According to the global bank, the CBN’s continued provision
of subsidised funding to certain sectors has to slow down as it is undermining
the ability of commercial banks to lend on a risk-adjusted pricing basis. It
added that the apex bank’s disbursement in the private sector as its share of
private sector credit rose from 6.5 per cent in 2019 to 10 per cent in 2021.
It disclosed this in its ‘Nigeria Development Update (June
2022): The Continuing Urgency of Business Unusual.’ It said, “The CBN’s
continued provision of heavily subsidised funding to certain sectors undermines
commercial banks that lend on a risk-adjusted pricing basis and needs to be
dialled down.
“CBN disbursements are growing in funding the private
sector, with the CBN’s share of private sector credit rising from about 6.5 per
cent at end-2019 to 10 per cent by end-2021. Although some of the COVID-related
tools deployed by the CBN are being phased out (e.g., the moratorium on
principal repayments on CBN-funded credits lapsed in March 2022), the Central
Bank has introduced new intervention facilities without a publicly available
evaluation of their impact.
“The CBN also stepped up disbursements and kept the monetary
policy rate unchanged at 11.5 percent from September 2020 until May 2022. On
March 15, 2022, the CBN extended the five percent per annum interest rate on
its development finance intervention funds for one more year through
end-February 2023.
“The Monetary Policy Committee has strongly encouraged the
central bank to continue its development finance interventions, including a
policy tool to help tame rising inflation. However, this stance fuels inflation
in the short term from elevated aggregate demand and weakens the ability of the
central bank to control inflation efficiently.”
According to the Washington-based bank, expanding government
programmes to support micro, small, and medium enterprises is a priority to
protect viable and vulnerable MSMEs against rising uncertainty.
It said while the banking system had proved resilient in the
face of the pandemic, the operating environment for banks and firms has become
more challenging recently. It stated that the fallout from the war in Ukraine
is driving inflation higher, increasing production costs and the cost of
borrowing through higher rates.
It further said that loan quality over the next several
quarters is likely to deteriorate. It added that certain medium-sized banks
that cater to SMEs and intermediate CBN development finance could be stressed
if economic recovery falters and SMEs, many of which have already suffered over
the last two years, typically have less resiliency in revenue generation than
larger, more diversified companies.