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So
the Central Bank of Nigeria (CBN) would like to see credit to the
private sector grow by more than it has done in the past year?

Credit has strong
uses in most modern economies. Just before the last global crisis
broke, credit-based consumer spending accounted for about 75% of output
growth in the United States. Moreover, current International Monetary
Fund (IMF) estimates indicate that stronger consumption in the US has
been part of the new recovery. Credit works for business investment
too; and when government borrows, it drives government spending.

The apex bank is
thus justified trying to resuscitate bank lending. To this end, it has
tied itself up in several knots. It has eased monetary conditions, only
to find banks building up liquidity in the wrong places, including
balances with it. It has tinkered with the corridor around the policy
rate, trying to discourage banks from warehousing surplus funds in the
CBN’s vaults.

Still, the banks
would rather keep such money with the apex bank, and earn 2% on it,
than lend to sectors of the economy where higher returns might be met
with. When you consider as fact that one of the main responses in the
markets to the current crisis has been for depositors to demand higher
returns on their funds with the banks, then the banks’ behaviour
becomes harder to explain. Surely, there must be better ways to lose
money?

Put differently, is
it enough for banks to have a surfeit of cash in order that they may
lend money? In response to the global and local shocks that have hit
the industry, most banks have tightened their risk acceptance criteria.
They have not only shortened the maturity profile of new loans, they
are more prone to demand that would-be debtors meet requirements that
were not in place nine months ago. Again, we imagine that further down
the road, these loan covenants will firm even more. This would follow
naturally, as risk management frameworks are strengthened in response
to the lapses unearthed by the CBN’s recent special audit.

There are other
worries, not least of which is the fact that most of the banks that
have been at the receiving end of the apex bank’s monetary forbearances
are still in the process of rebuilding their capital. Add to this, the
on-off debate over the extent to which current levels of provisioning
may have sufficiently addressed the industry’s portfolio of
non-performing loans, and the effect on bank lending of current
proposals by the Basle process to raise the industry’s capital adequacy
ratio.

But none of these
attend to the question of how strong the demand for credit is. Current
concern with the supply side of the market for credit is all very well.
However, no less crucial is the need to establish whether there is a
market out there for loans. Are there investment vehicles?

Did the stock
market bubble not inflate largely because the banks had no other place
to put these funds? And what has happened to non-bank sources of
credit? Why have these not taken up the slack from the failure of bank
credit?

The more probable
cause of the credit market problem is that there are major structural
policy challenges constraining the supply and demand sides of the
market.

Until recently, the
downstream sector of the oil industry was a major market for bank
credit. Apparently, the central bank’s intervention at some point dried
this market up. Now, the banks are asking that would-be importers of
fuel obtain promissory notes from the federal government before they
provide the necessary trade finance cover. Because government has
refused to meet this demand, oil importers haven’t had access to the
credit necessary to remove the unsightly fuel queues from our roads. Of
course, government’s practice in the past of not paying these importers
on time was the one reason why their bank facilities did not perform.

Until issues of
this nature are addressed, and you want to add the difficulty with
passing the petroleum industry bill to this list, I am not sure that
the market for credit in this economy will pick up.