STAYING AFLOAT WITH SINKING FUND
As the Central Bank of Nigeria (CBN) signed the dotted lines with the 24 banks in the country on the establishment of the Banking Sector Resolution Cost Sinking Fund, penultimate week, to complement the current efforts of the Asset Management Corporation of Nigeria(AMCON) in soaking up the toxic assets of the banks, the question on the lips of many observers is this: will the fund unlock the tap and make credit flow again?
This question particularly becomes pertinent now as cries of the manufacturers have reached the heavens that Nigerian banks, despite all forms of advice, moral suasion or intervention from the apex bank, continue to show reluctance to lend to the real sector.
As if to give both credence and excuse for this, the CBN Governor, Mallam Sanusi Lamido Sanusi , recently said: 'The Nigerian manufacturing sub-sector is made up of large, medium and small enterprises, as well as cottage and hand-craft units. In spite of spirited efforts made to boost manufacturing output and various policy regimes, manufacturing has not made any significant contribution to the growth of the economy.
Industry as a whole contributed only 11.3 per cent of the GDP in 1960-70, growing significantly in the next two decades to a high of 41.0 per cent in 1981-1990, owing largely to the crude petroleum and gas production during the decades. The contribution contracted to 38.6 per cent in the 1990s and further to 29.4 per cent during 2001-2009.'
This notwithstanding and in a bid to show leadership by example, the CBN last year took the lead in the financing of the real sector and infrastructure projects, as well as enhancing credit to the real sector. A N500 billion fund was established out of which N300 billion is for power/infrastructure and aviation sectors and N200 billion for the refinancing/restructuring of banks' existing loan portfolios to manufacturers Small and Medium Enterprises.
Also, a N200 billion Small and Medium Enterprises (SMEs) Credit Guarantee Scheme was created to complement the earlier N200 billion Commercial Agricultural Fund for loans to farmers. So far, the apex bank had released over N190 billion out of which N130 billion had been disbursed to the manufacturers/SMEs at a fixed rate of 7 per cent through the Bank of Industry (BOI) and the banks.
Some critics even said that Sanusi's reforms resulted in credit being withdrawn or withheld from the real sector, thereby threatening the economy even though the situation did not even fare better before the CBN intervention.
A peep into records would prove this. For instance, sectoral breakdown of total loans of N8.955trillion as at December 2009 shows that before the CBN intervention, most of the available credit was not accessible due to exorbitant lending rates; most credit went into speculative bubbles in the capital market, some went to the blue chip multinational corporations, while the rest went into the huge Non-Performing Loans (NPLs), estimated at N2.5 trillion, which the Asset Management Corporation of Nigeria (AMCON) is making frantic efforts to soak up.
Already, 21 banks had so far transfered their NPLs to the corporation in exchange for N1 trillion bonds. Although only the rescued banks were under obligation to do so, but the grace was grabbed by the buoyant banks which also used the opportunity to offload their problematic loans. The bad loans submitted by the 21 banks were estimated at N2.5 trillion.
This is in line with the purpose for which AMCON was set up; to assist in the resolution of the high level NPLs in the banking sector and help banks in cleaning up their balance sheets as part of the CBN reform programmes.
The AMCON Act was signed into law last July 19, by President Goodluck Jonathan. The objective is to empower the corporation to buy toxic assets from banks thereby freeing their balance sheets and expectedly, help in addressing the various weaknesses in the system; safeguarding the interest of depositors, creditors and other stakeholders; providing liquidity to banks; recapitalizing the intervened banks; providing access to refinancing; and generally increase confidence in the Nigerian banking system and ensure stability in the economy.
In line with its functions as provided by the Act, last month , December 2010, AMCON acquired some of the eligible bank assets of the 21 banks in consideration of a bond issue.
The body is to be funded from authorized share capital, which has been jointly subscribed to by the CBN and Ministry of Finance; income from the management and disposal of eligible bank assets acquired by the Corporation and investment income;.Its sources of funding also include borrowings which should be approved by the board and other sources that may be approved by its board.
The establishment of the Sinking Fund is an added advantage as it will boost the liquidity position of the corporation.
Actually, the idea of the Fund came when the CBN and the 24 banks realized that the funds from the management and realization of the eligible bank assets to be acquired by AMCON might turn out to be insufficient to meet the resolution cost of restoring financial stability.
