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Nigeria’s Central Bank move complicates life for First Bank

By Joël Té-Léssia Assoko
Posted on Wednesday, 4 September 2019 08:13, updated on Tuesday, 10 September 2019 11:52

Nigeria's Central Bank Governor Godwin Emefiele speaks during the monthly Monetary Policy Committee meeting in Abuja, Nigeria May 22, 2018. REUTERS/Afolabi Sotunde

As the September 30 deadline approaches, banks in Nigeria may need to lend massively to meet Central Bank regulations.

When Nigeria’s Central Bank Governor Godwin Emefiele increased the loan-to-deposit ratio to 60%, the country’s banks ran into a problem.

For Adesola Kazeem Adeduntan’s First Bank of Nigeria, the country’s number two lender, the measure could create new credit risks.

The coming weeks for Nigerian banks look tense. In early July, the Central Bank of Nigeria (CBN) required local credit institutions to loan more money, raising their minimum loan-to-deposit ratio to 60% by September 30.

Governor Emefiele, who was reappointed for a second term in May, has two key objectives: reduce the desirability of government bonds and securities for local banks, which account for a disproportionate share of the local financial sector’s outstanding loans, and encourage the financing of the ‘real economy’ by asking banks to prioritize loans to SMEs, retailers, home loans and consumer credit.

These loans attract a weighting of 150% in the calculation of the loan-to-deposit ratio, according to CBN. Banks that fail to meet the new threshold will be sanctioned.

New credit risks

Analysts in Lagos say Nigerian banks will have to grant between N1,000bn and N1,700bn (between €2.4 billion and €4.2 billion) in new loans to reach the target. However, according to rating agency, Moody’s, “The volume of bank loans contracted by 6.7% in 2018 to N12,800bn, before rising slightly to N12,900bn in April 2019”.

First Bank of Nigeria appears to be one of the institutions most affected by the new directive.

“First Bank’s loan-to-deposit ratio in Nigeria declined to 53% in June from 62% at the end of 2018, which would require the bank to increase its lending by approximately 13%, all other things being equal, to meet the 60% regulatory requirement, creating new credit risks in a challenging operating environment,” says Moody’s analyst, Peter Mushangwe.

Bottom line: The increase in loans to SMEs and households “with a weak or limited credit history” will lead to an increase in loan delinquency.

This article first appeared in Jeune Afrique.

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