Merchant banks in Nigeria play a crucial role in the financial system by offering specialised services like underwriting, corporate advisory, trade finance, and fund management.
Despite their significant role, these banks face numerous challenges that impact their operations and limit their potential for growth. Navigating through a complex economic landscape, merchant banks contend with regulatory constraints, economic volatility, limited access to foreign exchange, high operational costs, evolving technology demands, capital adequacy requirements, market competition, and political instability. These challenges create a difficult environment for merchant banks to thrive in and underscore the need for strategic planning and adaptability within the industry.
One of the primary challenges facing Nigerian merchant banks is the regulatory environment, where the Central Bank of Nigeria (CBN) and other regulatory bodies enforce strict compliance requirements. While these regulations aim to maintain financial stability, the frequent changes in regulatory policies create an unstable environment that complicates long-term planning.
According to financial analyst, Paul Ogbuchie, “The cost of compliance with regulations such as Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements is substantial for merchant banks, adding to operational expenses and affecting profitability.” Compliance costs are often passed down to customers, making merchant bank services relatively expensive and less competitive. These regulatory limitations restrict the scope of services and reduce the flexibility of merchant banks to diversify their offerings, thereby constraining their growth potential.
The economic volatility in Nigeria, driven by fluctuations in global oil prices, presents another formidable challenge. Nigeria’s heavy reliance on oil exports exposes it to economic downturns whenever global oil prices drop, which affects many industries and the financial institutions that serve them.
As noted by a financial economist at Nnamdi Azikiwe University, Dr. Felix Echekoba, “Merchant banks are highly susceptible to economic cycles, as a downturn can reduce clients’ repayment abilities, impacting loan performance and raising non-performing loan ratios.” Economic downturns increase credit risks as clients, affected by reduced revenue streams, may struggle to service loans. Consequently, this leads to a higher incidence of non-performing loans, impacting the financial health of merchant banks. Additionally, inflation and exchange rate fluctuations contribute to economic uncertainty, decreasing the value of assets and eroding investor confidence. Merchant banks operating in this environment often find it difficult to raise funds or sustain lending at previous levels.
Another critical challenge faced by Nigerian merchant banks is the limited access to foreign exchange. Many of these banks engage in cross-border transactions, trade financing, and investment activities that require a steady supply of foreign currency.
However, due to Nigeria’s heavy reliance on oil revenues and a high demand for foreign currency to support imports, the country faces a persistent forex scarcity. One merchant banker, Peter Erute, highlighted that, “The lack of access to foreign exchange significantly hampers the ability of Nigerian merchant banks to meet client needs and support international transactions, affecting their ability to facilitate cross-border services.” He said the CBN’s foreign exchange policies, designed to control currency outflows, add another layer of difficulty for merchant banks, limiting their ability to support clients with international financing requirements and ultimately stifling the expansion of cross-border services.
High operational costs also represent a significant hurdle for merchant banks. The infrastructure needed to run merchant banking operations, coupled with the high cost of acquiring skilled personnel, results in considerable overheads. In addition, merchant banks must invest in advanced technology to keep up with industry standards, protect customer data, and enhance cybersecurity to counter growing threats.
As a leading financial consultant, Rufus Nkwo, noted, “The cost of implementing modern technology and cybersecurity measures puts a heavy financial strain on merchant banks, impacting their ability to offer competitively priced services. Furthermore, the cost of borrowing within the Nigerian financial system remains high due to inflation and strict monetary policies, raising the cost of capital for merchant banks and reducing their profitability. High operational expenses make it challenging for these banks to price their services competitively, which, in turn, limits their market share and profitability.
Capital adequacy requirements are another major concern for Nigerian merchant banks. Regulatory bodies such as the CBN impose minimum capital adequacy ratios to ensure banks have a buffer against potential losses. This requirement, while important for financial stability, imposes a significant constraint on merchant banks.
Securing adequate capital in a market with limited investor confidence remains challenging, especially, when funds could otherwise be deployed toward expansion or lending opportunities, commented Development Economist, Professor Tayo Bello,
Such restrictions can hinder growth and prevent merchant banks from responding swiftly to new market opportunities, thereby reducing their competitiveness.
While technological disruption is increasingly challenging for Nigerian merchant banks as they strive to remain relevant in a rapidly digitizing financial landscape, the rise of fintech firms offering digital solutions for payments, lending, and investments has attracted a tech-savvy customer base, reducing the demand for traditional merchant banking services.
According to a recent financial technology report, “Merchant banks must keep pace with fintech innovation or risk losing market share to companies that offer more agile and efficient digital solutions.” However, the costs and complexities associated with implementing these technological upgrades pose significant barriers. In addition, regulatory requirements for digital services create an additional layer of compliance complexity. Merchant banks that are slow to adopt digital transformation risk losing market share to more agile fintech companies that offer faster, more user-friendly services.
A further challenge is the limited market awareness of merchant banking services among Nigerian businesses, particularly small and medium-sized enterprises (SMEs). While merchant banks offer valuable services such as underwriting, advisory, and structured finance, a significant portion of the market remains unaware of these offerings.
As the president of the Independent Shareholders Association of Nigeria, Moses Igbrude, observed, “many Nigerian businesses view commercial banks as their primary financial service providers, often overlooking the specialized benefits of merchant banking.” This limited awareness restricts the customer base of merchant banks, as potential clients overlook their services, which ultimately reduces revenue opportunities. Educating the market on the benefits and unique capabilities of merchant banks is an essential, yet challenging task, as it requires sustained efforts in marketing and client engagement.
