Credit to manufacturers declines in Q1 2020, stalling productivity – MAN
…as lending rate drops 13% YOY
The decline in credit availability to Nigeria’s real sector has continued to be a major challenge for manufacturers, affecting productivity and investments. This is despite various measures put in place to improve credit access for sector players, as noted by the Manufacturers Association of Nigeria (MAN) in its economic review for the first half of 2020 made available last week.
According to the association, in the first half of 2020, commercial banks’ lending rate to manufacturers declined by 13 percent to 19.5 percent from 22.5 percent recorded in H1 2019, it also declined by 3 percent when compared with 20 percent recorded in H2 2019.
The report revealed that the least interest rate being operated in the manufacturing sector was 14.8 percent given to the wood and wood products subsector while the non- metallic mineral products sub sector was given loans at 22 percent.
“High and double-digit lending rate has been one of major challenges to manufacturing in Nigeria for decades. Even with the operations of Bank of Industry (BOI and the new Development Bank of Nigeria), credit to the sector is still very limited and at exorbitant cost. The trend is responsible for low investment in the manufacturing sector as manufacturers find it difficult to commit to unprofitable interest charges,” the report states.
Presently, Nigeria has one of the highest lending rates in Sub Saharan Africa, with a Monetary Policy Rate (MPR) at double digits of 11.50 percent leaving deposit money banks to lend as high as 25 to 35 percent interest loans. Whereas other countries like Kenya and Ethiopia have an MPR of 7 percent, Rwanda has 4.5 percent, South Africa and Cameroon have 3.5 percent interest rate while Namibia has 3.75 percent.
As part of its efforts to spur economic growth and improve lending to the real sector the Central Bank of Nigeria (CBN) on July 3, 2019, directed financial lenders to maintain a minimum loan to deposit ratio (LDR) of 60 percent and by October 2019, it was further increased to 65 percent.
However, data from CEIC Data Company shows that the lending rate of Nigerian banks hovered between 14.7 and 15 percent in the first half of 2020. By implication, steps taken by the monetary authority to reduce cost of borrowing in the country seem unproductive, especially as it hinders investors from pursuing investments in the country, bearing in mind high production cost and infrastructure deficits that remain challenges for the business environment.
Frank Jacobs, former president of MAN, told Businessday that Nigeria’s manufacturing sector needs a single digit interest rate to stimulate growth, adding that no economy will grow when businesses have to contend with high interest rates. However, analysts say that Nigeria’s financial regulator may find it difficult cutting the interest rate further owing to the fast rising inflation rate, which as at November 2020 was 14.89 percent.
As a recommendation, the association suggests the CBN rolls out modalities for a specialized single digit interest loan, specifically for businesses involved in production activities, while also recapitalizing the bank of industry and the bank of Agriculture. It further urged a review of the guidelines of the various development funds to ensure that the terms and conditions are liberal enough to attract borrowing from the industrial sector.
“The manufacturing sector should be supported with a bailout fund up to N500 billion by the Government, particularly companies in the sectors that were severely affected by COVID-19; Implementing the N1trillion COVID- 19 stimulus package by the CBN to assuage the funding constrains and push forward production in the industry.
Also, specialized development funding windows should be established to further support backward integration and improve the production of industry raw-materials locally,” MAN advised.