Following commercial banks’ growing reluctance to extend credit
to the real sector, the Central Bank of Nigeria (CBN) may intervene directly to
provide the much needed funds to boost private sector liquidity.
This is one of the fresh initiatives of the apex bank that
was sanctioned by Tuesday’s Monetary Policy Committee (MPC), a move to tackle
the dwindling flow of banking sector credit to this critical segment of the
economy.
Figures from the Central Bank of Nigeria (CBN) showed that
credit to the private sector fell in May 2018 to N22.207 trillion year-on-year
as against the N22.254 trillion it was in April. The CBN report had shown that
industry gross credit recorded a 3.63 per cent decrease in April 2018, the
lowest since January 2017.
To stem this, the CBN has proposed a direct lending to the
private sector at single digit, using the purchase of commercial papers at the
same single digit.
CBN Governor, Mr. Godwin Emefiele, unfolded the new
approach, which would be tied to the Cash Reserve Ratio (CRR) mechanism.
Addressing journalists at the end of the thir MPC meeting of
the bank for the year, he stated that lending to the real sector had declined
in recent times, prompting an innovative approach to encourage the DMBs to
boost credit to the sector.
He disclosed that at the MPC meeting, a new arrangement that
would make loans available at single digit with a minimum tenor of seven years
and two years moratorium was considered.
He said: “At this meeting, we found a somewhat improvement which
is gratifying but we feel that we must still do what we need to do. Two
approaches were considered.
“The first approach, where we said, in order to achieve the
objective of lowering interest rate particularly to those priority sectors–
manufacturing sector, agric sector– that we will encourage large corporates to
issue commercial papers to the market and there will be a memorandum that will
detail explanations of what they are going to do with that money.
“In order to complement the effort of the banks, we will
expect that these commercial papers will come at low rate at single-digit of
nine per cent or below that, and for long tenor at a period of seven years with
a specific purpose for that loan.
“If the central bank sees those kind of notes in the market,
we will complement the effort of the banks through a mechanism to support that
bank that lends to that corporate at single digit rate.
“It is not meant to bring competition in the money deposit
banks; it is meant to complement their efforts. The most important thing is
that we want to see to it that we achieve a single digit rate.”
The second approach, he disclosed, works in such a way that
any bank that lends money for new projects and planned expansion that are
verifiable (not refinancing), for seven years (inclusive of two years
moratorium) at nine per cent interest rate, would compel the CBN to go into
that bank’s CRR and release equivalent of that financing from its CRR at zero
kobo spread.
Emefiele said: “We feel this is novel; it is something that
we should give a chance. In the past, we had reduced CRR and released liquidity
into the market, but the liquidity was not channelled properly to the high
impact corporations – we mean employment-generating sectors or ouput-improving
sectors of the economy.
“So, we decided we should approach it through this note. We
believe this will work because rather than the banks keeping the money in the
reserves, they can key into this and promote these transactions as long as they
meet the terms and conditions.
“More details on this will be provided soon for the banks
and everybody to know.”
Commenting on the development, the Head, Investment Research
at Afrinvest Securities Limited, Mr. Robert Omotunde, stressed that the fiscal
authorities have to do a lot to complement the efforts of the MPC so as to
realise the objective of reflating the economy.
According to him, Nigeria has a lot of structural issues
that must be resolved in order for the real sector to thrive.
On his part, an analyst at Ecobank Nigeria, Mr. Kunle Ezun,
who welcomed the initiative by the MPC, said the move would support the growth
of the Nigerian economy.
“The idea is that for you to drive growth, you need the
banks to lend. Most of the banks today are exposed to foreign currency loans
and as such they have huge non-performing loans that is constraining them to
give out credit to corporates.
“So, the idea is to encourage corporates not only to get
liquidity, but get it at a very cheap rate. Today, a lot of the corporates are
not comfortable with the rates at which the commercial banks give out their
loans. That is where the CBN comes in to bridge the gap.
“Most importantly, what the Commercial Paper would do for a
lot of corporates is to provide access to fund for expansion,” he said.
On his part, the chief executive of Nova Merchant Bank
Limited, Mr. Chinedu Ikwudinma, who welcomed the move by the CBN, explained
that, “commercial paper offers corporates a wider pool of funding.”
“It is different from a bank making a bilateral loan to you.
And there is a rate on that commercial. In commercial paper, the rate is known.
“So, on a medium-term basis, it is a cheaper way of sourcing
funds. The renewed interest is because of the spike in interest rate,” he
added.
In all, it is expected that with these measures that have
been rolled out by the central bank, the private sector would be given the
impetus to contribute to high and inclusive growth while still generating the
profits needed to succeed and grow.
