Nigeria's Central Bank Wants Banks To Lend 60% Of Liquid Assets To Productive Sector

The Central Bank of Nigeria (CBN) has instructed commercial lenders to increase lending to the productive sectors of the economy and face placing their excess liquidity in a non-interest yielding instrument in the regulatory bank's vaults.
According to a report by Bloomberg, a circular by the apex bank sighted showed that the CBN wants the banks to lend 60 percent of their liquid assets to boost production in the economy by the end of September.
The report indicated that those banks that are not willing to lend 60 percent of their liquid assets would have to invest such money in its Standing Deposit Facility (SDF) at no interest through an increase in their Cash Reserve Requirements (CRR).
Commercial lenders in Nigeria are some of the most reluctant lenders in major emerging markets, with an average loan-to-deposit ratio below 60 percent.
In the personal note at the last Monetary Policy Committee (MPC), members of the rate-setting committee noted the drop in banking loans to the productive sector.
The MPC members raised concern over the vulnerabilities in the industry which include high concentration and contagion risks as well as significant foreign exchange exposure.
They said many of the banks have risk aversion and would rather invest the bulk of the assets in government treasuries and fixed income.
"It is especially concerning that credit to the private sector is declining and this needs to be halted and possibly reversed to strengthen economic activity and job creation," Edward Adamu a member of the MPC said.
The CBN circular was signed by Ahmad Abdullahi, director of banking supervision, the intention of the new rule was to grow the economy by improving investments in the real sector.

“To encourage lending to small businesses and consumers and more mortgages, these sectors shall be assigned a weight of 150% in computing the LDR-loan-to-deposit ratio,” the circular showed.
“Failure to meet the above minimum LDR by the specified date shall result in a levy of additional Cash Reserve Requirement equal to 50% of the lending shortfall of the target LDR.”
Although there was previously no rule on minimum loan-to-deposit ratios, many Nigerian lenders have a ratio of about 40 percent, below the industry average.
Many of the banks are however concerned that with inflation running at more than 11 percent, extending more credit could endanger the financial system through an increase in non-performing loans, or NPLs.
That makes some analysts skeptical of whether the new measures will work.
“I don’t expect much change,’’ Michael Famoroti, an economist and partner at Stears Business, said by phone from Lagos. “We just came out from a period of high NPLs and banks are very cautious of credit growth at this time.”