Amid economic challenges and widespread hardship in Nigeria, banks in the country are reporting significant earnings and profits. This surge in profits occurs even as bank lending to the private sector—a critical growth driver—has noticeably declined.

Research by Financial Vanguard on 11 major deposit money banks (DMBs) for the first half of 2024 (H1’24) reveals a remarkable 131.9% increase in gross earnings, rising to N11.7 trillion from N5.5 trillion in H1’23. Similarly, their Profit Before Tax (PBT) jumped to N3.7 trillion, a 101.9% increase from N1.83 trillion during the same period last year.

The data indicates a shift from profits driven by foreign exchange gains to those propelled by high interest rates, benefiting from two key policies of the Central Bank of Nigeria (CBN) implemented over the past year: the liberalization of the foreign exchange market and a strict interest rate policy. The forex policy has resulted in over N10 trillion in profits from exchange rate revaluation, while recent monetary policy rate hikes by the CBN have significantly boosted income.

The CBN’s approach has led to an effective interest rate increase of around 1000 basis points, with the Monetary Policy Rate (MPR) reaching 27.25% after a recent hike. This escalation has driven up bank lending rates substantially while limiting credit availability, as evidenced by a 4.2% decline in private sector lending from N76.5 trillion in January 2024 to N73.2 trillion.

ALSO READ:  CBNs Rate Hikes: Renewed Confidence in the Naira for Nigerians

Despite their soaring interest income—N6.9 trillion, a 141.75% year-on-year increase—banks are facing rising funding costs and decreased lending. Analysts caution that while banks are thriving, the reduction in credit to the private sector presents significant challenges for manufacturers and other economic sectors struggling with high borrowing costs and inflated operational expenses due to currency depreciation.

Among the banks analyzed, tier-1 institutions such as Zenith Bank, Access Bank, and Guaranty Trust Company accounted for 77.7% of total pre-tax profits. GTCo led the profit increase, with its PBT soaring 207% to N1.004 trillion.

Further analysis shows that foreign exchange gains are declining, with a combined revaluation gain of just N229.481 billion in H1’24, compared to over N2 trillion in the latter half of 2023. Some banks even reported forex losses.

Experts attribute the banks’ profitability largely to the high-interest rate environment and currency fluctuations that have enhanced their foreign exchange positions. However, the resulting high borrowing costs and restricted credit availability could adversely affect overall economic growth, leading to business closures and job losses.

There is a consensus that the CBN needs to adjust its monetary policy to enhance liquidity and promote lending to avoid further economic stagnation. High interest rates, while beneficial to banks, can be detrimental to the broader economy, underscoring the need for a balanced approach to monetary policy that fosters growth without excessive inflation.