The Central Bank of Nigeria’s directive aimed at accelerating growth in Africa’s largest economy is yielding fruit as the largest listed banks have started turning on the tap on lending to the economy as loans to customers have hit five-year high.
The CBN had in July asked banks to lend a minimum of 60 percent of their customer deposits in its bid to boost lending to the real sector of the Nigerian economy, and further raised the minimum Loan-Deposit Ratio for banks to 65 percent for a December deadline.
Analysts say the LDR policy of the CBN has continued to increase banks’ credit to the private sector.
The 11 largest banks in Nigeria reported N15.01 trillion of loans and advances to customers in the first nine months, which is 16.06 percent higher than the N12.93 trillion recorded in the corresponding period of last year.
A cursory examination of their books shows that in 2018/17, cumulative loans increased by 3.81 percent to N12.93 trillion, but fell by 3.81 percent to N12.07 trillion in 2017/16 when they took packed money in government securities that offered attractive yields.
Furthermore, loans increased by 14.84 percent to N11.94 trillion in 2016/2015, a year after the banks had made money from foreign exchange gains, thanks to the devaluation of the currency by the regulatory authority.
The new rules have helped buoy the nominal interest credit to the economy and lenders will continue to extend credit to the real sector, said Ayodele Akinwunmi, equity research analyst at FSDH Merchant Bank Ltd.
“But you need to adjust for inflation to know whether they have increased from a year ago. Is it growing in real terms? Of course, the amount of money in the financial system is increasing, and we have to take into cognisance credit to GDP,” said Akinwumi.
Banking sector’s credit to private sector rose by 2.61 percent to N25.47 trillion in September, from N24.82 trillion in August, setting a new record for the year, according to The Money and Credit Statistics by the CBN.
The statistics also revealed that the banking sector’s credit to the private sector was N22.9 trillion in January. It increased to N24.2 trillion in February. The figure dropped marginally to N23.99 trillion in March and increased by 3.72 percent to N24.88 trillion in April.
But some analysts said forcing lenders to extend credit under the current macroeconomic conditions could result in defaults, which could stoke Non Performing Loans (NPLs), a double whammy for an industry that is recovering from the exposure to oil and gas.
They added that without a complementary fiscal policy that will create the enabling environment for businesses to thrive, it will be practically difficult for financial institutions to record double-digit growth in earnings.
The Nigerian economy has been growing sluggishly as GDP expanded by 1.94 percent in the second quarter of 2019, compared with 2.1 percent expansion in the first quarter, according to available data.
“It is already affecting the outlook of the banking industry because it reduces the ability to earn income, and that money will not earn interest,” said Ayodeji Ebo, managing director/CEO, Afrinvest Securities Ltd.
Zenith Bank’s loans and advances to customers increased by 9.24 percent to N2.72 trillion as at September 2019, the highest in five years.
Access Bank’s loans and advances to customers spiked by 37.53 percent to N2.93 trillion in the period under review, thanks to the acquisition of Diamond Bank, a lender that had spread its tentacles in the retail space.
United Bank for Africa’s loans and advances increased by 14.68 percent to N1.98 trillion as at September 2019, the highest in five years.
In order to stimulate loans for purposes other than speculations, the CBN has banned individuals and local non-banking firms from buying high yielding government bonds.
“A lot is being misunderstood. Open Market Operations (OMO) should be limited to banks and not investors. OMO is not meant as an investment option for the public. It is a CBN tool for mopping liquidity,” said Elias Igbinakenzua, managing director/CEO, Globus Bank.
“The regulator is asking banks to be more rigorous in credit selection. If they apply more rigour, then bad loans will reduce. The LDR is a laudable step but the way it is implemented matters. There is probably not enough information for the people,” he said.
