Uwaleke: CBN Should Check Insider Loans in Banks


As concerns increase over the level of non-performing loans in some banks, an Associate Professor of Finance and Head of Department, Banking and Finance, Nasarawa State University,  Dr. Uche Uwaleke wants the Central Bank of Nigeria to strengthen its supervision to ensure that insider loans are minimised. He spoke with Ndubuisi Francis. Excerpts:


The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) recently retained the policy rate and all others. What’s your take on that?

Having held the policy rate at 14 per cent since July last year under a tight monetary policy regime in an effort to tame high inflation and stabilise the exchange rate, I had thought it was time to signal a gradual easing of monetary policy considering the waning headline inflation, some level of stability in the exchange rate on the back of improved liquidity and the marginal positive growth in real GDP recorded in the second quarter of 2017. Other factors remaining the same, lower MPR is expected to translate to reduced lending rates by the banks, increased access to funds by the real sector, cheaper cost of capital for firms leading to more job opportunities. An accommodative monetary policy stance at this time is also expected to reduce the high cost of debt service by the government which has been crowding out public spending. Unfortunately, however, other factors are hardly ever the same. The positive macroeconomic indicators witnessed in recent times are still fragile and vulnerable to oil price shock. The Q2 GDP growth was chiefly driven by the oil sector. Similarly, improvement in capital importation was more from the highly volatile portfolio investment. Also, retreating headline inflation is partly accounted for by baseline effect. Besides, at 16.01 per cent (August) the inflation rate is significantly higher than the upper band of 9 per cent set by the CBN. Real interest rate in the economy is negative since the rate of inflation is higher than the policy rate and so bringing down the MPR will further pull interest rate into the negative territory which will not augur well especially for foreign investments. Cognisance should equally be taken of the uncertainty in the global environment especially the normalisation of interest rates in the United States which has the effect of strengthening the dollar with adverse consequences for the economies of developing countries as well as the seemingly complicated Brexit negotiations. Therefore, taken together, it does appear that the balance of risks is in favour of not tinkering with the policy configuration for the time being to give some more space for the policies to work. It bears repeating that the primary mandate of the CBN, as spelt out in the CBN Act of 2007, is to maintain price and exchange rate stability. The decision to hold the rates is dictated by this obligation. Complementary fiscal policies are therefore required to bring about full employment and inclusive growth. To this end, the implementation of the 2017 Budget, especially the capital component, in line with the government’s Economic Recovery and Growth Plan should be pursued with vigour.

What’s your perspective on the Nigerian economy? Where do you think we are headed?

I think we already have a map–a blueprint, even though it took time in coming in this administration. But the most important thing is that it’s out. And I think if it is implemented,  there’s hope for the Nigerian economy, especially with regards to diversifying the export base, because to me that’s the primary aim of that document; to move the economy away from over-dependence on one particular product which has brought a lot of woes to this country. The economic recession that we just had can be tied to the fact that the economic structure is defective, so the Economic Recovery and Growth Plan, which is the blueprint that is talked about contains all that it takes or the minimum that is required to move us out of this over-reliance on oil. So implementation is the key.

What do you think we should be doing about the fragile growth?

South African economy is exiting recession on a firmer footing. That’s probably because their economy is a lot more diversified than our own. If you recall the growth in question 0.55 per cent growth, though marginal but in my view it’s something considering the fact that we were deeper in recession during the first quarter of 2017 and it grew by negative -0.9 per cent. So, the fact that oil is a major driver, so let me say the growth is fragile is mainly because the growth is driven by one particular sector which is oil. The other one is agriculture, manufacturing sector which is not really driven as much as the oil sector. For example, it grew by 3.01 per cent and even if you compare that to the growth recorded in the first quarter of 2017, you will see that the agriculture sector actually declined. So, the major growth remains the oil sector; the oil price might be looking up  now at $58 per barrel but it is one market where anything can happen. The downside risks are still there. What is probably pushing the price now are countries experiencing challenges. Take the US, for example– their hurricane. So, these things are not sustainable. It’s very likely that in future particularly now that we are here, the cost of Shale production is on the decline; as low as $23 per barrel so the downside risk is very much there and that is why it’s important we de-emphasise the credit that is coming from oil because we saw the way it crashed in 2014 when we were selling in excess of $100 per barrel and so many went down. So, there is no prediction for oil price that is found today to be accurate ; it can go either way. So, that is the more reason we should shift attention from oil. I agree that it’s fragile and if nothing is done to strengthen the other sectors again, we expose them to external shocks especially coming from oil price. In essence, if you look at the growth we have witnessed, I agree that it’s weak and coming again at a time that we are still having macroeconomic challenges, it’s still improving here and there, though these improvements are not yet strong, which is why in my view, the Monetary Policy Committee still decided to hold the rates as against the popular expectations that the rates should come down. They should consider adopting an accommodating monetary policy.

