Published On: Sun, Aug 26th, 2018

CBN launches measures to boost Agric, Manufacturing

By OKEY ONYENWEAKU

In a masterful review of bank lending policy the Central Bank of Nigeria (CBN) has engineered a solution to reducing funding costs to both the agriculture and manufacturing sectors. In a move that took analysts by surprise the Bank recently announced a policy of allowing commercial banks use a proportion of their cash reserve ratios (CRR), or cash reserve buffer, to finance lending to the agriculture and manufacturing sector at a maximum interest rate of 9 per cent per annum. The announcement has put smiles on the faces farmers and manufacturers alike, but not without a few reservations in some quarters.

So far, the CBN website says the total banking industry reserves with the central bank as at June 2018 stands at N4.115 trillion, an amount analysts have described as ‘huge’.

Indeed, at a Cash Reserve Ratio (CRR) of 22.5 per cent, Monetary Policy Rate (MPR) of 14 per cent and liquidity ratio of 30 per cent, the Nigerian economy has barely grown beyond 1.9 per cent since the recession of 2016 which lasted 12 months.

Given his commitment to seeing the economy grow by at least the population growth rate of 3 per cent, Governor of the CBN, Mr. Godwin Emefiele appears to have ignored the failings of fiscal policy. Analysts deduce that banks that are ready to lend to these sectors will be able to enjoy about 13.5 per cent CRR on loans in Agric and manufacturing.

While the bank regulator still works on modalities for the scheme, the CBN Director of Banking Supervision, Mr. Ahmad Abdullahi, told Journalists that the idea was to enhance job creation.

He noted that, “Although agric and manufacturing are the initial sectors that are being considered, a bank can apply if there is a job creating sector that the bank is operating in, it may be considered.’’

“The idea is that we can refund the CRR equivalent of a bank that has engaged in lending to a new project or an existing one in the agriculture or manufacturing sector as a way of utilising the CRR more effectively.

“So anytime a bank lends to a manufacturing or agric sector operator, at the rate the CBN has prescribed, it would have its CRR refunded up to the amount it has lent. The guidelines are coming up any moment from now.’’, he explained.

According to Abdullahi, “It is two folds, there would be commercial papers (CPs) and corporate bonds. On the other hand, there would be direct lending by the banks to SMEs that are in those sectors.”

The focus of the CBN in recent times in addition to ensuring price stability has been to ensure that the economy grows. The Apex bank has done this through the introduction of various measures of which the new policy of single digit interest rate loans appears to be compelling according to economists.

Nevertheless, as good as the initiative appears on paper, there have been misgivings about its smooth implementation.

The Chief Executive Officer of Guaranty Trust Bank Plc, Mr. Segun Agbaje, who is a member of bankers committee said the initiative was expected to create jobs and enhance economic growth.

Agbaje believes, “The CBN has been very gracious to these sectors, if you have companies that are doing new capital expenditures and expansions, you (the banks) would be able to lend using some of your CRR at nine per cent.’’

“These are not short-term loans; they are long term loans of seven-year tenor with a two year moratorium on principal.”

According to him, “It would probably be the first time in the history of this country where manufacturers would be able to take fixed interest rate loans for seven years, which means they would be able to plan.

“The volatility that they fear for all kinds of risks would be taken out and I think these are very laudable steps in improving and growing the economy.”

He added, “So, it would allow people to do capital expenditure, which is more long-term. It would give people single-digit interest rate loans, where bonds could go as far as 10 years.”

Also, the Executive Director, Finance, First City Monument Bank, Mrs. Yemisi  Edun, said, “The CRR that is taken from banks would be positively deployed to grow the real sector as well as the agriculture sector.’

Edun added, “This is very positive for the economy and also positive for banks because we would be able to access these funds and earn on it. And because it would be coming at single digit rate, it would be positive for the economy.”

“The focus is to ensure that the economy grows. Now that we have achieved stability, we need to see a positive trend of growth and that is what we are committed to do at this time.”

According to him, “The outlook for the economy in 2018 is much better than 2017. We have seen stability in the exchange rate being sustained, gross domestic product (GDP) growth higher than 2017.

