Sanusi defends Nigeria’s 12% MPR

Central Bank Governor, Lamido Sanusi

Nigeria’s Central Bank has said that a reduction in the nation’s Monetary Policy Rate (MPR), which currently stands at 12 per cent, would not translate to access to credit and loan facilities for Small and Medium Scale Enterprises, SMEs, and businesses as presumed and widely believed.

Interest rates are currently as high as 25-30 per cent, and even at that, access to credit at these rates are difficult.

“A cut in the Monetary Policy Rate would not necessarily make banks lend money to SME’s and businesses. We are cautious of the high interest rates but we are not in a hurry to loosen our hold on MPR because its easy to take stability for granted,” the Central Bank Governor, Lamido Sanusi, said.

Mr. Sanusi said this on Tuesday at Renaissance Capital’s  three-day 4th Annual Pan-Africa 1:1 Investor Conference in Lagos, which began on Monday.

He said the issue of lending to SMEs and entrepreneurs is not that of reduction of rates. According to him, even when the sector was regulated in less stricter measures, the banks were not lending to small scale businesses.

“Even in a loose and accomodative environment, banks were not lending to SMEs and entrepreneurs,” he said.

“The real issue with this is structural reform” he said. “Low interest rates do not compensate for bad infrastructure and uncompetitive environment. We can’t afford another risk in the sector. We have to fix these structural issues that hinder credits.”

The Central Bank Governor said the banks cannot lend to businesses that thrive in so much structural obstacles to success as are obtainable in the country. He added that banks can no longer lend money to businesses that would tie their funds down and end up in legal battles which run for years sometimes.

According to him, there is still a major risk to stability as the economy still remains vulnerable to crisis.

“We don’t intend to send a signal that the tightening era is over. We are still going to be very cautious,” he said.

Nigeria’s Monetary Policy Committee (MPC) left the MPR unchanged at 12 per cent in accordance with the consensus view at its last meeting in January, contrary to the expectations of some economists and finance analysts of a cut.

The MPC, which also maintained all other monetary policy instruments, said it is concerned about the risk to inflation from the higher-than-proposed benchmark price of $79/bl (as opposed to $75/bl), which implies upside risk to government spending.

The decision was to leave MPR unchanged at 12 per cent per annum with an asymmetric corridor of +/- 200 basis points (bps) around the mid-point. Cash Reserve Ratio, CRR, was left unchanged at 12 per cent of total asset while Net Open position limit was also retained at 1 per cent of shareholders’ funds.

The MPC would like to see recurrent spending, in particular, lowered and would also likely to see core inflation come down further. The strongest sources of inflation are food, housing, electricity and transport prices.

Mr. Sanusi, in an interview late January with Bloomberg in Switzerland, when asked the signs he would be looking for before he can consider moving the interest rates, especially having a rate cut, said a number of issues would determine that.

“First of all the exchange rate is a critical element in our price stability mandate… In general, once the exchange rate moves all over the place, then you begin to have uncertainty and prices change. The second thing is about the inflation numbers themselves and the components of the CPI basket” he said.

Bismarck Rewane, Financial Analyst and Managing Director of Financial Derivative Company (FDC), a diversified financial institution said interest rates, this year 2013, will continue to be market driven.

“Interest rates are influenced by the Central Bank’s adjustments of the Monetary Policy Rate (MPR),” he said.

Report from FDC show that credit to private sector grew by 16.96 per cent to N15.13 trillion in October 2012, over December 2011 figure of N12.93 trillion.

According to Mr. Rewane, MPRs are likely to be reduced from current levels in view of lower inflationary threats this year and there is a “strong possibility of marginal reduction.”

He said there is a correlation between the size of the inflation gap and the policy stance of the Central Bank as the lower the inflation gap, the more accommodating the Central Bank will be.

“We anticipate a decline in inflation to a single digit figure of 9.29 per cent in first quarter of 2013 (Q1’13). The high base effect in January 2012 after the increase in pump price, will have a downward effect on the price level,” he said.

Small and Medium Scale Enterprises (SMEs) and manufactures have lamented their lack of access to credit and expressed their desire to get loan at single digit and eliminate delays associated with loan processing

Muda Yusuf, the Director General of the Lagos Chamber of Commerce and Industry, in a report issued recently, said that the issue of unavailability and high costs of funding is weighing down economic activities in Nigeria.

According to him, access to credit as well as concerns on collateral cover requirements by banks, were beyond many investors.

He added that government borrowing at a high cost of 14-16 per cent, which is one of the highest globally, was a major source of the credit problem in 2012.

He said it created a disincentive to lend to entrepreneurs; put pressure on interest rates and increased the flow of funds from the banking system to the government coffers; a scenario which was clearly not healthy for the economy.

Nothando Ndebele, Head of Africa Research, Renaissance Capital said on Monday that a couple of factors are hindering access of credit to SMEs and entrepreneurs.

“The stability of cash flows in banks is very essential for lending, irrespective of high or low interest rates”. She added that banks don’t want to take up too much risks as they are trying to keep a 5 per cent
non performing loan ratio.

CRR is basically the minimum fraction of customer deposits and notes that commercial banks must hold as reserves, and not lend out, as set by the Central Bank regulation.

These mandated reserves could be in form of cash stored physically in bank’s vault or as deposits made with the central bank.

This cash reserve ratio can be classified as a monetary policy tool, as it can be used to influence borrowings and interest rates by changing the amount of funds available for banks to make loans with.

The more money banks have to place in reserve, the less they have to lend, irrespective of the interest rates obtainable at a given time, and vice versa.

Ms. Ndebele said that if the Cash Reserve Ratio, which was increased in quarter three, 2012 from 8 per cent to 12 per cent was adjusted and relaxed, there would be an improvement in banks’ lending.

“If there were to be some adjustment in the CRR, there would be some boost in lending,” she said.

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