Professor of International Finance Law, University College London, Professor Graham Penn, on Tuesday, called on Deposit Money Banks (DMBs) to pay attention to balance sheet management as this will play a critical role in the Nigerian banking sector as a consequence of the Central Bank of Nigeria’s (CBN) new regime of minimum capital requirements.
This is just as the net domestic credit in the Nigerian economy surged to N96.1 trillion as at December 2023.
Penn said the call for balance sheet management is in the context of capital adequacy, which needs to be carefully managed in order for Nigerian banks to be in a position to provide much-needed debt finance to the real economy.
Professor Penn, while delivering his speech as guest lecturer at the 2024 annual lecture of the Chartered Institute of Bankers of Nigeria (CIBN), said the most important way that balance management can be achieved is by improving liquidity in the nascent Nigerian secondary debt market, thereby enabling Nigerian banks to diversify the way in which they fund their lending business.
According to him, DMBs should shift from traditional “relationship” lending that are held until maturity to securitisation.
He said, “CBN need to develop clear regulations governing the balance sheet and regulatory (capital carrying cost) effect of loan transfers for both the buyer and the seller of the loan/asset. Those regulations need to cover both the transfer of individual loan assets and portfolios of assets in the case of securitisation transactions.”
The theme of the lecture is ‘Improving Availability of Credit in the Nigerian Real Economy: The Critical Importance of Secondary Market Liquidity.’
In his welcome address, the President/Chairman, CIBN, Dr Ken Opara, said it is worth highlighting the improvements in liquidity within Nigeria’s real sector.
He quoted data from the CBN, which shows that the Net Domestic Credit stood at N66.4 trillion as of December 2022, showcasing the substantial credit extended by financial institutions to the real sector of the economy.
“This figure experienced a significant surge to N96.1 trillion by December 2023, highlighting the tremendous potential for growth and development in the real sector,” he stated.
Opara, while commending the CBN over the recapitalisation exercise in the banking sector, highlighted some of the challenges facing credit availed to the real sector to include lack of proper structure, key man risk, low value creation, low technology leverage or low adaptation to technology, craze for foreign goods and poor infrastructure facilities, especially power and storage facilities, poor road networks, among others.
Opera said due to these challenges, most companies in the real sector perform sub-optimally, making them less competitive than their foreign counterparts.
He said the recently announced upward review of the Minimum Capital Requirements of Nigerian banks by the CBN would further empower banks to extend more credit to the economy’s productive sectors.
Opera said, “In addressing the above challenges, I humbly suggest that the government needs to improve further the ease of doing business and infrastructural development, such as power, roads, rail networks, etc.
“Setting up industrial centres where these companies can co-habit and share common infrastructure; harmonise and reduce the various taxes and levies, including locating them in a single hub.”
“Banks need to be deliberate in derisking these companies via capacity building programmes and advisory services. Specialised financial institutions can be created in addition to the Bank of Industry (BOI), especially credit guarantee agencies and risk-sharing institutions, to further facilitate the deepening of credit as practised in countries such as China, which significantly transformed its economy in the space of just 30 years.”
He said the institute recognises the pivotal role that access to credit plays in driving economic growth and prosperity.
“Our mandate encompasses not only fostering excellence within the banking sector but also advocating for policies and initiatives that promote financial inclusion, sustainable development and economic empowerment.
“Today, as we gather for the lecture, we reaffirm our dedication to knowledge-sharing, collaboration and dialogue among stakeholders.
“By convening policymakers, regulators, industry leaders and experts, we aim to deepen our understanding of the challenges and opportunities facing Nigeria’s real economy and identify actionable solutions to improve credit availability.
“It may interest you to note that CIBN and Nigeria Exchange Group (NGX) are forming strategic collaborations towards building capacity as regards the recapitalisation of banks. The parties have agreed on a number of initiatives, including a joint visit to the Governor of Central Bank, Mr Olayemi Cardoso, which took place on Wednesday, March 20 and other series of needed sensitisation, support and platforms for banks recapitalisation exercise,” the CIBN helmsman stated.
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