Appraising banks’ role in economic development through lending capacity

Economic development involves investment in various sectors of the economy; the banks collect savings from the people and mobilize savings for investment in industrial project. Commercial banks not only facilitate but speed up the process of economic development through making more funds available from resources mobilized. But in recent times, banks’ lending capacity to the private sector has become a mountain to climb. In this analysis, Niyi Olaoye, x-trays banks’ lending objectives as catalysts to Nigerian economy growth and development.

Introduction

Banks, the world over, play fundamental roles in the development and growth of the national economy. The effectiveness and efficiency in performing these roles, particularly the intermediation between the surplus and deficit unit of the economy, depends largely on the level of development of the financial system.

It is to ensure its soundness that the financial industry in Nigeria appears to be the most regulated by the government and its agencies.

However, despite the efforts of the Federal Government and the Central Bank of Nigeria (CBN) to develop this financial market, in order to play its role in the economy, recently there have been involving constraints on the ability of banks to expand their balance sheet.

Since lending objectives are designed to ensure growth and profitability, therefore, the economic environment determines the growth and the profit opportunity that can be tapped.

As a result of this, financial analysts believe that if the economy is dispensed, banks will tend to protect first and foremost its loan portfolio. Furthermore, at time pursue programmes of consolidation rather than the expansion of their portfolio.

According to them, financial market is thought to be central to business activity, therefore, when they experience financial distress; governments usually come to the rescue, offering emergency liquidity and various forms of bailout programs.

Market analysts and watchers also believe that credit to the private sector and aggregate output does, in fact, decelerate during banking crises. Though, this is not necessarily evidence that banking problems contribute to the decline in output.

Having therefore, seen two consecutive quarters of slow growth in Nigeria, and the country’s economy, fallen into recession, many Nigerians have, therefore, seen the need to seek for banks’ assistants in the developing of the economy.

It will be recalled that Nigeria has recorded a negative Gross Domestic Product (GDP) growth rate for two consecutive quarters in 2016, thus officially indicating a recessed economy, as the National Bureau of Statistics, NBS, released the second quarter economic report.

In fact, NBS after releasing the second quarter economic report stated that proactive steps should be taken to revive growth in the key sectors of the economy.

Roles of banks in economic development

Most financial experts interviewed, therefore, have suggested that the economies of all market-oriented nations would then depend on the efficient operation of complex and delicately balance systems of money and credit, which however, makes banks an indispensable element in these systems.

To this end, it makes commercial banks to play an important role in economic development of developing as well as the developed countries.

It will be noted that economic development involves investment in various sectors of the economy; the banks collect savings from the people and mobilize savings for investment in industrial project.

It is noted that investors borrow from banks to finance the projects while commercial banks involves in the process of increasing the wealth of the economy, particularly the capital goods needed for raising productivity.

Generally commercial banks not only facilitate but speed up the process of economic development through making more funds available from resources mobilized. These are done through their function of financial intermediation; banks facilitate capital formation, lubricate the production engine turbines and promote economic growth.

However, banks’ ability to engender economic growth and development depends on the health, soundness and stability of the banking system itself.

Banks fail customers in loan and capital for running business

Business247 News Online, however, gathered that contrary to aforementioned statement, banks and financial institutions have failed Nigerians in the area of loan and capital for running business.

Speaking with Mr. Uche Moses, a customer of GTbank Plc, he said that some of the banks claimed to be offering loan to Small and Medium scale Entrepreneurs  (SMEs) and private individuals but they end up playing on the intelligence of their customers.

According to Moses, after running the account and maintaining your relationship with the bank for centuries by the time you apply for loan they ask you to bring your whole community if not to bring your grandmother for them to check if her teeth are still complete, all in the name of collateral.

More so, Mr. Paul Ugbajeh, a bottled water producer at Iyana Ipaja, said that he had tried to process various types of bank loans through two different microfinance banks, to no avail.

“I have tried to access the loans to expand my business, by applying to two different microfinance banks but I have been denied.

“I have provided all the required documents, but have heard nothing from them, and I keep asking.

“I had to approach a friend of mine because there are prospects in water and Ice block business that I want to expand into,” he said.

Similarly, Mr. Segun Kuti-George, Chairman, Nigerian Association of Small Scale Industrialists (NASSI), Lagos Chapter, said that none of his members had been able to access neither the government loans nor the bank’s loans.

He said that the association has taken deliberate efforts to assist its members in writing presentable proposals submitted to the Small and Medium Enterprises Development Agency (SMEDAN) for processing.

.Also speaking to Business247 News Online on phone, Mr. Olufemi Egbesola, President, Association of Small Business Owners, (ASBON), said that none of the members of the association has accessed any loans.

He said that most of the small scale operators have turned to relatives to get funds to start or expand their businesses, since the government and banks loans were not forthcoming. “To me, I think the process of accessing the loans is too tedious.

“You are asked for this, we bring, tomorrow they ask for something else, collateral documents and so on, even after fulfilling all the requirements, we still have not heard anything,” Egbesola said.

Whose fault?

Meanwhile, Mr. T.O Adekanye, an economist, while given a lecture in Lagos on “Credit Management and Bank Lending in Nigeria” said that the liquidity ratio prescribed by CBN monetary circular has created a limitation on the credit operations to these commercial banks, therefore making lending hard.