There are concerns in some quarters that the CBN is over-funding the federal government. what is your take on that?

You see, when you are dealing with deficit that is arising from the fact that government just has to spend, government has to spend to be able to reflate the economy, fiscal policy is not just about getting more revenue and especially when you can’t afford to say that you are increasing taxes in an economy that is laying down to be able to get revenue. So, you see to really stimulate the economy again you can’t afford to say that you are cutting taxes. The way it works is for them to spend especially on critical sectors and when you look at the revenue profile, the major source is in decline; that is talking about oil. You are left with no choice but to borrow. That is why government has been borrowing. What is of concern to me is the purpose for which it’s being used, as long as the revenue is used for productive sectors. It’s not really dangerous. Now, on whether the central bank is over-funding the government, I think we have heard from the horse’s mouth, from the central bank governor. He is in a position to say whether over-funding is being done. The governor talked about the size of these loans to the government. Relative to GDP, Nigeria is about 23 per cent, but for other countries that is far higher, Nigeria is one of the least in the funding status of the central bank. Don’t forget the central bank is not only the banker to the government but it’s also a lender of last resort. So when the government has a deficit to fill up because of the need to spend then I don’t see any problem with the central bank acting as a render of last resort. Again, the CBN Governor talked about the size of the account in the custody of the central bank which is over six trillion naira. So, if that funding is within the custody of the central bank, then it’s not dangerous. For me, again in particular, the most important thing is when we borrow what do we use the money for? If it’s to finance the budget for its implementation, then I think it’s very much in order.

The Senate recently criticised the CBN for using about $9 billion to defend the naira. Do you think the concern is justified?

That is the role of the central bank. The central bank has primary mandate to maintain price stability, and that includes exchange rate stability. Now, given the structure of our economy (which I alluded to earlier) that depends solely on oil and the central bank has custody of the bulk of that. So, the central bank is the major supplier of the forex market and because it has the bulk of forex, it is now incumbent on the central bank to defend the local currency using the stock of dollars at its disposal.  So, the central bank will be failing in its duty if it doesn’t do that. The central bank has the responsibility to defend the naira where it’s not running a complete flexible system and we can’t afford to leave the fate of the naira completely at the mercy of market forces because of the huge mismatch between demand and supply of forex in Nigeria. Since the supply is limited, the demand is much. There’s no way you can argue for a complete floating of the naira. So, I am in support of defending the naira with the reserves that we have. That is the primary purpose of having reserves to ensure that you have stable exchange rates. If the CBN had not done that, by now, the exchange rate wouldn’t be converging downwards the way we are seeing them converge across all sectors of the foreign exchange market.


Equally, the upper legislative chamber has expressed concern over the level of implementation of the capital budget for 2017. What’s your take on that?

Yes, I agree with you and that’s because again for this economy to be fixed, you don’t have to clap with one hand. Fiscal policy is required. Expenditure on infrastructure will go a long way to help reflate the economy. If you look at the National Bureau of Statistics’ report on inflation, it talks about high cost of transport as major driver of inflationary pressure and that’s because the roads are not in good condition. So we need to spend money on infrastructure—power, roads. The fact that in the 2017 Budget, for example, we have two trillion voted for capital expenditure and as we speak not up to N350 billion has been released few months to the end of the year and that is something to worry about. I also think that in fairness to the government, I don’t think it’s a deliberate act because I’m sure too and also desirous in pushing this spending on capital projects because for the first time in many years, we are seeing a government that is giving due consideration to the capital components. Last year, for example, I heard that as much as 30 per cent voted for capital and this year again 30 per cent voted for capital but of course what usually impeded implementation has been shortfall in revenue. I also think that the government is conscious of it that they need to spend money on capital projects. If there’s delay at all, something has to be done about it which is why I also think the government recently is talking about borrowing further through the international capital markets to be able to fund capital projects. So, if the borrowing is to expedite action on the capital component of the budget,  I am in support of it because it will help to really boost the economy.

