In July 2019, the financial soundness indicators showed that the Nigerian financial sector had remained sound.
For instance, the banking industry Non-Performing Loans (NPLs) entered single digit at 9.36 percent after five years, an indication of improved soundness of the sector. The decline of the NPLs was a good signal that Central Bank of Nigeria’s policies in relation to NPLs were effective.
The Capital Adequacy Ratio (CAR) stood at 15.26 percent which was slightly above the prudential requirements of 15 percent. This compares favourably with Nigeria’s peers, such as South Africa, Malaysia and Turkey with CARs of 16.4, 17.3 and 18.1 percent, respectively.
Similarly, the liquidity ratio (LR) in June 2019 improved year-on-year and higher than that of peer countries. The performance of the banking sector in terms of both Return on Equity (ROE) and Return on Asset (ROA) pointed to a healthy position of the banking sector.
“Key major risks and vulnerabilities identified in the Nigerian banking were slow economic growth, high inflation, growing debts sticky NPLs; Security and insurgency challenges,” Balami, Dahiru Hassan, member of the MPC said in his personal statement.
Aishah Ahmad, deputy governor of the Central Bank of Nigeria (CBN) in charge of financial system stability, noted that several months of low credit to the private sector amidst burgeoning treasury securities activity prompted the CBN policy statement on July 3, mandating Deposit Money Banks (DMBs) to build up their minimum loan to deposit ratio (LDR) to 60 per cent over a three-month period, with additional incentives (150 per cent weighting) for new Small and Medium Enterprises (SMEs), retail, mortgage and consumer loans.
Broad money (M3) grew by 4.97 per cent in June 2019, compared with a growth of 4.55 per cent in May 2019, while credit to the Government continued to crowd-out the core private sector.
Joseph Nnanna, deputy governor, said with the recent regulatory measure of loan-to-deposit ratio of 60.0 per cent, it is expected that commercial banks will enhance lending to the real sector.
The CBN had given the banks September 30 deadline for the commencement of 60 percent loan to deposit ratio, which was targeted at increasing credit to the real sector of the economy.
Godwin Emefiele, governor of the CBN had at the last Monetary Policy Committee (MPC) meeting in July explained that the core role required of the banks is to act as financial intermediaries to provide credit to the private sectors of the economy.
On his part, Obadan, Mike Idiah, MPC member, said the financial system soundness indicators generally reflect improvements. The banking industry’s assets and total deposits indicate consistent growth. But total credit has continued to decline year-on-year since June 2017. Loan deposit ratio also declined between 2018 and 2019. And the number of new credits each month in 2019 is lower than the amount for December, 2018.
However, the good news is that credit to the manufacturing sector increased end-June 2019 compared to end-June 2018. Also, credit to the agricultural sector has trended upwards since September, 2018. This he said was not unconnected with the CBN interventions. Importantly, the CBN’s recent measures relating to the Standing Deposit Facility and raising the loan-deposit ratio target for banks will most likely boost credit delivery to the private sector.
The CBN at the last MPC meeting in July, held the benchmark interest rate at 13.5 percent. The 11 members present also voted to retain the Cash Reserve Ratio (CRR) would be retained at 22.5 precent, Liquidity Ratio at 30 percent as well as the Asymmetric Corridor around the MPR at +200/-500 basis points.
