CBN issues strict directives to banks over lending, financial inclusion

Shortly after the recent unveiling of a five-year roadmap by the Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, the bank has issued directives to improve real sector lending and financial inclusion.

In a circular dated July 3, 2019, the CBN mandated all Deposit Money Banks (DMBs) operating in Nigeria to maintain a minimum Loan to Deposit Ratio (LDR) of 60 percent by September 10, 2019. This means that DMBs, otherwise known as commercial banks are required to lend out up to 60 percent of their customer deposits with the ratio subject to quarterly review.

“To encourage SMEs, Retail, Mortgage, and Consumer Lending, these sectors shall be assigned a weight of 150 percent in computing the LDR for this purpose,” the CBN said, adding that a framework for classification of businesses that fall under these categories will be provided.

Banks that fail to meet the requirement by the specified date would risk facing “a levy of additional Cash Reserve Requirement equal to 50 percent of the lending shortfall of the target LDR.”

The new and somewhat strict policy is meant to address the dearth of loans available to the private sector, ramping up the growth of the Nigerian economy through aggressive investment. It follows a series of recent discussions on the role of commercial banks in providing capital to spur economic growth in Nigeria.

in this regard, the CBN Chief has been particularly critical of banks in the country because most of them prefer investment in risk-free government securities to private sector lending. To address this unproductive practice, Emefiele in May said that the Central Bank, under the directive of the Monetary Policy Committee (MPC), was looking to set up measures that will limit the access that deposit money banks have to government securities.

During the June 2019 Africa Investors’ Conference (AIC) in London, Emefiele accused commercial banks in the country of lying about why they are not able to lend money to the private sector as they ought to. The apex bank leader reiterated that the CBN took the issue seriously and was working on a piece of regulation that would restrict bank investments in secure government instruments to aggressively refocus them to lend.

On the implications of the new lending policy, Nairametrics notes that banks will be exposed to higher loan losses which could impact significantly on their profitability. The total amount of Non-Performing Loans (NPLs) of Nigerian banks is already high, hitting N1.79 trillion in 2018.

On the bright side, however, companies with strong cash flows and collateral will have significantly higher chances of obtaining loans. The development could also be a major boost for Nigeria’s real estate sector. Qualified home buyers would easily secure mortgages as more banks, under pressure to lend, will consider this a better option since the loans will be secured against the property.

On the critical issue of financial inclusion, the CBN has directed Nigeria’s microfinance banks to get 64 new customers every month. This is in accordance with the Federal Government’s goal of providing a significant majority of adult Nigerians access to financial services.

The mandate to microfinance banks is contained in a circular on the revised National Financial Inclusion Strategy (NFIS) targets. The 64 new customer target translates to 774 new bank accounts – measured by new BVN registration – per branch annually.

In advice to the banks considering the urgency of the task, the CBN said it is important to “cascade the target to your branches for their information and implementation.”

The CBN has a financial inclusion objective of reaching 80 percent of the total adult population by 2020, but presently, Nigeria is not on track to meet this target which was set out in the National Financial Inclusion Strategy (NFIS) of 2012.

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