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Obstacles to CBN’s credit expansion target, by experts

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Central Bank Of Nigeria building

Central Bank Of Nigeria building

Business owners flay banks over ‘risk’ Plans by the Central bank of Nigeria (CBN) to ease the liquidity crisis assailing the real sector of the economy may be compromised if the assessed risks associated with retail and small businesses are not urgently addressed.

Besides, financial experts who spoke with The Guardian, said the delays in the preparation and passage of the national budget may also derail the credit expansion target of the apex bank.

The analysts, though admitted that with the available liquidity in the system, there would be significant credit expansion to the private sector in the medium term, said the likelihood in the short term is remote, because real sector risks would need to be repackaged by banks and addressed in the budget first.

The Monetary Policy Committee (MPC) of CBN had lowered MPR to 11 per cent from 13 per cent and slashed CRR by five per cent to 20 per cent, which increased money supply to banks, to further raise financial market liquidity, aimed at promoting economic growth through increased lending.

But the rising level of liquidity in the system has already affected activities in the treasury bills (T-bills) market and the rates of interbank market instruments, as they all trend lower.

The Sub-Saharan Africa Banking Analyst and Head of Research – Nigeria, Renaissance Capital, Adesoji Solanke, said that given the weak macro environment, which continues to deteriorate, system capital constraints, like capital adequacy ratio; scarce foreign exchange liquidity; weak credit demand; and mounting credit risks, the banks may unlikely grow credits at the pace at which the MPC desires.

“We need to see the budget and get a clear sense of what the government is thinking around fiscal policy direction and borrowing plans, which does not appear happening till the new year.”

But the National President of the Association of Small Business Owners of Nigeria, Dr. Femi Egbesola, who applauded the apex bank for the decision he described as long sought after direction, flayed banks and their analysts, who have failed to provide suitable products for the sector, rather took to branding it a “risky sector.”

According to him, the “lack of structure” tag on small businesses only serves their purpose to avoid facility extension to the segment in preference for cheap income, adding that no new idea comes with perfect structure, unless with time and knowledge.

Egbesola said that even now, the business community could only ask for more, as it is the only way to develop the economy, diversify it away from the lone revenue source and provide the needed employment for the citizenry.

He however, pointed out that a good plan without implementation is as good as non-existent, urging CBN to step up its modalities aimed at ensuring that banks do not deviate from the objectives of the policy as usual.

An economist in one of the major banks in the country, who spoke on condition of anonymity, told The Guardian that the move is a calculated one, targeted at short to medium term, which might also be reversed as the economy picks.

He said that the recent inflationary trend has not solely been demand pull, but also cost push, which might be corrected with trickling effects of cheap funds and intervention supports to strategic sectors, allaying fears over liquidity fueled inflation.

The Head of Research at WSTC Financial Services Limited, Olutola Oni, said the departure of the CBN from its liquidity-tightening stance is a necessary step towards credit expansion to the real sector and consequently the enhancement of growth in the domestic economy.

He noted that the marked reduction in the standing deposit rate from 11 per cent to four per cent would serve as a disincentive for banks from stacking up funds with the CBN, rather than lending to the private sector.

“However, we believe the full impact of this on economic growth will still be constrained in the interim by prevailing high credit risk, the various currency restriction measures of the CBN and infrastructural gap.
“The change in monetary policy to a more accommodative stance will keep yields low in the fixed income market in the near term. We believe the reduction in CRR will further amplify the impact of the current liquidity surfeit in the fixed income market in the short term.

“We do not see the current levels of yields in the money market as sustainable in the medium term, given the possibility of an expansion in government borrowing in order to stimulate economic performance, as well as the need to compensate investors for expected inflation,” he said.


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