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CBN and banks’ appetite for FG securities

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The decision of the Monetary Policy Committee of the Central Bank of Nigeria (CBN) at its recent meeting (CBN) to curtail the appetite of banks for Federal Government’s (FG) debt instruments is remarkable. According to the Governor of the CBN, Godwin Emefiele, this is to facilitate a redirection of banks’ lending to the private/real sector to stimulate growth of the economy. According to the CBN, banks have neglected their role of lending money to the private/real sector and have been investing in government debt instruments (e.g bonds and treasury bills). Consequently, the economy is suffering from inadequate funds that would have catalysed economic activities and growth.

In the opinion of the Monetary Policy Committee (MPC) of the CBN, the way around the development of banks not lending to the real sector of the economy is to find ways to curtail banks’ interest in government securities while redirecting their interest to making funds available to the real sector. According to CBN, there is a regulation that specifies the minimum percentage of treasury bills that the banks must invest in to remain liquid.

Curiously, the CBN did not explain why the banks have failed to operate within the set limit. The CBN also did not point out why it did not ensure banks’ compliance with the regulatory provision.

More curious is why CBN had to wait for the MPC’s directive. Indeed, if there is an existing regulation on the matter, why did MPC direct the management of CBN “to put in place policies and regulations that will restrict the banks from unlimited access to government securities.” If there is an existing regulation, the MPC should have its enforcement by the CBN.

Besides, why is it now that the CBN will “come up with strategies to mitigate credit risks of private sector lending, which led to very high non-performing loans in the past”? Credit risk has been and remains a major factor against increased credit provision and delivery to the private sector in the country.

Overall, CBN recognises that banks’ lending to the real sector of the economy is fraught with risks. The risk of credit failure is very high and accounts for banks’ distaste for real sector financing. Strangely enough, CBN seems not to have provided anything that will encourage banks to provide funds to the real sector. It is rather surprising that it is only now that CBN is considering “coming up with strategies to mitigate credit risks of private sector lending” with a view to making it more attractive for banks to lend to the private sector. In other words, the apex regulator has not provided mitigants for credit risks of the private sector. How then did the CBN expect banks to neglect risks-free government securities and head towards the hazardous and risk-prone private sector lending?

It is important for CBN to always put in its perspective the fact that banks are businesses seeking for profit by trading with other peoples’ money (OPM). They, therefore, need to be exceptionally careful and cautious (even as they seek profit) in the deployment of the depositors’ funds. Banks are playing safe and there is nothing wrong in doing so. Indeed, it is expected and necessary that they do so.

If banks invest money where the certainty of repayment is in doubt, they do so at their own peril. When the fund owners demand for their money, they will not tell them that they cannot pay because they complied with CBN’s directives. If, however, they so make such an excuse, banking as a business and service will become history and the economy will even become worse for it.

Although CBN explained that there is improvement in the rate of non-performing loans (NPLs) in the banking industry, from between 15 – 17 percent in the last two years to nine – 10 percent against the regulatory threshold of five percent there is still an unreasonable gap of almost 100 percent between the expected and actual levels. This is a glaring evidence that the banks are still carrying a huge burden of non-performing debts arising, most likely, from private sector credit failures.

We note that CBN has offered to support the banks through administrative, legal and regulatory framework to ensure that NPLs are brought down significantly to encourage banks to begin lending aggressively to the private sector. This is worth doing and a good development. And we hope it will be successfully undertaken.

If CBN must carry out the directive by MPC, it must exercise significant level of caution. Besides being careful, CBN should first put in place all the necessary safeguards. It is imperative, for instance, that appropriate and sustainable mitigants to private sector credit risks (failures) are developed and put in place. The promised support to banks via administrative, legal and regulatory framework should also be guaranteed.

To ensure that appropriate mitigating strategies are good enough to aid credit performance or recovery if things go bad, there is the need to conduct thorough studies that will reveal the core and ancillary causative factors for NPLs in our economy. It will certainly be more meaningful to emplace mitigating solutions based on findings from such studies. And it should not be a surprise that such research-determined mitigants will be more effective when implemented.

But it is obvious that the performance of the economy is a major factor in the state of the credit market. Quite unfortunately, this Nigerian economy is yet to support private sector businesses to the extent that investments can produce results that surpass the committed funds. Achieving profit in subsisting Nigerian economy is a big challenge. This is one critical factor borrowers of funds are caught up with the problem of inability to repay the credits, hence the high rate of NPLs in banks.

On the whole, we would like the CBN to tread cautiously in buying into and implementing, on wholesale basis, the MPC’s directive. The Bank should rather intensify efforts towards achieving single digit inflation and interest rates as well as a tolerable foreign exchange rate. At a 13.5 percent Monetary Policy Rate, there is hardly any way other rates, including interest rates, can be below. With such high rates, it will be Herculean for most businesses in today’s economy to borrow and successfully pay back. The ways to overcome are for the economic indicators to be better and for CBN to fulfill its promise to provide antidote to non-performing loans in the banking system.


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