Government is doing a lot of right things these days, however, it is sad that negativity has taken over the minds of a lot of us that we fail to acknowledge these positive moves of the government, thereby starving ourselves of needed energy to start or save our companies, businesses and families. This week’s review focused on the positive moves of the Government through the eyes of the Central Bank of Nigeria Governor.
At his maiden address on June 5, 2014, Mr. Godwin Emefiele, the Governor of the Central Bank of Nigeria (CBN) stated that: “… my vision would be to ensure that the Central Bank of Nigeria is more people-focused, as its policies and programs would be geared towards supporting job creation, reducing the high level of Treasury Bill rates, improving access to credit for MSMEs, deepening our intervention program in the Agricultural Sector, building a robust payment system infrastructure that will help drive inclusion …”
How far has he gone? Let’s put this vision to the test.
Test No. 1 – “Reducing the high level of Treasury Bill rate…”
Treasury Bills are short-term debt instruments issued by the Federal Government through the Central Bank to provide short-term funding for the government. Put simply, anytime you participate in T-Bills primary auction, you are borrowing government money for a fixed and certain return.
The return on T-Bills is so sweet, yourself and banks would rather invest in T-Bills rather than start a business or lend money to SMEs. In Nigeria, anytime you borrow government money, you starve an Entrepreneur the needed funds to start or grow a business, you deplete the real sector. It’s not your fault neither is it the Banks’ fault, Government asked you for money in exchange for fixed returns free from risk and you gladly obliged as a logical being.
However, burdened with the rising cost of debts and unimpressive economic performances, the Government is on a mission to reduce her debts and encourage lending to the real sector. How can Government discourage Investors and Banks from lending her money? One of such ways is to reduce T-Bill rates.
At the T-Bills Primary Market Auction (“PMA”) held on 13th November 2019, T-Bill rates fell to a 3-year low of:
91 Days: 7.998%
182 Days: 9.00%
364 Days: 10.00%
Two weeks after, another Treasury Bills Primary Market Auction (“PMA”) held on 27th November 2019, rates fell to a 4-year low of:
91 Days: 6.495%
182 Days: 7.23%
364 Days: 8.37%
These rates used to be as high as 14%. Finally, the T-Bills party is coming to an end, no more ‘owambe’. Banks are now forced to give loans to SMEs instead of lending to the Government.
Clearly, CBN is using T-Bill rates to discourage banks and investors from lending to government and using other measures and directives to direct the funds to SMEs who need them most.
Test No. 2 – “Improving access to credit for MSMEs”
Currently, there are quite a number of CBN initiatives to increase credit to SMEs, the focus of this article is LDR. Loan-deposit ratio (LDR) is a ratio between a bank’s total loans to customers and total deposits from customers, measured in percentage terms.
In a letter dated 3rd July 2019, CBN directed all banks to maintain a minimum Loan to Deposit Ratio (LDR) of 60% by September 2019, subject to quarterly review. Put simply, this is CBN saying if customers bring N100 to your bank as deposit, N60 must be given back as loans.
In the same circular, CBN specified that those loans must be directed at SMEs, Retail, Mortgage and Consumer Lending – this is what you call a people-focused directive, this is CBN Governor living his vision.
Naija Banks have a way of avoiding loans to people like you and me in the name of risk, so CBN closed the directive with a threat that “Failure to meet the above minimum LDR by the specified date shall result in a levy of additional Cash Reserve Requirement equal to 50% of the lending shortfall of the target LDR”. In the simplest terms, if a bank gives out N40 as loan instead of N60, CBN will collect 50% (N10) out of the balance (N20) and keep it, a case of “shebi u no wan loan SMEs, I go kuku collect am for your hand”
Is this directive working at all?
According to CBN, Nigeria’s credit sector recorded a 5.33% growth from N15.57 trillion at the end of May 2019, to N16.40 trillion as at September 26, 2019. That is, Banks forked out extra N830 billion as loans in 5 months, Wow! Apparently, CBN was ‘wowed’ as well, so they increased the LDR directive to 65% with a new deadline of 31st December 2019.
Just in case you are still doubting this directive, after all, all the quotes ‘na from CBN’. Below is a review of the total deposit and loan balances in the books (financial results) of some selected banks in Nigeria.
Clearly, you can see the growth in loan to customers between June and September, also, the room that must be covered before December 2019. This is not an advert but you have to respect the LDR performance of Fidelity and Sterling Bank, best in class.
- the gap between the regulatory 65% and the average 61.94%, hundreds of billions will be forked out in the coming days, also observe the gap among individual banks, this should serve as a guide for the banks to target between now and December. Depending on your financial advisers, some of those loans must be won by your company.
- if you have a decent business plan and the banks have been chasing you away, this is the time to go back. If you already have a loan with a bank and you want more for business expansion, this is the time to go back. If your current loan with your bank is at 30%, this is the time to go back and negotiate the rates down to 25%.
- If you are an Investor in T-Bills, this is the time to go back to the equities market to hunt for dividend yields that will match the yields you use to get on T-Bills. In any case, the yields must beat the 11.61% inflation rate
Leave a message if you seek more clarifications, reach out if you need more insights and financial advisory.
Is there any relationship between LDR and the development of a country? Be the judge, see images below to guide your conclusions.
It’s a wrap for the week.