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NIGERIA - Securities cap -- different perspectives.

Summary: The Central Bank is restricting how much banks can invest in government securities in a bid to encourage them to lend more to businesses. How will this work out? Michael Nwadike finds out.

Risk-averse commercial banks have been scrambling for government securities to lock in relatively high returns on deposits. The rush for such securities has cut lending to the private sector, especially small businesses.

An SME operator in the Fast Moving Consumer Goods (FMCG) sector, Silas Adekunle, said his application to a commercial bank for N350, 000 ($971.63) loan to enable him to increase sales was declined without any explanation. The bank did not even call to inform him that the request was declined.

Another bank customer, Isaac Okon, said he gave up his request for a $1,665 loan four months after his application, during which time his bank kept asking him to be patient. "Certainly, it takes a long time for banks to approve loans for entrepreneurs. In many cases, the loans are declined after several months of waiting," Okon insisted.

Although the majority of banks know the important roles played by the private sector in driving economic development, their involvement in financing this segment remains low.

Banks have attributed their limited funding to the sector to the risk involved in lending to the segment. However, the biggest challenge has been government's rising borrowing, which is crowding out the private sector from accessing needed loans.

In the last year, the top five banks by asset size, invested $12.79bn in Treasury bills and bonds and loaned out only $5.82bn to the private sector.

Besides, the income from the investments in government securities is tax-free, hence, not many investments can match this kind of return.

Already, the secondary market (discount) rate on Treasury bill is expected to trade at between 8-10% for 91-day maturity and below and 11.5% for tenors above 91-day maturity. The secondary market yield on bonds is expected to moderate downward to sub-13.5% for tenors above five years in the short term.

But the banks are now being forced to change their investment strategy as the Central Bank of Nigeria (CBN) policy restricting investment in Treasury bills and bonds comes alive.

Godwin Emefiele, CBN Governor, said banks' access to government securities will be restricted, with policies and regulations for the policy shift being perfected.

He said: "In view of the abundant opportunities available to banks for unfettered access to government securities, which tends to crowd out private sector lending, we will provide a mechanism for limiting commercial banks' access to government securities. This will redirect banks' lending focus to the private sector to stimulate growth in the economy."

Emefiele believes that for the economy to grow, banks must be seen to perform their intermediation roles effectively.

Risk-free bonds

With near risk-free government bonds offering yields of more than 13%, there is little incentive to lend. An economist, Okechukwu Unegbu, said limiting banks from investing in bonds has certain implications, including creating excess liquidity that will make it difficult for policymakers to control inflation and stabilise the naira.

Bola Onadele, managing director, FMDQ OTC Securities Exchange, said if the CBN succeeds in putting caps on what a bank can hold in government securities, it will definitely bring more money to the real sector.

"The demand for government securities will go down, price will drop, yield will rise, meaning that government will borrow at [a] much higher rate," he disclosed.

Oladele Afolabi, Debt Management Office (DMO) director, Portfolio Management Department, said the impact of the proposed limitation on commercial banks' access to government securities on the market will depend on specific mechanisms provided by the CBN.

He said: "For instance, how would 'government securities' be defined? Would this include the Open Market Operations (OMO) bills being issued by the CBN? The specifics of the mechanism would determine the impact on the market."

He said the bond market has grown beyond banks being nominated investors and is now attracting new categories of investors such as pension funds, asset managers and foreign investors. n

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Publication:African Banker
Date:Aug 5, 2019
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