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CBN loan: How banks created N1.16trn credit in 6 months

Central Bank of Nigeria, CBN
Central Bank of Nigeria, CBN

In July 2019, the banking regulator, the Central Bank of Nigeria (CBN) set at least 60 percent minimum loan-to-deposit ratio (LDR) to encourage lending to small businesses and consumers and more mortgages. Daily Trust in this analysis examines the success of the policy in boosting lending while maintaining a sound financial system.

Since then, Nigeria’s credit sector has recorded 5.33% growth, from N15.57 trillion in May 2019, to N16.40trn as at September 26, 2019, the CBN said. The apex bank further reviewed the LDR to 65% which banks are required to attain by December 31, 2019. It is also subject to quarterly review.

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CBN Governor, Godwin Emefiele in a recent update said: “The credit conditions in the banking system had improved supported by the new policy measures announced in June 2019, which require banks to maintain a minimum 65 percent loan to deposit ratio.

“This has increased gross credit by N1.16 trillion between May and October 2019,” Emefiele announced.

He said the Nigerian financial system was now stronger due to the fact that capital buffers and liquidity in the banking system have continued to improve.

The industry-wide Capital Adequacy Ratio (CAR) had increased from 10.2 percent in December 2017 to 15.5 percent in September 2019. The percentage of non-performing loans in the banking sector reduced from 14.7 percent in January 2017 to below 7 percent in October 2019.

To further strengthen compliance, CBN debited about N500 billion from banks that failed to reach the initial compliance level.

CBN Director, Banking Supervision Department, Ahmad Abdullahi, clarified that the N499.1bn deduction from defaulters is not a fine but would be refunded whenever the lenders meet up.

“We are going to diversify the economy, we are going to provide credit to the real sectors to ensure sustainable growth and development of the economy,” he assured.

Although there are fears that the new LDR policy could increase Non-Performing Loans (NPL), Abdullahi said, “As part of the documentation by banks, there will be a clause that an obligor will sign that if for any reason the loan that is taken goes bad, then the bank has the right to set off against any amount that the obligor will have in the system.”

In his keynote address at the 54th Annual Bankers’ Dinner of the Chartered Institute of Bankers of Nigeria (CIBN) in Lagos last weekend, Emefiele unveiled the priorities for 2020.

They include support for greater economic growth, price stability and low inflation, sustained tight monetary policy stance. He said a Bankers’ Charitable Endowment Fund finance a major charitable initiative every year will being by 2020. “The CBN will continue to ensure that the policy interest rate is delicately set to balance the objectives of price stability with output stabilization,” he said regarding CBN’s monetary stance.

For the recap of 2019, the CBN governor said GDP remains positive and driven by improvements in Agriculture, Oil and Gas, Manufacturing and ICT; through CBN interventions along with sustained supply of foreign exchange and stability of the naira. He also attributed the decline in inflation to the Bank’s maintenance of a tighter monetary policy rate at 13.5 percent, and its efforts at improving local production of staple items.

On External Reserves, Emefiele said effort at supporting domestic production in the agriculture and manufacturing sectors encourages foreign exchange inflows into the market.

Over $60bn worth of transaction had taken place since the inception of the Investors’ and Exporters’ window in April 2017, he said, adding that Nigeria’s foreign exchange reserves is above $40bn by October far from $23bn in 2016.

“We should encourage Nigerians to consume goods that can be produced in Nigeria, knowing full well that a time will come when we may not have the foreign exchange to aid such activities, if we continue to rely on earnings from the export of crude oil,” he said regarding conflicts rocking global oil market.

The Governor urged all stakeholders to believe in Nigeria’s greatness, stressing that the country was blessed with abundant human and natural resources, which if truly harnessed would propel Nigeria into one of the world’s top 20 economies.

For 2020, Emefiele said CBN will also improve access to credit for farmers and SMES by deepening its intervention efforts through the Anchor Borrowers’ Programme, Commercial Agriculture Credit Scheme and the Real Sector Support Funds, amongst others.

To also support growth in the real sector, CBN said it is working with the Nigerian Export Import Bank (NEXIM) to improve access to the N500bn facility for Nigeria’s non-oil exports.

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