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Recent developments in funding the economy inherited by Buhari
As we continue to give independent review of what the administration of President Mohammadu Buhari is taking over from ex-president Goodluck Jonathan some issues in the private sector-driven economy that has defile solutions by successive governments at the centre appears worsening. They key amongst these is the funding gaps in the real sector and the associated issues are presented here.
Interest Rate Developments
Available data has indicated that banks’ interest rates trended upwards since second half of 2014 up to date with lending rates outpacing deposit rates just as the spread between deposit rate and lending rates widens. According to data from Central Bank of Nigeria (CBN) while the weighted average deposit rate (demand, savings, time/ term) has increased to 5.02 per cent from 4.5 per cent mid last year lending rate increased from 25 per cent to 30 per cent by second quarter 2015.
At about 25 percentage point, the spread reflects high margins for the banks against extremely high cost of borrowing for businesses. The organized private sector has been clamoring for proper regulations that would address the issue of high operating cost by banks which has not only necessitated the high lending rate but also the widening spread between the two rates.
Microfinance Banks borrowing window:
As the conventional banks appear to be unwilling to extend credit facilities to the small and micro enterprises the microfinance option was created and that has been helping to some extent. However there seems to be a worrisome trend of gradual erosion of capacity in this sector since late last year.
Total liquid assets of the Microfinance Banking (MFBs) sector in the last quarter of 2014 stood at N80.9 billion, representing a massive decrease of N55.9 billion or 40.9 per cent and N2.4 billion or 2.9 per cent below the levels reported in the preceding quarter and corresponding period of 2013 respectively.
Shareholders’ funds of MFBs amounted to N53 billion representing a frightening decrease of N147.5 billion or 73.5 per cent and N11.9 billion or 18.3 per cent below the levels reported in third quarter 2014 and corresponding quarter of 2013 respectively. The 73.5 per cent decline in the funds was attributed to the decrees of N78.9 billion or 59.1 per cent and N68.6 billion or 102.2 per cent in paid-up capital and reserves (including the year’s losses) respectively.
This obviously indicates a dying financing window for the small businesses which constitutes the largest employer of labour in Nigeria today. A recent data below from CBN already points to this development.
MFBs aggregate credit to the domestic economy in the last quarter of 2014 amounted to N114.1 billion representing a decrease of N36.1 billion or 24 per cent and N14.4 billion or 11.2 per cent below the levels reported in the preceding quarter of 2014 and the corresponding period of 2013 respectively.
The 20 per cent decrease in domestic credit was largely accounted for by the decrease of N20.1 billion or 16.9 per cent and N8.9 billion or 68.1 per cent in loans and advances and long term investments respectively.
The N535b CBN Intervention Funds
One of the very commendable steps of the government of ex-president Goodluck Jonathan is the establishment of the CBN Intervention Fund under the management of Bank of Industry which was rolled out two years ago to address specific needs of some critical sectors facing funding crises. The fund amounted to N535 billion. The programme consists of two schemes, namely, the N235 billion Intervention Fund for Refinancing and Restructuring Facility (RRF) to SME/ Manufacturing sector and the N300 billion Power and Aviation Intervention Funds, (PAIF). BoI manages these intervention funds with the participating banks and the Nigerian Export Import Bank (NEXIM) to disburse to various beneficiaries.
By December 2014 the RRF fund was fully disbursed with over 80 per cent of request unattended. In fact even those that applied represented less than 20 per cent of the need to be met in this critical sector. As at now no immediate plan is in place to further address this huge gap.
On the other hand a total of N330 billion PAIF was approved by CBN comprising of N177.9 billion or 53.8 per cent and N152.7 billion or 46.2 per cent for Aviation and Power sector respectively. BoI disbursed total of N236.4 billion with a share of N117.4 billion and N118.9 billion to 15 and 19 beneficiaries in the Aviation and Power sectors respectively. The sector, especially the power companies are presently in deadly stress of cash crunch, abandoned by banks over huge infrastructure and operational funding gaps. The sector is heading for a major crises if nothing urgent is done.
Agric sector funding
Agriculture sector is perhaps the most neglected in the private sector business funding chain. Recognising this gap the government at various times have rolled out several initiatives to address this but with little results. However the most outstanding institutional arrangement for this came with the establishment of Bank of Agriculture (BoA).
Aggregate credit to the sector by BoA in the last quarter of 2014 stood at N16 billion representing an increase of N1.1 billion or 7 per cent above the level recorded in the preceding quarter but a massive decrease of N9.2 billion or 36.6 per cent below the level recorded in the corresponding period of 2013. The decrease is not as much a problem as the volum of credit available compared to demand which has been abysmal over the years due to weak capacity of the bank.
Shareholders’ funds of the BoA stood at N3.4 billion in the last quarter of 2014. As poor is this figure is it represented a decrease of N4.4 billion or 56.4 per cent below the level in the corresponding period of 2013.
Other measures of capacity also show gross inadequacies. Total deposit liability of the bank amounted to N8.7 billion representing increase of N 0.1 billion or 1.5 per cent and N1.7 billion or 24.1 per cent above the levels recorded in the previous quarter and corresponding quarters of 2013 respectively. Long term loans of BoA stood at N 0.2 billion a stagnation.
