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‘Size, tenor of loans to manufacturing sector discouraging productivity’

By Femi Adekoya
15 March 2023   |   4:12 am
Local manufacturers have raised concerns about the size of loans given to the manufacturing sector by commercial banks, describing it as inadequate and one that does not encourage productivity in the sector.

Local manufacturers have raised concerns about the size of loans given to the manufacturing sector by commercial banks, describing it as inadequate and one that does not encourage productivity in the sector.

According to the Manufacturers Association of Nigeria (MAN), about 53 per cent of manufacturers disagreed that commercial bank loans to the manufacturing sector encourages productivity.

Indeed, they noted that the dearth of limited credit has been a core challenge of manufacturing, outside access to electricity and foreign exchange.

The operators stated that when loans are available, they are usually on short-term tenor and do not adequately support the medium to long-term gestation required in the manufacturing sector.

The implication is low investment; limited capacity utilisation and production level in the sector, the operators lamented.

Using the Manufacturers CEO’s Confidence Index (MCCI) of MAN as a benchmark for measuring changes in the pulse of operators and trends in the manufacturing sector quarterly, the local producers noted that these issues, among others, are principally responsible for the difficult operating environment and its declining implication on manufacturing activities in the country during the quarter under review.

Despite low exposure to the productive sector, The Guardian had reported an uptick in commercial banks’ lending to the Central Bank of Nigeria (CBN) through the SDF window since the beginning of the month with the next balance hitting N201.34 billion.

With the standard lending facility (SLF) estimated at N27.42 billion, the amount unpacked by the financial institution is 89.2 per cent of the total value involved in the short-term lending/borrowing between them and the regulator in the month so far.

SDF and SLF are twin-prudential tools the banks leverage to regulate short-term liquidity positions. When banks face liquidity pressure, perhaps as a result of an increase in credit demand, they access SLF to meet their needs.

But when they are swimming in liquidity, they resort to SDF to unpack the excess. Successive CBN governors have incentivised banks to use SLF to fund the country’s economy out of the doldrums.

The financial data sets point to consistent growth in SDF since the beginning of the year – a sort of reversal in the usual trend. Last month, the banks lent a total of N641.19 billion but borrowed N453.7 billion.

The value of SDF activities was about 17 percentage points higher than that of SLF. Of the N1.115 trillion exchanged through the window in January, SDF was N586.7 billion or 52.6 per cent.

Subject to prevailing conditions and terms, banks lend to CBN at a monetary policy rate (MPR) of less than 700 basis points (bps) but borrow at MPR plus 100 basis points.

While the sudden rise in SDF suggests a healthy and liquid banking sector, it also points to falling credit penetration, with diverse possibilities in-between.

Except the economy is already saturated with funding, which is not the case in Nigeria, rising SDF could be a public vice.

Faced with high political and economic uncertainty, it is expected that banks would price in risks in their loan underwriting. High energy cost, cash scarcity and election conflict, experts have warned, would increase the country’s risk profile.

With the maximum lending rate heading to 30 per cent, the uptrend in SDF reveals the premium banks place on the safety of depositors’ funds. The banks had grappled with the non-performing loan (NPL) crisis for a long time before the recent stability.

Citing the adverse effect of the Consumer Price Index (CPI), continuous erosion in Naira value and difficulty in accessing foreign exchange, high cost of energy, persisting insecurity and the consequences of lingering Russian-Ukrainian war, local manufacturers also cited waning confidence in the business environment in Nigeria.

Specifically, the Aggregate Index Score (AIS) of MCCI declined to 55.0 points in the fourth quarter of 2022 from 55.4 points obtained in the third quarter of the year.

The index score of the current quarter, though below that of the previous quarter, indicates that manufacturers generally still have confidence in the economy.

MCCI Index is computed using data generated on standard diffusion factors of current business condition, business condition for the next three months, current employment condition (rate of employment), and employment condition for the next three months and production level for the next three months.

The Index has a baseline score of 50 points and scores above the baseline indicate improvement of manufacturers confidence in the economy, while index score of less than the baseline suggests deterioration in the operating environment.

Among the standard diffusion factors, current business condition and business condition for the next three months, scored above 50 benchmark while increasing in the quarter; current employment condition (rate of employment) and production level in the next three months scored above the 50 benchmark points though with a decline in the period respectively; employment condition for the next three months dipped below the benchmark points to 48.8 points which is also below 49.2 points obtained in the preceding quarter.

The report noted that employment decisions by manufacturers are so difficult due to the unpredictability and difficulty in macroeconomic movement.