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Nigeria orders banks to lend more money

IN AN effort to boost economic growth in Africa’s most-populous country, Nigeria is giving its banks a choice: lend more money, or hand it over to the central bank and earn nothing on it.
Banks should use at least 60 percent of their deposits for loans by the end of September, the central bank said last week, according to a circular seen by Bloomberg. Those that don’t will have their cash-reserve requirements increased, meaning they’ll be forced to park more money at the central bank.
Nigeria’s banks are some of the most reluctant lenders in major emerging markets, with an average loan-to-deposit ratio below 60 percent. That compares with 78 percent across Africa, according to data compiled by Bloomberg. It’s above 90 percent in South Africa and about 76 percent in Kenya.
The decision was taken “to ramp up growth of the Nigerian economy through investment in the real sector,” Ahmad Abdullahi, director of banking supervision, said in the letter to banks. “To encourage lending to small businesses and consumers and more mortgages, these sectors shall be assigned a weight of 150 percent” when computing the loan-to-deposits ratio.
The Nigerian economy is struggling to recover from a full-year contraction in 2016 and will expand 2,1 percent this year, according to the International Monetary Fund. The central bank cut its key lending rate in March to help boost growth.
There was previously no rule on minimum loan-to-deposit ratios, and many Nigerian lenders have ratios of about 40 percent, Abdullahi said by phone from Abuja, the capital.
The order came after Central Bank governor Godwin Emefiele urged banks to boost lending or have access to risk-free assets restricted. Speaking at the most recent Monetary Policy Committee meeting in May, he said he would create “a mechanism” to limit banks’ purchases of government securities.
Risk-averse Nigerian banks have resisted lending to businesses and consumers and instead piled their cash into naira bonds, which yield 14,3 percent on average, one of the highest rates globally. Lenders worry that with inflation at more than 11 percent, extending more credit could endanger the financial system through an increase in non-performing loans, or NPLs. – Bloomberg