The Central Bank of Nigeria (CBN) has demonstrated its readiness to stimulate growth in the economy through its recent directives to the deposit money banks which focus on boosting credit to the real sector.
The CBN within the last two weeks swung into action after Godwin Emefiele, its governor, recently unveiled his policy trust and vision for the financial services sector in the next five years.
Emefiele was on May 2019, re-appointed for a second term as the CBN governor by President Muhammadu Buhari, an action that was widely accepted by both Nigerian and foreign investors.
On assuming office the following month after the expiration of his first term, Emefiele unveiled an 84-page policy trust, which centred around promoting price and monetary stability, exchange rate stability, financial system stability as well as efforts to spur growth through development finance interventions.
Working closely with the fiscal authorities, Emefiele pledged to target a double-digit growth by the next five years and committed to working assiduously to bringing down inflation to a single digit, while accelerating the rate of employment.
Part of the CBN governor’s policy trust reads: “Put succinctly, our priorities at the CBN over the next 5 years are the following; First, preserve domestic macroeconomic and financial stability; Second, foster the development of a robust payments system infrastructure that will increase access to finance for all Nigerians thereby raising the financial inclusion rate in the country; Third, continue to work with the Deposit Money Banks to improve access to credit for not only small holder farmers and MSMEs but also Consumer credit and mortgage facilities for bank customers”.
Consequently, the CBN swung into action as it has in the last two weeks released two circulars, which focuses on increasing lending to real sector, thereby stimulating growth in the economy.
In the first circular to all banks with reference number BSD/DIR/GEN/MDD/01/045, dated July 3, 2019 and signed by Ahmad Abdullahi, director, banking operations of the CBN, the apex bank required all DMBs to maintain a minimum Loan to Deposit Ratio (LDR) of 60 percent.
The circular titled ‘Regulatory Measures to Improve Lending to the Real Sector of the Nigerian Economy’, as seen by BusinessDay, said “all DMBs are hereby required to maintain a minimum Loan to Deposit Ratio (LDR) of 60 percent by September 30, 2019”. It said the ratio “shall be subject to quarterly review”.
The CBN said these measures were intended “to ramp up growth of the Nigerian economy through investment in the real sector”.
“To encourage SMEs, retail, mortgage and consumer lending, these sectors shall be assigned a weight of 150 percent in computing the LDR for this purpose. The CBN shall provide a framework for classification of enterprises/businesses that fall under these categories,” it said.
The apex bank warned that failure to meet the stipulated minimum LDR by the specified date “shall result in a levy of additional Cash Reserve Requirement equal to 50 percent of the lending shortfall of the target LDR”.
Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank. CRR is set according to the guidelines of the central bank of a country.
Analysts have critically looked at the policy and came up with their different verdicts. Taiwo Oyedele, head, Tax and Regulatory Services, PwC, said on one hand that it was a good development that should encourage banks to increase their lending especially to the private sector. On the other hand he said the risk is that the quality of banks’ loan portfolios may deteriorate in an attempt to meet the target at all costs, which may result in a relatively high non-performing loan ratio. “The CBN therefore needs to ensure a balance between the potential benefits and inherent risks of the new guideline,” Oyedele added.
Uche Olowu, president/chairman of council, Chartered Institute of Bankers of Nigeria (CIBN) said banks would comply but they were expecting a detailed framework to this directive.
He said the reason for the new guideline was that the CBN wanted to jump-start exposure to the real sector.
Olowu said the CBN coming up with a 60 percent loan-to-deposit ratio meant that banks’ lending to the real sector had not been sufficient. He added that the reason for deficient lending was the fact that the risk environment had not been mitigated. “There should be a win-win situation,” he said.
The overall availability of credit to the corporate sector decreased in Q2 2019 but was expected to increase in Q3 2019, according to Credit Conditions Survey Report published by the CBN.
One of the questions asked lenders in the report was, “How has the overall availability of credit to the corporate sector changed?” The response was 0.08 for current quarter, and -2.33 for the next quarter.
Ayodele Akinwunmi, head of research, FSDH Merchant Bank Limited, said the development meant more money from banks’ customer deposit will be channelled as lending to the real sector of the economy. Given the positions of customer deposits and loans of commercial banks in Nigeria as at December 2018, if Banks are to comply with the directive from the Central Bank of Nigeria, over N1.5trillion additional money would be available as credit to the real sector of the economy. It is also possible that commercial banks may sell down some of their holding of fixed-income securities in their portfolio to enable them meet the regulatory requirement. This may lower price with a possibility of increasing yields on fixed-income securities.
However, it is also important to address those hindrances to lending in Nigeria, otherwise lending in the name of complying to meet regulatory a requirement may lead to a rise in non-performing loans.
Ronak Ghadia, director of Sub-Saharan African Banks, EFG Hermes Research, said, “We think the regulation could be damaging for the Nigerian Banking industry; normally banking sector regulators introduce maximum LDR thresholds to limit risk taking by banks. Conversely, in Nigeria, introduction of a minimum LDR by the CBN encourages banks to undertake more risks at a time when the macro-environment remains fragile at best. Moreover, the regulation encourages banks to lend to sectors that they have historically been uncomfortable lending to. We think there is a risk that the new regulation could lead to banks underwriting high-risk loans which could lead to further asset quality deterioration and destabilisation of the industry, at a time when the regulator has limited scope for further bail-outs”.
The second circular FMD/DIR/CON/OGC/12/019 to all banks and discounts houses on ‘Guidelines on Accessing the CBN Standing Deposit Facility’, and signed by Angela Sere-Ejembi, director, financial markets department, the CBN said the remunerable daily placement shall not exceed N2 billion.
With this circular, the CBN has reduced the amount of excess cash that banks and merchant banks (discount Houses) deposit with it, which is known as SDF by 73.3 percent to N2 billion from N7.5 billion since 2014.
“The amount is not a lot, so we don’t expect it to significantly affect the banks’ credit profiles. Nigerian banks’ revenue is largely influenced by their interest income on their loans and advances and treasury bills and bonds, and fee and commission income. Income from their deposits with the Central bank in the Standing Deposit Facility is negligible,” Moody’s said.
In a commentary made available to BusinessDay, Moody’s said the banks may still mitigate the loss of interest on the extra N5.5 billion by moving the extra liquidity to the interbank market, which may depress interbank interest rates, and benefit net interbank borrowers, somewhat.
“The latest measure signals the central bank’s intention to stimulate lending to the real economy. However, in our view, this directive is unlikely to force Nigerian banks to grow their lending aggressively. Already, banks were only remunerated up-to NGN7.5 billion, and any amount above N7.5 billion was not remunerated. Assuming banks would lend out amounts above the new N2 billion placement ceiling, the additional lending would be only N5.5 billion per bank, and will likely be less than 1% of total loans outstanding. In our view, the additional liquidity will likely move to the inter-bank market rather than lending.”
Ayodele Akinwunmi, head of research, FSDH Merchant Bank Limited, it is important that the efforts of the CBN are supported by appropriate fiscal policies and incentives to reduce the risk of lending to the economy and also develop new businesses and sectors that bank loans can be directed to.
Continuing in his policy trust, Emefiele said, “We shall also during this intervening period encourage our Deposit Money Banks to direct more focus in supporting the Education Sector. Fourth, grow our external reserves; and fifth, support efforts at diversifying the economy through our intervention programs in the agriculture and manufacturing sectors.
We are confident that when implemented, these measures will help to insulate our economy from potential shocks in the global economy.
In my second term in office, part of my pledge is to work to the best of my abilities in fulfilling these objectives”.
Hope Moses-Ashike
