Credit to the private sector is a top option for Nigerian banks as they seek to diversify their sources of income away from Treasury Bills (T-Bills) amid low yields, BusinessDay findings show.
Banks’ credit to the private sector increased by 5.3 percent in the fourth quarter of 2021 as against the 1.4 percent reported in the comparable period of 2020 and 4 percent recorded in the third quarter of 2021.
Among other factors, the move by the lenders to offer high loan volume, a strategy that aligns with the plans of the Central bank, may have paid off as the finance and insurance sector outperformed 13 others to record the highest quarterly growth in the fourth quarter of 2021. The sector expanded by 24.1 percent, the only one that reported double-digit growth. The sector’s growth was mainly underpinned by growth by financial institutions, which was up 25.1 percent year-on-year.
“A major driver behind the robust expansion of FI is that banks have tried to use volume (loan) growth to compensate for low asset yields,” research analysts at FBNQuest said.
In the past, Nigerian banks were known for tapping the low-risk high-interest rate Treasury bill instrument to grow their books. It was described by many market analysts as ‘free money for the banks.
No wonder seven in 10 customers of Nigerian banks did not have access to credit as of the first quarter of 2019. Only 1.89 million of the total 47.66 million Bank Verification Number (BVN) holders got loans in the review period.
This means that only 3.78 percent of the banks’ customers were able to access loans in the three months to March 2019, as analysed from the Selected Banking Report by the National Bureau of Statistics (NBS). The Q1 2019 report is the most recent with a breakdown of the number of borrowers from Nigeria’s deposit money banks.
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Interest rates have always been high in Nigeria due to the monetary system in vogue since 2009, which sought to use FGN bonds/T-bills and Open Market Operation (OMO) bills as a means of attracting the US dollar to stabilise the Naira, but the OMO policy by the central bank that prevents domestic investors from participating in the auction sent yields to its worst record.
From October 23, 2019, the apex bank banned non-bank locals (individuals and corporates) from participating in OMO auctions at both the primary and secondary markets. The CBN’s policy is largely in line with its drive to divert liquidity away from risk-free instruments to the real sector.
According to consulting firm McKinsey, the proportion of Nigerian bank earnings derived from fixed-income securities increased from 14 percent in 2009 to 30 percent in 2019. But a collapse in treasury bill yields, coupled with inflation at a high rate, means the real return on investment has touched some of its lowest levels.
Even after the crash in interest rate, checks by BusinessDay revealed that banks were more comfortable with investing in low-risk government instruments than lending to the private sector. This was due to the high risk that accompanied the COVID-19 induced slow economic growth since the outbreak of the pandemic in 2020.
Nigeria’s biggest banks were more concerned about their exposure to risk than the return on their investment in the first quarter of 2021 as their investment in government securities rose faster than their lending to the economy.
Despite the negative real return, the five tier-one lenders raised their holdings in government securities by 46.49 percent in the first three months of 2021 as against the 11.72 percent rise in their loans and advances to customers.
This mirrored the lenders’ perception of an economy that was still reeling from the pandemic and was stuck in a low growth cycle.
But, as economic activities gradually return to their pre-pandemic level evident in the fourth quarter of 2021 Gross Domestic Product (GDP) of 4.3 percent, market analysts expect banks to increase lending to the private sector.
