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Banks’ credit to real sector nears 5-year high to N17trn

...as LDR policy pays off ...Analysts divided on lenders’ loan book growth Q1 2020  

The Nigerian banking sector recorded the most credit growth to the real sector of the economy in almost five years, hitting N17.1 trillion in the fourth quarter of 2019.

The breakdown of the sectoral credit shows that oil & gas and manufacturing sectors got credit allocation of N3.42 trillion and N2.62 trillion, respectively, to record the highest credit allocation as at the period under review.

The National Bureau of Statistics (NBS) released its sectoral banking sector report on Wednesday, which showed that year-on-year deposit money banks’ credit to the economy stood at N13 trillion in 2015, rose to N16.1 trillion in 2016, contracted to N15.7 trillion in 2017, further declined to N15.1 trillion in 2018, and picked up the most to N17.18 trillion in 2019, helped by the policies of the Central Bank of Nigeria (CBN).

To spur growth in the economy, CBN in October 2019 raised the Loan-to-Deposit Ratio (LDR) of banks to 65 percent, after the September 30 deadline given to the banks to raise LDR to 60 percent.

Gbolahan Ologunro, a research analyst at Lagos-based CSL Stockbrokers, said it was clear that CBN policies in trying to direct banks to lend to the real sector have been effective. Apart from the LDR policy, banks were also restricted from participating in the Open Market Operations (OMO) bills which supported more lending to the economy.

From the demand side as well, he said corporates and individuals were also restricted from investing in the OMO bills which meant that corporates would make records to banks in terms of getting liquidity for investment purposes.

“Because if you can invest in OMO bills, there is really no incentive for you to demand for credit from banks for investment,” he said.

Analysts were divided on the outlook of banks’ credit growth in the first quarter of 2020 as two of them expect a decline while the other two anticipate an increase.

But for the first quarter (Q1) of 2020, Ologunro expects to see a reverse in the upward trend that was recorded in Q4 2019 due to the CBN hike of the Cash Reserve Ratio for banks, effectively limiting their ability to direct funds to the private sector, and the downturn in global crude oil prices seen in February/March.

Ibrahim Tajudeem, head of research, Chapel Hill Denham, said the CBN’s policies really worked.
“That LDR increase played a major role to what we are seeing. I think for Q1 2020, we will likely see a marginal decline or flat loan growth because of some loans that will mature in Q1, and those loans that would have matured in Q1 won’t have been rolled over because of the broad economic challenges ranging from lower crude oil prices, reduced volatile FX rate.  And I not sure that banks are putting out new loans as we speak because the macroeconomic outlook looks weak,” Tajudeem said.

The growth in aggregate credit to the economy by banks is put at N2.35 trillion since the inception of the LDR policy, Godwin Emefiele, CBN governor, said at the last Monetary Policy Committee (MPC) meeting in Abuja.

Ayodeji Ebo, MD, Afrinvest Securities Limited, said on back of the push by the CBN, personal loans to retail sector have increased significantly. He said banks are being pushed to lend, and the more deposit they have, the more opportunity they have to lend.

“So, I feel it is a positive move of the CBN to see how banks can be channelling more funds to the real sector. I believe that the total credit will be higher in Q1 because the Covid-19 crisis started about two weeks ago, so businesses have run normally before we started to have lower oil prices. So, we have been able to build up on a lot of lending within January and February,” Ebo said.

“With respect to the CRR, I feel they still had enough cash to lend. And in January and February, banks were lending aggregative to the economy,” he said.

Damilola Adewale, a Lagos-based economic researcher, said there might be an increase in banks’ credit to private sector in Q1.

According to official data from CBN, credit to private sector averaged N26.3 trillion in Q4 19 and has already averaged N26.6 trillion between January and February 2020.

Adewale said the coronavirus became more pronounced in the second week of March 2020, implying that the virus won’t have any robust impact on credit in Q1 2020. But the problem, he said, would be Q2 2020 when banks would be cautious to create risky assets given the rising global and domestic macroeconomic uncertainties.

 

HOPE MOSES-ASHIKE & BUNMI BAILEY

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