Are Better Days Here for SMEs?


The economy will witness a strong and sustainable growth if the Central Bank of Nigeria continues to enforce its directive on 65 percent loan- to- deposit ratio to players in the nation’s banking industry, especially commercial banks, to make affordable loans available to businesses and consumers to drive economic activities, writes Bamidele Famoofo

Sometime in July 2019, the Central Bank of Nigeria (CBN) directed Deposit Money Banks (DMBs) also known as commercial banks, to make cash available to players in the economy at affordable rates to boost economic activities and as a result drive growth.

The directive issued through a letter titled: “Regulatory Measures to Improve Lending to the Real Sector of the Nigerian Economy”, mandates all commercial banks operating in the country to make credit available to businesses to increase their capacity and be able to create more jobs.

The objective of the CBN was to encourage SMEs, retail, mortgage and consumer lending in the real sector, which it said shall be assigned a weight of 150 per cent in computing the LDR for this purpose.

The CBN through the Director of Banking Supervision, Ahmad Abdullahi, instructed banks to make available as loan to the real sector, at least 60 per cent of the cash which they collect from depositors effective from September 30, 2019.

“Failure to meet the above minimum loan to deposit ratio (LDR) by the specified date shall result in a levy of additional Cash Reserve Requirement equal to 50per cent of the lending shortfall of the target LDR. The CBN shall continue to review development in the market with a view to facilitating greater investment in the real sector of the Nigerian economy,” CBN said.

Applauding the CBN for the policy, financial experts who spoke with THISDAY, said the real sector of the economy will have at least N1.5trillion additional cash to borrow from, if all the banks comply with the new policy.

In a bid to match its words with action, the CBN under the watch of its governor, Mr. Godwin Emefiele, has taken far-reaching measures to let the banks know it was ready to implement the policy.

Hence, after the September 30 deadline set for banks to comply with the directive to give out at least 60 percent of their deposits as loans to SMEs, retail, mortgage and consumers, it descended heavily on the defaulters. Specifically, the banking sector regulator debited 12 banks a total of N499 billion for failing to meet the September 30, 2019 deadline. Meanwhile, the CBN has since refunded some of the affected financial institutions.

But on the expiration of the September 30 deadline, the central bank raised the minimum LDR to 65 per cent, with a December 31, 2019 deadline, up from the 60 per cent it had prescribed.

The Director, Corporate Communications, CBN, Mr. Isaac Okoroafor, justifying the upward review, explained that CBN has vowed to impose stiffer sanctions on any commercial bank and customers that flout its minimum loan-to-deposit ratio (LDR) policy that is focused on increasing lending to the real sector of the economy. He said customers of banks who fail to play by the rules will be blacklisted.

Okoroafor disclosed that the central bank has discovered that some banks, in order to achieve the 60 per cent LDR target and in a bid to beat the September deadline, gave out money to customers who did not invest in productive business ventures. Rather, the banks gave out the loans for investment in money and capital markets instruments for short-term gains. CBN warned that any bank that is found to be disbursing loans to customers, who subsequently invest such funds in treasury bills and other money market and capital market securities, would be sanctioned and the customer blacklisted.

The CBN spokesman explained: “Any customer found arbitraging will be blacklisted, names published and the banks penalised. The essence of this is to stop arbitrage practices by the banks.

“In other to meet up the LDR policy, they are avoiding giving loans to the real sector and instead are giving loans to speculators who now go to buy treasury bills,” Okoroafor reiterated.
“The whole aim of this policy would be defeated by this kind of practice. So, the CBN will deal with any bank that tries to circumvent this policy.”

The Purpose
Okoroafor insisted that the central bank will do everything in its powers to make sure that the purpose of the policy which was to fuel the economy for growth is achieved.
On assumption of office as CBN governor for a second term of five years, Emefiele said his vision for the bank over the next five years was primarily driven by the need to support continued growth and development of the Nigerian economy.

In his five-year policy thrust for a second term in office, he said: “Our vision would be to ensure the Central Bank of Nigeria is more people-focused, as its policies and programmes would be geared towards supporting job creation, reducing the high level of treasury-bill rates, improving access to credit for MSMEs, deepening our intervention programme in the agricultural sector, building a robust payment system infrastructure that will help drive inclusion, in addition to key macroeconomic concerns such as exchange rate stability, financial system stability and maintaining a strong external reserve.”

To achieve the lofty goal of growing the economy by double digits, Okoroafor said banks must lend mandatorily to deserving customers that are willing to engage in businesses that will create jobs and grow gross domestic product (GDP).
“What we are saying is that banks must lend. So we prescribed the LDR. Now that they are ready to lend and at reasonably low rates and not buying securities, people should not borrow to buy securities thereby arbitraging.”

He stressed the need for banks to support activities that would drive economic growth in the country.
“The economy must see growth induced by higher consumer and manufacturing output. We will crack down on banks and companies that would attempt to game our policies through financial markets arbitrage.
“Nigerians have been praying for low rates. So if borrowing rates from banks are coming down, companies should take the loan to conduct their manufacturing business and not get involved in arbitrage.”

Experts’ Remarks
Head of Research at FSDH, Ayo Akinwunmi, said the policy would allow for more deposits to be released to customers.
He, however, noted that some of the commercial banks may have to sell some of their short-term yielding investments in the money market to be able to free more cash for lending to the real sector.

Akinwunmi warned that except the challenges of lending were addressed, the policy of compulsory lending to the economy might aggravate the issue of non-performing loans which most commercial bank had struggled with over time.

But a Lagos-based financial consultant, Dr. Boniface Chizea, said the new approach will enable the CBN to keep fidelity to its development banking mandate. He noted that the policy also aligned with the need of the monetary authorities to positively impact the unacceptable high unemployment rate of over 20 per cent with its nefarious social consequences.

“As a well-articulated policy, it embodies carrots and sticks. The loan/deposit ratio at 65 per cent prudentially allows the banks to commit a larger part of their deposit base; which is 65 per cent to lending. Therefore the message to DMBs is to adopt a more aggressive posture in booking credit. It, at once, sends a clear message that reliance on fixed income investments should be de-emphasised going forward,” he said.

Chizea said it was in the best interest of banks to read the handwriting on the wall for them to slow down their investments in short-term yielding financial instruments as they would be restricted on the extent of exposure to fixed income securities.

“We give kudos to the Central Bank of Nigeria for putting its mouth where its word is,” he said. But Chizea expressed reservation over compliance on the side of banks. “The challenge will be to ensure that the new guidelines are observed beating the shenanigans the banks are known as being adept at mounting.”