Revealed: Rosabon Study Shows Nigeria Loan Financing Over 5 Years

In the financial sector, there has been continued improvement in performance as the reforms carried out by the Central Bank of Nigeria (CBN) to evolve dynamic financial system continued to have positive effect on the sector, according to a study by Rosabon Financial Services.

The reasons for the growth in loan lending, according to the study, cannot be unconnected with the reforms that were taken by the CBN to save the financial sectors that witnessed an unprecedented decline resulting from the global financial crisis.

The bailout of some banks and the successful cleaning of banks’ balance sheets through the sale of non-performing loans to Asset Management Corporation of Nigeria (AMCON), have brought renewed confidence in the banking industry.

In 2011, AMCON acquired 1.7 trillion non-performing assets of some Nigerian Banks.

Furthermore, the CBN reviewed and replaced the universal banking model which was adopted in 2001 with a new model which makes banks to focus on core banking businesses.

Under the new model, banking licenses are categorized into commercial banking (regional, national or international); merchant (Investment) banking and specialized banking which could be microfinance (unit, state or national) mortgage (state or nation) or non-interest banking.

In 2011, 3 of the 8 banks that were bailed out with public money failed to show commitment towards recapitalization.

Their banking licenses were revoked and the Nigeria Deposit Insurance Commission (NDIC) formed three new banks to take over their assets and liabilities.

These three banks were Afribank, Platinum-Habib Bank and Spring Bank from which Main Street Bank Ltd, Keystone Bank Ltd and Enterprise Bank Ltd were formed respectively.

The remaining bailed banks were recapitalized through merger/acquisition agreement with Access Bank, EcoBank, FCMB and Sterling Bank respectively. This is evidenced in the performance indicators of banks which show that are better position to perform their functions:

Also, the financial deepening indicators show that credit facilities to the private sector has been on the increase since the 2009 bank reforms.

Small and Medium Enterprises (SMEs) function as an engine for development, innovation and prosperity in emerging economies like Nigeria.

Therefore, access to loan facilities by the SMEs is very crucial for the economic growth of any nation. Unfortunately, access to loan financing is highly constrained for them.

In 2014, commercial bank loans to the SMEs dropped at an exponential rate. An analysis of commercial banks’ credit to small-scale industries indicates a decline of about 7.5% in 2003 to 0.12% in 2014.

A number of reasons have been proffered for this financing gap. The banks attribute their risk aversion stance for not lending to MSMEs to demand-side constraints.

These include the lack of managerial capacity, inadequate collateral, and poor record-keeping, among others.

However, supply-side issues such as high transition costs and a lack of understanding by the banks of the nature and operations of the MSMEs also exist.

Other constraints plaguing the MSME sub-sector in Nigeria include infrastructure deficit, especially power and transport, policy inconsistencies, bureaucracy; multiple taxation and levies, insecurity, weak intellectual property protection and contract enforcement.

To address the huge financing gap mitigating against the MSMEs, the CBN established the Micro, Small and Medium Enterprises Development Fund (MSMEDF) on August 15, 2013 with a seed capital of N200billlion.

The broad objective of the Fund is to channel low interest funds to the MSME sub-sector of the Nigeria economy to:

.Enhance access by MSMEs to financial services

.Increase productivity and output of microenterprises

.Increase employment and create wealth

.Engender inclusive growth

Robust economic growth cannot be achieved without putting well focused programmes that increase access of poor and low income earners to factors of production, especially credit in place.

Microfinance is about providing financial services to the poor who are traditionally not served by the conventional financial institutions.

In Nigeria, a large percentage of the population is still excluded from financial services.

The 2010 EFInA study revealed a marginal increase of those served by formal financial market from 35.0% in 2005 to 36.3% in 2010, five (5) years after the launching of the microfinance policy.

It can be seen from the table above that the loan and advances profile of microfinance banks to the various sectors of the economy is growing.

The recapitalization of the microfinance banks in December, 2013 has further strengthened the lending capacity of the banks. The shareholders’ fund of the microfinance finance/community banks has increased from N227 million in 1992 to N53 billion in 2014.

