...Operators say growing appetite for debt instruments and the tight monetary stance of the CBN are killing appetite for lending

Festus Akanbi
There are indications that the Central Bank of Nigeria (CBN) may not be able to win its current battle to stimulate credit growth in the financial system in spite of the consistent tightening of monetary policy for six consecutive times.

Rather than encourage the nation’s money deposit banks to develop appetite for lending, especially to the real sector of the economy, the series of measures adopted by the apex bank to fence the economy against inflation and attack on the naira are said to have, ironically, constituted serious threats to credit growth in the economy.
Analysts say the growing appetite in bond market in recent times are turning attention of lenders away from the real sector of the economy.

For instance, the Federal Government sold N60 billion ($380.71 million) worth of sovereign bonds with maturities in the range of 5 to 7 years at 12.93 percent and 12.90 percent, respectively, at a regular auction last Wednesday.

The 2017 bond was issued at 16.32 percent at the last auction, while the 2019 paper was issued at 16.14 percent last month. Total subscription for the notes stood at N82.94 billion, driven by strong participation from offshore investors and local pension funds taking positions ahead of the inclusion in the JP Morgan index, dealers said.

Dealers said the fall in yield was partly as a result of declining inflation, making bonds more attractive.
The problem is also compounded by the regime of high lending rates, which the CBN Governor Mallam Sanusi Lamido Sanusi last week described as worrisome.

Confirming the inspiring credit growth in the system, the international financial advisory firm, Renaissance Capital, said in a special report last week that the nation’s financial system might not experience a substantial credit growth until the easing of the current tight monetary policy, which could be in the early part of 2013.

Tracing the seeming stultification of credit growth to last year when the CBN adopted the tight monetary policy, Rencap noted that, “credit extended to the private sector only increased 4.7 percent between December 2011 and July 2012, despite YoY growth rates of 40 percent-plus, which we partly attribute to Assets Management Company of Nigeria (AMCON) bonds.

“We thus expect a pick-up in credit growth from 1Q13, and for this to accelerate once rates begin to ease,” the report stated.

According to Renaissance Capital’s Sub-Saharan Africa Economist Yvonne Mhango, by raising Cash Reserve Ratio at the MPC meeting for the month of July, the financial authorities had set the stage for banks to shun lending to the private sector.

“Although leaving the policy rate unchanged does not help quicken credit growth, we believe the four percentage hike of the Cash Reserve Ratio (CRR) in July had a more pronounced dampening effect on credit extension than interest rates have had year to date.

“Moreover, history has shown that lending rates are downwardly sticky, so a rate cut would not have had a material positive effect on credit growth, in our view. According to the National Bureau of Statistics, the high end of the real estate sector was nearing a zero-demand situation in 2Q12 because of credit liquidity constraints. This implies that the tightening of liquidity in July further undermined credit growth in 3Q12, Mhango said in the section of the report titled, Credit Growth Deferred till 2013.
According to her, the upward trend in yields of treasury securities has also served as a discouragement to banks given the safety of investment in such securities.

“It also has not helped that yields on treasury securities have been so high, thus discouraging lending. We expect YoY credit growth to slow sharply in August to c. 40%, from 49.2% in July (as the base effect kicks in), and thereafter to continue slowing to the mid-to-late teens by YE12.

“This implies our credit growth projection for 2012 will be equivalent to nominal GDP growth, which is uninspiring to us. The upside is the recent fall in yields, by 350 bpts on average across a range of maturities, which we expect to increase banks’ appetite to extend credit. We thus expect a pickup in credit growth from 1Q13, and for this to accelerate once rates begin to ease.”

RenCap analysts in an earlier report titled “Nigerian Banks: CBN Tightening Liquidity” noted that annualised growth rates from the CBN showed private sector credit growth up 49.8 percent in June 2012 year-on-year (YoY).
They maintained that private sector credit growth is not as high, with annualised growth for most of the big banks not exceeding 20 percent year-to-date (YtD). 

Mhango had previously highlighted in her note on Sub-Saharan Africa (SSA) credit growth that it is not so fast in Nigeria.

According to the analysts, there is a discrepancy in the YoY credit growth rates and the bottom-up figures “we are receiving from banks. We attribute this to how the CBN accounts for AMCON bonds. Some of the AMCON bonds that were issued to banks when they sold their non-performing loans (NPLs) were subsequently sold back to the CBN by the banks to settle interbank liabilities and raise liquidity.

Three years after a credit crisis led to the near collapse of nine lenders, banking capital ratios have recovered, but lenders are piling all their cash into treasury bills at yields that are unlikely to be sustainable, say banking analysts.
“Eventually, banks are going to have to take real economy risks to drive up returns. I can’t imagine that regulators will continue to licence the operation of banks … without there being evidence of some lending to the real sector,” said Razia Khan, Head of Africa Research at Standard Chartered Bank.

Nigeria’s economy grew 6.17 percent in the first quarter of this year, according to the latest available figures, but credit to the private sector grew just 4.3 percent by July 2012, while lending to the government shot up 56.5 percent in that time.

Banks worry consumers and firms may not be able to pay back loans at high interest rates, whereas tax-free government bond returns are a safe bet at such attractive rates of 15-16 percent — a huge spread over average bank deposit rates of 1-2 percent.

“Access to credit is a bit more difficult for the businesses and households,” a bank official was quoted as saying.
He said lending rates for big firms like Flour Mills have risen to 14 percent this year, from 12 percent in 2008. For consumers, by contrast, they went up to 33 percent this year, from 22 percent last year.

“The crisis in the industry seems to be over,” he said, “but investments are largely being channeled to safer outlets.”
Yet if treasury yields continue to fall, banks over-reliance on them for earnings could hurt profitability down the line.