LDR Policy: Business Operators Admit Improving Access to Credit

Dike Onwuamaeze

Members of the organised private sector (OPS) have said the directive by the Central Bank of Nigeria’s (CBN) that banks should channel 65 per cent of their lending to the real sector is impacting positively on access to credit.

Representatives of the OPS told THISDAY that the policy has begun to provide solutions to the problem of access to finance for the real sector.

The central bank had in September raised the minimum industry Loan-to-Deposit Ratio (LDR) to 65 per cent, with a December 31 deadline; up from the 60 per cent it had prescribed previously.

The policy was to encourage lending to SMEs, retail, mortgage and consumer lending. The total value of banking sector credit to the private sector rose by 2.6 per cent or N646 billion to N25.466 trillion at the end of September; up from the N24.819 trillion recorded at the end of August and analysts have predicted that it would rise further.

According to the Director General of the Nigerian Association of Chambers of Commerce, Industries, Mines and Agriculture (NACCIMA), Mr. Ayoola Olukanni, the policy has seen more aggressive marketing of loan products by commercial banks.
Olukanni said: “Feedback from our members who are manufacturers reflected the fact that funds are currently easier to access to fund their business.”

Olukanni stated that NACCIMA has consistently advocated for access to single-digit-interest finance for the real sector since President Muhammadu Buhari’s administration assumed office.

This, he said, was a crucial factor to improving capacity utilisation in the industrial sector.
“We see this as a deliberate policy to ensure that there is greater access to finance. It is our position that at the very first instance of the implementation of this policy, industrial sectors that are able to guarantee sufficient returns to justify the high cost of funds will start to expand,” Olukanni said.

He added that the implementation of the CBN’s directive on LDR would have two-fold implications for the economy.
“First, there will be expansion of the real sector in the areas of high-margin potential leading to employment growth and increased contribution to national output from those sectors. Secondly, the financial system will be strengthened, based on the revenue interests that will accrue from this initiative,” he said.

The Director General of the Lagos Chamber of Commerce and Industry (LCCI), Mr. Muda Yusuf, who spoke in the same vein, said the new lending policy had improved the quality of financial intermediation to the real sector in such a manner that would impact the economy better as funding gaps in many sectors had started narrowing down.

Yusuf said the directive had also reduced the crowding out of the private sector in the credit market and improved economic inclusion as more SMEs and broader range of sectors have better access to credit.

“In addition, it has enhanced the deepening of the money market, the promotion of economic diversification in line with the Economic Recovery and Growth Plan (ERGP) and improved the purchasing power as consumer credit increases. This would also impact positively on the economy because of the stimulating effect increased aggregate demand,” he explained.

According to him, the LDR policy would ensure the “moderation of interest rates as supply of credit increases, improvement in lending creativity and innovation by the banks and broader and more diversified sectoral coverage of lending.”

However, Yusuf urged the CBN and fiscal authorities to among other things, strengthen the collateral registry to enhance the profiling of borrowers in the banking system.

“The character of the borrower has been identified as a major risk factor in lending in the Nigerian economy. Effective credit registry would improve the quality of customer profiling and credit risk management. Development of SME’s rating agencies to support credit assessment an evaluation in the SME space.

“There is need to scale up corporate governance practices in the banking system to prevent insider abuse and compromise of credit assessment processes; strengthen credit guarantee framework to give comfort to the banks; promotion of the use of credit insurance, and fiscal authorities should address enabling business environment issues, particularly infrastructure deficit and quality, in order to improve productivity and reduce credit risk,” he added.

But the Director General of Nigeria Employers’ Consultative Association (NECA), Mr. Timothy Olawale, expressed concern at the level of interest rate which hovers at double digits and in some cases above 20 per cent.

He said: “With the volatility of the Nigerian economy and the unpredictable regulatory environment, the risk of a double-digit interest rate could be too high for businesses, especially the SMEs that are supposed to also be beneficiaries of the directive.

“The CBN should do more than give directives but also ensure the effective implementation and monitoring of the directive. More deliberate efforts should be made to ensure a hospitable business environment that will make lending attractive and borrowing by the real sector even more attractive.

“High-interest rates remain a barrier to most existing businesses which have a business model based on small margins who simply cannot do business based on a 20 per cent cost of funds.”