The finance houses also play a prominent role in loan lending to the economy. The assets and liabilities of the finance houses have also increased. The Central Bank has set September 31, 2015 as the deadline for the recapitalization of finances to N100 million.

The net loans and advances of finance houses have increased from N16 billion in 2005 to N48 billion in 2014.

The finances houses have also been very active in the leasing sub-sector of the financial services business.

There is a great potential in the industry recognized by the 350 established companies presently engaged in a different forms of leasing.

Another interesting development is the attraction of the Nigerian Leasing to foreign investors in partnership with Nigerians.

The expansion of these activities is a reflection of the increasing awareness of lease consciousness in the country.

According to a study by Lafferty Cards and Consumer Finance, at the end of 2012 consumer loans in Nigeria stood at $7.29 billion, far lower than the $19.11 billion in Egypt and $293.29 billion in South Africa.

Currently, the CBN Monetary Policy Rate (MPR) in Nigeria is 13% which significantly higher than the average rate of 8.75% across other major emerging countries in Africa i.e. Kenya, Egypt and South Africa.

There is clearly a huge financial gap in terms of consumer lending in Nigeria. According to the same report, 93% of Nigerians could not access loans in 2012 and while about two-thirds of the population had access to informal money lenders, 71% of the loans granted were through family networks.

Despite about 42 million adults employed, Nigeria only had 8.2 million active borrowers, of whom only 1.6 million held loans from banks as at 2012.

However, there has been a recent rise in consumer confidence in the Nigerian banking system.

An EY 2014 global consumer banking survey found that 69% of Nigerian banking customers have confidence in their banks.

Unfortunately, the same cannot definitively be said about the borrowers by lenders, given that bad credit was one of the major factors that led to the 2009 “near collapse” of the Nigerian Banking sector.

Lenders are still very risk-averse regarding providing credit to individuals and businesses in the country.

Over the past five years, the MPR has steadily increased from 6% to 13%. This has translated to comparatively higher prime lending rates.

Prime lending rates are indicators of the interest rates offered by financial institutions to their most creditworthy customers e.g. large corporations that have a lower likelihood of defaulting.

For more risky customers, the rates offered by the lenders would be higher. The MPR rise has however, atypically had an inverse relationship with the prime lending rates which have declined.

The lending rates in Nigeria have decreased from 17.56% in 2010 to 15.95% as of April 2015. This decrease would be a major contributor to the 43.28% increase in credit from commercial banks to the private sector between 2010 and 2015.

Even with that decline, it is still more expensive to acquire credit facilities in Nigeria in comparison with other emerging African countries in 2015. This is illustrated in the graph below.

One of the major reasons for the limited access to credit facilities among consumers and households is the lack of robust identity verification systems and processes.

Aimed at tackling this issue, CBN has begun to roll out the Bank Verification number (BVN) mandate.

The BVN gives a unique identity that can be verified across the Nigerian Banking Industry i.e. not peculiar to one bank.

By the 31st of October 2015, all Nigerians with accounts in commercial banks would be expected to comply with this directive. This is a significant step in resolving the issue of identity as biometric information is acquired and linked to the account holder.

This helps create a less risky lending scenario as multiple account holders and the corresponding credit history can be linked.

For instance, if an account holder in one bank defaults on a loan, because the information is linked, such a person would not be able to take another loan from a second bank.

This directive would go a long way to encourage banks and other financial institutions to lend. It would ultimately act as a safety net by significantly limiting the reoccurring exposure to bad debt by the same defaulter.

The CBN has role to play in mandating banks to make loans more accessible to individuals, particularly the under-leveraged individuals and households with a focus in the consumer space.

Another way the loan lending can be increased in Nigeria is to issue a directive to financial institutions, requiring them to be enrolled with the Credit Bureaus.

Furthermore, the CBN should create a unified platform where all the lending institutions are able to share information of defaulting customers as this will create an atmosphere of transparency among the players in the financial industry.

Conclusively, although loan lending in Nigeria has increased in absolute terms over the years, there are still major steps that need to be taken in order to unlock the huge potential of consumer lending by the Nigerian financial industry.
Source: Rosabon Financial Services