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Increase in Banks’ Bad Loans Caused by Construction Sector

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The banking industry saw a 13.6 percent MoM (month on month) increase in bad loans to N2.76 trillion in August 2021, and the Central Bank of Nigeria attributed the increase to the rising loan defaults in the country’s construction sector.

The construction industry is touted to be under intense pressure due to the rise in the prices of building materials.

The Central Bank of Nigeria said this in its August Economic Report, stating that the NPL (Non-Performing Loans) ratio of the banking industry went up to six percent in August, one percentage point more than the five percent regulatory limit.

According to data from the apex bank, the total credit to the domestic economy went up by 2.2 percent to reach N46 trillion in August, from the N44.99 trillion recorded in July. This suggests that the NPL (bad loans) went up to N2.76 trillion in August from N2.43 trillion seen in July, a N330 billion or 13.6 percent increase.

The big rise in NPLs was explained by the CBN as a result of increased loan defaults in the construction sector, which accounted for about 4.7 percent or N905 billion of credit owed to other sectors in August, going up from 4.6 percent of N879 billion back in July.

The apex bank said the increase in the construction sector’s non-performing loans was due to the increase in process of building materials, which made it more difficult for contractors to meet their debt obligations.

Regarding this development, the Managing Director of Built2Suit Limited – a firm of architects – Ibukun Odu, said that apart from the increase in loan defaults, construction firms may have to turn to layoffs in order to reduce overhead cost.

Odu lauded the correctness of the CBN report, stating that a lot of contractors were finding the period extremely difficult. Odu stated that all the main components have witnessed increases of between 75 – 90 percent. He mentioned cement, which used to be sold at N2500 but is now sold between N4000 and N4200.

 

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Senate Approves N610 Billion CBN Loan Despite Legal Hurdles

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The Nigerian Senate has passed a bill amending the Central Bank of Nigeria (CBN) Act to allow the federal government to double its Ways and Means advances from 5% to 10% of the previous year’s revenues.

This amendment unlocks N610 billion in central bank loans for 2024, yet significant legal obstacles remain in the path of accessing the funds.

The Senate’s decision comes as the federal government grapples with financial constraints and seeks innovative solutions to stimulate economic growth.

Under the previous limit, the CBN could only extend loans equivalent to 5% of the federal government’s revenues from the previous year.

With 2023 revenues reported at N6.1 trillion, the new amendment effectively raises the borrowing cap to N610 billion.

However, Section 38 of the CBN Act, which was also amended, includes a critical stipulation that the federal government cannot borrow from the CBN if there are any outstanding balances.

According to the Act, “All Advances made (to the federal government) shall be repaid…by the end of the financial year in which they are granted and if such advances remain unpaid at the end of the year, the power of the Bank to grant such further advances in any subsequent year shall not be exercisable, unless the outstanding advances have been repaid.”

The federal government currently owes the CBN over N30 trillion, significantly complicating the new borrowing plan.

Although the CBN’s records show an outstanding balance of N8.21 trillion in Ways and Means advances at the end of December 2023, when including the N22.7 trillion in securitized loans, the total debt reaches N30.91 trillion.

This legal catch has sparked a debate among financial experts and policymakers. “The reality is that the government can no longer borrow via Ways and Means unless they pay back the outstanding N30 trillion,” a senior business leader told BusinessDay.

“Increasing the limit is of no consequence as it is also illegal to securitize Ways and Means to repay the CBN. What is required is comprehensive remedial legislation.”

Olayemi Cardoso, who was appointed as the CBN governor late last year, has expressed his awareness of the legal constraints and emphasized the need for fiscal responsibility.

Cardoso has reiterated that the CBN will not grant further loans to the federal government until the existing loans are repaid, citing compliance with Section 38 of the CBN Act.

“This is also in compliance with Section 38 of the CBN Act (2007). The Bank is no longer at liberty to grant further Ways and Means advances to the Federal Government until the outstanding balance as of December 31, 2023, is fully settled,” Cardoso told lawmakers.

Finance Minister Wale Edun has also declared an end to the government’s reliance on CBN loans, acknowledging the necessity for fiscal discipline and transparency.

“I am pleased to note the fiscal authorities’ efforts in discontinuing Ways and Means advances,” Edun stated during a Senate session.

The amendment’s timing is critical as Nigeria faces rising inflation fueled by a surge in money supply resulting from the extensive use of Ways and Means advances.

The CBN has tightened monetary policy to counter inflationary pressures, which were exacerbated by the substantial increase in money supply from N52.01 trillion in January 2023 to N68.25 trillion in November 2023.

The Senate’s approval of the N610 billion CBN loan marks a significant step towards addressing Nigeria’s economic challenges, but the outstanding debt must be resolved to make the new borrowing feasible.

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FG Seeks $500m World Bank Loan for Dam Safety and Water Management Enhancement

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The Federal Government of Nigeria has formally requested a $500 million loan from the World Bank to improve dam safety and enhance water resource management across the nation.

