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Thu, Mar

CBN Directs All Banks on Mass Loan to its Customers

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The Central Bank of Nigeria has issued a circular mandating commercial banks to lend up to 60% of their customer deposits. According to the Central Bank Governor, Godwin Emefiele who informed participants at the 2019 Africa Investors’ Conference (AIC).

 

The directives include the followings.

i. All Deposit Money Banks (DMBs) is to maintain a minimum loan to deposit ratio of 60% by September 2019. The ratio will be reviewed quarterly;

ii. To determine the 60% ratio, the CBN will assign SME, Mortgage, retail and consumer lending a combined weighting of 150%; and

iii. The CBN also said that banks that fail to meet this requirement will risk seeing their cash reserve ratios increased to 50%. This means 50% of a bank’s deposit will be immediately sent to the CBN.

It was gathered that as of March 2019 data from the Nigerian Bureau of Statistics (NBS), Nigerian Banks have non-performing loans of about N1.69 trillion (N2.19 trillion as of April 2018).

The data also reveals commercial banks had a total deposit of about N27 trillion out of which about N15 trillion or 55.5% is money lent to the private sector.

Emefiele blamed the non-performing loans on banks choice of investing in risk-free securities rather than lending to the real sector of the economy.

This decision could have wide-ranging implications such as:

i. Rather than engaging in moral suasion, Banks are now being forced to lend money to sectors of the economy where risks are higher. In fact, just about anyone could get a loan at this rate;

ii. Most banks will be exposed to higher loan losses which could impact significantly on their profitability;

iii. Banks will have to invest heavily on strategies that can help mitigate against lending risk thus increasing their cost to income ratios;

iv. The CBN’s target appears to be the informal sector of the economy. Unfortunately, most of the players have projects or funding requirements that are hardly bankable, either because of lack of adequate collateral or evidence of steady cash flows;

v. This should be a major boost for credit rating agencies who are increasingly pivotal to lending beyond collaterals;

vi. Quick Loan Banks relying on FinTech to drive consumer lending will now face increasing competition from bigger commercial banks;
The CBN’s directive also has some positives;

i. On the flip side, companies with strong cash flows and collateral will have significantly higher chances of obtaining loans;

ii. This could be a major boost for Nigeria’s real estate sector which has been wallowing in negative GDP growth rates and only able to eke out a growth rate of 0.23% in the first quarter of this year;

iii. Home buyers with good jobs may also easily secure mortgages as more banks will consider this a better lending option considering that the loans will be secured against the properties.

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