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Banks face pressure to hasten real sector lending

Although previous Governors of the CBN mounted pressure on Deposit Money Banks (DMBs) in the country to increase lending to the real sector of the economy, it is debatable if any of them tackled the issue with the same kind of zeal that the present occupant of that office, Mr. Emefiele, is handling the subject.

Emefiele’s agenda

When Mr. Emefiele first assumed office on June 3, 2014 and immediately unveiled a 10-point agenda that he said he would focus on in running the apex bank, the first item on the list was his promise to: “Pursue a gradual reduction in key interest rates, and include the unemployment rate in monetary policy decisions.”

However, the slump in oil prices during that period and its attendant negative impact on the country’s foreign exchange reserves compelled the banking watchdog to increase the benchmark interest rate in order to attract capital inflow. Still, during his first term, Emefiele, consistently harped on the need for banks to boost lending to the real sector, as according to him, this was the only way the country could effectively address its massive unemployment problem.

But apart from using moral suasion to encourage DMBs to lend to the real sector, the CBN Governor also ensured that the regulator collaborated with the Bankers’ Committee to introduce several intervention schemes aimed at facilitating access to credit at single digit interest rate for operators in some key sectors of the economy.

CRR refund as bait

For instance, at a Bankers’ Committee meeting held last August, the CBN and the DMBs agreed to start channeling the Cash Reserve Requirement (CRR) funds kept in the apex bank’s vault to agricultural and manufacturing lending at single interest rate of nine per cent.
According to the CBN Director of Banking Supervision, Mr. Ahmed Abdullahi, the loans would only be available for job creation and expansion plans.

He stated: “The idea is to have job-creating activities in the economy and also to bring interest rates down within the economy. Although agriculture and manufacturing are the initial sectors that are being considered, a bank can apply if there is a job-creating sector that the bank is operating in, it may be considered. The whole idea is to bring down interest rates, create jobs.”

He further explained: “At the moment, banks funds are held under CRR and they are not being used. The idea came up that we could refund the CRR to a bank that has engaged in lending for a new project or for the expansion of an existing one in the agricultural or manufacturing sector as a way of utilising the CRR. Anytime a bank lends to manufacturing or agricultural business at a rate that the CBN has prescribed, it will have its CRR refunded to it, up to the amount that it has lent.”

In fact, the CBN’s Monetary Policy Committee (MPC) had earlier given a hint of this move at its meeting in May last year.

The CBN Governor, Emefiele, who read the communiqué of the meeting, announced that the CBN was setting up a framework to penalize DMBs who preferred to keep liquidity and trade on government securities rather than granting loans to the real sector.

He said at the time: “We will try as much as possible to come up with some decisions that will relate loan deposit ratio with a level of cash reserves that a bank holds, so as to direct a bank or compensate a bank that has done a lot of work in boosting its own deposit ratio through compensating them with CRR and penalize those who prefer to keep liquidity and trade on government securities or direct those to the exchange market rather than granting loans to the real sector.”

Policy continuity

With President Muhammadu Buhari reappointing him for a second and final five-year term as CBN Governor, the general view among industry analysts is that Emefiele is likely to continue with the key policies he pursued during his first term in office.

The CBN boss seemed to have confirmed this a fortnight ago while delivering the third in the University of Benin’s series of Eminent Persons’ Lecture. He pledged at the event that the regulator would promote policies that will enhance domestic production of goods that can be produced in Nigeria along with measures that improve the stability of the financial system.

Treasury bills, bonds’ restriction

Similarly, the communiqué issued by the MPC at the end of its meeting in May, a few days ago, which was read by Emefiele, also indicates that the CBN is set to intensify pressure on DMBs to lend to the real sector.

According to the communiqué: “The MPC noted the 2.01 per cent growth in real GDP during the first quarter of 2019 compared with 1.89 per cent in the corresponding quarter of 2018. Although output growth in the first quarter was slower than 2.38 per cent recorded in the preceding quarter, it emphasized that actual output remains well below the economy’s long-run potential, indicating the existence of spare capacity for non-inflationary growth in the economy, an opportunity, which should be explored through increased credit delivery to the private sector.


