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Central Bank of Nigeria’s monetary policy committee has disclosed that banks have created about new N2 trillion loans in the last six months. The apex bank made this claim in its monetary policy communique.

Commenting on developments in the banking sector, the regulator expressed “delight” in the increase in lending to the private sector since it introduced its policy on loan to deposit ratios (LDR).

“The Committee observed with delight that over the last six months, aggregate credit grew by N2.0 trillion and urged the Management of the Bank to sustain the current momentum of improved flow of credit to the Private Sector while exploring other options with the fiscal authorities to strengthen the legal framework for the enforcement of credit recovery.”

Bank’s non-performing loan ratios also dropped from 6.6% to 6.1%, according to excerpts from the communique.

So, who do banks lend to?

The CBN lists the sectors that benefited from the new credit across the private sector:

“Credit to the Private Sector also grew to 13.1% in December 2019, from 12.82% in the previous month. Consequently, the sectoral distribution of credit between end-May 2019 and end-December 2019 was as follows:”

  • Manufacturing (N446.44 billion);
  • General Retail and Consumer Loans (N419.02 billion);
  • General Commerce (N248.48 billion);
  • Agriculture, Forestry, and Fishing (N160.94 billion);
  • Information and Communications (N156.47 billion);
  • Finance and Insurance (N129.87 billion);
  • Construction (N86.54 billion); and
  • Transportation and Storage (N68.61 billion), amongst others.

On its LDR policy

The CBN noted that banks are yet to reduce interest rates on loans despite an obvious drop in deposit rates. This means that the financial institutions rejected deposits from some customers just to meet up with their LDR ratios. Banks were also reported to have switched from investing in government securities to lending to the private sector.

The Committee noted the improvement in the financial soundness indicators, growth in assets of the banking system and the gradual switch in the composition of DMB assets from investments in government securities to growth in the credit portfolio.

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It, however, noted that lending rates at the retail segment of the market had remained fairly sticky downwards as deposit rates had declined substantially. It also noted that in some cases, DMBs were not encouraging term deposits in their portfolios and therefore, emphasized the Bank’s commitment towards the implementation of the Loan-to-Deposit ratio (LDR) policy.

Nine out of 11 members of the central bank’s committee voted to increased the bank’s cash reserve requirement (CRR) from 22.5% to 27.5% as it worried about the increase in money supply as well as other structural issues affecting the rise in the inflation rate. The bank-owned up that while the move was counterintuitive, it had no choice.

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Although tightening would limit the ability of DMBs to create money, ultimately leading to a reduction in money supply and curtail their credit creation capabilities, which would eventually lead to the rising cost of credit and credit risk as DMBs re-price their risk assets.  The MPC believes that the aggressive pursuit of the current loan-to-deposit ratio policy thrust would continue to help to catalyze credit growth and positively impact growth and prices.

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