Mr. Godwin Emefiele, Governor of CBN

CBN’s interventions driving banks’ credit to growth in private sector: Report

*The Central Bank of Nigeria’s latest ‘Money and Credit Statistics’ indicates banks’ credit to the private sector of the economy increased by 20.06 percent to N35.31trillion November 2021 from N29.41 trillion in the corresponding period in 2020

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Credit to Nigeria’s private sector has maintained an upward momentum in recent times, a development, analysts have largely attributed to the Central Bank of Nigeria’s (CBN) intervention policy in the country’s economy.

According to the CBN’s recent “Money and Credit Statistics” banks’ credit to the private sector of the economy increased by 20.06 percent to N35.31 trillion in November 2021 from N29.41 trillion in the corresponding period of 2020.

The data also shows that net domestic credit increased by 20.27 percent to N48.34 trillion in November 2021 from N40.19 trillion in the corresponding period of 2020.

Findings reveal that total credit to the private sector of the economy has been on an upward trend since February last year when it stood at N30.51trillion.

Financial experts attribute the surge in banking credit to the private sector to policies introduced by CBN in recent years to get Deposit Money Banks (DMBs) to increase lending to the private sector in order to boost economic growth.

MPC’s backing

Indeed, personal statements of members of the apex bank’s Monetary Policy Committee (MPC) during most of the committee’s meetings last year show that they fully support the bank’s intervention policy, which according to them, was responsible for the output growth recorded in the first three quarters of 2021.

For instance, in his personal statement at the MPC’s meeting in November last year, Mr. Edward Adamu, Deputy Governor, Corporate Services Directorate of CBN, said: “The bank’s development interventions have combined well with the Federal Government of Nigeria (FGN)’s growth initiatives under the Fiscal Sustainability Plan to revive and sustain economic activity during the year.

“Needless to say, the sterilisation actions of the bank have effectively prevented the economy from overheating in the face of increased liquidity injections in response to the fallouts of COVID- 19.

“Notwithstanding the positive outcomes so far on inflation and growth, the economy is yet to attain the pre-pandemic level on several fronts.”

The CBN Deputy Governor, Corporate Services Directorate also stated: “Employment, for instance, continues to be a major policy concern. The surest bet to alleviating poverty is growth in employment, which is tied to economic (output) expansion.

“The need to sustain liquidity support to key economic activities is buttressed by the vulnerabilities in the horizon, including new variants of the coronavirus driving infection resurgence.”

“For Nigeria, I do not think the time is rife to look away from economic growth for at least two reasons.

Though impressive, growth is still fragile and should benefit from a slightly much longer policy support,” he added.

Also, in her personal statement at the same meeting, Mrs. Aishah Ahmad, Deputy Governor, Financial Systems Stability Directorate, at CBN, stated: “Improvements in the macroeconomy were also propelled by a resilient financial system which channelled significant credit to support growth enhancing sectors such as agriculture, manufacturing and general commerce, as well as individuals and households.

Mrs. Ahmad said: “Total credit increased by N4.10 trillion (21.12 per cent) between end-October 2020 and end-October 2021, due largely to the increase in the industry funding base and the CBN’s Loans to Deposit Ratio policy, which has encouraged banks to increase lending to the real sector of the economy. This credit to the real sector has been critical for the economic recovery.”

Similarly, in his personal statement, another member of the MPC, Prof. Festus Adenikinju, noted that bank industry credit increased from N19.39 trillion in October 2020 to N23.49 trillion in October 2021.

According to him, “the CBN interventions have boosted both the demand and real sides of the economy.

“Boosting the demand side is extremely critical given the size of consumption in the aggregate GDP as well as the huge compression on real income caused by COVID-19.

“The increase in aggregate supply also has the capacity to increase GDP as well as lower general price level.”

However, Adenikinju advised that “there is also a need to decompose the intervention fund to those that went to boost aggregate demand and those that went into expanding the supply base of the economy.

“Careful examination of the contributions of these interventions should guide the decision on the pace of winding down the interventions in 2022.”

He also noted: “The CBN must continue to explore ways of further derisking the critical sectors of the economy to enable the deposit money banks to lend to them.

“As CBN interventions cannot continue in the long term, domestic banks must take on the responsibility of supporting households’ credit and the MSMEs.”

LDR policy

As part of its efforts at encouraging DMBs to increase lending to the private sector, the CBN July 3, 2019, introduced the minimum Loan-to-Deposit Ratio (LDR) policy.

The policy required lenders to maintain a minimum LDR (portion of customers’ deposit that is given out as loans) of 65 per cent by 31 December 2019.

The CBN stated that failure to comply with the directive will result in a levy of additional Cash Reserve Requirement (CRR) equal to 50 per cent of the lending shortfall of the target LDR.

In a report released last year, analysts at Coronation Research stated that efforts by DMBs in the country to comply with the LDR policy led to banking sector credit to the economy growing from N15.5 trillion at the end of Q2’19 to N22.04 trillion at the end of Q2’21.

According to the report, the introduction of the policy has also changed the structure of the economy’s loan composition as oil & gas and real estate sectors loans now make up much less as a share of total loans than before the directive.

In their comments on the surge in banking credit to the private sector of the Nigerian economy, analysts at CSL Research, in a  recent note, stated: “The real sector has largely benefitted from the CBN’s sustained monetary stimulus evidenced by the fact that the economy has returned to growth and the government’s fiscal position has increased through improved Company Income Tax (+20.1 per cent y/y in 9M’21) and VAT collections (+40.2 per cent y/y in 9M’21) arising from recovery in economic activities.

“The expansion in private sector credit reflects the CBN’s continued efforts to revive the ailing economy. The CBN has been relatively successful at supporting output recovery.

One, thus far in 2021, the apex bank has maintained the benchmark Monetary Policy Rate (MPR) at 11.5 per cent, avoiding any further tightening that could stifle credit growth, while a huge proportion of the credit was towards sectors such as agriculture, oil & gas, and manufacturing sectors, the Non-Performing Loan (NPL) ratio of deposit money banks (DMBs) have remained moderate as CBN allowed banks to restructure loans to the strained sectors.”

The analysts further stated: “Increasing oil prices have also been supportive as many of the restructured loans to the oil and gas sector have been reported to be meeting the new terms.

“That said, lower yields on investment securities have forced many banks to increase lending to the real sector of the economy.

“The sustained credit to the economy has been a valuable stimulus tool.

“However, the agelong structural bottlenecks that have affected growth remain a problem,” they added.

Likewise, in a recent report, one of the global rating agencies, Standard and Poor’s (S&P), predicted that private sector credit in Nigeria would be in the range of 15─18 per cent of the country’s GDP before 2023.

The rating agency also estimated that banking sector loan growth would average around 20 per cent through 2023, adding that the sector’s NPL ratio was expected to increase to seven per cent in 2021, compared with a reported 5.7 per cent in June 2021, as regulatory forbearance measures have ended for most loans.

Furthermore, it stated that banks have continued to focus on loan recoveries despite the weak operating environment and close monitoring of their restructured loans.

The agency said it anticipates that Nigeria’s GDP growth would average a moderate 2.3 per cent a year through to 2024 after a contraction of 1.8 percent in 2020.

Although critics argue that Nigeria is still grappling with sluggish economic growth, analysts point out the situation could have been worse without the CBN’s measures to encourage DMBs to increase lending to the private sector. (Piece extracted from New Telegraph)

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