The new government needs to look into the capacity of BoA to deliver on its mandate and be relevant in this very important sector.
Interest Rate Developments
Available data has indicated that banks’ interest rates trended upwards since second half of 2014 up to date with lending rates outpacing deposit rates just as the spread between deposit rate and lending rates widens. According to data from Central Bank of Nigeria (CBN) while the weighted average deposit rate (demand, savings, time/ term) has increased to 5.02 per cent from 4.5 per cent mid last year lending rate increased from 25 per cent to 30 per cent by second quarter 2015.
At about 25 percentage point, the spread reflects high margins for the banks against extremely high cost of borrowing for businesses. The organized private sector has been clamoring for proper regulations that would address the issue of high operating cost by banks which has not only necessitated the high lending rate but also the widening spread between the two rates.
Microfinance Banks borrowing window:
As the conventional banks appear to be unwilling to extend credit facilities to the small and micro enterprises the microfinance option was created and that has been helping to some extent. However there seems to be a worrisome trend of gradual erosion of capacity in this sector since late last year.
Total liquid assets of the Microfinance Banking (MFBs) sector in the last quarter of 2014 stood at N80.9 billion, representing a massive decrease of N55.9 billion or 40.9 per cent and N2.4 billion or 2.9 per cent below the levels reported in the preceding quarter and corresponding period of 2013 respectively.
Shareholders’ funds of MFBs amounted to N53 billion representing a frightening decrease of N147.5 billion or 73.5 per cent and N11.9 billion or 18.3 per cent below the levels reported in third quarter 2014 and corresponding quarter of 2013 respectively. The 73.5 per cent decline in the funds was attributed to the decrees of N78.9 billion or 59.1 per cent and N68.6 billion or 102.2 per cent in paid-up capital and reserves (including the year’s losses) respectively.
This obviously indicates a dying financing window for the small businesses which constitutes the largest employer of labour in Nigeria today. A recent data below from CBN already points to this development.
MFBs aggregate credit to the domestic economy in the last quarter of 2014 amounted to N114.1 billion representing a decrease of N36.1 billion or 24 per cent and N14.4 billion or 11.2 per cent below the levels reported in the preceding quarter of 2014 and the corresponding period of 2013 respectively.
The 20 per cent decrease in domestic credit was largely accounted for by the decrease of N20.1 billion or 16.9 per cent and N8.9 billion or 68.1 per cent in loans and advances and long term investments respectively.
The N535b CBN Intervention Funds
One of the very commendable steps of the government of ex-president Goodluck Jonathan is the establishment of the CBN Intervention Fund under the management of Bank of Industry which was rolled out two years ago to address specific needs of some critical sectors facing funding crises. The fund amounted to N535 billion. The programme consists of two schemes, namely, the N235 billion Intervention Fund for Refinancing and Restructuring Facility (RRF) to SME/ Manufacturing sector and the N300 billion Power and Aviation Intervention Funds, (PAIF). BoI manages these intervention funds with the participating banks and the Nigerian Export Import Bank (NEXIM) to disburse to various beneficiaries.
By December 2014 the RRF fund was fully disbursed with over 80 per cent of request unattended. In fact even those that applied represented less than 20 per cent of the need to be met in this critical sector. As at now no immediate plan is in place to further address this huge gap.
On the other hand a total of N330 billion PAIF was approved by CBN comprising of N177.9 billion or 53.8 per cent and N152.7 billion or 46.2 per cent for Aviation and Power sector respectively. BoI disbursed total of N236.4 billion with a share of N117.4 billion and N118.9 billion to 15 and 19 beneficiaries in the Aviation and Power sectors respectively. The sector, especially the power companies are presently in deadly stress of cash crunch, abandoned by banks over huge infrastructure and operational funding gaps. The sector is heading for a major crises if nothing urgent is done.
Agric sector funding
Agriculture sector is perhaps the most neglected in the private sector business funding chain. Recognising this gap the government at various times have rolled out several initiatives to address this but with little results. However the most outstanding institutional arrangement for this came with the establishment of Bank of Agriculture (BoA).
Aggregate credit to the sector by BoA in the last quarter of 2014 stood at N16 billion representing an increase of N1.1 billion or 7 per cent above the level recorded in the preceding quarter but a massive decrease of N9.2 billion or 36.6 per cent below the level recorded in the corresponding period of 2013. The decrease is not as much a problem as the volum of credit available compared to demand which has been abysmal over the years due to weak capacity of the bank.
Shareholders’ funds of the BoA stood at N3.4 billion in the last quarter of 2014. As poor is this figure is it represented a decrease of N4.4 billion or 56.4 per cent below the level in the corresponding period of 2013.
Other measures of capacity also show gross inadequacies. Total deposit liability of the bank amounted to N8.7 billion representing increase of N 0.1 billion or 1.5 per cent and N1.7 billion or 24.1 per cent above the levels recorded in the previous quarter and corresponding quarters of 2013 respectively. Long term loans of BoA stood at N 0.2 billion a stagnation.
The new government needs to look into the capacity of BoA to deliver on its mandate and be relevant in this very important sector.
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