CBN’s New Credit Initiative May Boost Private Sector Liquidity

Following commercial banks’ growing reluctance to extend credit to the real sector, the Central Bank of Nigeria (CBN) may intervene directly to provide the much needed funds to boost private sector liquidity.

This is one of the fresh initiatives of the apex bank that was sanctioned by Tuesday’s Monetary Policy Committee (MPC), a move to tackle the dwindling flow of banking sector credit to this critical segment of the economy.

Figures from the Central Bank of Nigeria (CBN) showed that credit to the private sector fell in May 2018 to N22.207 trillion year-on-year as against the N22.254 trillion it was in April. The CBN report had shown that industry gross credit recorded a 3.63 per cent decrease in April 2018, the lowest since January 2017.

To stem this, the CBN has proposed a direct lending to the private sector at single digit, using the purchase of commercial papers at the same single digit.

CBN Governor, Mr. Godwin Emefiele, unfolded the new approach, which would be tied to the Cash Reserve Ratio (CRR) mechanism.

Addressing journalists at the end of the thir MPC meeting of the bank for the year, he stated that lending to the real sector had declined in recent times, prompting an innovative approach to encourage the DMBs to boost credit to the sector.

He disclosed that at the MPC meeting, a new arrangement that would make loans available at single digit with a minimum tenor of seven years and two years moratorium was considered.

He said: “At this meeting, we found a somewhat improvement which is gratifying but we feel that we must still do what we need to do. Two approaches were considered.

“The first approach, where we said, in order to achieve the objective of lowering interest rate particularly to those priority sectors– manufacturing sector, agric sector– that we will encourage large corporates to issue commercial papers to the market and there will be a memorandum that will detail explanations of what they are going to do with that money.

“In order to complement the effort of the banks, we will expect that these commercial papers will come at low rate at single-digit of nine per cent or below that, and for long tenor at a period of seven years with a specific purpose for that loan.

“If the central bank sees those kind of notes in the market, we will complement the effort of the banks through a mechanism to support that bank that lends to that corporate at single digit rate.

“It is not meant to bring competition in the money deposit banks; it is meant to complement their efforts. The most important thing is that we want to see to it that we achieve a single digit rate.”

The second approach, he disclosed, works in such a way that any bank that lends money for new projects and planned expansion that are verifiable (not refinancing), for seven years (inclusive of two years moratorium) at nine per cent interest rate, would compel the CBN to go into that bank’s CRR and release equivalent of that financing from its CRR at zero kobo spread.

Emefiele said: “We feel this is novel; it is something that we should give a chance. In the past, we had reduced CRR and released liquidity into the market, but the liquidity was not channelled properly to the high impact corporations – we mean employment-generating sectors or ouput-improving sectors of the economy.

“So, we decided we should approach it through this note. We believe this will work because rather than the banks keeping the money in the reserves, they can key into this and promote these transactions as long as they meet the terms and conditions.

“More details on this will be provided soon for the banks and everybody to know.”

Commenting on the development, the Head, Investment Research at Afrinvest Securities Limited, Mr. Robert Omotunde, stressed that the fiscal authorities have to do a lot to complement the efforts of the MPC so as to realise the objective of reflating the economy.

According to him, Nigeria has a lot of structural issues that must be resolved in order for the real sector to thrive.

On his part, an analyst at Ecobank Nigeria, Mr. Kunle Ezun, who welcomed the initiative by the MPC, said the move would support the growth of the Nigerian economy.

“The idea is that for you to drive growth, you need the banks to lend. Most of the banks today are exposed to foreign currency loans and as such they have huge non-performing loans that is constraining them to give out credit to corporates.

“So, the idea is to encourage corporates not only to get liquidity, but get it at a very cheap rate. Today, a lot of the corporates are not comfortable with the rates at which the commercial banks give out their loans. That is where the CBN comes in to bridge the gap.

“Most importantly, what the Commercial Paper would do for a lot of corporates is to provide access to fund for expansion,” he said.

On his part, the chief executive of Nova Merchant Bank Limited, Mr. Chinedu Ikwudinma, who welcomed the move by the CBN, explained that, “commercial paper offers corporates a wider pool of funding.”

“It is different from a bank making a bilateral loan to you. And there is a rate on that commercial. In commercial paper, the rate is known.

“So, on a medium-term basis, it is a cheaper way of sourcing funds. The renewed interest is because of the spike in interest rate,” he added.

In all, it is expected that with these measures that have been rolled out by the central bank, the private sector would be given the impetus to contribute to high and inclusive growth while still generating the profits needed to succeed and grow.