Nigeria: How Inflation, Forex Reforms, and Recapitalization Shaped Nigeria’s Banking Sector in 2024

The Nigerian banking sector in 2024 was marked by significant policy changes driven by surging inflation, foreign exchange (forex) reforms, and a recapitalization agenda. These factors collectively reshaped the industry, influencing operational dynamics and economic outcomes.

Inflation and Rising Costs

The persistent rise in inflation was fueled by the removal of fuel subsidies and the depreciation of the naira. The national average price of petrol surged by 76.4% to ₦1,184.83 per liter, triggering a ripple effect on goods and services. Consequently, the cost of a healthy diet skyrocketed by 74%, and the headline inflation rate reached 33.88% in October, up from 28.92% in December 2023.

In response, the Central Bank of Nigeria (CBN) aggressively hiked the Monetary Policy Rate (MPR), raising it by 875 basis points to 27.5% by November. Cash Reserve Ratios (CRR) were also increased, creating liquidity challenges for banks, which saw interbank interest rates soar to 31.5% in December from 15.38% the previous year.

Foreign Exchange Reforms

A major highlight of 2024 was the CBN’s comprehensive forex market reforms aimed at enhancing transparency, boosting dollar supply, and stabilizing the naira.

• Price Transparency: A new policy enforced accurate transaction reporting in the official forex market, narrowing the exchange rate gap between official and parallel markets to ₦76.37 per dollar by January.
• Bank FX Holdings: Banks were mandated to reduce excess dollar holdings and limit their Net Open Positions to 20% of shareholders’ funds, improving market stability.
• Diaspora Remittances: The CBN removed exchange rate caps for International Money Transfer Operators (IMTOs), enabling competitive rates and easier access to naira for remittance beneficiaries. Revised IMTO guidelines raised operating capital requirements to $1 million and prohibited banks and fintechs from providing IMTO services.
• Spread Removal: A 2.5% cap on interbank forex transaction spreads was abolished, granting banks more flexibility in determining rates.
• E-Payment for Travel Allowances: Personal and Business Travel Allowances (PTA/BTA) payments were restricted to electronic channels to curb forex malpractices.

FX Backlog Controversy

Forex backlog issues dominated the year, with the CBN disclosing irregularities in $2.4 billion of overdue transactions. Despite claims of clearing valid backlogs, businesses alleged funds remained trapped, prompting a re-validation exercise to authenticate unresolved claims.

Recapitalization Drive

The recapitalization mandate aimed to strengthen banks’ resilience and ensure adequate liquidity. The policy, combined with high interest rates, boosted banks’ profitability, with interest income for top commercial banks surging by 141.75% to ₦6.89 trillion in the first half of 2024.

Enhanced Dollar Supply

The CBN’s strategies to increase forex liquidity included limiting International Oil Companies (IOCs) to remit only 50% of export proceeds immediately, with the balance deferred by 90 days. Additionally, Bureau de Change (BDC) reforms introduced a controlled supply mechanism, followed by revoking 4,173 BDC licenses to curb price distortions.

Sectoral Impacts

While these policies stabilized the forex market and bolstered bank revenues, they sparked debates over their impact on the real sector. Manufacturers and small-scale industries criticized the high interest rate regime for exacerbating production costs and stifling growth.

Outlook

The reforms of 2024 left a lasting imprint on Nigeria’s banking sector, balancing between fostering stability and addressing systemic challenges. As the industry adapts to these changes, the emphasis will likely shift toward sustainable growth and broader economic recovery in 2025.