As Banks Phase out COT'

As banks begin to count their losses following the final phase out of Commission on Turnover effective January 1, Festus Akanbi reports that a regime of standard practice in Nigerian banks has begun, positing that operators have no choice but to build their revenue from lending to the real sector of the economy

One of the issues in the Nigerian banking sector in 2015 was that of diminished performance which eventually pulled down performance on the Nigerian Stock Exchange. As banks turned in losses and moderated profit margins especially, for the third quarter, investors who hitherto placed their bets on banking stocks as money-spinners quickly dumped their shares in response to weak results submitted to the Exchange.

However, banking industry watchers said that although some of the stocks of quoted banks are showing signs of recovery in the New Year, the recent expiration of the deadline for the phase out of the operation of Cost of Turnover (COT) by banks has the potential of worsening the woes of money deposit banks in Nigeria.

COT also known as Commission on turnover, in simple terms, are charges a customer incurs for debit transactions (transaction involving withdrawals and/or operating cost to the bank) from his current account. This serves as a secondary source of income for banks since they pay interest on customers’ deposits.

COT Charges

Most banks charge a fee per N1, 000 value of withdrawal transaction done by the customer. Previously, COT fees were subject to the banks discretion and negotiated based on the volume of the transaction and business history of the customer.

But recently, the CBN in conjunction with the Bankers Committee placed a ceiling on the maximum amount a bank can charge as COT per mille (per 1,000), in addition to this, they initiated a gradual phase out of COT. From N3 per N1, 000 in 2013, to N2 in 2014, and N1 per N1, 000 transaction in 2015. By 2016, banks are not permitted to charge their customers COT. However, in a bid to adapt before hand and retain customers, some banks do not charge COT at all but some banks have been indicted for charging above the approved margin.

In fact, there have been incidences of banks charging higher than the prescribed limit, the CBN has directed a refund of all such charges.

Banks under pressure

As the regime of zero COT takes off, debate in the banking industry has shifted to what becomes of banks now that the door to one veritable source of revenue has been effectively shut?

There is a consensus that in the emerging scenario, banks will have to increase efforts to remain profitable and lend more to viable sectors of the economy.

Banks will definitely not find it funny considering this is coinciding with the implementation of the Treasury Single Account (TSA), which has taken government funds out of the banks.

Already, operators have begun to put up figures of the anticipated losses of banks to the implementation of zero COT.

For instance, some believed that banks’ revenues would drop by about N100 billion this year with the implementation of the zero Commission On Transactions (COT) policy.

Customers can protest

Lending his voice to the need for banks to brace up in order to meet the emerging dispensation, Managing Director, Financial Derivatives Company, Mr. Bismark Rewane, said bank customers have the opportunity to protest any arbitrary deductions in the name of COT.

He said now that the gradual phase out of COT has fully run its course, banks will be under serious pressures because their revenue streams are being streamlined and reduced. The onus, according to him, is on banks to be efficient and innovative.

He said, “This regime of zero COT will definitely put banks under pressure but I think it will make them more efficient anyway. Definitely, this will affect their margins, therefore they have to be more efficient or else they will have to lay off more of their staff. It is a very important development because elsewhere, nobody is charging COT anymore. It is a Nigerian phenomenon.

“No bank can remove COT again. If they do it, they (regulators) will penalise them and such deduction would be refunded. This is because COT is zero from January 1. My banks charged me last week, which was December. I’m waiting to see if they will still charge me COT this month. If they do, I will raise the alarm.”

An insider and a former Executive Director of Keystone Bank, Richard Obire, explained that of the annual N550 billion average revenue for the 21 banks, about N100 billion is raked from COT.

Obire explained that bank’s revenues are made up of interests on loans, which constitute 70 per cent of the total revenue. Fees and commission covers 30 per cent of the total revenues.  COT, he said constitutes 60 per cent of income within the segment.

Income diversification

Obire said banks should be moving towards income diversification to shore up their revenue base. He said lenders should be creative and think of how to diversify to support activities that generate foreign exchange from local industries. He said aside the COT-free banking; the lenders will face pressure arising from interest revenues on loans.

The “Guide to Bank Charges” is an initiative of the Central Bank of Nigeria (CBN) to reduce charges widely seen by bank customers

In a circular titled: “Implementation of Revised Guide to Bank Charges –Commission on Turnover,” posted on CBN’s website and signed by its Deputy Director, Financial Policy and Regulation Department, Franklin Ahonhai, last year, the regulator said there was no going back on the policy implementation.

It mandated banks that charged excess COT since the effective date to refund same to the affected customers or be sanctioned.

According to the CBN, the policy is expected to have implications for both banks and their customers as it is expected to give the regulator more power to deal with banks reluctant to lower service fees considered ‘as the highest in the world’.

The apex bank said the “Guide to Bank Charges” would make it more difficult for banks to set high fees and charges without having reasons acceptable to regulators. The regulator said banks’ drive to make inroads into the legions of this country’s unbanked, financially illiterate and those isolated from traditional banking services through distance and hard terrain will be hampered by excessive charges.

It said the guideline was meant to address complaints arising from bank tariffs and other miscellaneous fees charged by banks on their customers’ accounts. The policy is also expected to ensure greater competition in retail banking and achieve real benefits for customers through lower costs, better service and greater access of financial services to poor communities whilst at the same time preserving the stability of the banking system.

But some financial analysts believe Nigerian economy will be better for the current developments in the nation’s banking sector.

Afrinvest West Africa’s Managing Director Ike Chioke said banking was confronted with the reality of declining fee incomes; mobile money and dollar denominated capital sourcing.

Era of real banking begins

In a report titled: “Nigerian Banking League – The fate of small players” Chioke predicted that the era of “real banking” appears to be gradually re-emerging as traditional sources of high income/profitability continue to come under threat from increased competition and tighter regulation.

He predicted that in the next five years, outlook on yields and fee income remains downwards, necessitating the need for banks to focus on lending to the real sector. Also, banks are expected to develop and grow the depth of their core retail banking businesses to retain and amplify cheap deposits.

The CBN, which targeted a zero per cent CoT  by 2016, noted that the guide was part of efforts to standardise charges for various products and services offered by banks in the country, lamenting a situation where the banks have continued to abuse the portion that says that CoT is negotiable.

Amidst reports by the apex bank that some financial institutions are still reneging on the pledge to adopt the resolution of the CBN and the Bankers Committee on the gradual phase out of CoT, some financial analysts said the reality is that the management of some of the banks are either bereft of ideas on how to find alternative sources of revenue or just cashing in on the failure of the apex bank to wield the big stick. Besides, they subtly introduce hidden charges that are beyond the imaginary.

Investigations revealed that major banks take excess charges on CoT, interests and facility fees, above the limit fee, CoT shortfall, bank draft fee, loan interest, fee earned and handling fee, returned cheque fee, collection fee and debit correction fee, letter of administration fee, among others. However, experts say returned cheques should not attract CoT.

Analysts said the phase out of COT deductions, which came after the removal of deduction from ATM services means that another income stream of banks have been effectively blocked.

However, in a poll conducted by NOI Polls, it was revealed that 61 percent of customers of banks in Nigeria complain of hidden charges on them for banking services.