Why DMBs shun loan creation for investment in government instruments
FBNQUEST HAS STATED that the major reason why deposit money banks (DMBs) have opted to become major investors in federal government bonds and treasury bill as against loan creation is the additional risk of lending to less established companies and the higher credit administration it employs.
According to FBNQuest, there is need for a more robust framework that will involve the monetary and fiscal authorities to address the credit squeeze experienced by the country as it could affect the quality of growth. Adding that the lack of serious competition amongst DMBs in the country has led to immobility of real economy rates.
They said, “The real economy rates rarely move because, as in many other markets, the deposit money banks are not engaged in serious competition with one another. Nor have they ventured meaningfully into credit to SMEs.”
“Beyond their blue-chip customers, DMBs are more comfortable buying federal government paper than lending to less established companies, even though the average maximum lending rate offers a far better return than federal government bonds or treasury bills but such new borrowers require more credit administration and bring additional risk,” the researchers added.
The Central Bank’s series on money and credit aggregates put the deposit money banks’ lending to the private sector at N16.15 trillion in December 2018, representing a 4.1 percent increase year-on-year but a 2.3 percent decline quarter-onquarter.
The CBN has launched several initiatives to offer affordable finance to priority sectors. Its role in development finance has its critics: the reality, however, is that the CBN and the stateowned development banks have moved into territory where the DMBs have declined to tread.
There is a strong need for a more robust developmental framework which involves both the monetary and fiscal authorities is desperately needed, such that would be aimed at addressing credit squeeze been experienced, coupled with the inherent structural flaws that have held growth back. Obviously, such measures are needed to reverse the growing inequality.
There should be an urgency to ensure that banking credit to the private sector does not lag for too long nor lag far behind the cycle as could affect the quality of growth moving forward.
The oil and gas sub-sector was the largest recipient of bank credit to the private sector in 2018 at N4.737 trillion, inclusive of both service and industry bound credit.
Credit to the oil sector represents 30 percent of the total loans provided to the private sector by banks.
Giving the current dynamic, the balance sheet of banks both directly and directly is exposed to the oil sector. The present scenario validates the position that banks will be more forthcoming to the resource sector, especially when the economy is oil dependent for its growth.
The manufacturing subsector stood out as the second largest recipient of credit behind the oil sector at N2.17 trillion, 13 percent of the total banking credit to the private sector. The present credit level to the subsector is o.25 to its gross domestic product.
The huge ratio is not reflective of robust credit but a lean manufacturing sector as the sub-sector is suffering from both structural contours and financial repression.