Emefiele, unfolding his priorities for the next five years, said the depreciation of the naira (by over 300 per cent) since the last major recapitalisation in 2005 had eroded the value of the surviving 24 Deposit Money Banks by about $175 million on the average. When they were asked to raise their capital base from N2 billion to N25 billion, the exchange rate was just about N100 to US$1; today, it is N306 to $1 at the official window and N360 to $1 at the parallel market. From the roughly $250 million capital (at the prevailing exchange rate) in 2005 therefore, he said each DMB had only about $75 million as capital today. Combined, analysts put the capital erosion of the top 20 banks at $3.5 billion.
To meet the CBN’s ambition to push Nigeria’s big banks to the top 500 bracket globally in five years, they are to start prepping for another explosion in the system: the last quake saw a drastic reduction in the number of banks from 89 to 25 post-consolidation. Mergers, acquisitions, a few stand-alone reboots accompanied that exercise.
As the market digested this, the CBN came out with a stick: banks should lend 60 per cent of their deposits by the end of September this year and will be reviewed every three months. Those who fail will be penalised by having their Cash Reserve Ratio raised and the excess funds deposited at the CBN at zero interest.
Both policies seek to enhance the banks’ financial intermediation role and direct credit to the productive sectors. Analysts say this could free up to N1.5 trillion for credit. Efforts to channel credit substantially to businesses have failed over the years. Bloomberg recalls that our banks are particularly reluctant to lend to the productive sectors for reasons ranging from low returns, high risk to low repayment levels, as well as inadequate long term funds. Instead, they opt for government securities and naira-denominated bonds that, at over 14.3 per cent yields, are among the highest worldwide. While Nigerian banks typically lend less than 60 per cent of their deposits, the average loan-to-deposit ratio in Africa is 78 per cent; it is about 90 per cent in South Africa and 76 per cent in Kenya. Guaranty Trust Bank, Nigeria’s biggest bank by market value, has a 53 per cent loans-to-deposit ratio. Total deposits were $82.12 billion (almost 25 trillion) in the country by December 2018, as recorded by the Census and Economic Information Centre, USA, while lending to agriculture, manufacturing, oil and gas and 15 other sectors was N241.87 trillion in the years 2015 to 2018, this newspaper reported.
Ensuring that small and medium enterprises, the mortgage sector, retail, consumers and the real sectors benefit from credit, the CBN will have, first, to ensure compliance with its directives. Banks should be compelled to meet set targets. The harder task will be bringing down interest rates and taming inflation, both of which make lending to these high job-creating sectors, very risky. The CBN’s own benchmark rate of 13.5 per cent is steep, while DMBs lend at between 20 per cent and over 40 per cent for mortgages. Unless the CBN is able to harmonise its policies with fiscal policies to expand and diversify foreign exchange sources away from its near monopoly and reduce interest rates, the banks may find it simply impractical to lend as directed. Inflation at over 11 per cent, will erode long-term funds, make profitability and repayment harder and push the banks into stress mode. The system is already grappling with high non-performing loans that stood at N2.24 trillion by September 2018. Elsewhere, to realise its 12th five-year development plan, India’s Small Industries Development Bank guarantees 75 per cent repayment of loans to SMEs and does not demand collateral.
A report by the OECD in 2018 found that increasingly, in China, the United Kingdom and the United States, government interventions were making low interest loans more available to small businesses. In Singapore, where 99 per cent of its 220,100 businesses are SMEs, employing two-thirds of the workforce and providing 49 per cent of GDP, invoice financing is one of the instruments used to plug the credit gap. The CBN should explore such innovative complements to traditional bank lending to mitigate our difficult operating environment.
Making our banks stronger and healthier should be a priority. In 2005, the economy was awash in cash and many banks met new capital thresholds through initial public offers. But with unemployment at record highs and foreign investors fleeing (they pulled out $2.1 billion in 2018 and the bourse lost $50 million in value), that will not happen today. Much will therefore depend on how Emefiele and the Muhammadu Buhari government can lift the economy in the years ahead. The CBN should deploy cutting edge technology, improve its skills and, above all, adopt a zero tolerance culture for malpractices to ensure that the system is strong and resilient. The economy cannot afford bank failures at this time; it was the frequent recourse to the CBN’s overnight lending window that alerted the regulator to systemic stress in 2009, enabling it to intervene and save the system. Vigilance and swift policing are, therefore, crucial in the years ahead. Forty-five banks out of 48 in liquidation closed between 1994 and 2006, after their licences were revoked. Several more have gone down since then.
Hardly can the banking system thrive when the economy is on its knees. Buhari especially, needs to grasp the precariousness of Nigeria’s economic situation and assemble a team of capable technocrats and initiate market-oriented policies to rescue the economy and strengthen the financial system immediately.