Nigerian lenders say they cannot fully pass on the central bank’s (CBN) latest policy rate cut to borrowers, in the form of lower lending rates or credit growth.
A slowdown in deposits mobilisation, elevated cash reserve ratios (CRR) and increasing competition from the government and money market for small-savings mean banks increasingly face a higher cost of capital, limiting their ability to transmit monetary policy easing.
Bankers say the CBN’s 50 basis-point reduction in the monetary policy rate (MPR) on Tuesday was a start, but was probably too little to have any impact on lending just yet.
The three bank chief executive officers (CEOs) who spoke to BusinessDay were reacting to the CBN’s surprise decision Tuesday to cut the MPR to 13.50 percent from 14 percent.
“To grow your loan book, the first thing you (a bank) need(s) is liquidity, I’m not sure how this 50bps cut solves that liquidity problem,” one bank CEO who did not want to be named said.
When asked what could move the needle on lending, another bank CEO said, “For starters, I would have expected the CBN to review the Cash Reserve Requirement so that there is more liquidity for banks to lend with. Without that, even a 100 bps rate cut may prove insignificant.
“We have piles of loan requests, but we can’t do much, because we are being careful in order not to put ourselves in a liquidity crunch.”
CRR is a central bank regulation employed by most, but not all, of the world’s central banks, that sets the minimum amount of reserves that must be held by a commercial bank.
The minimum reserve is generally determined by the central bank to be no less than a specified percentage of the amount of deposit liabilities the commercial bank owes to its customers.
While the CBN has left the CRR unchanged at 22.5 percent since 2015, bankers say effective CRR is much higher at around 40 percent.
“The banks are left starved of cash because the CRR is not dynamic and that’s why banks are not cheering the rate cut because they know it changes nothing in terms of lending,” one of the bank CEOs said.
The discord comes from the fact that the CRR is not dynamic enough to reflect dwindling bank deposits, which means banks sometimes have a higher percentage of their current deposits stashed away with the CBN at zero interest.
It effectively means the banks are denied extra liquidity that would have been used for lending purposes. The practice often contradicts the CBN’s push to spur lending in an economy still finding its feet after a painful recession.
The economy expanded a mere 1.8 percent in 2018, according to state data agency, the National Bureau of Statistics (NBS).
The International Monetary Fund (IMF) forecasts 2 percent growth in 2019. Population growth of around 2.6 percent per annum means that GDP per capita has been negative since 2016.
“Nigeria’s Central Bank’s rate cut had been expected as real interest rates have remained positive for almost a year. However, its potential impact on growth is likely to be limited since its transmission to the real economy and to lending rates is weak in Nigeria,” Aurelien Mali, a vice president at Moody’s, told BusinessDay.
Governor Emefiele said the decision to cut rates was a signal that the monetary policy needed to begin to consolidate growth.
He, however, added that the decision does not in any way indicate a commencement of a rate-cutting cycle.
“I find the move very confusing,” the third bank CEO interviewed by BusinessDay said of Emefiele’s comment.
“The CBN says it wants to boost lending but isn’t doing what needs to be done to achieve that and then suggests it could continue tightening,” the person said.
Nigeria’s biggest banks have had to cut back on loan book growth in an attempt to curb non-performing loans which had skyrocketed on the back of falling oil prices and an economic recession.
Despite giving a guidance of 10 percent growth in 2018 – an outlook buoyed by the recovery in oil prices and the economy’s exit from recession – most banks actually saw a contraction in their loan books, with the big banks from Guaranty Trust Bank (GTB) to Zenith Bank leading the way.
During a conference call with investors this month (March), Segun Agbaje, CEO of the country’s largest bank by market capitalisation, GTB, called for a looser monetary environment for banks to grow their loan books.
“The reality is that we are in a tight monetary policy environment where our (GTB) effective liquidity ratio is 41 percent and CRR is 30.5 percent,” Agbaje said.
“There is macro hindrance to growing our loan book which is the size of CRR. Until you have a bit of loosening, where there is a release in CRR and there is more naira liquidity, what we will see if we are lucky is 10 percent loan growth in 2019,” he said.
LOLADE AKINMURELE
