It began with an order to lend at least 60 percent of their deposits to small businesses. Then a measure that cut how much money lenders can keep in interest-bearing accounts with the apex bank by 73 percent followed.
Yet, the Central Bank of Nigeria (CBN) may have more in its arsenal as it seeks to force bank lending in an effort to boost credit to the real sector and accelerate the pace of economic recovery in Africa’s most populous nation, which has been reeling from low growth and high unemployment since an economic contraction in 2016.
Banking analysts say more lending measures will follow, as the CBN makes good its earlier threat to go after deposit money banks that were not extending enough credit to cash-strapped businesses but were more attracted to government securities.
“We believe that the apex bank is likely to introduce additional policies to complement the recently issued regulatory measures,” Jerry Nnebue and Phillip Anegbe of the research unit of investment bank, Cardinal Stone Ltd, said in a July 11 note to clients.
Nnebue and Anegbe doubted whether the measures introduced by the CBN so far were enough to significantly boost credit to the real sector. “Overall, the recent revision of standing lending facilities (SDF) guidelines is unlikely to drive material credit creation in isolation,” they said.
Two senior banking sources said the CBN has held meetings with executives in the sector where the possibility of placing a cap on how much banks can stash in government securities was discussed. They were not able to confirm when the CBN plans to implement the measure.
“The CBN is well aware that raising LDR to 60 percent and capping banks’ interest-generating deposits at N2 billion are not enough to materially boost lending to the real sector,” one of the sources who didn’t want his name mentioned said.
“The end game is to place a cap on how much banks can invest in government securities. Foreign investors know that this plan is on the table and that’s why banking stocks are selling off over fears that industry profitability will take a hit from such a measure,” he added.
One of the country’s biggest banks with strong exposure to foreign investors, Guaranty Trust Bank, has since fallen to a 52-week low on sustained investor sell-off.
Other tier-one banks like First Bank and United Bank for Africa are also trading lower than they were prior to the announcement of the CBN’s lending order.
CBN spokesperson, Isaac Okarafor, didn’t return two phone calls seeking comment. International ratings agency, Moody’s, also thinks the CBN’s directive regarding interest payment on bank deposits is unlikely to force banks to grow their lending “aggressively”.
“Assuming banks would lend out amounts above the new N2 billion placement ceiling, the additional lending would be only N5.5 billion per bank, and will likely be less than 1 percent of total loans outstanding,” Peter Mushangwe, a banking analyst at Moody’s, said in an exclusive comment to BusinessDay.
In the view of Moody’s, the additional liquidity will likely move to the interbank market rather than lending.
“The amount is not a lot so we don’t expect it to significantly affect the banks’ credit profiles,” Mushangwe added.
Nigerian banks’ revenue is largely influenced by their interest income on their loans and advances, Treasury Bills and bonds, and fee and commission income.
Income from their deposits with the apex bank in the Standing Deposit Facility (SDF) is negligible, according to CBN data.
Banks’ deposits in SDF pales in comparison to their placements in investments securities from a size and interest rate standpoint.
For context, total banking sector investments in CBN bills amounted to N3.9 trillion as at March 2019 (December 2018: N3.9 trillion) compared to SDF of N68.9 billion.
The CBN had said at its last monetary policy in May that it was working on mechanisms that would limit how much the banks can invest in government securities, which has been the biggest distraction for lenders who have been willing to lend to government for a juicy double-digit return since 2016, rather than gamble on private lending in a risk-laden economy and watch gains made in reducing non-performing loans in the thick of the economic crisis fizzle out.
Yields on government securities have averaged 15 percent since 2016, allowing banks make some profit even though their loan books shrank.
Treasury Bill yields have since cooled to around 11 percent after the government cut back on domestic borrowing in favour of foreign debt to manage its interest payment costs.
However, at 11 percent, banks are still piling cash into one of the highest returning government securities in emerging markets.
The impact of Nigerian banks’ risk averseness has been telling on the economy which has not grown fast enough to create new jobs for burgeoning population.