The Nigerian Banking Sector’s Paradoxical Profitability Amidst Economic Strain
In 2024, nine prominent Nigerian banks witnessed a remarkable surge in interest income, collectively amassing a staggering N14.26 trillion. This represents a dramatic 119.55% increase compared to the N6.49 trillion earned in the previous year. This windfall stemmed primarily from the interest accrued on loans extended to customers. While the banking sector flourished, the manufacturing sector grappled with soaring borrowing costs, exceeding N1.3 trillion during the same period. This stark contrast underscores a fundamental imbalance in the Nigerian economy, where the financial sector’s profitability appears to be inversely proportional to the health of the real sector. A detailed analysis of individual bank performance reveals that Access Holdings led the pack with a 98.69% surge in interest income, reaching N3.11 trillion. Zenith Bank followed closely with a 137.74% increase, posting N2.72 trillion. First HoldCo, the parent company of FirstBank, experienced a 155% jump in interest income, totaling N2.39 trillion. Other major players, including United Bank for Africa, Guaranty Trust Holding Company, and Stanbic IBTC Holdings, also registered significant increases exceeding 100%.
The impressive growth in interest income can be attributed, in part, to the Central Bank of Nigeria’s (CBN) consistent hikes in the Monetary Policy Rate (MPR). Throughout 2024, the MPR was raised by a substantial 875 basis points, escalating from 18.75% to 27.50%. The CBN’s aggressive monetary tightening was primarily driven by the need to combat escalating inflation, which reached a concerning 34.80% by December 2024. While the policy aimed to stabilize prices, it inadvertently created a challenging environment for businesses seeking affordable financing. The increased MPR directly translated to higher commercial lending rates, ranging between 28% and 35%, making it exceedingly difficult for businesses and individuals in productive sectors to access credit. Ironically, this challenging economic climate inadvertently fueled the banking sector’s profitability.
However, the banks’ success story is not without its complexities. A portion of this substantial interest income was derived from non-performing loans, highlighting a concerning trend within the financial system. Zenith Bank, UBA, and Fidelity Bank all reported accruing interest on impaired assets. This practice, while contributing to the banks’ bottom line, raises questions about the overall health of the loan portfolio and the potential risks hidden within the system. Moreover, the exorbitant interest rates charged by banks are stifling growth in crucial sectors like manufacturing. The Manufacturers Association of Nigeria (MAN) voiced concerns about the crippling cost of borrowing, which consumed approximately N1.3 trillion of manufacturers’ funds in 2024. Coupled with high energy costs, these financial burdens are threatening the survival of many businesses.
This situation has sparked a debate about the role of banks in a struggling economy. While banks are understandably focused on profitability, their practices are inadvertently exacerbating the challenges faced by the real sector. The high interest rates, justified as a measure to control inflation, are making it nearly impossible for businesses to access the capital they need to invest, expand, and create jobs. This has a cascading effect, impacting economic diversification, domestic production, and employment generation. The situation is particularly dire for small and medium-sized enterprises (SMEs), which form the backbone of the Nigerian economy, and for farmers struggling to finance their operations. Experts warn that this trend is unsustainable and could further widen the gap between the rich and the poor, pushing more Nigerians into poverty.
The focus on short-term gains through high-interest lending and investment in risk-free government securities is diverting resources from the real economy, hindering long-term growth and development. This financial model, where banks prioritize profitability over the health of the productive sectors, is creating a distorted financial architecture. While banks are posting record profits, investment in critical sectors like agriculture, manufacturing, and SMEs is declining. This imbalance poses a significant threat to Nigeria’s economic future. Analysts argue that a recalibration is necessary, one that incentivizes banks to invest in the real economy and support the growth of businesses that contribute to job creation and sustainable development. A system that prioritizes the needs of the productive sectors is crucial for fostering inclusive growth and reducing poverty levels.
The prevailing high interest rates are not only affecting businesses but are also deepening the poverty crisis in Nigeria. With over 133 million Nigerians already living in multidimensional poverty, the increasing cost of borrowing makes it even harder for individuals and businesses to access funds for basic survival, let alone investment or expansion. This vicious cycle further weakens the economy and exacerbates the existing inequalities. The impact on the agricultural sector is particularly alarming. The lack of access to affordable credit is crippling agricultural productivity, contributing to rising food prices and exacerbating food insecurity. This situation demands urgent attention and a shift in policy to prioritize the needs of the real sector.
The Nigerian economy finds itself in a precarious situation. While the banking sector prospers, fueled by high interest rates and investments in government securities, the real sector struggles under the weight of exorbitant borrowing costs. This dynamic creates a dangerous imbalance, hindering economic diversification, job creation, and poverty reduction. A sustainable solution requires a restructuring of the financial architecture to incentivize investment in the real economy, ensuring access to affordable credit for SMEs and farmers. Failure to address this imbalance risks further exacerbating existing inequalities and jeopardizing Nigeria’s long-term economic prospects. The current situation calls for a collaborative effort between the government, the CBN, and the banking sector to develop policies that promote sustainable and inclusive economic growth. This includes prioritizing investment in critical sectors, fostering innovation, and creating an enabling environment for businesses to thrive. The focus must shift from short-term profits to long-term sustainable development, ensuring a more equitable distribution of resources and opportunities for all Nigerians.
