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Banks to remain conservative towards private sector lending amid COVID setback

Why Lagos remains Africa’s best investment destination

While credit to the private sector has continued to maintain an upward momentum with a chunk of the loans awarded to large corporates and high-end medium enterprises, analysts see lenders becoming more conservative especially with small businesses who account for the larger segment of the Nigerian economy.

The setback from the impact of the COVID-19 pandemic on small businesses was one of the reasons the five analysts polled in a BusinessDay survey projected that Nigerian banks will remain cautious about lending to the real sector of Africa’s largest economy.

Nigeria’s over 40 million small and medium-sized enterprises (SMEs) are described as the bedrock of the economy as they account for over 95 percent of all businesses and contribute over 50percent to the economy.

“Banks will remain very conservative in lending due to the setback caused by COVID-19 on businesses,” Ayodeji Ebo, Senior Economist/Head, Research & Strategy, Greenwich Merchant Bank, said.

While gross loans and advances grew by 12 percent in 2020, loan growth in real terms was negative when the 19.3 percent naira devaluation is put into consideration.

“Real loan growth was nearly absentia as banks focused on restructuring risky loans. Thus, we saw a significant slowdown in credit creation from Q3-2020,” Ayorinde Akinloye, investment research analyst at United Capital, said.

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Nigeria’s financial intuitions growth slowed to its lowest levels in four years in the second quarter of 20201. The sector growth stood at -4.54 percent in the review quarter, 2.26 percentage points less than the 6.8 percent reported in the corresponding quarter of 2020, as gathered from the latest GDP report by the National Bureau of Statistics (NBS).

According to the Central Bank of Nigeria (CBN) Money and Credit Statistics, credit to the private sector in the first seven months of 2021 was up 6.68 percent to N32.8 trillion in July 2021 from N30.65 trillion in January.

But analysts believe the increase in private sector lending has not had the desired impact especially on small businesses who were most affected by the impact of the pandemic.

Data by FBNQuest and NOI showed that Nigeria’s manufacturing Purchasing Managers’ Index (PMI), an indicator that is gathered from manufacturers’ responses to set questions on core variables in their businesses, remained in negative territory in August, improving from 48.0 in July to 49.6.

A PMI above 50 percent reflects that the overall economy is expanding; if less than 50 percent, it reflects the overall economy is in recession.

On a 12-month moving average basis, FBNQuest and NOI said Nigeria’s headline index weakened from 51.5 to 51.3 in August.

“I think loans and advances will improve if the economy sustains its positive momentum,” Ebo said, adding that “lending this year in real terms will also reduce due to higher fixed-income rates relative to last year.”

According to Agusto & Co., 2021 Banking Industry Report gathered from the financial statements of twenty commercial banks and five merchant banks, the reliability of business continuity measures was tested in 2020, considering the movement restrictions that lasted for months.

“Most banks showed resilience through innovative measures including remote work arrangements and upgrade of network infrastructure to accommodate higher traffic on digital channels.”

Leveraging the lessons from the 2016/2017 economic recession, the credit rating agency said the Nigerian banking industry was better prepared in 2020.
“Proactive measures in the form of forbearance granted by the Central Bank of Nigeria CBN), enabled banks to provide temporary and time-limited restructuring of facilities granted to households and businesses severely affected by COVID-19,” it said.

The pandemic forced banks to take a risk-off approach towards lending due to the weaker economic and business environment, according to Akinloye.

While the COVID-19 pandemic brought to the fore, technology’s crucial role in deepening financial services as some banks recorded as much as a double in their digital banking transaction volumes, the gains were limited by the CBN-induced reduction in bank charges, which took effect in January 2020.
Analysis of the report by Agusto & Co. revealed that the electronic banking income of the reviewed banks declined by 27.3 percent, accounting for a lower 13.2 percent (FY 2019: 21.1%) of non-interest income.

According to the Lagos-based credit agency, the CBN’s policies targeted at lowering interest rates have persisted especially given the dire need to stimulate the economy following adversities created by the pandemic.

However, given the need to moderate inflation amidst efforts to maintain a stable exchange rate, the apex bank increased the lenders’ cash reserve requirement (CRR) to 27.5 percent. The standardised CRR was implemented alongside discretionary deductions.

“As at FYE 2020, the industry’s restricted cash reserves exceeded N9.5 trillion and translated to an effective CRR of 37 percent,” Agusto & Co. said.

It is noteworthy that Nigeria has the highest reserve requirement in sub-Saharan Africa. South Africa, Kenya and Ghana all have CRR’s of below 10 percent.

“We believe the elevated CRR level moderated the industry’s performance and liquidity position in 2020. Assuming the sterile CRR was invested in treasury securities at 5%, N482 billion would have been added to the industry’s profit before taxation. This would have increased the industry’s return on average equity (ROE) by 11% to 31.6% in the financial year ended 31 December 2020.” research analysts at Agusto & Co. explained.