“Not impressed by the flow of credit from the Deposit Money Banks (DMBs) to the private sector, the MPC called on the CBN management to urgently put in place modalities to promote Consumer, and Mortgage lending in the Nigerian economy, noting that doing this will greatly and positively impact on the flow of credit and ultimately result in output growth,” the communiqué said.


Significantly, it added: “In view of the abundant opportunities available to banks for unfettered access to government securities, which tends to crowd out private sector lending, the Committee called on the Bank to provide a mechanism for limiting DMBs access to government securities so as to redirect bank’s lending focus to the private sector, noting that this would spur the much needed growth in the economy.”


Indeed, the statement explained that even though data released by the National Bureau of Statistics (NBS) a few days earlier showed inflation rising for the first time in three months, the MPC members decided against monetary tightening at the meeting. Reason: they felt: “Doing this will limit the ability of DMBs to increase credit at this time, given the need to support or redirect the focus of DMBs to new credit in support of consumer, mortgage and other priority sectors of the economy, including, SMEs, agriculture and manufacturing.”


However, it was the announcement by Emefiele that the CBN intends to listen to the MPC’s advice to restrict lenders’ access to government securities such as treasury bills and bonds that has generated heated debate in industry circles in recent days.

Although the CBN Governor acknowledged that DMBs have a required minimum number of treasury bills they must invest in so as to remain liquid, he argued that the lenders have been focusing on buying government securities instead of focusing on providing financing facilities to the private sector.

He said: “The truth is that yes, according to our own regulations, there is a particular minimum percentage of treasury bills or government securities that the banks must invest in, in order to remain liquid. But again, we have observed and unfortunately and increasingly so, that the banks, rather than even focusing on granting credit to the private sector, they tend to direct their focus mainly on buying government securities. The MPC has frowned on that and has directed the management of the CBN to put in place policies or regulations that would restrict the banks from unlimited access to government securities.”


Besides, he stated: “It is important and expedient that the committee gives this directive to management because this country badly needs growth. For us to achieve growth, those whose primary responsibility that it is to provide credit, who act as intermediaries in providing credit and are called catalysts to credit and growth in the economy must be seen to perform that responsibility.”

finance conference

Stressing that the banking watchdog would implement the directive of the MPC, the CBN Governor said it was regrettable that rather than perform their responsibility to the private sector – the engine of growth in the economy- banks are directing liquidity to other sectors of the economy.

Bankers’ concern

Although some stakeholders have said that the move was necessary to force the DMBs to lend to the real sector and grow the economy, bankers were generally worried that, if implemented, the policy would make it more difficult for lenders to sustain their profitability.
A source in a Tier 1 bank told New Telegraph that if the policy were enforced, banks would be forced to reevaluate their investment strategy.

“Banks have managed to remain profitable in recent years, despite the tough economy, due largely to their investment in treasury bills and bonds,” he explained.

“So, they would definitely be impacted if the CBN goes ahead with the implementation of the policy.”

Also, commenting on the move, analysts at Nairametrics stated: “The implication of this is that, by dissuading banks from investing in treasury bills and other government securities, CBN is basically triggering less demand in its bills, which could lower yields on T-bills. It means anyone looking to buy treasury bills should start to look forward to even low yields.”

Furthermore, a top banker, who did want to be named, argued against CBN’s move last weekend, pointing out that the banking watchdog was still in custody of banks’ funds running into billions of naira, which it has made idle due to its CRR.

According to the bank official, CBN should first release the funds to lenders before restricting their access to government securities.

Last line

In fact, the consensus in industry circles last weekend was that while CBN, during Emefiele’s second term, would make fresh efforts to compel DMBs to lend to the real sector, loan growth is unlikely to pick up significantly, as lenders would continue to tread cautiously regarding Non Performing Loans (NPLs). Besides, as industry experts have pointed out, funding alone cannot solve the problems of the real sector, as there are other issues such as lack of reliable power supply, antiquated infrastructure and multiple taxes that have not yet been addressed.

Source: New Telegraph

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