Nigeria’s banking sector witnessed a paradoxical surge in profitability in 2024, even as the broader economy grappled with significant challenges. Five of the nation’s largest banks, Zenith Bank, Guaranty Trust Holding Company (GTCO), United Bank for Africa (UBA), Stanbic IBTC, and Fidelity Bank, reported combined profits exceeding N3.3 trillion. These seemingly impressive figures, however, require careful interpretation. Economists caution that the naira’s substantial depreciation against the dollar, estimated at around 70% since May 2023, significantly inflates these naira-denominated profits when converted to a more stable currency. The gains, therefore, may not accurately reflect genuine growth in underlying economic activity. Instead, factors like holding dollar-denominated assets and substantial investments in high-interest government securities, such as treasury bills, likely contributed significantly to these inflated profit figures.
The context of these record banking profits is a struggling Nigerian economy marked by high inflation, currency devaluation, and declining consumer purchasing power. The devaluation of the naira, a consequence of policy changes implemented by President Bola Tinubu’s administration, including the removal of fuel subsidies, artificially boosted the naira value of dollar-denominated assets held by banks. While intended to attract foreign investment, these policies have had adverse effects, leading to a surge in inflation, a threefold increase in petrol prices, and escalating costs for businesses and households. The Central Bank of Nigeria’s response, raising the monetary policy rate to 27.75% to combat inflation, further compounded the situation by increasing borrowing costs for businesses. This created a favorable environment for banks investing in government securities, but further squeezed the real economy.
This divergence between banking sector prosperity and broader economic hardship is further underscored by the exodus of multinational companies from Nigeria. Since 2023, several major corporations, including GlaxoSmithKline, Equinor, and Unilever Nigeria, have either ceased operations or relocated, citing currency volatility, rising operational costs, and the uncertain economic climate. This trend highlights the disconnect between the financial sector’s performance and the realities faced by businesses operating in the real economy, which are grappling with the challenging macroeconomic environment. While the naira has stabilized somewhat since December 2024 due to Central Bank reforms aimed at promoting transparency in the foreign exchange market, the damage inflicted by earlier volatility continues to reverberate through the economy.
The devaluation’s impact on the cost of living for ordinary Nigerians is stark. The price of essential goods, such as cement, has skyrocketed. While nominal incomes might appear to have increased for some, the real purchasing power of those incomes has diminished significantly. This erosion of purchasing power highlights the misleading nature of focusing solely on nominal figures without considering the impact of inflation on the true value of money. Essentially, more naira buy significantly less than they did previously, underlining the hardship faced by ordinary Nigerians despite the apparent success of the banking sector. This situation reinforces the argument that the banking sector’s robust profits are not translating into tangible economic benefits for the wider population.
Economists argue that this disparity between banking profits and economic reality raises serious concerns about the Nigerian economy’s underlying health. The banking sector’s apparent success does not translate into broader economic growth, as evidenced by the struggles faced by other sectors, rising inflation, and declining living standards for many Nigerians. This raises questions about the effectiveness of current economic policies and the allocation of resources. The fact that banks benefit disproportionately from foreign exchange policies, often receiving preferential allocations, further exacerbates this issue. These allocations, critics argue, could be better utilized to support broader economic development and stimulate job creation in more productive sectors.
The long-term implications of this disconnect are worrisome. While sectors like banking, oil and gas, and telecoms exhibit resilience and profitability, their contribution to job creation is minimal. This creates a scenario where the nominal economy, driven by these sectors, appears healthy, while the real economy, responsible for employment and production of goods and services, stagnates. This imbalance is unsustainable and could lead to further economic difficulties if not addressed. The focus, economists argue, should shift towards supporting sectors that drive real economic growth, create jobs, and improve the living standards of all Nigerians, not just a select few. This requires a more equitable distribution of resources and policies that foster a more inclusive and sustainable economic model.
