Banks compete for US$6bn of deposits as Nigeria redesigns its banknotes

Nigerian lenders are competing to attract up to 2.7 trillion naira (US$6 billion) that’s outside the formal sector, taking advantage of the six-week window citizens have to replace old currency notes.

Lenders including Zenith Ban, FBN Holdings and United Bank for Africa have already begun reaching out to existing and potential clients online and in-person to turn in unbanked cash. The central bank in October announced a plan to replace 200-, 500- and 1,000-naira notes from December 15.

The move to switch the notes may lead to chaos in a country where the majority of the population live in rural areas away from bank branches. In 2016, Indian Prime Minister Narendra Modi’s move to ban high-value currency led to a prolonged scramble for cash and slowed economic growth.

The old bills, which amount to 85% of currency in circulation, will cease to be legal tender on Jan. 31. Access Bank, the biggest lender by assets, is looking to attract as much as 30% of the funds, in part through an expanded network of 200,000 agents to reach rural Nigerians who live far from bank branches.

“We are actually going to rural markets and rural areas with our agents now to encourage people to open account and deposit cash,” Chioma Afe, head of retail marketing and analytics, said in a phone interview.

Some have argued that six weeks isn’t enough time for Nigerians, 45 percent of whom lack bank accounts, to turn in their cash, especially given the country has just 4.5 bank branches per 100,000 people.

Liquidity push
The prospect of potentially trillions of naira in fresh deposits has sparked competition among banks looking to boost liquidity. All are building out their agent networks — men and women who sit in markets across the country selling mobile-phone credit and accepting deposits or withdrawals on behalf of banks.

“Banks with the largest agency network are the ones likely to get more of the funds, especially the small depositors,” said Joshua Odebisi, a banking analyst at Vetiva Capital Management in Lagos. “Being able to attract those cheap savings and current accounts will increase their capacity to create loans at a cheaper rate.”

The industry is facing a rising cost of funds amid climbing interest rates — up 500 basis points since May. In September, the central bank increased the cash reserve ratio — the amount of money banks have to keep at the central bank — to 32.5 percent from 27.5 percent, further curbing liquidity.

The Abuja-based regulator has ordered all banks to open branches on Saturdays to accommodate the anticipated deluge of customers.United Bank for Africa, like many of its peers, has begun a marketing push to urge customers to replace their notes early in order to “avoid the rush,” Alex Alozie, chief operating officer, said in a phone interview. Fidelity Bank has extended banking hours on weekdays in addition to banking on Saturdays, the lender said in emailed comments.

The country’s banks held 42 trillion naira in deposits as of June, according to the central bank.

Capturing a “significant chunk” of the notes outside the banking system will help boost liquidity, provided it doesn’t provoke a further hike in the cash reserve ratio by the central bank to tame inflation, Timothy Wambu, analyst at ABSA Bank, said. “The cheap deposits, assuming they are not interest bearing, would be a boost in lowering their cost of funds.”