This loan, aimed at addressing the country’s pressing water security challenges, is expected to significantly boost agricultural productivity through the Sustainable Power and Irrigation for Nigeria (SPIN) Project.

The request was detailed in a World Bank Project Information Document released on Monday, highlighting the SPIN project’s focus on four critical areas: institutional strengthening and capacity building, irrigation modernization, improvements in dam operations and safety, and effective project management.

The World Bank’s proposed approval date for the SPIN project is September 26, 2024.

The project aims to reinforce federal and state institutions responsible for water resource management by developing national dam safety guidelines, providing training for water resources and irrigation management, and creating a comprehensive hydropower master plan.

“Nigeria faces water security challenges which impact water availability for drinking, energy, and food production, exacerbated by climate change,” the document stated. “Harnessing water storage and ensuring dam safety are central to climate change adaptation and mitigation in Nigeria. It is crucial for improving water management for supply, irrigation, and hydropower generation, and for protecting against floods and droughts.”

Nigeria boasts over 400 dams with an estimated total combined storage of 59 billion cubic meters. Of these, 46% are federally owned and managed by the Federal Ministry of Water Resources and Sanitation through River Basin Development Authorities, while 48% are state-owned.

However, many dams remain incomplete, and over 50% of the large dams built in the 1970s and 80s require rehabilitation due to inadequate budgets, human resources, and capacity for proper management, operation, and maintenance.

The 2022 floods, which caused an estimated $6.7 billion in economic damage, underscored the urgent need for improved dam safety and water management.

The SPIN project intends to rehabilitate and modernize 40,000 hectares of irrigated land and establish Water User Associations to manage these irrigation schemes efficiently.

Additionally, the project will focus on rehabilitating and enhancing the safety of priority dams, conducting risk assessments, preparing emergency action plans, and implementing structural safety improvements.

To ensure effective implementation, monitoring, and evaluation, the project will establish a Federal Project Management Unit and Technical Units at both federal and state levels.

This initiative by the Federal Government represents a significant step towards securing Nigeria’s water resources, ensuring sustainable agricultural practices, and protecting the country from the adverse effects of climate change.

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Nigerian Banks Boost Private Sector Support by 74.98% in Early 2024

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Nigerian banks have significantly increased their support for the private sector with loans and other forms of credit to the tune of N375.78 trillion in the first five months of 2024.

This represents a 74.98% rise from the N214.76 trillion recorded in the same period last year, according to the Central Bank of Nigeria (CBN).

The data from the CBN highlights a consistent growth in credit to the private sector, underscoring the banking sector’s critical role in driving economic stability and expansion.

This surge in private sector support includes loans, trade credits, and other account receivables, illustrating a robust and dynamic banking sector committed to bolstering the national economic agenda.

A closer examination of the figures reveals that credit to the private sector climbed by 65.9%, or N29.52 trillion, to reach N74.31 trillion in May 2024, compared to N44.79 trillion in the corresponding period of 2023.

The monthly breakdown showed that April’s credit stood at N72.92 trillion, while March and February recorded N71.21 trillion and N80.86 trillion, respectively.

February’s figures marked the highest contribution within this period, followed closely by January’s N76.48 trillion.

This significant increase in private sector credit comes on the heels of a recent report on capital importation, indicating that Nigerian banks are attracting substantial foreign investment.

According to the National Bureau of Statistics, capital importation into Nigeria rose by 2.62% to $1.09 billion in the fourth quarter of 2023, up from $1.06 billion in the previous year.

Leading this charge were Stanbic IBTC Bank, Citibank Nigeria, and Rand Merchant Bank, which facilitated the highest levels of capital importation.

The production and manufacturing sector emerged as the largest beneficiary of capital inflow, receiving $450.11 million, or 41.35% of total capital imported in Q4 2023.

The banking sector followed with $283.30 million (26.03%), and the financing sector with $135.59 million (12.46%).

Financial experts at Cordros Capital have attributed this upward trend to the CBN’s reinforcement of the loans-to-deposits macro-prudential ratio for Deposit Money Banks.

This regulation encourages banks to maintain a healthy balance between deposits and loans, fostering a stable financial environment conducive to lending.

An International Monetary Fund (IMF) study on bank balance sheet strength during financial crises found that banks with robust balance sheets were better positioned to maintain lending during economic downturns.

This finding underscores the importance of strong capital buffers, which the CBN Governor, Dr. Olayemi Cardoso, has emphasized in the ongoing recapitalization efforts aimed at strengthening Nigerian banks to support the country’s ambitious $1 trillion economic target.

Dr. Cardoso stated, “Additional capital not only provides a substantial buffer for banks against potential economic challenges but also enhances their capability to support massive economic growth and compete globally. The ongoing recapitalization will empower our banks to drive sustainable growth and achieve our national economic goals.”

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