5 July 2009
editorial
Lagos — The Central Bank of Nigeria (CBN) moved decisively last month to limit business of banks with their preferred customers in the public sector. And all things being equal, as it is said in economics, it will make some more room for the private sector that had been crowded out of the banking halls.
The public sector, particularly the states, had always found ready support in banks for funding real and sometimes non-existing projects. Some banks were even known to lobby states into doing business with them. Traditionally, banks make money by accepting deposits and lending with some level of assurance that the loans would be paid back. Understandably, the likelihood of a lower rate of default by the public sector makes it more attractive to lending.
This position may have been reinforced by the current heavy banks' exposure to margin loans and lending to the downstream petroleum sector. Indeed, according to the CBN, banking sector credit to the private sector grew just 0.3 per cent to about N8 billion in the first quarter of the year, compared to some 25 per cent growth in the same period of 2008.
With tightening liquidity arising from the global financial crisis and even more pressing regulation of the new CBN Governor, Lamido Sanusi, the private sector was at greater risk until the intervention of the bank.
In a widely reported circular, the CBN directed that "granting of credits to all tiers of government and their agencies" requires banks to make provision of 50 per cent and 100 per cent for performing and non-performing credits, respectively is revised as follows:
"Banks are now to apply the normal provisions of the prudential guidelines to all public sector credits. However, a maximum limit of 10 per cent of the total credit portfolio should be placed on public sector credits, both on-and-off balance sheet.
"Where the existing credit limit to the public sector has exceeded the prescribed maximum limit of 10 per cent, it should be brought down to the maximum limit of 10 per cent by December 31, 2009."
This is consistent with government's economic policy thrust which recognizes the private sector as the only reliable engine of growth, and also Sanusi's concern for the overall growth of the economy.
We commend the bank for this timely intervention, believing that since banks must lend to make money, they would be forced to give the private sector better attention.
Already the states had been exploring funding opportunities in the banks following their shrinking revenues from the statutory allocation from the federal government. The Federation Account Allocation Committee (FAAC) attributed the revenue decline to fluctuating crude oil prices and Nigeria's inability to meet its OPEC production quota due to the Niger Delta crisis.
The revenue shared by the three tiers each month, which peaked at over N450billion last year, reduced to about N200 billion in the first half of this year.
Commendable as the new directive is, we believe that it may not be a one-capsule cure for the funding problems of the private sector. Desperate attempts by the banks to meet various CBN requirements being enforced to sanitise the sector appears to have frozen capital flows, and curtailed lending.
For example, interbank lending rates have been on the rise as some major banks are holding back funds to balance their books ahead of quarterly and full-year financial reports. Since the beginning of the year, investors have been complaining about high lending rates, rising in some cases to as high as 35 per cent. And with tightening liquidity, the CBN caps introduced some months ago has even served to nourish the black market.
We, however, believe that while the directive may not yield immediate benefits to the private sector, it certainly will after the current liquidity crisis in the system. It is a well thought-out directive in the overall interest of the economy.
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