Dispelling the Myth on Bank Charges

Unpacking how banks really make their money

As chronically online people who also happen to work in financial services, we have found that many Nigerians believe that banks are, somehow, able to declare huge profits every year by charging customers fees on transfers and other account-based charges. While it’s true that charges generate a significant portion of revenue, particularly in banks with substantial customer bases, the extent to which these revenue streams contribute to the overall gross earnings or Profit Before Tax (PBT) is significantly exaggerated.

Let’s use Zenith Bank as an example, as they are one of the banks that have declared over a trillion naira in PBT. If you’re not a finance buff, try to stay with us. We promise it’ll all make sense.

Let’s start by summarizing their financial performance for the last two years.

Finance buffs can skip this next part. Here’s a simple explanation for each of these metrics.

• Gross Earnings: The total revenue from all banking activities, both interest and non-interest income.

• Interest & Similar Income: The income earned primarily from loans and investments in fixed income securities (e.g., treasury bills, government bonds, etc.)

• Interest Expense: The money paid to customers for their savings and fixed deposits, and the cost of borrowing other funds.

• Net Interest Income: The difference between interest earned and interest paid. It shows the profitability of core lending activities. This is important.

• Impairment Charge: The money used to cover potential loan losses due to credit risks or defaults (customers not paying back).

• Non-interest Income: Revenue from fees, commissions, FX trading, and other non-lending services. This is what people think Banks make the bulk of their money from.

• Operating Expenses: Costs incurred in running the bank’s operations, excluding interest and impairments.

• Profit Before Tax (PBT): Earnings before tax obligations, reflecting operational and investment performance.

• Profit After Tax (PAT): Net income available to shareholders after deducting taxes.

• Earnings Per Share (EPS): Portion of profit allocated to each outstanding share, indicating shareholder value.

Zenith Bank made a ridiculous amount of money for a bank, by Nigerian standards. In an economy where many people are struggling and businesses are closing down, their trillion-naira profits almost seem immoral. But when you take a look at how this revenue was generated, it paints a different picture.

With over 30 million accounts, Zenith Bank made NGN1.1 trillion in non-interest income. Account maintenance charges brought in about NGN73 billion, while transfers generated around NGN80 billion. Together, these fees only made up about 4.64% of their total NGN3.9 trillion earnings in 2024.

Where did the bulk of the N3.9 trillion then come from? Let’s have a look at the earnings from lending and investments.

Interest and similar income amount to NGN 2.72 trillion, representing about 68.5% of the total gross earnings.. This is way more significant than the 4.64% from bank charges and transfers. Also important to note is that the bank saw a 135% increase in Net Interest Income from the previous year, and this increase happened because interest rates went up significantly.

The explanation for why interest rates went up will require us to delve (no GPT) into the work of the Central Bank of Nigeria (CBN), but for this article, just know that the CBN increased their interest rates significantly and this made the interest rate of both savings and loans to rise across banks and other financial institutions in the country. Zenith Bank also made NGN331 billion from treasury bills and NGN558 billion from Bonds, amounting to about 22.4% of gross earnings.

Simply put: Most of Zenith Bank's money came from lending activities and investments, not from your transfer fees.

Most commercial banks in Nigeria will have an income structure similar to this; the bulk of their revenue will come from lending and investments, and some change from transfers and account maintenance charges. Stanbic IBTC’s interest income accounts for about 68.8% of gross earnings, and in FCMB, it is even higher at 78.3%, with gross earnings being NGN823.31 billion and NGN794.4 billion, respectively.

This also debunks the notion that banks don’t lend money. It’s an inaccurate idea that, unfortunately, has gained traction in public opinion. Our theory suggests that individuals who make unsuccessful loan requests are the most vocal, while those who have access to loans from banks remain silent. This creates a cycle where the most negative voices are reinforced and amplified by people with similar experiences.

The reality is that banks are very careful about who they lend money to. A large chunk of the money they lend comes from customers’ deposits, and they have a responsibility to customers to ensure that the money does not get lost to borrowers who don’t pay back.

Imagine if your bank told you that they were taking money out of your account to give to some tech bro in Yaba who wants to buy a PS5, and works for a company that hasn’t paid his salary in the last 2 months.

Would you be excited about it?

In a sense, in lending with customers’ deposits, banks must have that same ick, and only choose to lend to people and businesses that they can see a straight line to repayment. This means even if you're financially responsible with a good job, banks might still refuse you a loan if they can't verify your finances, don't know enough about your employer, or don't have collateral to secure the loan.

This explains why many people don't qualify.

How to position yourself for bank financing deserves its own discussion, but I hope this clarifies how banks really make their money and why the money was moneying this year.