Business
Oil price slump: Banks may enter troubled waters
Banks in Nigeria are likely to have issues in the first half of 2015 with Non Performing Loans (NPLs) as a result of declining crude oil prices, and the pressure on the naira exchange rate.
According to the Central Bank of Nigeria (CBN) other sources of risk in the financial system include a reversal of capital flows, owing to improvements in the US economy and the adverse implications for the capital market, as well as security challenges in parts of the country.
The CBN, in its Financial Stability Report for December 2014, stated that oil and gas firms owe financial institutions about N3.24 trillion, adding that low crude oil prices will pose a significant risk to Nigeria’s financial system and might lead to an increase in Non-Performing Loans, NPL.
The report also stated that “There are equity market losses that might linger as a result of low investor confidence; uncertainties associated with the 2015 general elections; and an upward inflationary pressure from election spending and an expected increase in electricity tariffs in the first half of 2015.”
According to the CBN, sustained low oil prices may, however, result in an increase in NPLs, given that the exposure to the oil and gas sector accounted for 25.70 per cent or N3.24 trillion of the total credits of N12.63 trillion at end-December 2014.
The CBN, however, advised banks to strengthen their contingency plans and conduct regular stress tests so as to be able to mitigate the impact of the crash in oil prices on their balance sheets.
“In light of the above, the CBN, in collaboration with relevant stakeholders, will continue to take appropriate measures designed to ensure sustained financial system stability,” the apex bank stated.
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