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Thursday, May 13, 2021

Banks’ Exposure to Manufacturing Sector Hit 15% of Gross Loans

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Despite the myriad challenges facing Nigerian manufacturing, banks are slowly channeling funds to the sector, aided by Central Bank of Nigeria (CBN), intervention funds to the sector.

MoneyCentral’s analysis of the loan books of 9 major Nigerian banks for which there is available data shows that gross loans to the manufacturing sector hit a combined average of 15 percent of their loan books or N2.406 trillion.

Stanbic IBTC Bank had the highest exposure to the manufacturing sector with 26 percent of loans channeled to the sector, this was followed by Guaranty Trust Bank at 19 percent, Union Bank at 18 percent, FBN Holdings 17.7 percent, Fidelity Bank at 17.3 percent, Zenith Bank at 16 percent, UBA 15 percent, FCMB at 10.5 percent and Access Bank at 8.8 percent of loan book.

The oil and gas sector (upstream and downstream) still had the highest exposure on average at close to 24 percent of the combined loan books of banks analysed, while the Agriculture sector got the lowest loans at around 2 percent.

It is glaringly conspicuous that banks are reluctant to give loans to the Agric sector because they are wary about the uncertainty in the macroeconomic environment.

This is because when they extend credits to companies that are struggling, and these loans go wrong, they expose themselves to deteriorating asset qualities.

Interestingly, the coronavirus pandemic that disrupted the demand and the supply side of the market elicited rising impairment charges as many customers whose businesses were shuttered could not pay interest on money they had borrowed.

Many bank executives are avoiding a repeat of the industry crisis of 2009, and they have been strengthening their risk asset strategy.

The main reason is that they are afraid they may not get their money back, they are only interested in firms that are credit worthy with the prospect of meeting their obligations, according to Wale Olusi, head of research at United Capital Limited.

There are divergences of opinion on why the central banks left the monetary policy rate at the current levels, while its counterparts in the United States, Asia, and the United Kingdom are cutting interest rates.

Of course, a high monetary policy rate means manufacturers bear the brunt since financial institutions will charge them a cut throat interest rate after factoring other costs of doing business.

The majority of economists have concurred that the central bank governor needs to maintain a tightening stance so as to curb inflation and stabilize the economy.

Nigeria’s inflation for the month of March 2020, rose to 18.17 percent from 17.33 percent recorded in February.

It is noteworthy that the main challenge to inflation in Nigeria is supply side driven, and border closure and insecurity in food producing regions means food scarcity will surface.

Industry experts are calling on the government to put an end to the heinous insecurity challenges across the country, and by doing so, farmers will go back to the fields.

The structure of the Nigerian economy is different from others.

The supply side is hampered by insecurity that has disrupted distribution of items from the North to other parts of the country, according to Abiola Gbemisola, equity research analyst with FBNQuest Limited.

The central bank had taken the bull by the horn when it implemented policies aimed at forcing banks to turn on the tap of lending to manufacturers and other small businesses.

In June 2019, it announced a new policy measure, which required Deposit Money Banks to maintain a minimum 60 percent Loan to Deposit Ratio. And it further increased it to 65 percent in 2020.

The central bank debited lenders with N8.30 trillion in 2020 for failing to meet the cash reserve ratio (CRR) requirements, another stringent measure to accelerate loans.

“CBN debits them because they have refused to lend,” said Wale Olusi.

Analysts say manufacturers can also tap the capital market for funds since there may not be enough incentive for banks to lend to them.

In short, manufacturers are missing out because many companies are raising commercial papers between 6.5 percent and 7.5 percent from the debt market, whereas financial institutions charge 13.75 percent.

The yield on 12 months short- and long-term bonds have been at single digit since the apex bank prohibited individuals and non-bank corporate from its open market operations.

Ambrose Oruche, acting director-general, Manufacturers Association of Nigeria (MAN), is of the view that the manufacturers should be prioritised in the foreign exchange allocation as the sector creates more jobs and it contributes significantly to the economy.

In 2020, Nigeria’s GDP amounted to N152.32 trillion, over $400 billion. About 13 percent of the Gross Domestic Product was generated by the manufacturing sector.

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