Banks Hit by Dollar Restraint, Delay Forex Loan

There were indications yesterday that restriction on the dollar by the Central Bank of Nigeria (CBN) is adversely affecting banks in Nigeria, as it has forced a delay of hard currency loan and trade repayments to foreign banks, according to Leadership newspaper.

Leadership newspaper report came as Reuters also reported that the curbs on the dollar is also increasing the risk of defaults.

As a long term measure to encourage local productivity and the strengthening of the naira, the central bank began to impose a strict control on the dollar to stanch the depletion of foreign reserves, which tanked at at $27.82 billion by March 1.

Bankers have insisted they have the capacity to pay what they owe, saying “the delays are understood by both parties to be due to exchange controls”.

While banking sources estimate outstanding LCs at $500 million, the CBN had rationed dollars since oil prices began to fall, selling around $250 million a week, according to bankers.

The central bank met commercial lenders this week to assure them it would sell them foreign currency to repay foreign loans, but told them they needed to pay off matured LCs first before negotiating new ones to prevent a backlog building up, bankers said.

If the amount of delayed repayments gets too big, bankers fear it might become impossible for the central bank to meet dollar demand, which would push the situation from a liquidity crunch to a credit crunch – and ultimately even a default.

“If we have a credit default due to the currency controls, it will affect the entire country and worsen the country risk profile,” another banker said.

Oil revenues have historically accounted for 70 percent of Nigerian government income and 90 percent of its foreign exchange. The oil price collapse has whacked public finances and the currency, which trades on the black market at almost half its official value.

President Muhammadu Buhari had rejected calls to devalue the naira, even though banks are being squeezed harder every day.

Loan growth ground to a halt last year after a 32.5 percent jump in 2014 as the banks’ main clients in the oil sector halted projects or were unable to service loans.

“We will see non-performing loans rise to around 10 percent in 2016 moderated by restructuring and write-offs,” said Akin Majekodunmi, a sub-Saharan Africa banking analyst at Moody’s.

Bad loans had risen above 5 percent at the end of 2015, up from 4.7 percent as of June 2015, he estimated. (Additional reporting by Ulf Laessing; editing by Adrian Croft)

Meanwhile, Interbank lending rate climbed to to an average of 3.5 percent yesterday from a paltry 1 percent last week, after central bank sales of treasury bills and deposits for dollar purchases drained liquidity in the banking system.

Nigeria raised 329.93 billion naira ($1.66 billion) worth of three-month to one-year treasury bills at an auction on Wednesday with higher returns than in its previous auction.

The central bank had also directed commercial lenders on Tuesday to pay for their dollar purchases 48 hours in advance of its Thursday intervention in the official interbank forex market. This step also drained cash from the system and led to a hike in the cost of borrowing among banks.

The central bank usually intervenes once a week in the official interbank foreign exchange market to provide dollars for eligible importers, while it requires commercial lenders to fund its naira account 48 hours ahead of the intervention.

Traders said the central bank offered 50 billion naira in open market operation (OMO) treasury bills on Friday, but the result of the auction was yet to be released.

The total commercial lenders’ credit balance with the central bank stood at 439 billion naira on Thursday compared with 591.76 billion naira last Friday.

Traders said banking system liquidity was expected to decrease further after additional cash outflows to OMO bill purchases and cash reserves requirements are debited from commercial lenders’ accounts.

“The cost of borrowing is expected to spike further on Monday if the central bank sells more treasury bills than it offered at the OMO auction today (Friday) and the CRR debit is reflected in the banking system debt balance,” one trader said.

The interbank rate reflects the level of naira cash liquidity in the banking system.