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Nigeria's 'sledgehammer' rules stifle lending to real economy

Nigerian banks are increasingly concerned about the impact of central bank rules on their ability to extend credit in Africa's largest economy.

At the center of banks' concerns is the cash reserve ratio, or CRR, under which banks must leave a percentage of deposits with the Central Bank of Nigeria, or CBN. At 27.5%, Nigeria's CRR dwarfs those of regional peers such as South Africa, Kenya and Ghana. In the most recent monetary policy committee meeting in mid-September, members unanimously approved maintaining the CRR at 27.5%, saying any changes could exacerbate capital outflows and inflationary pressure, which could jeopardize the recovery from the economic impact of the coronavirus pandemic.

"Rather than using a newspaper to swat a fly, the regulator decided to use a sledgehammer," said Teslim Shitta-Bey, managing editor at Proshare Nigeria, a data and research provider. "Banks have found it quite problematic to extend credit."

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The CBN did not respond to requests for comment. Inflation is estimated to rise in 2021, according to the IMF, while the naira continues to devalue versus the U.S. dollar.

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In January 2020, the central bank increased banks' CRR on local deposits to 27.5% from 22.5%. The CBN also converted some of banks' other deposits into special bills that pay 0.5%. The CRR and special bills have the same effect of increasing the percentage of banks' deposits that are in effect restricted.

"By the end of 2020, many Nigerian banks had an effective CRR of 40% to 60%," said Ronak Gadhia, director of research on sub-Saharan African banks at EFG Hermes. "Overall, around 25% to 30% of banks' balance sheets are now sitting in cash earning 0%."

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Increasing the CRR for local-currency deposits has also undermined banks' ability to meet the central bank's minimum loan-to-deposit threshold of 65%, a requirement that was implemented in the final quarter of 2019 to boost lending to the real economy. Lenders that fail to meet the requirement could be fined by the regulator.

As of the second quarter, Nigeria's four largest banks by assets — Access Bank PLC, Zenith Bank PLC, United Bank for Africa PLC and FBN Holdings PLC — did not meet the threshold and have recorded declining loan-to-deposit ratios over the last year. Liquid assets as a percentage of total assets fell at all four banks year over year in the second quarter of 2021, and net profit at Zenith and FBN fell over the same period.

None of the big four responded to requests for comment.

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"GDP growth is lagging population growth significantly we're not growing credit as fast as we should because much of the money that should be lent to businesses is held at the CBN," said Shitta-Bey.

Nigeria's real GDP growth was estimated to have fallen 1.8% in 2020 amid the COVID-19 pandemic, but growth is expected to rebound and grow by 2.5% in 2021 before leveling off at 2.3% through 2022 and 2024, according to the IMF.

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Standard Bank Group Ltd.'s Nigerian subsidiary, Stanbic IBTC Holdings PLC, has a CRR of more than 60%, although the effective figure is higher; in December 2020, the central bank converted a portion of the cash reserves of Stanbic — and other banks — into the special bills that pay 0.5%.

At the same time, CRR debits have had a negative impact on Nigeria's banks, especially on the second-tier banks, said Busola Jeje, an equity research analyst at Tellimer, a data provider, in Lagos.

"There were a series of CRR debits, and a number of banks complained it was negatively affecting their margins and liquidity ratios," Jeje said. "It has added to the problems they've faced during the pandemic."

'Unfavorable environment'

Among the banks to see a portion of their cash reserve forcibly converted into the special bills was Zenith. The bank had 1.26 trillion naira in total CRR debits at the central bank as of June 30, plus a further 670 billion naira in special bills, according to Zenith.

The CRR debits have forced banks, especially tier two lenders, to borrow in order to meet their liquidity ratios, said Jeje. Often, this is through the interbank market, which is increasingly expensive due to shrinking liquidity as temporarily out-of-work Nigerians spend their savings due to the pandemic.

"The problem with that is the CBN priced those bills at 0.5%, thereby lowering banks' margins," said Jeje. "The bills are trading in the secondary market at yields around 5% to 6%, so if banks want to sell them, they will have to take a loss."

"That's also contributing to margin compression," she said. "It's a very unfavorable environment. The larger banks have weathered the storm the best."

As of Oct. 15, US$1 was equivalent to 410.91 Nigerian naira.