Analysts say why banks see risk in real sector investment

Nigerian banks experience the dilemma of investing in the real sector because of the risky investment environment, owing to the need to guarantee investors a high return on investments.

Several analysts made this assertion at the recent Banks’ recapitalisation round table discussion held by BusinessDay.

Mustafa Chike-Obi, Chairman, Bank Directors’ Association of Nigeria, said that banks prefer to fund assets and instruments created by the government because it makes more economic sense and offers a higher return on investments.

“There’s a reluctance of banks to lend to people. To a banker, treasury bills are more attractive to buy at 25percent than to lend to people. It’s a rational economic decision. What we have to do is to make it more rational to hold assets in naira than in dollars,” he stated.

Similarly, Osaro Eghobamien, Managing Partner, Perchstone & Graeys, noted that banks sell down their assets globally and diversify into more productive paths to grow the economy.

However, Nigerian banks are prevented from diversifying their investments across different sectors of the economy, due to the absence of a diversifying framework.

“Suppose banks diversify by funding infrastructure, and today, we have cost-reflective tariffs in the power sector. In that case, it makes more sense to fund any of the value chains in the power sector because it can generate money. However, there’s no framework for diversifying. What the carrying capital cost or adequacy treatment should be due to that diversification is unclear, so banks can’t do it,” he said.

Furthermore, Chike-Obi recommended that CBN reduce the short-term rates, and direct banks to lend to people, which would spur economic activity.

“What we have doesn’t allow growth and banks aren’t lending. I believe GDP growth will be lower in the fourth quarter than predicted. I’ll raise short-term rates to 30%, and prevent banks from having 10percent in treasury bills. This will force them to lend to people,” he stated.

Finally, Eghobamien stated that the federal government should introduce several guarantees to ease the risk of lending to people and investing in the real sector.

“Many SMEs are not structured, so they’re risky to be invested in. There are guarantees to be introduced to help the system. Some include a system where the mechanism for resolving disputes works. You cannot create assets and have an almost non-existent dispute resolution,” he said.