For instance, on the issue of the Cash Reserve Requirement (CRR), which each commercial bank has continued to maintain with the CBN, a ratio of its total demand deposit, he said, that this has only become a liability been received by the apex bank since 1980.

According to him, the appropriation of this fund curtails the aggregate of deposit available for lending purpose since the renovation of the time.

In his words:” the dictionary of modern economy” say credit is a wide term used in connection with operation or state involving lending generally short term . He said to give credit is to finance directly or indirectly , while  lending or financing is direct when a bank extend an order of facility to a customers who then uses it .

Adekenye further mentioned that to have a credit is to have a facility to acquire goods without the immediate payment or to drawn finance from a financial institution. It is this latter definition; he said that banks are not putting in use.

‘In spite of the knowledge that lending is a highly risked business, commercial banks still devote part of their total resources into making loan and advance to their customers’, he added.

He opined that there is no other area of operation in which bank can suffer a sizable lose as quickly as its lending operation and there is no better way in which bank can contribute to the growth and development of the economy than by prodding productive investment which result in the promotion for the welfare of the people .

The economist said that lending is instrumented in the creating and maintaining contract establishment with the borrowers. ‘It is also instrumental in the broadening the market for other bank service’, he added.

In Mr Segun Adeifa’s view, a seasoned banker with one of the Tier 2 bank, the same exogenous adverse shocks that trigger banking problems may also cause a decline in aggregate demand, leading firms to cut investment and working capital and, ultimately, demand for bank credit.

Adeifa further mentioned that these same shocks may also cause a temporary increase in uncertainty, leading firms to delay investment and borrowing decisions.

In addition, he said output and bank credit are likely to decelerate around banking crises even in the absence of a feedback effect from bank illiquidity and insolvency to credit availability.

The TSA Constraints

Meanwhile, Business247 News Online also gathered that Nigerian banks are seriously searching for new sources of deposits and means of boosting profits, as a result of the implementations of the Treasury Single Account (TSA).

The new TSA platform which kicks started early this year allows all receipts by MDAs to be made directly to the Consolidated Revenue Fund at the CBN, through an electronic channel process known as e-Collection. The TSA translates to a significant decline in banks’ deposit, as these are monies that are being kept with the banks.

The implication, according to investigations carried  out by Business247 News Online, has further impoverish consumers whose purchasing power has been eroded by delayed payment of monthly salaries and in some cases half salaries to staff of local government staff in some states of the federation.

Consequently, lenders have drastically been affected by the TSA directive, as this effectively raises to 100 percent, the proportion of public sector funds sterilized with the CBN.

“All banks are reviewing interest rates up on existing loans,” one bank official at a mid-tier lender told Business247 News Online.

A letter to a customer from one of the banks seen by our correspondent, shows average interest on loans up by 3 percent or 300 basis points. “The increase is aligned to current money market realities,” the bank said.

It is also gathered that some banks had increased deposit rates to attract idle funds and adopting aggressive tactics to lure customers to open accounts in a country where 67 percent of the adult population is unbanked.

“There is pressure generally, our targets have been raised to N1 billion a week,” one marketer in a second-generation bank said on grounds of anonymity.

A year before that, the apex bank had identified implementing the TSA as a fiscal strategy that would support its inflation-targeting policies at the time.

The development has therefore helped reduce the need for government to borrow, by issuing bonds  which are mostly subscribed by banks, when the government’s idle funds already exist in same banks.

What Banks could do

Recently, it has also being said that the Nigerian commercial banks have not been performing the desired roles in improving capital formation and promoting economic growth in the country.

Capital formation refers to the net addition to the capital stock after of any nation after depreciation. It is defined as an addition to stock of capital assets set aside for future productive endeavours in real sector which will lead to more growth in physical capital assets of the country.

Capital formation captures all the real-value-added to the economy in real-asset-terms which will lead to further enhancement of savings, investment and generation of more wealth in future. Capital formation derives from savings accumulation. It has a positive impact on private savings accumulation in the sense that increase in capital formation will lead to more savings.

When savings accumulate it will lead to an increase in gross domestic investment (GDI) and income generated as a result of the investment projects made will, in turn, lead to GDP growth.

One of the most striking features of institutional credit in Nigeria in the last decade has been the significant increase in deposit money banks direct lending to the federal government (via the bond market) for building of infrastructural facilities, programme support and meeting budget deficits.

What CBN and banks plans to do

The Governor of the Central Bank of Nigeria (CBN), Mr.  Godwin Emefiele, while briefing journalists on the communiqué released after last Annual Bankers Committee Retreat  recently said that CBN and banks will up their game in developing Nigerian economic through their lending objectives.

.The CBN boss said that the retreat also gave the opportunity to exchange ideas with invited ministers about their agenda and plans on lending.

“We had extensive discussions on some of the previous outcomes of the bankers committee which have helped to increase lending to the manufacturing sector, facilitated finance to the power and aviation sectors and we sincerely want to do more.

“It has also helped to sensitise lending to the agriculture sector where we have seen lending increasing from as low as one per cent in 2010/ 2011 to as high four per cent in 2014/2015,” Mr. Emefiele said.