CBN: Sustaining private sector credit growth in 2021

Having projected that the country’s current recession will be short-lived, the Central Bank of Nigeria (CBN) is likely to intensify efforts to boost credit growth in the private sector this year, writes TONY CHUKWUNYEM


In a recent report, analysts at FBNQuest, citing data obtained from the Central Bank of Nigeria (CBN), noted that net domestic credit to the private sector increased by 11.1 per cent y/y to N29.34trillion at end-November and that while the rate of growth remained double-digit, it had slowed for four successive months.


According to the analysts, the slowing rate of growth in Private-Sector Credit Extension (PSCE) was the result of deposit money banks’ (DMBs) increased compliance with the minimum 65 per cent threshold for the Loan-to-Deposit Ratio (LDR) set by the CBN.


LDR policy

The CBN had introduced the LDR policy in July 2019 as part of measures to boost growth by encouraging DMBs to increase lending to the real sector of the economy. The policy initially saw the apex bank directing lenders to maintain a minimum Loan to Deposit Ratio (LDR) of 60 per cent by September 30, 2019, which was later increased to a ratio of 65 per cent by the end of that year.


According to the circular issued by the regulator on the subject, “This ratio shall be subject to quarterly review. To encourage SMEs, Retail, Mortgage and Consumer lending, these sectors shall be assigned a weight of 150 per cent in computing the LDR for this purpose. The CBN shall provide a framework for classification of enterprises/businesses that fall under these categories. Failure to meet the above minimum LDR by the specified date shall result in a levy of additional Cash Reserve Requirement equal to 50 per cent of the lending shortfall of the target LDR.”


Policy success


Significantly, despite concerns in some quarters that it would make the operating environment even more challenging for lenders, the LDR policy was an instant success as the CBN said it was responsible for the additional N829.4 billion loans that were extended by DMBs between May and September 2019.


Also, the communiqués issued by the CBN’s Monetary Policy Committee (MPC) at the end of its meeting in March last year showed that members of the committee wanted the apex bank to sustain LDR policy.


As the communiqué issued at the end of the MPC meeting put it, “the committee noted with satisfaction the growth in aggregate credit by N2.35 trillion since the inception of the LDR policy, reflecting the potency of the policy and thus urged the management of the bank to sustain the current momentum of improved flow of credit to the private sector in Nigeria.”


Similarly, in the communiqué they issued at the end of their meeting in July last year, the MPC members stated: “The committee commended the CBN Loan-to Deposit Ratio (LDR) initiative to address the credit conundrum as the total gross credit increased by N3.33 trillion from N15.56 trillion at end-May 2019 to N18.90 trillion at end-June 2020. These credits were largely recorded in manufacturing, consumer credit, general commerce, and information and communication and agriculture, which are productive sectors of the economy.”


In addition, personal statements  


MPC members at the committee’s meeting in September last year show strong support for the policy among them.


Thus, in her personal statement, the Deputy Governor, Financial Systems Stability Directorate, CBN, Mrs. Aisha Ahmad, stated: “Six months into the pandemic, the financial system continued to show resilience with soundness indicators retaining their robustness, amidst regular stress testing by the CBN. Non-performing loans ratio declined to 6.1 per cent in August 2020, from 6.4 per cent in the previous month, capital adequacy improved to 15.3 per cent from 14.6 per cent over the same period even as net interest margin remained robust.


“Focused implementation of the Loans to Deposit (LDR) policy over the last year continues to promote credit growth to the real sector and lower deposit and lending rates, – which supported banks’ net interest margins. For instance, credit to the economy increased by N3,766.08 billion from N15,567.66 billion at end-May 2019 to N19,333.74 billion at end-August 2020, with significant growth recorded in manufacturing, consumer credit, general commerce and agriculture.


“Staff reports presented at the meeting also show prime lending rates declined (15.40 per cent in August 2019 to 11.76 per cent in August 2020), in sync with money market rates (one year NTB rate from double digit in 2019 to 3.30 per cent in August 2020) and Open Buy Back rates (from 12.35 per cent in August 2019 to 8.22 per cent in August 2020). This lower interest rate environment coupled with improved credit conditions survey which indicated that more households are accessing finance presents an opportunity to further increase credit to the real economy at lower cost, critical to driving the much-needed recovery.”


