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Financial Stability Report: CBN Says Banks Credit to Private Sector Fell Marginally 1.47% to N15,91 Billion in December 2016

 

Executive Summary

Global output growth was projected at 3.5 per cent in 2017, compared with 3.2 per cent recorded in 2016. The key drivers of the increase in growth included the strengthening of financial markets and expected recovery in manufacturing and trade. Inflationary pressures were sustained across the globe due to rise in the prices of raw materials and a recovering commodities market.

Global consumer price inflation rose due to increases in energy and consumer prices in advanced economies. Stock markets recorded mixed performance across countries, while major currencies showed mixed trends against the US dollar. Most of the central banks surveyed in the report kept their monetary policy rates fairly stable during the first half of 2017.

On the domestic front, the economy gradually recovered from the recession that had persisted since the second quarter of 2016, as gross domestic product grew by 0.55 per cent in the second quarter of 2017. The improvement was attributed to the rebound of activities in the services and agricultural sectors, as well as increased patronage of locally manufactured goods.

Furthermore, inflationary pressures started easing during the first half of 2017 as the headline inflation (year-on-year) declined to 16.10 per cent in June 2017 from 18.55 per cent at end-December 2016.

External reserves increased by US$3.35 billion in the first half of 2017 to US$30.34 billion, while the naira maintained a fairly stable exchange rate in the foreign exchange market.

The tight monetary policy stance maintained in the review period resulted in a contraction of most of the major monetary aggregates. Relative to the level at end-December 2016, broad money supply, M2, fell by 7.33 per cent at end-June 2017. Net aggregate credit to the economy rose marginally to N26,921.03 billion at end-June 2017, reflecting the increase in net claims on the Federal Government, which grew by 5.91 per cent.

The banking system’s credit to the private sector fell marginally by1.47 per cent to N15,907.47 billion from the position at end-December 2016. The oil and gas sector remained the sector with the highest share of credit at 29.29 per cent. The contribution of manufacturing, construction, and power and energy sub-sectors to total credit increased. Reserve money declined by 6.76 per cent in the review period, though it was higher than the second quarter indicative benchmark by 0.6 per cent. The decline in reserve money reflected the decline observed in net domestic assets and net foreign assets.

Interest rates varied in line with liquidity conditions. The average short-term money market rates traded mostly above the MPR of 14.00 per cent. Most of the key rates in the first half of 2017 were higher than their levels in the second half of 2016.

Short-term maturities maintained dominance in the credit market, though their share of total credit declined. Similarly, banks’ short-term deposits (below one year) constituted a very significant portion of the total. The low concentration ratios observed in the banking industry showed a trend towards more competition across the banks.

In the OFI segment of the banking industry, 167 institutions were licensed in the first half of 2017. This was to further enhance financial inclusion among the populace. Key financial indicators for OFIs showed an increase in total assets, net loans and advances, deposits and shareholders’ funds.

The Bank maintained its contractionary monetary policy stance in the first half of 2017 as it retained its monetary policy rate at 14.00 per cent. Money market rates closed high at the inter-bank market with the overnight call and open buy back (OBB) rates trading significantly above the upper bound of the MPR corridor for most of the first half of 2017.

In the capital market, the Nigerian Stock Exchange All Share Index (NSEASI) and market capitalization both increased due to improved confidence in the market and gradual economic recovery. Total bonds outstanding increased in the first half of 2017 by 2.96 per cent. The Bank continued to play a developmental role by providing key interventions to bridge the financing gap in some segments of the real sector.

In the banking industry, the asset quality of commercial banks deteriorated in the first half of 2017 as the ratio of non-performing loans to gross loans increased, compared with the level at end-December 2016. This led to a slight capital deterioration and a decline in earnings indicators. To test the resilience of the industry, a stress test was conducted on the banks. The test showed that the capital adequacy ratio of the banks deteriorated when the most severe shocks were applied. It also showed that liquidity shortfalls will only occur when the most severe shocks of a cumulative 30-day run were applied.

Supervisory activities of the Bank in the review period included the examination of banks and OFIs in conjunction with the NDIC, ongoing implementation of enhanced supervisory standards for the domestic systemically important banks (D-SIBs) and preparation for the implementation of IFRS 9 starting January 2018. The Bank, under the auspices of the FSRCC, commenced consolidated examinations of the three financial holding companies in the review period.

The Bank continued to collaborate with both domestic and international institutions to strengthen the AML/CFT regulatory framework.

The Banking Sector Resolution Cost Trust Fund (BSRCTF) realized a total collection of N190.89 billion in the review period. The fund is to be applied to the redemption of the outstanding bonds of the Asset Management Corporation of Nigeria, (AMCON).

To ensure that consumers of financial services are treated fairly by the banks, the CBN conducted compliance checks on banks’ compliance with the various consumer protection regulations, especially the Guide to Bank Charges. The report of the examination showed reasonably high compliance levels. Non-compliant banks were directed to implement specific remedial actions, including making refunds where applicable. The Bank continued its consumer education engagements to enhance financial literacy among the populace.

Following the approval of the roadmap for the Nigerian Sustainable Finance Principles (NSFP) by the Financial Services Regulation Coordinating Committee (FSRCC) in 2016, each member agency established a steering committee to coordinate the development of sector-specific sustainability principles and guidelines.

The FSRCC conducted an investigation of the activities of ‘Mavrodi Mondial Moneybox’ (MMM) and other Ponzi schemes and recommended the immediate shutdown of the websites of the illegal fund managers.

The moderate recovery of the domestic output growth, sustained decline in inflation rate, stability in the exchange rate and the gradual accretion to external reserves are expected to improve economic performance. In the medium to long-term, the implementation of the National Economic Recovery and Growth Plan and the Executive Orders are further expected to spur economic activities.

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