According to Dr Kingsley Moghalu, CBN's deputy governor in charge of Financial System Stability, ' they, therefore, resolved in the national interest to establish a Banking Sector Resolution Cost Fund to meet any shortfalls and to ensure financial stability and the soundness of the banking system.'
As to how much would be contributed to the pool, he explained that CBN would contribute N50 billion annually to the Fund , while each participating bank would contribute an amount equivalent to 30 basis points of its total assets as at the date of its audited financial statements for the immediately preceding financial year.
It would be recalled that last year, the banks, along with the CBN, voluntarily agreed to set up a sinking fund that would see them contribute 0.3 per cent of their assets annually up to a maximum of N1trillion over 10 years for the resolution of the challenges that have confronted Nigerian banks.
Conservative estimate of the decade long contribution has been put at N1.1 trillion. This consists of N600 billion from the banks-N60billion annually for 10 years- plus N500billion contribution by CBN-N50 billion per year.
Moghalu was full of praise for the banks saying the burden on the national treasury is significantly reduced by this innovative approach. His words: 'The role of banks in this regard is unique and they deserve commendation. This is because in most jurisdictions, it was the national governments alone through their treasuries that bore the cost of stabilizing the banks and preventing bank failures. In other words, the tax payers in those countries almost exclusively bore these costs. In Nigeria's case, the burden on the national treasury is significantly reduced by this innovative approach in which the resolution costs of the recent banking crisis will be borne by commercial banks themselves in addition to the CBN and AMCON.'
As good as the gesture appears, the fear being expressed is that the lenders may cunningly channel moneys meant for loans to this project, going by the fact that various efforts of the apex bank in making the banks lend to the real sector has not been all that successful. For example, having observed with concern the reluctance of the banks to lend to the real sector, the Monetary Policy Committee(MPC) of the apex bank during its meeting in March, 2010 reduced interest payable on bank's deposit with CBN from 2 per cent to 1 per cent.
In the Communique issued at the end of the meeting, it said:
'The MPC further stressed the need to unlock the credit market. Members also observed that there is sufficient liquidity in the money market as suggested by the low interbank interest rates, but that the perception of credit risk on the part of the DMBs(Deposit Money Banks) remained a major constraint to their ability to lend to the real sector of the economy. In this regard, the Committee felt that a broader macroeconomic policy framework will be needed to unlock the credit market.'
Once bitten, twice shy,goes the popular saying. The perception risk by the banks is afterall not unfounded as encapsulated by Sanusi at a recent lecture: 'In 1994, the Federal Government re-regulated the economy, by capping exchange and interest rates due to high nominal interest rates that reached an all-time high of 48.0 per cent in commercial banks and 60.0 per cent in non-bank financial institutions. These rates were in turn driven by the high rates of inflation at 48.8 per cent in 1992 and 61.3 per cent in 1993.
The global financial crisis adversely affected the Nigerian financial services sector, particularly the banking sector. Indeed, a section of banking industry was badly affected as some banks were in grave condition and faced liquidity problems, owing to their significant exposure to the capital market in the form of margin loans and share-backed lending, which stood at about N900 billion as at end-December, 2008. The amount represented about 12 per cent of aggregate credit of the industry or 31.9 per cent of shareholders' funds. Furthermore, in the wake of the high oil prices, a section of the industry that was extensively exposed to the oil and gas sector was also badly affected.
'As at end-December, 2008, banks' total exposure to the oil industry stood at over N754 billion, representing over 10 per cent of the industry total and over 27 per cent of the shareholders' funds.The excessive exposure resulted in some weaknesses, notably liquidity problems, exhibited by some of the banks towards the end of 2008. As part of its liquidity support, the CBN Discount Window was expanded in October 2008 to accommodate money market instruments such as Bankers' Acceptances and Commercial Papers.
As at June 2009, the banks' total commitment under the Expanded Discount Window (EDW) was over N2,688.84 billion, while the outstanding commitments was over N256billion, most of which were owed by less than half of the banks in operation. When the CBN closed down the EDW and, in its place, guaranteed inter-bank placements, it was observed that the same banks were the main net-takers under the guarantee arrangement, indicating that they had more deep-rooted liquidity problems. Arrangements were also made to recover non-performing loans from banks' debtors'
It was in this context that the MPC recognised the need to encourage the banks to channel the excess funds deposited with the CBN under the standing deposit facility to the real sector. It therefore considered the review of the setting of the standing facility corridor as imperative, to encourage banks to lend to the productive sectors of the economy.
