Nigerian banking regulator- Central Bank of Nigeria- has fined 12 banks for failing to meet the regulatory target for disbursement of loans. The fine, aggregating to US$1.3 billion will cast shadows on the working of the banks in Nigeria.
As per the direction of the regulator issued in July this year, the banks are required to lend 60% of the deposits that they receive by September. Lest they would attract a higher cash reserve levy. The direction was issued to enhance the liquidity in the system. In Nigeria banks are required to maintain a cash reserve of 22.5%. That means, of the total deposit they receive, banks are required to lend 78.5% and the rest should be kept with the central bank, a common stipulation across most of the countries with percentage difference of the cash reserves to be kept with the central bank. The regulator also said that banks which fail to meet its new minimum loan requirement will face a higher cash reserve equal to 50% of the lending shortfall.
This measure of central bank was to boost the credit available from the institutional sources to boost the economic activities. The rationale is that with increased liquidity, banks will be able to lend to corporations and individuals, who in turn would boost the aggregate demand, a necessary condition for accelerating economic growth. Nigeria is said to be in a recessionary trail due to a number of reasons including lack of demand.
It is a common trend among banks and financial institutions, across the world, to park the funds in risk free portfolios, particularly in the government bonds. This is a hedge against accumulating non-performing assets, the ratio of which will be very high during a recessionary trajectory.
Despite the best effort by the central banks to improve the liquidity in the system to recover from recession, banks were reluctant to follow the direction. As against this, government sources estimate that Nigeria’s economy will pick up in 2019 with gross domestic product expanding close to 3%, up from 1.9% last year.
The central bank maintains that as against its directives, loans rose only 5.3% in the last three months, that is July to September, which is not adequate to boost a sagging economy. The bank management, however, is very sceptic about the implication of the fine imposed on them. They feel that such a measure would only lead to higher quantum of non-performing assets, which will further deteriorate their lending capacities. Banks, they argue, should be given operational freedom to decide on their portfolios and investments. The government interferences would only lead to confusion and disarray.
The banks affected by this step include local units of Citibank and Standard Chartered Bank and top tier Nigerian lenders, like Zenith Bank, Guaranty Trust Bank, First Bank and United Bank for Africa.