The level of non-performing loans (NPLs) in the banks is another area of concern. How would you react to that?

Yes, you see the high level of non-performing loans in the banks had a lot of factors behind them. Of course, it’s something that is worrisome. The central bank has a threshold of five percent but we hear on the average the NPL is as high as 15 per cent especially when you aggregate. So, if you remove the four banks that we read were having liquidity problems, then you could have something lower but on the average it’s about 15 per cent which is quite high. The major cause of non-performing loans in banks is insider loans. You also have challenges of core corporate governance. The bulk of those banks not doing a lot that they are supposed to do, you also have issues of high interest rate regime because each time maybe the monetary policy rate is increased, banks reprice their loans and the borrowers have difficulty in paying back. But that aside, the major cause can be traced to insider loans when the directors, for example, give loans to family members and they don’t pay back. There’s also the issue of poor appraisal of credit given by credit officers and it has to do with maybe unqualified staff put in credit departments. So, the CBN has a role to play and that is to set up supervision to ensure that banks adhere to guidelines and CBN code of corporate governance to ensure that insider loans are minimised and recovered. So this issue I’m sure the CBN is aware of the challenge and recently listening to the CBN governor talk about it, I want to believe that the central bank is going to be on top of the situation to bring down issue of high loans within the banking industry.

Nigeria has just been ranked 125th out of 137 in the global competitive index, do you think this is justifiable and if so what should we do?

Yes, I think when you consider the challenges we have in this country, the infrastructure challenges, its competitiveness has a lot to do with the state of infrastructure. It also has a lot to do with even the ease of doing business.  Of course, we also know that some way you can put Nigeria 169 out of 180 countries. So, all these factors are coming to play when it comes to competitiveness. To move up the rungs of competitiveness, we need to fix infrastructure and do something about the ease of doing business. We need to do something about corruption, security and by the time we do all that, foreign investors will find us attractive and they will come here to invest, not just because our interest rates are high but because generally we have a favourable business environment. So we need to fix infrastructure to make us more competitive.

The National Corruption report recently released by the National Bureau of Statistics (NBS) is disturbing. Don’t you think it’s part of why we are not competitive?

I mentioned it, that corruption places us at a disadvantage and perception is very important even if you try to say that the report is not true. Perception is very important and these institutions must work towards changing the way the public perceives them because that is what goes out to the international community. They should see it as a challenge to ensure that subsequent reports don’t pin them as the worst culprits when it comes to the issue of corruption.

The  Vice President, Prof. Yemi Osinbajo recently talked about the need for more transparency in revenue mobilisation.
The recent report by a committee chaired by a former South African President , Thank Mbeki painted a worrying picturw about illicit financial flows in Africa. A lot of multinationals are involved. What do you think we should be doing to curtail these illicit financial flows?


I know for example the recent scheme by the federal government, the voluntary Assets and Income Declaration Scheme (VAIDS) is meant to curtail illicit financial flows. It’s also meant to widen the tax base and ensure that some of these multinationals and high networth individuals who are under-declaring their income are not even paying taxes are captured. So it’s to look at that scheme and implement it, and try to capture multinationals that have been evading taxes. For a country like Nigeria with its GDP size, there’s no doubt that six per cent of GDP coming from tax revenue is small, sub-optimal, far below our peer countries. It tells you that a lot of tax evasion is going on, where you have huge income but less tax. That’s why I’m happy we have this voluntary assets and income declaration scheme. We have a lot of leakages in the system and I’m sure the government recognised that and that is what they are trying to solve through this scheme.

Domestic debt accumulation is another challenge which many have expressed concern about. What do you think we should be doing now?

