· Last week Thursday, the Central Bank of Nigeria (CBN) released the guidelines for its ‘Real Sector Support Facility’ (RSSF), which was initially discussed during the July 2018 Monetary Policy Committee meeting.
· The aim of the facility is to increase the flow of credit to the real sector (Agriculture & Manufacturing) to ‘consolidate and sustain economic recovery’ through the use of a Differentiated Cash Reserve Requirement regime and the Corporate Bond (CB) funding programme.
· Under the DCRR regime, Deposit Money Banks (DMB) interested in providing credit would request for funds to be released from their Cash Reserve Requirement (CRR) to lend to the real sector at an all in interest rate of 9% per annum.
· The maximum facility size should not exceed N10billion with a minimum tenor of seven years and moratorium of two years. However, DMB would have to bear the credit risk for these facilities.
· On the other hand, the CB programme would cut out DMBs with CBN buying and encouraging the general public to invest in the CB issued by triple ‘A’ rated companies registered in Nigeria under the Companies and Allied Matters Act of 1990. However, the company must have no existing non-performing facility with any financial institution with the maturity of the CB being no less than seven years.
· Our initial view is that the CBN’s RSSF may not live up to the Apex bank’s expectations of stimulating GDP growth and reducing the unemployment rate (18.8% as at Q3 2017).
· The initiative to stimulate lending by DMBs via a reduction in CRR is not necessarily a new idea. In November 2015, the Monetary Policy Committee voted to reduce the CRR to 20% from 25% with the additional liquidity only available to DMBs willing to lend to the real economy.
· However, the initiative did little to inspire DMBs to lend and we could see a similar outcome with the DCRR, as the main concern for DMBs is not necessarily liquidity but risk given asset quality issues (quantity of bad loans sitting on the balance sheets of DMB). While non-performing loans are reducing, it remains above the regulatory threshold of 5% at 14.15%, industry wide in April 2018, according to CBN staff report. This could continue to deter lending to the real sector.
· Furthermore, Tier one banks who are capable of driving lending to the real sector, since they account for about 60% of private sector credit and have an average liquidity ratio over 50% as at Q1 2018, are more focused on improving asset quality in the near term.
· With this said, there may be some success under the CB funding programme as CBN would bear the credit risk of lending. The programme would offer companies in the real sector, access to long term cheaper funding that could go a long way to supporting activities in the non-oil sector, which accounts for about 90% of GDP.
· However, we point out this is unlikely to be supportive of Micro Small and Medium Sized Enterprises (MSMEs) given the cost of coming to the market to raise funds. According to CBN, MSMEs are businesses with revenue below N100million per annum and/or with less than 300 employees.
· In our opinion, CBN should be targeting MSMEs due to their ability to stimulate economic activities and boost job creation as they account for 50% of GDP, according to the Minister of Finance, and 96% of Nigerian businesses according to the IMF. Consequently, we are of the view that CBN’s initiative may contribute very little to economic activities and job creation.
· Conclusively, we believe CBN’s RSSF is an indication of the Apex bank’s intent to drive economic activities, specifically in the non-oil sector, however results may be less than inspiring.