MPC Member Warns of Excess Banking Sector Liquidity

Obinna Chima

A member of the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC), Dr. Mahmoud Isa-Dutse, has warned that the Nigerian banking system continues to harbour excessive liquidity with industry liquidity ratio far above the prescribed requirement.

Specifically, Isa-Dutse put the average industry liquidity ratio as at June 30, 2018, at 46 per cent, compared to the minimum prudential requirement of 30 per cent.

This was reflected in his personal statement at the July 2018 MPC meeting posted on the CBN website.

In his contribution at the meeting, Isa-Dutse, pointed out that industry data and complaints from real sector operators indicated weak lending by the banks, directly contributing to the weak economic recovery.

Nigeria’s Gross Domestic Product (GDP) slowed to 1.50 per cent (year-on-year) in the second quarter of the year (Q2, 2018), compared to the 1.95 per cent rate recorded in the preceding quarter, according to a recent data by the National Bureau of Statistics (NBS).

He said, “The liquidity overhang in the system is likely to worsen in the immediate future on account of 2018 budget execution, election spending and the new minimum wage proposals if approved.

“All hands must, therefore, be on deck to accelerate the rate of growth to a much higher level to enable us achieve the targets set in the Economic Recovery and Growth Plan (ERGP).”

He pointed out that as a result of the liquidity overhang in the banking sector, the gains in the fight against inflation could be vulnerable to reversal.

“Inflationary pressures are actually building up already as data indicate a deceleration in the rate of decrease in year–on–year inflation and actual increase in the month–on–month inflation figures for June 2018,” he said.

On his part, while the CBN Deputy Governor, Financial System Stability, Dr. Okwu Nnanna, pointed out that economic growth in the country remains weaker than expected, he noted that the persistent high rate of unemployment – especially, among the youth remains a challenge.

He said, “Though inflation has moderated downward owing to stable exchange rate, month-on-month data shows evidence of incipient inflationary pressures.

“The anticipated deficit financing of 2018 federal government budget and 2019 election spending including review of salaries and wages in September 2018 constitute upside risks to inflation in the near-term.
“Despite the growth in the monetary aggregates and improved liquidity conditions in the banking system, contraction in credit to the private sector has continued to linger.”

According to him, the banking industry continues to grapple with a high ratio of non-performing loans (NPLs).
“While the recovery in oil price offers hope to the banking industry, this may not likely impact on lending and asset quality in the near term. “Consequently, the combination of rising oil price, settlement of federal government contractual obligations to the private sector creditors including stronger economic growth may reduce NPLs, improve asset quality and sustain financial system stability,” he added.

Also, another MPC member, Dr. Mike Obadan, said the CBN should continue to ensure that banks embark on aggressive debt recovery drives; realise collaterals of non-performing credits as well as get the insurance companies to settle claims relating to insured debts.

He also called for the strengthening of risk management practices and strictly enforce the CBN restrictions on payment of dividends by banks with high NPLs.

“The financial system remains sound based on various measures of financial soundness. The few cases of high non-performing loans in the portfolios of a few DMBs have negative consequences on the banks’ earnings and capital. “However, the problem is being addressed by the CBN with corrective actions to prevent spill over to other institutions or adverse impact on financial system stability,” he said.