Nigeria bank deposits rise faster than loans despite CBN credit push as economy dives into recession

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Despite calls to support Africa’s largest economy to offset recession, Nigerian companies are parking more of their funds in bank deposits, upending a push by the central bank to fuel lending to support the economy.

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“Many rich corporates have simply been content with saving their cash balances and collecting huge interest payments,” the Abuja-based central bank said in a statement on Wednesday. That’s at the expense of “expanding their investment, which should lead to hiring more people and producing more goods.”

It also means that banks aren’t meeting a central bank requirement to use at least 65% of their deposits for loans, or face penalties. The ratio dropped to 63.9% in August from 68% in January, as savings expanded quicker than deposits, the central bank said.

The latest data will come as a blow to a central bank that has resorted to unconventional policies, such as banning imports of some goods to spur local manufacturing and reduce Nigeria’s reliance on the oil industry. It’s also taken a development role by offering cheap loans through commercial lenders to boost sectors like agriculture.

Lenders must hold 27.5% of deposits as reserves — more than 10 times that of South African banks and six times their Kenyan counterparts — as the central bank battles to contain inflation. At the same time, they’re being forced to extend 65% of these deposits as loans to spur growth. Analysts say the measures don’t add up.

“Policy signaling from the Central Bank of Nigeria has been extremely contradictory,” said Ronak Gadhia, a banking analyst at EFG Hermes Research in London. “It is hard to manage the two policy objectives concurrently, especially in the current environment,” so banks are instead topping up cash reserves rather than accelerating lending, even if it means being penalized, he said.

Nigeria’s central bank is playing a delicate balancing act. It needs to stoke credit growth to support an economy the International Monetary Fund estimates will shrink 3.4% this year because of the coronavirus and plunging oil prices. It also needs to contend with inflation that’s been above its target range for almost five years. Critics have slammed monetary authorities for fueling prices by blocking rice and other food imports and also for flooding the market with cash by curbing access to the nation’s short-term bond market.

“Nigerian banks are having to work significantly harder than banks elsewhere in the world to deliver profitability,” said Renaissance Capital analyst Adesoji Solanke, adding that the cash reserve ratio is the highest among major frontier and emerging markets tracked by the brokerage.

Fitch Ratings criticized the central bank last month for its interventionist policies and for implementing sometimes conflicting rules. The ratings company cited a regulation that forces banks to hold at least 27.5% of their cash in non-interest bearing accounts with the regulator, which sucks cash out of the system that could otherwise be used for lending.

Naija247news
Naija247newshttps://www.naija247news.com/
Naija247news is an investigative news platform that tracks news on Nigerian Economy, Business, Politics, Financial and Africa and Global Economy.

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