Well, Nigeria’s total debt stock is about N19.6 trillion and out of that, we have over N4trillion as external. The bulk has remained domestic and that is probably why we are having this challenge; the challenge of huge debt service is more because the bulk of it is domestic. A situation where a government is borrowing at a rate as high as 16 per cent whereas external debt requires maybe 1.5 per cent. In fact, the highest rate that we have seen  in case of external is just 7 per cent. But the external loans that have come from multilateral sources go for like 1.5 and even the bulk of it. So to get out of this, debt trap, I’m in support of the debt strategy to rebalance our debt composition in favour of external debt. So we should look more outside especially if we can access multilateral loans that are far cheaper and have longer tenor, and then borrow less from the domestic economy. Even when you are borrowing from the domestic economy, we need to, if possible, restructure the short term maturity to longer term maturity instruments as opposed to treasury bills. For example, we do more of the saving bonds that’s like two or three years as opposed to 90 days treasury bills and that way you don’t punch up together. Also, I am in support of getting cheaper foreign loans to pay off domestic debts. So,  the thing is huge no doubt and also don’t forget that we also have the parts coming from state governments as a matter of fact. You know Lagos State debt is not much of a problem because it has capacity to service but for some other states there’s a challenge there.  So, it’s for the Fiscal Responsibility Act of 2007  to really monitor the debts that are taken by these state governors especially the ones they are taking from banks which are huge. The state assemblies should play a role too to ensure that if their state governments are taking loans , they  must be tied to particular projects and those loans should be sourced from the capital market. And then, for the government to look at longer term loans and then put attention more in foreign loans that are cheaper. But what is important is that debt is not bad, the important thing is that if we are borrowing we must always look at the issue of self-liquidating loans. Once a debt is self-liquidating, if I can borrow at 6 per cent and I use it to do something that will give me like 7 per cent extra then there’s no problem with borrowing. But when I borrow and consume, or borrow for one year and use it to do a project of 5 years, that’s funding mismatch and that is where I have problem with borrowing. So to get out of this debt trap or reduce it, we need to focus on external loans. For domestic debts, we try to focus on longer term domestic debts as opposed to very short terms and then ensure that we abide by the Fiscal Responsibility Act of 2007 that puts a cap on borrowing particularly the federal to state governments.

Although inflation is decelerating, when you talk about food prices, they are still very high. What should we be looking at?


If you noticed the August National Bureau of Statistics report talked about the inflation dropping to 16.01 per cent but for the first time again this year food index actually dropped from 16.28 per cent to 16.25 per cent and that’s probably because of the harvest season. So having said that,  there’s no doubt that the cost of food prices is still high and that speaks to the need for us to begin to look at those things we can do here, those crops we can focus on to achieve food sufficiency. There’s need to put more money in agriculture to achieve self-sufficiency in food production. Inflation will come down the moment we begin to work towards food security. The other ones have a lot to do with the exchange rate; once we are able to bring down exchange rates, it will certainly have a pass-through effect on the price of commodities. And how you bring down exchange rate is by increasing the supply of foreign currency by ensuring that we have multiple streams of foreign currency and curtailing the demand for foreign made goods. The moment we begin to patronise locally-made products, from the government to the individual, it will go a long way in providing job opportunities. When the economy is better and you earn more revenue then you will find a situation where the price of commodities will begin to come down. The nature of inflation that we have in Nigeria is not demand-issue inflation but cost-issue inflation. By the time we begin to fix some infrastructural bottlenecks we have in the country it will go a long way in rubbing off positively on cost of food prices. So to bring down food index, we need to put money in agriculture and pursue mechanised agriculture. The farmers need to have a means of moving their products from the farm to the city without incurring so much cost in terms of transport. We need to have storage facilities for the farmers; mechanised farming will improve the yield. I also commend the CBN for their contributions towards rice to ensure that the price of a bag of rice comes down. So the CBN should be encouraged to extend it to many other crops and also ensure that many more states are covered. So if we have this intervention by the CBN and complimented by targeted spending in agriculture by the government I’m sure we will achieve the self-sufficiency in agricultural production like we already have in Economic Recovery and Growth Plan.