December 9, 2021/CSL Research
In a statement credited to the CBN Deputy Governor, Financial Systems Stability, Mrs. Aishah Ahmad, the Central Bank of Nigeria (CBN), under the leadership of Godwin Emefiele, has injected N7 trillion in loans to the real sector in three years. This has been achieved not only through intervention funds given but also through some of the policies put in place such as the loan to deposit ratio (LDR) policy, which from its institution in 2019 till date actually added about N7 trillion or so in loans. Numerous interventions like the Anchor Borrower programme have also served to extend credit to the real sector albeit sometimes with mixed results.
The CBN in July 2019 came out with guidelines to mandate commercial banks to direct credit to real sectors of the economy particularly small and medium scale enterprises (SMEs). The guidelines stated that; a) All Deposit Money Banks (DMBs) are required to maintain a minimum Loan to Deposit Ratio (LDR) of 60% by September 2019 and this was later reviewed to 65% in October 2019. b) To encourage SMEs, Retail, Mortgage and Consumer Lending, these sectors shall be assigned a weight of 150% in computing the LDR for this purpose. The CBN provided a framework for classification of enterprises that fall under these categories. The punitive measure to be employed to ensure that DMBs comply is a levy of additional Cash Reserve Requirement (CRR) equal to 50% of the lending shortfall of the target LDR. As of October 2021, the total credit to the private sector stood at N34.51trn, a 12.6% Year to Date (ytd) rise from N30.65trn in January 2021.
However, due to the heightened level of economic frailties and a reluctance to avoid accumulation of bad debt, many Deposit Money Banks have had to contend with more CRR debits. We believe the CBN’s move to ensure adequate flow of credit to the private sector would be a proper fit to addressing aggregate demand concerns, only when the overall economic structure is right. The low-risk appetite among banks for lending to the real sector can be attributed to the high risk in the operating environment which has hindered the survival of SMEs. This claim can be validly supported by the current level of default on the Anchors Borrower Programme for the CBN. In most cases, some farmers have ascribed their inability to repay to insecurity in their farm area, while others have ascribed their inability to repay to climatic concerns which has hampered yields. Overall, the operating environment in the real sector does not support growth. A recent comment credited to Alwan Hassan, Acting Managing Director at the Bank of Agriculture alleges that N77.18bn is due for repayment from farmers to the CBN.
We maintain our view that unorthodox measures of the CBN to force banks to lend do not address the fundamental reason behind commercial banks’ reluctance to aggressively extend credit to the real sector and may be counter-effective if not well managed. While we laud CBN’s efforts at intervening in the real sector, we believe that there is a need for the fiscal side of the economy to be rejuvenated. That said, the high Monetary Policy Rate (MPR) rate at 11.5%, Capital Adequacy Ratio (CAR) minimum at a stringent 15% for banks with international subsidiaries, and the CBN’s stringent Cash Reserve Requirements (CRR) which tightens banks’ liquidity, do not support an aggressive expansion of the loan book of banks.
