Why Nigeria's Banks Are Spurning Sort-of-Free Money

(Bloomberg) -- Nigerian banks, facing challenges on many fronts, are proving reluctant to take advantage of new rules aimed at boosting loans to the country’s agriculture and manufacturing industries. The measures introduced by Nigeria’s central bank in August, in the hope of stimulating growth, allow banks to use funds that are otherwise sitting in their statutory cash reserves to finance certain projects, with the condition that such loans are at a maximum interest rate of 9 percent and a minimum tenor of seven years. For the most part, banks aren’t biting.

1. Why are banks not taking advantage of the new rules?

Because they see the risk of lending to agricultural and manufacturing companies as greater than the single-digit interest rate the West African nation’s regulator wants them to collect. Currently, bank loans to corporations carry interest rates exceeding 30 percent. For perspective, the central bank offers risk-free government treasury bills to lenders at about 12 percent.

2. Isn’t a single-digit interest rate better than nothing?

That’s what the central bank evidently figured. But banks are being extremely cautious about extending loans and don’t want to increase bad loans or impairments with their cash reserves. The banks would still be on the hook for the credit risk, and they’d likely want to make huge provision for loans going bad.

3. Why are agriculture and manufacturing seen as risky?

The agriculture sector is struggling with low crop yield, inadequate mechanization, poor transport and storage infrastructure, illegal food imports and insurgency. Most rice farmers harvest their crops by hand due to lack of machinery; wheat growers in the northeast abandoned their farms last year after attacks by Boko Haram militants. Manufacturers are struggling with higher energy costs, cheaper imported products and low consumer demand. Companies in service sectors such as commerce, hospitality, education and telecommunications are more attractive to banks.

4. Why is the central bank keen to increase loans?

Nigeria is looking to diversify the economy away from oil following the plunge in crude prices. To encourage investments in agriculture and manufacturing -- which, along with trade and services, employ the most people -- President Muhammadu Buhari (who is seeking a second four-year term in February) is increasing spending on capital projects including roads, rail and power. Agriculture contributed 23 percent of gross domestic product in the second quarter and employs about 48 percent of the workforce.

5. How much lending is there to agriculture and manufacturing?

Total credit by banks to agriculture amounted to 523 billion naira ($1.4 billion), or 3.4 percent of bank loans, as of the second quarter of 2018, while manufacturing’s share was 13.2 percent, according to the statistics agency.

6. Why is this a tough time for the banks?

Nigeria’s economy is still recovering from a 2016 recession that triggered a scarcity of dollars and devaluation of the local currency, forcing companies to raise prices for goods and hampering their ability to meet debt obligations. Banks are more focused on getting companies to repay their loans than on creating new loans. Non-performing loans as a percentage of total credit stood at 12.5 percent at the end of June, down slightly from 14.8 percent at the end of 2017, according to the central bank. Lenders are aiming to bring their non-performing loans to the regulatory requirement of less than 5 percent.

7. What are banks saying about the new measures?

Fidelity Bank’s chief operations officer, Gbolahan Joshua, said that his bank hasn’t put any money into the new loan program. Access Bank said its flat credit growth -- the total stayed around 2 trillion naira for the first nine months of 2018 -- reflects “macro realities and cautious loan growth strategy.” FBN Holdings said its loans declined 4 percent to 1.9 trillion naira during the first nine months of 2018 as it sought to book the “right credits.” “It’s not easy to get banks to lend when they deem the risk as being too high,” said Bunmi Asaolu, a banking analyst at FBNQuest. “The government may also have to step in to provide guarantees to some obligors they feel need backing.”