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Despite
pumping N620 billion into the banking sector, businessmen still do not
have access to credit to finance their projects. Bismarck Rewane, the
Managing Director, Financial Derivatives Company, said the paradox of
the industry remains that credit intermediation is declining sharply in
the face of money supply saturation.

“The
credit crunch is unlikely to ease anytime soon. The decisions of the
last committee meeting did not address the credit crisis,” he said. He,
however, commended the committee for acknowledging that there is a
credit crisis rather than toeing the path of national self-deception.

The
Central Bank of Nigeria, confirming that the credit crunch is
worsening, said, a decline in annualised credit to the private sector
by -16.20 per cent, signals a stalling of economic recovery.

Risk aversion

An
extreme level of risk aversion hinders banks from giving out credit
facilities, even though they have enough to lend out. A bank official
at First Bank said banks would rather take their funds to the Central
Bank on the two per cent interest rate overnight, than lend them out,
owing to a lack of confidence in the safety of their funds. “Banks are
not lending, neither are they creating assets for now. They would
rather keep the money with the Central Bank and collect it the next
day,” he said.

But
the last Monetary Policy Meeting reduced the rate to one per cent, to
discourage banks from keeping cash idle, and encourage them do more
lending.

Exorcising the ghosts

However,
Mr. Rewane in the March edition of his monthly Economic Review said the
ghost of banks’ risk repugnance will not “be exorcised with this
measure”, adding that liquidity would be freed up when nonperforming
assets are bought over the Asset Management Corporation, when it
becomes effective.

While
keeping the standing lending rate flat at eight per cent, the CBN
reduced the standing deposit facility to one per cent, down from two
per cent. This is the second time the industry regulator is reducing
the rate, which was previously at four per cent before it was brought
down to two, a step it adjudged to be necessary to encourage banks to
unlock the credit market.

Asset Management Corporation, a must

Finance
experts say the passage of the AMC bill by Nigeria’s House of
Representatives has already started to drive the markets. A report by
Kato Mukuru, Esili Eigbe and Odalo Addeh, a team of finance experts at
Renaissance Capital, published on Friday revealed that, “The passage of
the Asset Management Corporation (AMC) bill has been the key driver of
Nigerian equities this week (March 8-12), putting paid to speculations
about its passage on a lack of support by the current administration.
Over this week, equities have rallied 5.3 per cent, bringing the return
on the index to its high of 15.9 per cent. In addition, the average
value of stocks traded has advanced 19 per cent to $22.6 million daily,
from $19 million last week.”

They
also expect increased trading activities next week in the shares of
some of the strong banks, as the industry complies with the common
year-end reports as directed by the CBN, which should have been
published before the end of March.

“If
the results are better than the market expects, we think this week’s
rally could be sustained, potentially supported by further positive
news on the passage of the AMC bill. We note that the Senate has now
referred the AMC bill for a public hearing (its third reading), before
being presented again for a final reading,” the report said.

The
sharp deterioration in banks’ assets on account of non-performing loan
portfolios, estimated to have increased to around 22 per cent at
December 2009, up from eight per cent a year earlier, has made banks
lending-shy.

Finance
experts believe that a turnaround in credit metrics is unlikely to be
achieved simply on the back of interest rate decisions, especially
given the weakness of the monetary policy transmission mechanism.

They
argue that any turnaround will require more structural steps, such as
the establishment of an asset management company to clean the system
and speed up the recapitalisation of the finance industry and the
emergence of a corporate bond market..