The Central Bank of Nigeria will soon prevent Nigerian banks from investing in government bonds in a bid to boost lending to consumers and businesses. CBN Governor Godwin Emefiele made this known after the Monetary Policy Committee meeting on Tuesday.
Why it matters: Nigerian banks have not been banking in the real sense. Most of the banks have stayed profitable in spite of the economic downturn by holding high-yield, and largely risk-free government securities. This has resulted in a lack of liquidity with the most damaging impact felt on the productive sectors. In 2018, five big Nigerian banks invested N4.61 trillion in government securities. This failure of the banks to lend to the real sector has taken its toll on the economy and there is no incentive to make them do otherwise.
Most Nigerian banks are worried by the burden of Non Performing Loans (NPLs) and the slow growth economic environment, and are reluctant to lend. However, the CBN’s move if implemented is expected to provide a framework to support the banks to execute their core mandate. The central bank took a similar measure in 2016 where it limited the investment by Banks in Islamic Sukuk bonds over liquidity concerns.
- Per Governor Emefiele: “We would see to it that NPLs are brought down so that DMBs are encouraged to go back and begin to lend money more aggressively to those sectors that they considered to be risky.”
- One positive thing: Overall percentage of NPLs in Nigeria is currently about “nine to ten per cent on average” from 15% about two years ago. But this figure still stands above the threshold of not more than five per cent.
- One expert take: Goldman Sachs alumna and former CEO of Nigeria’s asset management corporation, Mustapha Chike-Obi tweeted: “I have been advocating taxing income from Govt. Securities at a higher rate than income from lending to the private sector. If properly calibrated, that should solve the problem.”
- One data point: Nigeria’s domestic debt has grown by 49% in the last four years. It presently stands at N12.7 trillion from N8.51 trillion in 2015.