Last week, the Central Bank of Nigeria (CBN), once again tapped into its arsenal of circulars. In what seemed like a repeat of history, when banks remunerable placements at the Standing Deposit Facility was capped at N7.5bn some few months after the tenor of the CBN governor started in 2014, the CBN reduced the maximum placement at the window to N2.0bn.
This directive came a few days after the CBN issued a regulatory note for banks to increase their loan to deposit ratios to 60.0% by Sep-19.
No doubt, the CBN is doubling down on efforts to drive banks to increase lending to the private sector.
For context, data from the NBS showed banking sector credit to the private sector fell 2.5% y/y in 2018 and an annualized Q1-19 number shows that we could be on track for a further decline by the end of the year.
It is unlikely that the CBN’s recent policy will trigger a spike in credit to the real economy in the near term.
Rather, banks could opt to lose 50.0% of liquid assets to CRR at 0.0% instead of worsening asset quality.
In the medium term, banks will have no option but to lend by either going into a partnership with Fin-Techs, via liquidity support, to drive SMEs loans or boost their risk management framework to drive credit origination and expansion.
Overall, interest income could suffer in 2019 (especially in Q4-19) as lower yield, tighter regulation, and harsh operating environment soften bottom lines.
Meanwhile, with the MPC set to meet next week, we see the possibility of an adjustment to some policy of the variables to support recent actions.
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