The Central Bank of Nigeria (CBN) has issued a circular mandating commercial banks operating in the country to lend out up to 60% of their customer deposits. The Governor of the apex bank, Godwin Emefiele, had informed attendees at the 2019 Africa Investors’ Conference (AIC) which took place in London between June 25 and 27 of his plan to issue this regulation.
Order from above: In military fashion, the Central Bank ordered all banks to maintain a minimum loan to deposit ratio of 60% by September 2019. The ratio will be reviewed quarterly.
To determine the 60% ratio, the CBN will assign SME, Mortgage, Retail and Consumer lending a combined weighting of 150%.
The CBN also said that banks that fail to meet this requirement would risk seeing their cash reserve ratios increase to 50%. This means 50% of a bank’s deposit will be immediately sent to the CBN.
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Current data: According to the data released in March by the Nigerian Bureau of Statistics (NBS), Nigerian banks currently have non-performing loans of about N1.69 trillion (N2.19 trillion as at April 2018). The data also revealed that commercial banks had a total deposit of about N27 trillion out of which about N15 trillion or 55.5% was money lent to the private sector.
What this means: In an article published on Nairametrics, we reported that the CBN Governor revealed that the apex bank would issue a circular that would address the paucity of loans available to the private sector.
We also reported in the article that he blamed the inability of banks to lend to the private sector on the latter’s choice of investing in risk-free securities rather than lending to the real sector of the economy. The immediate implication of this is that rather than engaging in moral suasion, banks are now being forced to lend money to sectors of the economy where risks are higher. In fact, just about anyone could get a loan at this rate.
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The future implications are that banks will be exposed to higher loan losses which could impact significantly on their profitability. They will also have to invest heavily on strategies that can help mitigate against lending risk, thus increasing their cost to income ratios.
Quick Loan Banks relying on FinTech to drive consumer lending will as well face increasing competition from bigger commercial banks.
The CBN’s target appears to be the informal sector of the economy. Unfortunately, most of the players have projects or funding requirements that are hardly bankable, either because of lack of adequate collateral or evidence of steady cash flows.
On the other hand, if the CBN achieves its aim, it will be a major boost for credit rating agencies who are increasingly pivotal to lending beyond collaterals.
The other positives of the CBN’s directive: On the flip side, companies with strong cash flows and collateral will have significantly higher chances of obtaining loans.
It could be a major boost for Nigeria’s real estate sector which has been wallowing in negative GDP growth rates and only able to eke out a growth rate of 0.23% in the first quarter of this year.
Also, home buyers with good jobs may easily secure mortgages as more banks will consider this a better lending option, since the loans will be secured against the property.
Feedback: Initial reactions from banks who received the circular suggest that they were shocked. Though they understood that Godwin Emefiele could be a hard nut, this is one regulation too much for them. Some claimed that two months is too short for them to start complying with the directive.
See circular: LETTER TO ALL BANKS-LENDING TO THE REAL SECTOR
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