A Lagos based financial analysts, Mr. Johnson Chukwu, Managing Director/ Chief Executive Officer, Cawry Asset Management Limited, lauded the CBN’s policy to give single digit loan to strategic sectors such as Agriculture and Manufacturing sectors to enhance the economy.

Mr. Chukwu told Business Hallmark that it will not be easy for the CBN to bring down interest rate generally at this point in time and be able to sustain it give the macro-economic challenges in the country. He said low interest rate now will causea reversal effect on the course of inflation which is already going down. Inflation now stands at 11.2 per cent. There will also be, he explained, pressure on the weak naira, the exchange rate.

While he stressed that any policy that targets a sector or few sectors could be discriminatory, especially the recent one which targets Agriculture and manufacturing sector, Chukwu noted that it is not out of place for the government of the day to apply it creatively in order to strengthen the economy.

‘’Sometimes government does that to boost or give strength to a particular sector which it thinks can strategically enhance the overall economy’’, said Chukwu.

However, Chukwu expressed fear that operators may still abuse the good opportunity being presented by the CBN. He said operators may have other outlets through which they can convert the loans to other things instead of the target sectors and purpose.

Dr. Afolabi Olowokere of Financial Derivatives Company (FDC) says it is a good policy that would help to expand money supply in the system, apart from helping the targeted group, Agriculture and the manufacturing sectors. He added that if many banks happen to key into this window the money expansion that it will cause may further fuel inflation which is one of CBN ‘s priorities.

He noted that whereas, the banks stand to benefit from the policy given that they will now put to use their reserves which have not been yielding any interest, there may still face other challenges that are not visible now.

Olowokere expressed fear that the policy could bring up Adverse selection problem. Experts explain that ‘Adverse selection’as a situation where sellers have information that buyers do not have, or vice versa, about some aspect of product quality. In the case of insurance, adverse selection is the tendency of those in dangerous jobs or high-risk lifestyles to get life insurance’’,

According to him, firms that have not been competitive and efficient in their own right could take advantage of this opportunity to get loans at 9 per cent and mis use it.

For Dr. Adi Bongo of Lagos Business School, who has been at the forefront of the advocacy that interest rate should be adjusted down ward especially for the real sector, said he does not know how far the new single digit interest loan could go to enhance and grow these targeted sectors of the economy.

Bongo said the fundamental problem of the real/manufacturing and agricultural sectors is lack of adequate infrastructure for them to perform optimally.

According to him, while lack energy is impeding development in that sector, poor transportation is making evacuation of food products very difficult.‘’What ever else that is done without tackling the issue of energy and transportation may not yield expected results’’, he said.

‘’The loan has not reduced the risks in those sectors. Will the risk profile of the sectors enable the banks to recoup their credits’’, he added.

On the economy, Bongo said the manufacturing sectors was yet to come out of recession. He explained that a rise in the production and price of oil brought the country out of recession and not Agriculture.

Listing the achievements of the CBN, a top government official has noted that ,“N43.92 billion was released through the CBN and 13 participating institutions; 200,000 small holder farmers from 29 states of the federation benefitting; and 233,000 hectares of farmland cultivating eight commodities, namely rice, wheat, maize, cotton, soya-beans, Poultry, Cassava and Groundnuts, in addition to fish farming.’’

“These initiatives have been undertaken in close collaboration with the states. I wish to commend the efforts of the Governors of Kebbi, Lagos, Ebonyi and Jigawa States for their support to the rice and fertilizer revolutions.’’

“Equally commendable are contributions of the Governors of Ondo, Edo, Delta, Imo, Cross River, Benue, Ogun, Kaduna and Plateau States for their support for the Presidential initiative for palm oil, rubber, cashew, cassava, potatoes and other crops,” he said.

However,Mr. Ikpong Umoh, Chairman,Toiletries and Cosmetics Manufacturers group of the  Manufacturers Association of Nigeria, has said ‘’Truly speaking, the manufacturing sector is comatose and the economy generally has not fared well. Some years ago, fuel was N65 per litre but now it is N145. The masses are paying directly without succour.   In terms of power supply, most people including manufacturers are using generators’’.

Analysts have, therefore, decided to wait to see the impact of policy before making detailed comments on the smooth winds the CRR-based loans will blow the way of manufacturing and agriculture in moths to come.

 

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