Nigeria: CBN Imposes ₦718 Billion Debit on Banks for Missing Loan Target

The Central Bank of Nigeria (CBN) has imposed a substantial ₦718 billion debit on Deposit Money Banks (DMBs) due to their failure to meet the 65% loan-to-deposit target set by the apex bank. The CBN initially normalized its policy but later reversed course due to dwindling loans to the private sector.

Amid a shift from stage two to stage three loans in the banking industry and increased loan defaults due to economic uncertainties, local deposit money banks scaled back their lending activities.

Smaller banks face a greater risk of problem loans compared to tier 1 banks due to their size and the fact that larger banks control a significant portion of the industry’s total assets and businesses.

Two significant reforms, subsidy removal and FX liberalization, launched in the first half of 2023, affected corporate performance. Fitch reported that stage two loans in the industry increased following the devaluation of the naira in June.

The banks’ loans were converted at the new exchange rate, automatically increasing the value of their loan portfolios, according to analysts.

The decision to debit Nigerian banks with a significant sum is detrimental to lenders, especially tier-2 banks with limited liquidity weight, according to research analysts at LSintelligence Associates.

In response to tight liquidity levels in the financial system, short-term benchmark money market rates increased, while yields on government borrowing instruments declined. Cowry Asset Management reported that the Nigerian Interbank Offered Rate moved in mixed directions due to a reduction in financial system liquidity. The investment firm’s asset managers attributed the reduction in liquidity to a system cash reserve ratio debit of about ₦700 billion.

Subsidy removal has negatively impacted companies’ operating costs, and the situation worsened with the devaluation of the naira. Many listed companies reported significant foreign exchange losses in the first half of the year.

While banks recorded higher profits due to substantial unrealized FX revaluation gains, analysts anticipate that non-performing loans in the industry will increase in 2023 due to expected defaults.

Analysts believe that the CBN’s debit on banks comes at a challenging time for the economy and is margin-dilutive for operators. The apex bank has been criticized for contributing to the decline in loans to the real sector due to its inability to control price and exchange rate instability.