The Nigerian government is offering such good rates on bonds and Treasury bills that the country’s banks would rather tie their money up in state debt than lend to consumers or businesses.
“Nigeria banks have a reduced incentive to lend to the private sector because of the favourable interest on government securities,” Akintunde Majekodunmi, a banking analyst at Moody’s Investors Service said on Wednesday in London.
“They have increased appetite for government securities, which may cannibalise private-sector credit.”
Lending in Nigeria just about stalled in 2016, according to Moody’s estimates, as the economy contracted for the first time in 25 years and unpaid loans soared. There is easier money to be made from government debt auctions where yields of 18.74% on Nigerian 12-month T-bills, the highest level since February 2012, and rates on 10-year naira bonds of 16.3%, come with a lot less risk.
The Central Bank of Nigeria (CBN) kept its main lending rate unchanged at a record 14% for the 4th consecutive meeting in March to help fight inflation that was 17.8% in February. The International Monetary Fund (IMF) urged authorities to tighten policy to anchor inflation expectations and boost investor confidence. This is even as Finance Minister Kemi Adeosun urged policy makers to lower rates to support growth.
“Even if the government lowered interest rates, it might not necessarily translate into increasing loans to businesses,” Majekodunmi added. Loan growth in 2017 might increase to between 5 percent and 10 percent in 2017 when adjusted for inflation, he said. “These credit growth rates are still too low for Nigeria.”
Banking system assets account for about 30% of Nigeria’s gross domestic product, which is much lower than many other African and most developed countries, where they sometimes exceed GDP, Majekodunmi said.
Nigerian small- and medium-sized banks are struggling to cope with an increase in non-performing loans that reached 14% of total credit at the end of December from 11.7% at the end of June, according to central bank data. Moody’s expects the ratio to remain at about 12% to 14% this year.
A Lagos-based Unity Bank Plc said on Wednesday that it is in talks to sell its soured loans, while also trying to entice investors and sell non-banking assets after missing a regulatory deadline to bolster its capital levels.
Moody’s rates Nigeria’s sovereign debt at B1, four levels below investment grade. The company assesses Nigeria’s banking system as resilient and expects measures taken by lenders to improve their asset quality.
“The risk of asset quality has been partially mitigated by restructuring loans, mainly by extending maturity,”
“A favourable economic outlook will stabilise liquidity,” Majekodunmi said.