Obinna Chima wonders if commercial banks design policies towards increased lending to productive sectors to aid economic development
Globally, the banking system remains very critical to any economy. Economic development depends largely on the effective flow of funds between the surplus and deficit agents, as this enhances the productive capacity of any country
Several economists have said that the role of intermediation that banks play help in providing linkages for different sectors of the economy as well as encouraging high level of specialisation, expertise, economies of scale and creates a conducive environment for the implementation of various economic policies of government.
For instance, Joseph Schumpeter in his book, “The Theory of Economic Development”, argued that financial intermediation through the banking system plays an essential role in economic development by affecting the allocation of savings, thereby improving productivity, technical change and the rate of economic growth. The economist also acknowledged that the efficient allocation of savings through identification and funding of entrepreneurs is vital to achieve this objective.
Similarly, Governor of the Central Bank of Nigeria (CBN), Mallam Sanusi Lamido Sanusi, said recently that the banking system reform was amongst others, expected to foster healthy competition in banking operations.
“Banking sector reform leads to improved financial services which lead to cost reduction. More people will have access to funds from the banking system and this will increase aggregate demand for goods and services,” Sanusi had said.
But, while increasing competition for blue-chip corporate accounts between the Tier 1 and Tier 2 banks has been identified as one of the gains of the reforms, there are doubts over the genuineness of the figures for banking sector credit growth announced by the CBN.
In fact, Renaissance Capital (RenCap), a financial advisory and investment firm, in its latest report on Nigerian banks where it cut its forecast of between 25 to 30 per cent banking sector loan book growth, to between 15 and 20 per cent, argued that commercial banks have become risk averse, thus showing a preference for investment in fixed income securities such as treasury bills. This and other economic factors have continued to impede credit growth in the economy.
Myth or Reality?
THISDAY checks at the weekend showed that credit to the private sector increased by N1.124 trillion to N14.472 trillion. Data obtained from the CBN website represented an 8.4 per cent growth, over the N13.348 trillion it was as at January. The Monetary Policy Committee had also indicated at its last meeting held in May that “overall credit to the private sector rose marginally by 0.06 per cent or 0.18 per cent on an annualised basis.”
However, RenCap faulted the assessment of credit growth in the banking system, stating that the “credit growth numbers being reported by the CBN show little resemblance to the bottom-up picture we are getting from the banks.”
The financial advisory firm explained: “In meetings with the CBN, our economist questioned the discrepancy between the 40 per cent year-on-year credit growth numbers reported by the CBN since the end of last year and the modest growth numbers reported by individual banks. The CBN attributed this discrepancy to the way it accounted for Asset Management Corporation of Nigeria’s (AMCON) bonds.
“Some of the AMCON bonds issued to banks were sold back to the CBN by the banks (at a discount) to settle interbank liabilities and raise liquidity. Our understanding from the CBN is that it records its holdings of AMCON bonds as loans to ‘other financial institutions’, which is included in the aggregate claims to the private sector.
“Hence, when we look at the monthly private sector credit data released by the CBN we note a significant increase in December 2011 to N14.2 trillion from N12.4 trillion in November 2011, a month-on-month increase of 15 per cent.”
But Emerging Markets Strategist, Standard Bank Plc, Samir Gadio, argued that the reluctance of banks to lend would constrain sustainable economic development in Nigeria.
Responding to enquiries on the development from THISDAY, Gadio, who is based in London, UK, said: “The banks typically seek to maximise the significant spread between low savings and deposit rates and elevated lending rates. In many cases (including Nigeria), the differential between deposit/savings rates and fixed income yields is such that there is limited incentive to lend to the real economy.
“Clearly, there are structural distortions that perpetuate this large spread. First, high inflation/market rates and the uncertain macroeconomic outlook weigh negatively on lending rates. Second, the absence of viable corporate bond market implies that most companies continue to rely on bank financing. Third, the risk profile of borrowers and long-term infrastructure projects reduces the incentive for the banking system to diversify the loan book away from tier I names and the government,” he added.
Continuing, RenCap observed that the high December base distorted the year-on-year growth rates being reported monthly, even as it advised investors to focus on the month-on-month loan growth figures, so as to avoid confusion. “This, in our opinion, paints a picture more aligned with the bottom-up numbers reported by the banks,” it added.
It also argued that the anticipated growth in lending by banks is being inhibited by high yields or returns they realise from treasury bills in the market. While RenCap acknowledged there have been some improvements in risk management, in the industry, it said it was not convinced that the improvement has been significant across the banking sector.
“Our discussions with most banks (especially the smaller banks) on this topic still leave us pondering whether any sustainable changes have actually taken place. Most of the risk management seems to centre on imposing sector limits (as a percentage of gross loan book), in addition to adhering to the CBN guidelines for single obligor limits (20 per cent of capital).
“In some of the banks, new management in risk and credit has been installed but it is too soon for us to judge their impact on book quality,” it declared.
The Big Five
The report which listed Access Bank Plc, First Bank of Nigeria Plc, Guaranty Trust Bank Plc (GTB), United Bank for Africa (UBA) Plc and Zenith Bank Plc as the ‘big five,’ noted that increasing competition for blue-chip corporate account from the Tier 2 banks was also affecting the loan book growth of the top five commercial banks.
It showed that between December 2011 and March 2012, credit growth was flat at N14.2 trillion, stating that the ‘Big Five’ reported average gross loan growth of zero per cent and average net loan growth of one per cent. This was largely attributed to weak economic activities in the first quarter, due to the fuel subsidy removal protest.
“We highlight that growth for the Tier 2 banks appears to us to have been faster, with some banks still set to achieve loan growth north of 25 per cent this year. However, given the relatively higher weighting of the Tier 1 banks in the overall sector credit numbers, we believe their growth rates more accurately reflect growth in the Nigerian credit system.
“The second tier banks, in an effort to improve the quality of their loan books, have been trying to move up the corporate ladder and lend to higher-end large corporates. Some have been offering very competitive rates as a way to get a foothold into this segment.
“Aside from slow economic activity, the big five appear unwilling to compete on price, in our view. In fact, First Bank and UBA have been on a re-pricing exercise – looking to improve margins on existing loans by re-pricing these loans upward. As a result, the big five have allowed some business to pass to the tier 2 banks, which has contributed to their low growth,” RenCap maintained.
Tinkering with Monetary Policie
A Senior Analyst at Sterling Capital Limited, Lagos, Mr. Sewa Wusu, in an interview with THISDAY, urged banks to lend to the real sector of the economy, so as to stimulate growth. He, however, called for the monetary policies that will encourage banks to lend.
“It is normal for banks to invest in treasury bills as part of their banking activities, but lending is significant. The economy needs enough lending to support, particularly, the real sector.
“Again, the CBN has to reduce the monetary policy rate (MPR) as we saw in China and Europe were rates have been reduced to stimulate growth,” Wusu added.
On her part, a Senior Lecturer at the Department of Economics, Lagos State University, Ojo, Dr. Jammelah, Yaqub, also advised commercial banks to design their credit policy towards real sector financing.