Culled—Proshare

September 24, 2020

By CSL Research

At the recently concluded MPC meeting, the Central Bank Governor, Godwin Emefiele disclosed that the total credit to the economy rose to N19.33tn in August 2020 from N15.57trn in May 2019 as a result of the minimum Loan to Deposit Ratio (LDR) policy of the apex bank. He further highlighted that the significant growth in credit was mainly driven by the manufacturing (N866.27bn), consumer credit (N527.65bn), oil and gas (N477.65bn), agriculture (N287.11bn) and construction (N270.97bn) sectors.   

We recall the CBN announced a raft of policy measures in Q3 2019 and Q4 2019 including the minimum LDR of 60% (which was later increased to 65%) as well as banning local investors from participating in its Open Market Operation (OMO). These policies led to a downward pressure on lending rates due to increased liquidity as well as pressure on banks to create new loans given that non-complaince with the LDR policy attracts sterilization of 50% of the shortfall required in meeting the threshold in form of CRR debits.

Thus far in 2020, the apex bank has reduced the benchmark Monetary Policy Rate (MPR) twice to 11.5%, reviewed the interest rate on savings deposits to a minimum of 10% of the monetary policy rate (MPR) from 30% previously, and adjusted the asymmetric corridor around the MPR from +200/-500bps to +100/-700bps. We believe the ultimate aim of these policy measures is to bring down lending rates and stimulate credit creation in the economy, thus improving economic output. While we acknowledge the efforts of the apex bank, we note that the presence of structural bottlenecks in the operating environment will continue to limit the effectiveness of monetary policy tools in stimulating economic growth.

Looking ahead, we believe banks will remain cautious in creating loans given elevated risks to asset quality due to the fragile macro conditions. In the medium to long term, credit creation will be dependent on the pace and pattern of recovery in the economy.