Regulatory and High Compliance Costs Threaten Nigerian Banking Industry – Elumelu #IndustryFinance

The Nigerian banking sector is currently facing significant challenges that threaten its ability to sustain growth and drive innovation. High regulatory and compliance costs have become a pressing issue, burdening financial institutions with expenses that could potentially stifle the sector’s capacity to contribute to the country’s economic development.

Tony Elumelu, Chairman of the United Bank for Africa (UBA) Group, highlighted these concerns during his keynote speech at the CIBN 17th Annual Banking & Finance Conference, where he emphasized the need for urgent reforms to alleviate the financial strain on banks.

Elumelu’s remarks come at a critical time when Nigeria’s banking sector is being leaned on to support an economy grappling with inflation, foreign exchange volatility, and dwindling investor confidence.

During his address, Elumelu noted the essential function banks play in Nigeria’s economic landscape but stressed that regulatory and compliance costs have risen to a level where they are now constraining growth. He called for collaboration between the government, regulatory bodies, and banking institutions to address these issues.

He stated, “The sector employs millions, provides crucial financial support to countless businesses, and generates income for millions of shareholders. However, the sector faces challenges that impede its growth and innovation, including regulatory and high compliance costs.”

This burden, according to Elumelu, has been made worse by Nigeria’s regulatory framework, which imposes stringent costs on banks in the form of levies and fees.

The Heavy Financial Burden from AMCON

Lending credence to Elumelu’s assertion is the burden of the levy the banks are mandated to pay to The Asset Management Corporation of Nigeria (AMCON).

A major financial obligation for Nigerian banks comes from contributions to the Asset Management Corporation of Nigeria (AMCON). Since AMCON’s inception in 2011, which was aimed at recovering bad loans in the banking system, it has relied heavily on the financial sector for funding. The Central Bank of Nigeria (CBN) has been contributing N50 billion annually to the AMCON resolution trust fund, while banks themselves are mandated to make additional payments to this fund.

The cost of these contributions is significant. AMCON fees now account for approximately 11.43% of banks’ operating expenses, making them one of the largest single expenses for many financial institutions. Over the last decade, from 2014 to 2023, 10 deposit money banks in Nigeria collectively paid a staggering N1.66 trillion into the Banking Sector Resolution Cost Trust Fund (BSRCTF), also known as the AMCON sinking fund.

In 2021, Nigerian banks, with combined assets of N70.25 trillion, paid N259.75 billion to AMCON in levies, representing a 17% increase from the N300.65 billion paid in 2020. As banks grow their asset bases, the levies increase correspondingly, putting additional pressure on profitability.

Shareholders argue that this ongoing financial burden is eroding their value, as it takes a significant portion of potential returns.

The financial toll of these levies has not only affected banks’ balance sheets but has also had a profound impact on shareholder returns and market competitiveness. According to economic analysts, the mandatory contributions to AMCON have consistently undermined banks’ profitability, reducing returns on average assets (ROAA) and returns on average equity (ROAE) by as much as 0.6%. This translates to an estimated 30% depletion in the bottom lines of Nigerian banks, making them less profitable compared to their peers in other frontier and emerging markets.

For instance, in 2015, 13 banks contributed a total of N107.9 billion to AMCON. By 2021, contributions surged to N259.75 billion, largely in line with the sector’s growing assets. This also meant that banks had less to reinvest in new products, services, and technological innovations, effectively stunting their ability to compete globally.

Financial experts warn that if these regulatory costs continue to rise, Nigerian banks may face declining investor interest, as profitability becomes less attractive relative to other markets.

Given the current financial situation, Elumelu is advocating for meaningful dialogue between the government, banking institutions, and regulatory bodies to craft a more conducive environment that allows banks to thrive. Without such intervention, he warned, the sector could be hamstrung by regulatory burdens at a time when it is most needed to drive economic recovery.

Elumelu’s comments resonate with growing concerns across the financial sector about the sustainability of the current regulatory regime. In addition to AMCON levies, banks are grappling with compliance costs related to other regulatory frameworks.

Financial experts say that the cumulative effect of these requirements is that banks are left with little room to innovate or expand their services, which could have long-term consequences for Nigeria’s economic growth.