Here are comments on this LinkedIn feed and I will explain my point below.
Comment: Just one simple question for me. Why is there no value for these banks in the NSE? Even with announcements such as these. Do Nigerian banks create value or they hide the value they create. Truly baffling.
My Response: I do not think the problem is with the banks. The issue is that Nigeria is a relatively poor country. Banks cannot create value where there is no value. Your national budget is about $35 billion for 200 million; South Africa spends more than $123 billion for 60 million people. That delta on budget makes its markets better because that is money pumped into the economy.
Another member’s comment: Prof Ndubuisi Ekekwe, for the first time I disagree with your view, which numerous of goods and services we import from developed countries, Nigeria Banks can be a string board that can triple Nigeria GDP if only they are innovative and willing to support more SMEs, to reduce the country poverty index. We have seen a lot of deficits in Nigeria trades with many countries: how can banks partners with private companies to turn things around. We can multiple this to housing/mortgage, transport, industry target towards exportable goods.
Now my main response:
Comment: “Nigeria Banks can be a string board that can triple Nigeria GDP if only they are innovative and willing to support more SMEs,”
See it this way: the Central Bank of Nigeria (CBN) lends at close to 11% to banks and NDIC, the deposit insurance regulator, asks banks to insure (put another 2%). If you add banking operations costs and need to make small money, no bank can lend below 17% annually in Nigeria.
But some nations lend to their banks at 0.25%: “In December 2020, the Federal Reserve maintained its target for the federal funds rate at a range of 0% to 0.25%.” This cheap money makes it possible for U.S. banks to give cheap loans to their SMEs. Yes, you can get a business loan at 6% or even lower.
But in Nigeria, starting at 11% made it impossible for banks to match that. Because they have to move above 17%, it creates a vicious circle which makes things harder. See it this way – at that 17%, most SMEs cannot return whatever banks have given them, setting the banks up for losses. Simply, there are few businesses in Nigeria where you can make profits when your cost of capital is 17% before taxes to repay your loans.
Without scaring people, most banks have paid hard penalties for being generous on lending. Yes, many collapsed due to failed loans. So, what do banks do in Nigeria? They trim lending because the rates are tough for most SMEs to handle, and the fault is not necessarily coming from the banks.
Sure, banks can do more. But the big issue is not addressed and that is where I bring Nigeria’s relative poverty. Give the banks money at 1%, and you will see they will lend at 6%, and most SMEs can handle that percentage.
Of course, CBN has hit them hard to lend from their deposits. Yes, that makes sense until you realize that deposits are not “free” money. In other words, they still have to protect that deposit so that when the owner comes, he/she gets the money back. For most, they prefer the CBN to fine them say N100 million instead of taking risk on that N2 billion because losing N100 million is a better outcome than N2 billion. That is why even as CBN keeps debiting them for not meeting the lending deposit ratio, most do not care since statistically, the fine from CBN is well below what they will lose if they follow the ordinance as stipulated by the apex bank.
See the CBN fine as cost of business! If they hit you N5 per say N1 million, you can find another cost on your non-loan customers or increase the cost on the few you are lending to! Simply, all the debits would be recovered from the customers, indirectly.
Yet, before we begin to criticize CBN, it has to manage inflation and because of that, it cannot lend to banks at 1% which you can get in the U.S. as Nigeria’s economy is not structurally similar to the U.S. That paradox is the risk element in Nigeria. The rates we need to unlock entrepreneurial capitalism cannot easily happen without taking inflation to a level that would destroy the economy.
