As the Nigerian economy recovers from recession, banks are still being cautious in increasing their lending to the real sector. This has not helped in speeding up the recovery process. Asides this, manufacturers continue to lament the high interest that they have to pay if they are able to secure any loan from the banks.
Lending rates by banks range between 25 and 30 per cent, a rate borrowers say is high. The Central Bank of Nigeria (CBN) has left benchmark lending rates at 14 per cent since July 2016 and analysts said they did not see a cut in rates soon particularly as the country seeks to attract investors.
This had called for alternative measures to encourage banks to lend to manufacturers albeit at a rate that is affordable.
Rising from the 119th meeting in July this year, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria(CBN) had introduced a scheme that would see Deposit Money Banks (DMBs) incentivised to lend at single digit interest rate to the real sector in order to consolidate and sustain economic recovery.
The scheme is particularly targeted at sectors that hold the key to a speedy recovery of the economy, driving growth alongside productivity and employment generation. Specifically the CBN is encouraging banks to give single digit fixed interest rate loans to customers in the manufacturing and agricultural chain. Asides this, the CBN is also encouraging operators in these sectors to raise funds through corporate bonds.
The plan is to channel the flow of credit to the real sector of the economy that is employment and growth stimulating. The CBN laid more emphasis on projects targeted not only at backward integration but also at those that would enhance Nigeria’s import substitution strategy.
According to the guideline released recently, deposit money banks interested in providing credit financing to new and/or expansion projects in the real sector, particularly agriculture and manufacturing sectors can request for the release of funds from their CRR to finance the projects having provided evidence that the funds would be directed at the projects approved by the CBN.
With this, entities that with new projects can now access up to N10 billion with a tenor of at least seven years at a fixed interest rate of nine percent. Priority for these funds are to be accorded projects with high local content, import substitution, foreign exchange earnings and potential for job creation.
The circular released by the apex bank titled: “Guidelines for accessing Real Sector Support Facility (RSSF) through CRR and Corporate Bonds,” stated that the new scheme would be executed under two facilities: a Differentiated Cash Reserve Requirement Regime (DCRRR) and a Corporate Bonds (CB) Funding Programme.
Specifically, for the DCRRR, the apex bank stated, “Under this programme, DMBs interested in providing Credit Financing to greenfield (new) and brownfield (new/expansion) projects in the real sector (Agriculture and Manufacturing) may request for the release of funds from their CRR to finance the projects subject to DMBs providing verifiable evidence that the funds shall be directed at the projects approved by the CBN.”
While for the CB funding programme, the regulator stated, “This programme involves investment by the CBN and the general public in CBs issued by corporates subject to the intensified transparency requirements for Tripple A-rated entities.
“Such requirements would include publishing through printing of an information memorandum spelling out the details of the projects for which the funds are required together with terms and conditions showing that these are long-term projects that are employment and growth stimulating.”
The Need For Funding Window
Speaking at the end of the July MPC meeting in Abuja, the CBN governor, Godwin Emefiele, noted that as it was difficult to encourage job creation in an environment with deficit infrastructure, the MPC believes that the CBN should continue to encourage deposit money banks (DMBs) to increase the flow of credit to the real economy to consolidate economic recovery.
“In this regard, the committee believed that a heterodox approach to reform the market in order to strengthen the flow of credit would be appropriate at this time. Consequently, credit constrained businesses, particularly the large corporations are encouraged to issue commercial paper to meet their credit needs and the Central Bank of Nigeria may, if need be, buy those instruments to complement the efforts of the DMBs.
“In addition, as a way of incentivise deposit money banks to increase lending to the manufacturing and agriculture sectors, a differentiated dynamic cash reserves requirement (CRR) regime would be implemented, to direct cheap long term bank credit at nine per cent, with a minimum tenor of seven years and two years moratorium to employment.”
Stakeholders’ Reaction
In his reaction to the funding window, the director – general, Lagos Chamber of Commerce and Industry (LCCI), Mr. Muda Yusuf, applauding the initiative said it would help increase the flow of credit to the private sector.
“We have always canvassed for low interest rate and have always complained about high interest rate for businesses.
“Each time the Monetary Policy Committee met, they kept tightening the benchmark interest rate, which meant that the cost of borrowing would remain high. So, the issue of adjusted CRR is an innovative approach, which would help to boost investment through low-cost funds and longer tenor funds as well. So, it is a good initiative.”
Significantly, commenting on the initiative, the minister of agriculture and rural development, Chief Audu Ogbeh, commended the CBN and the Bankers’ Committee for offering single-digit interest rate loans to operators in the agricultural and manufacturing sectors of the economy.
The minister described the development as “a remarkable progress in government’s efforts towards boosting the real sector to which agriculture is pivotal.”
According to him, the single-digit interest rate of nine per cent on long-term credit of a minimum tenor of seven years would support stable agricultural investment and predictable increase in food production.
“The multiplier effect of this initiative at a time of a restructured and recapitalised Bank of Agriculture (BOA) will be a reduction in uncertainties and avoidable risks in agricultural investments where farmers will enjoy wider latitude of access to loans from either commercial banks or BOA with less hassles.”
He explained that the single-digit facilities would help revive many ailing and moribund projects and invigorate the weak ones that desperately needed injection of funds to survive.
Analyst’s Take
Managing director and chief executive of Cowry Assets Management Limited, Johnson Chukwu, while noting that the release of the CAR fund would allow banks to lend more stated that “the reality is that it is hard for the real sector operators to be paying interest of between 22 to 25 per cent and remain profitable.
“So, to give them loan at nine per cent is quite creative and will certainly ease their problems.” Asides this, he said the initiative would open up the funds which sat with the apex bank.
Also speaking on the support facility, a senior analyst at Bode Augusto & Co, Mrs. Ada Ufomadu, said, “Banks have been asking CBN to release the CRR because of the impact it has had on profitability. So, the first upside would be the impact on profits as banks can now lend more. Of course, this will also mean more funding to the private sector given that government yields have crashed.”
Speaking earlier at the end of the Bankers Committee meeting in Lagos, chief executive officer, Guaranty Trust Bank (GTB), Mr. Segun Agbaje, said “it would probably be the first time in the history of this country where manufacturers would be able to take fixed interest rate loans for seven years, which means they would be able to plan. The volatility that they fear for all kinds of risks would be taken out and I think these are very laudable steps in improving and growing the economy.”
Similarly, in her remarks at the briefing, the executive director, Finance at First City Monument Bank (FCMB), Mrs. Yemisi Edun, said “this (initiative) is very positive for the economy and also positive for banks because we would be able to access these funds and earn on it. And because it would be coming at single digit rate, it would be positive for the economy.
“For now, it would be channeled to agricultural sector and manufacturing; it will enhance creation of jobs. The focus is that we have achieved stability, we need to now see a positive trend of growth and that is what we are committed to do at this time.”
Corroborating the remarks of both bank executives, director of banking supervision at the CBN, Abdullahi Ahmad, stated that the scheme’s objective was to bring about job creating activities in the economy and also to bring interest rate down.