CBN LIFELINE FOR THE REAL SECTOR

The move by the central bank is commendable

The Central Bank of Nigeria (CBN) recently unveiled measures to increase the flow of credit to the real sector of the economy. The idea is to stimulate growth by propelling Deposit Money Banks (DMBs) to lend to companies that are doing new capital expenditures and expansion to factories. Loans to be given under the unfolding policy are facilities of seven years with two-year moratorium on principal and nine per cent interest per annum. If well implemented, the provisions in the revised guidelines for Accessing Real Sector Support Facility (RSSDF) through the Cash Reserves Requirement (CRR)/Corporate Bonds (CBs) may help revolutionise the real sector of the economy.

Under the evolving policy, the DMBs will henceforth be incentivised to direct affordable, long-term credit to the manufacturing, agriculture, as well as other sectors considered as employment and growth- stimulating. Corporate/Triple-A rated companies will also be encouraged to issue long-term corporate bonds (CBs). Already, the CBs funding programme is in place, according to the CBN. The programme would encompass its own investment as well as that of the general public in CBs issued by corporates subject to the intensified transparency requirements for participating companies.

While several critical stakeholders in the financial sector would rather watch to see the implementation, the consensus seems to be that the CBN got it right with the move to increase the flow of long-term credit to the real sector in such a strategic manner as to ginger growth in the manufacturing and agricultural sectors. But since the devil is always in the detail, many have decided to express cautious optimism as they await the guidelines.

FOR DECADES, THE REAL SECTOR HAS CONTINUED TO BE HAMSTRUNG BY A MAJOR PROBLEM OF GETTING CREDIT AT HIGH INTEREST RATE AND AT SHORT TENOR

The idea of finding an enduring solution to the major challenges facing the real sector of the economy is quite commendable. For decades, the real sector has continued to be hamstrung by a major problem of getting credit at high interest rate and at short tenor. Repaying such loans with high interest and at short tenor has not only stifled their growth, but also sounded the death knell for many. While the nation’s fiscal and monetary authorities have at different times experimented with one form of measure or the other to stimulate growth without much success, we believe the new move by CBN is in the right direction.

However, lessons should be learnt from how such efforts failed in the past. We recall that the CBN had in August 2013 launched the N220 billion Medium, Small and Micro Enterprises (MSMEs) Development Fund. Ten per cent of the fund was devoted to developmental objectives such as grants, capacity building and administrative costs while 90 per cent commercial component was being released to Participating Financial Institutions (PFIs) at two per cent for on-lending to MSMEs at a maximum interest rate of nine per cent per annum. We are aware that the purpose was hugely defeated. The PFIs had cried out that lending at single-digit nine per cent interest per annum was a pipe-dream as the fund has remained largely unutilised.

We also recall that the purpose of settling up a wholesale financial institution like the Development Bank of Nigeria (DBN) was to provide long-term single-digit interest financing. It is evidently clear that while it might be striving towards providing long-term financing, giving loans at single digit has for years been a mirage. We, therefore applaud the current innovative approach of the CBN to incentivise the DMBs which give long-term credit at single digit interest, using the CRR mechanism. All factors considered, it might just work this time, especially if all the relevant stakeholders, including the banks and the business managers, deploy the facilities in a transparent and accountable manner.