The Central Bank of Nigeria (CBN) has been warned by the World Bank to seize supporting undercapitalised banks in the country. The support, according to a new report by the international financial institution, could deteriorate the assets of Nigerian commercial banks.
According to the report, the CBN had supported four banks that were severely undercapitalised with liquidity without requiring recapitalisation plan. The World Bank warned that if CBN continues to operate with leniency in matters relating to undercapitalised banks, assets of the financial market will worsen.
The World Bank warning was contained in its Nigeria Economic Update. “The CBN gave liquidity support to four medium-sized banks that were severely undercapitalised, without requiring hard time-bound recapitalisation plans.
“Going forward, asset quality needs to be closely monitored because it may deteriorate if the CBN continues to exercise regulatory forbearance for undercapitalised banks. Banks are performing better, but asset quality needs to be monitored closely,” the World Bank said.
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CBN’s lending policy: The measures by the CBN to improve bank lending to private sector worries the World Bank. The CBN had directed banks in July, to ensure a minimum loan-to-deposit ratio of 60 per cent by September 30, 2019. Any bank that fails to meet the directive – which is reviewed quarterly – additional cash reserve requirements on the shortfall will be imposed on it.
According to the World Bank, the economy could be impacted negatively by the measures because banks might begin to approve loans regardless of the level of risk exposure.
“It is possible that policy and regulatory efforts to stimulate commercial bank lending to selected private credit segments, while well-intentioned, could entail unintended negative consequences.
“For example, the minimum LDR requirement could lead banks to approve loans that expose them to more risky credits, undermining the quality of their loan portfolios.”
The World Bank said measures previously taken on bank lending had limited success, adding that the development could lead banks to shift funding modalities away from mobilising deposits, which would undermine financial inclusion initiatives.
“Dropping the level of deposits for which the CBN would remunerate banks when using the Standing Deposit Facility could undermine its ability to control liquidity conditions in the banking system, and additional, potentially costlier open market operations would be required to drain liquidity,” the World Bank added.
Criticism trails loan for MSMES: The credit facility provided by the CBN to micro, small, and medium-scale enterprises in agriculture and manufacturing could backfire according to the global bank. It also warns that it could affects CBN’s oversight role in the banking sector, its objectives as an operator of development financing schemes and its interests as a shareholder in development finance institutions.
“The CBN interventions could undermine the effectiveness of the credit transmission channel of monetary policy and the signalling role of changes in the Monetary Policy Rate.
“The interventions could crowd out private-sector funding by discouraging banks from venturing into under-served markets without subsidies when the schemes are not properly targeted, as well as creating expectations for borrowing at single-digit rates.”
In the Nigeria Economic Update reported, the development could also reduce the CBN’s operational surpluses, a share of which was normally transferred to the Federal Government as part of its independent revenue. It was also stated that financially supporting the MSMEs could diminish transparency and accountability in the allocation of public resources by circumventing the government’s standard budgetary process, the bank said.
One should obviously take this warning with a pitch of salt,
CBN find out what the U.S does with advice from IMF and World Bank, follow same strategy. Thank you.
all are there,the cbn said they wanted to recapitalized more than 8 montha ago,they have said,they wanted Nigerian banks should be in the top 100 banks,i am all for it,my view is for the cbn should nationalizes those banks,now they are licensing new bank,and some foreigners wanted a licensed cormmercial bank.
My view on why some of those bank shold be nationalized,is because,it could create new regional cormmercial bank as those microbank are very weakly capitalized to fund major infrastructure project and I have commented that those state micro banks should be merge,as gen Abacha did destroyed state bank,i do not know why fakoyejo is repeating what the cbn is saying,through the world bank,the voice is the voice of Jacob,while the hand is hairly like the hand of esau,the cbn did said everything but he decide to quote the world bank,which is an act of an enemy,you should give honour to those who deserve it,which is the major problem in Nigeria.