Nigeria's 50bp Rate Cut is Insufficient to Boost Lending – Fitch


Thursday, April 25 2019  10:53 AM / Fitch Ratings


The 50bp cut in Nigeria's monetary policy rate to 13.5% is unlikely to spur substantial growth in lending to priority sectors or wean banks off investing in Nigerian Treasury-bills (T-bills), Fitch Ratings says. We expect credit demand to stay weak and banks to continue favouring T-bills, as interest rates are still high. Lending is also inhibited by banks' risk aversion given their high proportion of non-performing loans (NPLs), and by the Central Bank of Nigeria's (CBN) actions to mop up excessive liquidity in a bid to contain inflation and support the naira.

Announcing the rate cut last week, the CBN's Monetary Policy Committee said that: "Having achieved a relatively stable exchange rate with price stability it is imperative that monetary policy should explore the next steps necessary for enhancing growth." We believe the rate cut, the first since 2015, is intended to enhance the country's economic outlook by stimulating lending to the private sector.

Bank lending remained subdued in 2018 despite a fall in three-month T-bill yields and a slight dip in average lending rates. This followed modest growth in 2017, which was largely attributable to naira devaluation inflating foreign-currency loans.

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Credit growth in Nigeria is not well correlated with policy rates and lending rates. This reflects the private sector's limited access to financial products and services, with a large part of the population excluded from even basic banking facilities due to lack of collateral, unemployment or informal employment with no regular income. We factor these constraints on private sector lending into our assessment of Nigerian banks' operating environment. Credit to the private sector was 14.2% of GDP at end-2017, according to the World Bank, which is low by international standards.

Borrowing is expensive for customers, reflecting banks' view that asset quality risk is generally high. The average prime lending rate offered by banks was 16.2% at end-2018 and the average maximum rate was 30.6%, well above the 14.0% policy rate. Banks' ability to lend is also constrained by the high cash reserve requirements on local-currency customer deposits

We expect loan growth in 2019 to be modest, as banks continue to deploy most of their liquidity into T-bills, still attracted by high yields and the benefit to their capital and liquidity ratios. T-bills are zero-risk-weighted assets and can be used in repo operations with the CBN.

We forecast loan growth to pick up slightly, given more favourable operating conditions, an easing of NPLs and greater FX availability. However, we believe lending growth over the medium term will ultimately depend on banks' continued recovery from weak asset quality and capital stemming from the 2015 oil price crash, and structural reforms such as lowering of cash reserve requirements and easing of open market operations to enable banks to deploy their liquidity to lending.

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