Nigeria’s central bank introduced measures last year to encourage commercial banks to lend more, part of a bid to revive one of Africa’s biggest economies. Credit growth, however, has stagnated, despite the new rules enabling lenders to deploy funds previously earmarked as reserves. Now, central bank Governor Godwin Emefiele is taking a more aggressive approach, penalizing banks that are deemed too risk-averse.

1. Why is the central bank doing this?

Nigeria’s economy contracted for the time in 25 years in 2016 -- sparked by the crash in oil prices in 2014 -- and has struggled to pick up since. (From 2000-2014, economic growth had averaged 7.7% per annum.) By increasing access to credit, the central bank is aiming to bolster investments in agriculture and manufacturing, diversify the oil-dependent economy and create jobs. Unemployment surged to 23.1% last year, up from just 6.4% in 2014.

2. Why did last year’s regulations not work?

The new rules, which were introduced in August 2018, enabled banks to lend out part of their mandatory reserves with the proviso that rates were capped at 9% and loans had a minimum tenor of seven years. Banks judged the returns insufficient to compensate for the risk of lending to agricultural and manufacturing companies. Bank loans to corporations currently carry interest rates exceeding 30%, while the central bank offers risk-free government treasury bills to lenders at about 12%.

3. Why else are banks cautious?

Most lenders are focused on recouping existing loans rather than issuing new ones. Nigeria’s economic contraction triggered a scarcity of dollars and a devaluation of the local currency. Companies were forced to raise prices and were hampered in their ability to pay off their debts. Non-performing loans as a percentage of total credit stood at 9.4% at the end of June, down from 12.5% a year earlier, according to the central bank. Lenders are aiming to reduce their non-performing loans to the regulatory requirement of less than 5%.

4. How about the central bank cutting interest rates?

It already tried this. Emefiele announced a surprise rate reduction in March. He has little scope for further cuts, since he needs to attract foreign inflows to prop up the naira and contain price increases. And the central bank’s mandate requires it to keep inflation within a 6% to 9% band, a target it’s missed for more than four years.

5. What’s the central bank doing now?

With the carrot approach having failed, it’s now trying the stick. The central bank announced July 10 that lenders will no longer receive interest on deposits exceeding 2 billion naira ($5.5 million). It previously ordered them to increase their loan-to-deposit ratio to at least 60% by September, failing which they’ll be forced to leave more of their cash with the central bank. It has also blocked lenders from buying Treasury bills for their own accounts.

6. How have banks reacted?

Most lenders are reluctant to publicly criticize the measures for fear of antagonizing the central bank. Herbert Wigwe, chief executive of Access Bank, the country’s biggest lender by assets, says he agrees penalties are needed to compel banks to offer more credit, given their reluctance to channel assets to some industries. United Bank for Africa, whose loan-to-deposit ratio is below the central bank’s requirement, says it will find ways to meet the target without causing a surge in bad loans.

--With assistance from Mike Cohen.

To contact the reporter on this story: Emele Onu in Lagos at eonu1@bloomberg.net

To contact the editors responsible for this story: Stefania Bianchi at sbianchi10@bloomberg.net, Rene Vollgraaff, Emma Vickers

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