Single digit interest loans in sight?
Hopes for single digit interest loans in the Nigerian economy may materialize following a cash glut in the country’s deposit banking sector, with the recent crash in the Treasury Bills rate from 18% to 10.5%. Hitherto Nigeria’s deposit banks had demonstrated habitual inability to grant single-digit interest loans, due to their dependence on Treasury Bills, […]
Hopes for single digit interest loans in the Nigerian economy may materialize following a cash glut in the country’s deposit banking sector, with the recent crash in the Treasury Bills rate from 18% to 10.5%. Hitherto Nigeria’s deposit banks had demonstrated habitual inability to grant single-digit interest loans, due to their dependence on Treasury Bills, which provides them with easy and guaranteed returns on their investments.
The Treasury Bills window is in turn financed largely by the government’s domestic borrowing at the high interest rate of 18%. According to the Central Bank of Nigeria’s [CBN] Deputy Governor, Economic Policy Dr. Joseph Nnanna, the attractiveness of the easy and high returns from Treasury Bills had dampened the desire of the banks to drive the single interest rate dispensation in their portfolio management. While speaking at a forum on factoring financing at the African Export-Import Bank’s Annual Conference recently held in Abuja, Nnanna also said with the willingness of the government to borrow at the double-digit rate of 18% through Treasury Bills, it will be difficult for the banks to lend at single digits.
Treasury Bills are securities floated by the government at a discounted rate for short term (ninety days) duration and pays subscribers full value at maturity. The difference between their offer and the maturity values is the bill rate and is presently around 10.5% in Nigeria. This rate of return on the Treasury Bills is not based on any interest yielding, value adding enterprise of the government, but a mere discount on what it borrows. Treasury Bills are generated by factors such as the desire of government to borrow from the domestic market, and/or the need to control money supply in the economy.
They are therefore essentially monetary policy tools for administering the economy. However, because of their benefit of providing guaranteed easy returns on money lent to the government through them by their subscribers, Treasury Bills are considered the most attractive investment options and are often referred to as ‘gilt-edged’ securities. Nnanna hence noted that with the recent recourse of the government to finance part of its budget externally and off-load Treasury Bills, banks will be awash with liquidity and must pay attention to borrowing by Medium and Small-Scale Enterprises (MSMEs).
Welcome as the new dispensation is, the government needs to work towards a consolidation of the emerging lending opportunities in the banks’ portfolios courtesy of the liquidity glut. The need to ensure that banks in their quest for quick profits, and sundry gains, do not marginalize real sector loan applicants comprising manufacturers and agricultural enterprises, who will drive productivity, in favour of politically motivated loan requests, remains critical. Several factors dictate so. Firstly, is the need to boost productivity in the country in order to prevent a return to the recent painful recession. As has been canvassed severally only a recourse to reflating the economy through copious investment of resources in the country’s real sectors can guarantee a safe distance from the recession.
Secondly and more worrisome is the upsurge in political activities pursuant to the forthcoming general elections in 2019, dictates the imperative for closer marking of the fortunes of bank loan administration. It is common knowledge that politics in Nigeria is driven by money and Nigerian politicians usually spare no effort in obtaining and diverting bank loans into unauthorised ventures including politics.
The new dispensation offers the government the most auspicious opportunity to turn the economy round in line with its change agenda. In this respect come the homily by the CBN, that the government needs to borrow less from the domestic market, live within its means to conserve liquidity, and allow banks lend to private sector borrowers at a sustainable single digit rate.