Nigeria: Stuck in a lending rut
Despite the government’s efforts to stimulate the economy after the worst economic crisis in a generation, Nigeria’s banks are drip-feeding the real sector of the economy. Muda Yusuf, director general of the Lagos Chamber of Commerce and Industry (LCCI), notes that high interest rates mean banks are not supporting the economic recovery. “At best, people who take the bank loans take it for short-term deals, maybe for trading, but you can’t do any long-term investments with an interest rate of 25% to 35%.”
Given the need for increased investment to sustain the recovery of the economy since its return to growth in the middle of 2017, the weak state of lending by banks to the private sector poses a threat to Nigeria’s economic recovery and the government’s goal of achieving growth rates in excess of 4% annually. The International Monetary Fund (IMF) reports that credit to the private sector rose by 22.3% in 2016. But in 2017, that growth was estimated at -3.3%. The IMF predicts it will increase by just 1% this year.
Speaking on the wider context, LCCI’s Yusuf observes that commercial banks cannot support the economy due to the cost and the tenor of funds available to them. About 90% of the banks’ funds are drawn from short-term sources such as customer deposits, so that makes long-term lending much riskier. This situation is further compounded by government borrowing, which had been increasing until recently, crowding out the private sector.
As the annual results season kicked off in March, the trend of growing profits amid marginal growth in lending, or, in some cases, reduced lending, continued. Two of the leading banks – Zenith and GTBank – recorded declines in loans and substantial increases in profits. While others, such as UBA, Access Bank and Stanbic IBTC, marginally increased lending and also recorded substantial growth in profits.
Stanbic increased its loans by 5%, while gross earnings increased by 36%. Commenting on the bank’s performance, Yinka Sanni, chief executive of Stanbic IBTC, tells The Africa Report that the contribution to interest income from investment securities and placements increased from 37% to 50%, while the contribution from loans and advances dropped from 63% to 50%. He says that the change in these elements was partly due to the bank’s cautious approach.
“The Nigerian economy recently came out of recession after facing several challenges, including a significant drop in oil price, a fall in oil production owing to militancy in the Niger Delta, and foreign exchange illiquidity, which the advent of the Investors’ and Exporters’ Foreign Exchange window has reasonably addressed. With the country coming out of recession, we have seen business performance improve, but we still remain cautious with regard to our lending appetite,” Sanni says.
Addressing what policies will encourage banks to lend more to the real sector, Sanni notes that the central bank and the government are supporting lending to core sectors by providing concessionary interest rates and priority access to foreign exchange, among other interventions. He adds: “The enforcement of legal rights and title will further encourage long-term and developmental lending.”
The latter point suggests that banks may have found it difficult to enforce collateral terms when customers default on loans. With the rate of non-performing loans in the sector reaching 15% in June 2017, the reluctance of banks to issue new loans is unsurprising.
With the Senate lifting its embargo on screening the President’s nominees to the central bank’s monetary policy committee, three out of four of the nominees were confirmed in the last week of March, allowing the committee to hold its first meeting of 2018 on 3-4 April. Analysts expected the committee to vote to reduce the headline interest rate by 25 basis points to 13.75%.
However, the committee voted to keep the key rates unchanged, explaining that although it thought about loosening its policy stance to strengthen the outlook for growth, this could have the undesirable effect of fuelling a rise in consumer prices and exert pressure on the currency.
In the light of the prevailing macroeconomic and policy situation, the LCCI’s Yusuf is not optimistic that much will change in terms of the banks providing lending support to the economy. He argues that unless a monetary policy framework that will align the profit objectives of the banks to the development objectives of the economy is established, the existing framework, which makes it attractive to invest in treasury bills, will not achieve much.
“You dance to the rhythm of the economy. It is what the economy says you should do that you do. You are not in business for charity. You are not a development institution. You are a profit-making institution. So the environment, the policies, the incentives, the sanctions, will shape the behaviour of actors,” Yusuf says.
This article first appeared in the May 2018 print edition of The Africa Report magazine