.

Nothing proves that more than the list of 45 banks that closed in just over 20 years as published by the Nigeria Deposit Insurance Corporation on its website.

A number of international institutions have already projected that some of the biggest job losses, at least in places like Africa will be incurred by low skills workers.

And these are the people most likely to lose all of their savings either because they need it to feed themselves and meet other basic needs or because of sudden policy changes from the government will wipe out the savings anyway.

And that could come in form of inflation or a devalued currency.

The response of both the private and public sectors in Nigeria is proving that low income workers will be the hardest hit from the pandemic.

The construction industry could be especially vulnerable because the federal government has already cut a massive N1.5trn from capital spending in the 2020 budget.

What that means will be job losses for low income earners in an industry that normally would be one of the most stable regardless of the state of the economy.

So, what happens in an economy like Nigeria’s when economic activities are partially shut down, job losses are in millions and government revenues plummet?

What are the chances that banks can remain afloat when they are running out of cash because no economic activity is taking place, yet customers are making withdrawals every single minute?

In a number of countries, the response of governments has been almost entirely a fiscal one, to support incomes and consumer spending.

Rising inflation and a falling currency don’t exactly inspire confidence in health of the financial sector, especially in the absence of activities in more than half of the economy

In that regard, the Central Bank of Nigeria and the Ministry of Finance do not appear to be on the same page.

Or at least their top most priorities are not the same. Yes, the central bank has encouraged commercial banks not to lay off workers, but on a broader scale, it is targeting their incomes by reducing their purchasing power.

What the CBN has done in response to the pandemic and subsequent closure of the economy is to inject N3.6trn into that system.

It is typical of a third world response to a financial crisis.

On its own, at a time of a pandemic when there is limited economic activity, that is enough to lead to Zimbabwe type inflation and even lead to a massive fall in the value of the Naira.

Both will harm people’s income.

But coming together with the $3.4bn emergency support from the IMF, the impact on workers may not be so severe.

Still, the Naira has lost a quarter of its value in last one month with $1 now worth as much N450.

Rising inflation and a falling currency don’t exactly inspire confidence in health of the financial sector, especially in the absence of activities in more than half of the economy.

Since the lockdown was lifted with the partial easing of economic activities, a large number of those queuing up at the banks are people who have trust issues with mobile and digital banking platforms or simply lack the knowledge to operate them.

There is no need for those trust issues to lead to a crisis of confidence in the stability of the banking sector because many people are facing persistent difficulties in accessing their own money.

Written by Shuaib Shuaib

Shuaibu, a former Editor of the LEADERSHIP Newspapers, is based in Abuja.

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