Godwin Emefiele, Nigeria’s central bank governor, discusses moves to encourage greater private sector lending and a push towards a cashless economy.

Godwin Emefiele

Godwin Emefiele

Two years after exiting its first recession in more than 20 years, Nigeria’s economic recovery remains fragile. While a recovery in the price of oil – which accounts for 90% of the country's exports – has lifted revenues since the lows of 2016, growth remains sluggish, thanks to weak private consumption and tepid investor confidence. The International Monetary Fund (IMF) expects Nigeria’s gross domestic product to grow by just 2.3% in 2019, an improvement on the 1.9% recorded in 2018, but well below the country’s population growth rate.

In a bid to boost the economy, in July 2019 the Central Bank of Nigeria (CBN) raised the minimum loan-to-deposit ratio for banks to 60% in a bid to encourage banks to lend more to the private sector. The CBN doubled down on the move in late September, with the announcement that the threshold would be raised to 65% at the end of the year.

The strategy has caused some consternation in the banking sector and beyond. The IMF noted in October that while banks’ prudential ratios were improving and inflation had fallen, the new regulations “may need to be revisited in view of the potential unintended consequences on banks’ asset quality, maturity structure, prudential buffers and the inflation target”.

Aside from its monetary policy responsibilities, the CBN is pressing ahead with several digital initiatives. In late 2017, the bank introduced new rules enabling non-banking entities such as telecom operators, retailers and others to offer limited banking services under ‘payment service bank’ licences, in a bid to expand the spread of bank accounts from non-traditional providers.

The CBN is also proceeding with its 'cashless' policy, first introduced in 2012, in a bid to expand the use of digital transactions across the population and deepen financial inclusion in rural areas.

Heading up the CBN is Godwin Emefiele, who in May became the first central bank governor to be awarded a second five-year term since the country’s return to democracy in 1999. In an interview with The Banker, edited for clarity and length, Mr Emefiele discussed the prospects for economic growth in Nigeria, the impact of measures to stimulate lending in the country, digital finance initiatives, and the country’s accession to the Africa Continental Free Trade Area earlier in 2019.

Q: What is your prediction for the Nigerian economy in 2020?

A: Global growth has been very fragile, with the IMF and World Bank revising their forecasts downwards for 2019, as a result of the trade tension between the US and China, and political tensions here and there. This has upset the flow of global capital and affected many different economies.

We’ve seen relative stability in the macroeconomic environment in Nigeria; exchange rates are somewhat stable and our reserves are looking good. We’ve tried as much as possible to work very hard to sustain growth, which according to our own projections will be about 2.38% for [2019].

We believe that crude prices will remain stable within the $62 to $65 range for the rest of the year, that is, at a level that is somewhat lower than for 2018. That will translate into a slightly weaker economy, but we can still expect to achieve our growth objectives.

Q: What was behind the CBN’s decision to keep interest rates unchanged in September?

A: The inflation rate has come down, and therefore people would have expected us to ease rates. But we still feel that having not attained the kind of inflation level we’re targeting – between 6% and 9% – we cannot ease in a hurry.

On balance, we thought we should keep rates constant. As you know, we’ve taken other steps to encourage banks to increase lending to the real economy to stimulate demand, improve productivity and ultimately help to achieve growth.

Q: One of those steps has been to raise the minimum loan-to-deposit ratio to 60% for banks that deposit money, which is due to increase to 65% on December 31. What impact has this had on lending?

A: The average loan-to-deposit ratio within the industry and the average size of loans [at banks] had, at best, been flat and in some cases had dropped. The Monetary Policy Committee [MPC] felt that the management of the CBN had to do something to compel the banks to begin to look at lending more.

There was a lot of hue and cry [over the move] from the banks and also from ratings agencies and foreign investors, who claimed that this would adversely affect non-performing loans. We’ve been able to [ease] that tension because we’ve met the banks and we came up with a credit risk protection clause for loan agreements.

In the last MPC meeting, which was held [in late September], we saw loans moving from about N15,400bn [$42.3bn] to more than N16,500bn within a period of two months.

Q: Late in 2018, Nigeria introduced the payment service bank model, allowing non-banks to offer limited banking services. What updates can you share with us? 

A: Those who have met our criteria for the licensing have been given approval in principle. Three entities [Hope PSB, Money Master PSB and 9PSB] have been given approval in principle so far. It is an ongoing process; as more and more of them meet our criteria, we’ll award more licences.

Q: Are we likely to see any more companies given approval in principle before the end of the year?

A: Not before the end of 2019. It is a new regime, so we want to see how we can nurture these three entities to ensure they do what we want them to do before we start to think of the next stage. So this year there will not be any other licences.

Q: Will you expand the payment service bank scheme to allow such entities to offer loans?

A: We’re not going to consider it. Once you begin to go into the regime of lending, you’re turning yourself into a proper commercial bank, so you might as well now obtain a commercial banking licence.

Q: The CBN recently reintroduced fees on cash deposits of more than N300,000 for individuals and N3m for companies in six states as part of the bank’s cashless policy initiative. How are you planning to extend the scheme further?

A: To encourage people to embrace the non-cash channels we’ve put in place – including mobile payments, e-channels, super agents and others – we decided we needed to reintroduce [charges] on large cash deposits. We think that it’s been going well so far.

We’re going to monitor what’s happening in the six states in which the scheme is in place between now and March 2020. If by then we’re satisfied that financial services penetration has improved in the system, then we will be able to introduce cashless throughout the whole country.

Q: Nigeria signed up to the African Continental Free Trade Area [ACFTA] in July, after pulling back from joining in 2018. What has changed, and what are your hopes for the project?

A: The entire concept of ACFTA is to say that we should open Africa up to business within Africa. It is about free trade and free movement, and we hope it will work.

In the initial stages, some of us in the CBN opposed it because we felt that Nigeria wasn’t yet right for it. But of course, we felt that there’s no need for us to remain outside and say we’re not right for it. We felt that we needed to go inside and put our conditions on the table and make sure that no games are played.

When we say free movement, we mean free movement of trade and persons. We will see to it that all conditions to free trade and movement are complied with by all members of that community, otherwise we will not be part of it. There’s a technical committee that has been set up and is working on all the protocols and agreements that need to be put in place that will give us the assurances that we need [in order] to say: “Yes, we’re ready to go.”


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