As part of the efforts to bring lending rates down, the MPC then lowered the Standing Deposit Facility rate to 1.0 per cent from 2.0 per cent. This, however, did not produce much result. Available data as at the end of August showed that while the aggregate domestic credit to the economy increased by 27 per cent on an annualized basis, credit to government grew by 98.72 per cent. However credit to the private sector declined by 1.37 per cent.
Giving the breakdown of the banks' total credit last year , the apex bank explained that credit by the non-rescued banks rose from N127.3 billion in April and N145.9 billion in May to N218. 9 billion in October 2010, representing increases of 14.63 per cent and 50.1 per cent respectively. However, credit that emanated from the rescued banks rose from N18.2 billion in April to N27.9 billion in May and N43.4 billion in October, 2010 – depicting increases of 53.51 per cent and 55.33 per cent respectively.
According to the apex bank, new credit to the economy increased from N145.5 billion in April to N173.8 billion in May and N345.9 billion in June, 2010 representing increases of 19.49 per cent and 99.1 per cent respectively. It however declined to N322.3 billion in October, 2010, indicating a decline of 6.85 per cent. The CBN Governor, noted that the bulk of the credit went to Oil and Gas, Manufacturing, and Transportation as well as Storage. The good news however, is that given the rise in the level of credits over the months, the banking sector may have resumed lending.
The governor also expressed his optimism about early return to lending by the banks.He said: 'The stress test conducted recently on the 24 banks has shown that the financial soundness of the banks (both the intervened and non-intervened) has improved significantly compared to the crisis period.'
However, a major challenge as observed by the apex bank lies in reducing the high lending interest rate in the face of low money market rates.
Mr. Godwin Etuhu, the Managing Director of Holt Investment Consultants Limited, in an interview with a national daily, painted the situation like this: 'There is no bank in Nigeria currently lending to people at a single interest rate. This is why many people cannot access credit facilities and take their business ideas to the next level. Besides, when you are borrowing at a rate above 15 per cent, how do you retain your profit to plough back some money into the business? At the end of the day, you find out that you are working for the banks where you obtained the loan facility.'
Going back to the money market rate, investigation has shown that Inter-bank rate and other key money market rates have moderated significantly compared to the pre-banking reform period. Weighted average inter-bank call rate and other key money market rates fell below the end of December 2008 level by end of August 2009 after the sharp increase between January and July 2009.
As at July 28, 2010, the inter-bank rate had fallen to 1.12 per cent while the Open Buy-Back (OBB) rate stood at 1.10 per cent.
The prime lending rate was between 18 and 19 per cent while the maximum lending rate hovered between 22.56 and 23.91 per cents over March 2009 and May 2010. The average prime lending rate remained at 16.66 per cent in both October and September 2010, declining from 16.89 per cent in August 2010. The average maximum lending rate was 21.85 per cent in October 2010 from 22.20 per cent in September 2010 and 22.31 per cent.
An investment research company, Afrinvest (West) African in its market outlook for 2011 lamented that the huge liquidity in the financial markets is as a result of the unwillingness of the banks to lend and investors' preference for safety rather than returns.
The company observed that with the debt market still largely dominated by government bonds and with over N1 trillion issued by the government in 2010, the funds coming from AMCON to banks including spending increases from the public sector, there will be excess liquidity in the system. This, it believed, gives room to uncertainty over the capacity of the market to absorb the quantum of securities, should banks decide to sell AMCON bonds all at once.
In the report, the company warns: 'bond yields and interest rates could rise if the market fails to provide the levels of liquidity needed to take up such a large issuance.' Now, with the coming on board of the Sinking Fund , will the banks make credit flow again? Afrinvest thinks so. 'The huge liquidity in the financial markets as a result of unwillingness of banks to lend and investors' preference for safety rather than returns led to the increased subscription to both Federal Government and state bonds during the first quarter of 2010, despite the lower rates compared to corresponding period in 2009.
This will, in our view, help shore up confidence in the banking sector, reinvigorate the Nigerian capital market and improve the soundness of the financial system and Nigeria's sovereign credit rating. While it was logical for banks to cut back on lending in order to carefully manage their balance sheets in the middle of the crisis, we expect a modest growth in credit to the real sector in 2011.'