Nigeria’s banks are some of the most reluctant lenders in major emerging markets, with an average loan-to-deposit ratio below 60% according to Bloomberg.
In Africa, average loan-to-deposit is at around 78%, according to data compiled by Bloomberg. It’s above 90% in South Africa and about 76% in Kenya.
In an effort to boost economic growth in Africa’s most-populous country, Nigeria’s Central Bank is giving the nation’s banks a choice: lend more money, or hand it over to the central bank and earn nothing on it.
Banks should use at least 60% of their deposits for loans by the end of September, the central bank said on July 3, according to a circular published by BusinessDay Thursday. Those that don’t will have their cash-reserve requirements increased, meaning they’ll be forced to park more money at the central bank.
Guaranty Trust Bank Plc, the nation’s biggest lender by market value, fell 1.9% in Thursday trading, contributing the most to the Nigerian Stock Exchange All Share Index’s decline. Its loan-to-deposit ratio was 53% at the end of March. United Bank for Africa Plc also dropped, while Zenith Bank Plc rose.
The decision was taken “to ramp up growth of the Nigerian economy through investment in the real sector,” Ahmad Abdullahi, director of banking supervision, said in the letter to banks.
“To encourage lending to small businesses and consumers and more mortgages, these sectors shall be assigned a weight of 150%” when computing the loan-to-deposits ratio.
The Nigerian economy is struggling to recover from a full-year contraction in 2016 and will expand 2.1% this year, according to the International Monetary Fund. The central bank cut its key lending rate in March to help boost growth.
There was previously no rule on minimum loan-to-deposit ratios, and many Nigerian lenders have ratios of about 40%, Abdullahi said by phone from Abuja, the capital.
The order came after Central Bank Governor Godwin Emefiele urged banks to boost lending or have access to risk-free assets restricted.
Speaking at the most recent Monetary Policy Committee meeting in May, he said he would create “a mechanism” to limit banks’ purchases of government securities.
Risk-averse Nigerian banks have resisted lending to businesses and consumers and instead piled their cash into naira bonds, which yield 14.3% on average, one of the highest rates globally.
Lenders worry that with inflation at more than 11%, extending more credit could endanger the financial system through an increase in non-performing loans, or NPLs.
That makes some analysts skeptical of whether the new measures will work.
“Forcing banks to lend under the current macro-economic situation will only result in a buildup in NPLs,” analysts at Lagos-based CSL Research, including Gloria Fadipe, said in a note to clients. “This could pose a risk to financial stability.”
CSL estimates it could result in an additional 1.4 trillion naira ($3.9 billion) of lending if the central bank gets its way.
Non-performing loans as a percentage of total credit in the Nigerian banking industry declined to 11% in the first quarter from 14% a year ago, according to the National Bureau of Statistics.
Past experience with such measures isn’t encouraging. The central bank last year allowed banks to use their statutory cash reserves to fund manufacturers on the condition that such loans were at a maximum interest rate of 9% and a minimum maturity of seven years.
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