She stressed that in order to coordinate effectively with the fiscal authorities to ensure economic growth, the CBN must, among other policy measures, sustain implementation of the minimum LDR policy.


Indeed, most analysts in the country clearly agree that the LDR policy led to the steady increase in DMBs’ loans to the private sector that was recorded for most part of last year.


For instance, in the “NOVA Economic Outlook H2 2020” report, analysts at Nova Merchant Bank Research stated: “Beyond doubt, the LDR policy has proven to be more potent in driving real sector lending and at the same time moderating the cost of borrowing due to the increased competition for corporate names.”


Also, in a report released in November last year, analysts at CSL Research examined the impacts of the policy on the overall economy after over a year of implementation and concluded that the CBN has been successful in using it to drive credit growth.


The analysts stated: “According to data sourced from the Nigerian Bureau of Statistics (NBS), aggregate banking sector credit to the economy stood at N18.8 trillion at the end of Q2’20 which represents an increase of 15.8 per cent from the aggregate banking sector credit of N16.3 trillion at the end of Q3 2019 before the minimum LDR was raised to 65.0 per cent. Much more impressive is the 24.4 per cent growth in aggregate banking sector credit when compared with the total of N15.1 trillion at the end of Q2’19 before the minimum LDR of 60.0 per cent was announced. This compares with a decline of 2.3 per cent and 3.9 per cent in aggregate banking sector credit in 2017 and 2018. Thus, on the credit growth front, it can be said that the CBN has been successful at driving credit growth.”


Emefiele’s Bankers’ Dinner address


It is also noteworthy that in his address at the Chartered Institute of Bankers of Nigeria’s (CIBN) Annual Bankers’ Dinner held in Lagos on November 27, last year, CBN Governor, Mr. Godwin Emefiele, pointed out that the apex bank strengthened the LDR policy as part of the monetary and fiscal authorities’ response measures to the impact of the coronavirus (Covid-19) crisis.


He stated that the move resulted in a significant rise in loans provided by financial institutions to banking customers, as, according to him, “total gross credit rose by over 21 per cent over the past year, from N15.5 trillion to N19.54 trillion. In addition, over N738 billion has been provided as credit to manufacturing related activities by the banks.”


He also disclosed that the CBN disbursed AgriBusiness/Small and Medium Enterprise Investment Scheme (AGSMEIS)-N92.90 billion to 24,702 beneficiaries, Anchor Borrowers’ Programme (ABP) by the sum of N164.91 billion to 954,279 beneficiaries.


In fact, Mr. Emefiele said that as a result of these and other measures introduced by the monetary and fiscal authorities, “GDP growth in the third quarter, improved to -3.6 per cent from -6.1 per cent in quarter two, even though the economy fell back into a recession.”


The CBN governor said that while the regulator was projecting that the economy could exit recession by the first quarter of this year, this would depend on if the covid-19 crisis does not affect the restoration of full economic activities, particularly in service related sectors.


CCS report for Q4’20


Equally significant is that the CBN’s Credit Conditions Survey (CCS) Report for Q4’20, released a fortnight ago, show that the availability of credit to the corporate sector increased in the last quarter of last year and is also expected to rise in Q1’21.


The report stated that the growth in Q4’20 was driven by changing sector-specific risks, market share objectives, changing appetite for risk, changing economic conditions and changing liquidity conditions.


It further said that the proportion of loan applications approved for all business sizes increased in Q4’20, adding that all firms benefitted from an increase in maximum credit lines on approved new loan applications during the period and were expected to benefit from an increase in maximum credit lines on approved new loan applications in Q1’21. Corporations (OFCs) in Q4’20. However, demand for corporate lending for all firm sizes are expected to increase in Q1’21,” the report stated.




Citing the clear success of the LDR policy, industry watchers told New Telegraph, at the weekend, that even if the FBNQuest analysts are correct to assert that DMBs’ increased compliance with the 65 per cent LDR policy is responsible for the slowing rate of growth in Private-Sector Credit Extension (PSCE) in the last few months, the CBN is not likely to scrap the policy, but could increase the LDR target for lenders to 70 or 75 per cent.


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