The Central Bank of Nigeria (CBN) has directed commercial lenders to double provisions on performing loans to 2% to build adequate buffers against unexpected losses. General provisions on performing loans had been fixed at one percent before the new regulation, said the circular which came into effect immediately.
Economic challenges in Africa’s top oil producer have been mounting after a plunge in oil prices cost the government vital revenues from crude sales, weakening the naira currency and slashing economic growth.
“In recent times, the adverse macro-economic environment has been a source of concern in the financial sector,” the central bank said. “The regulator said in the circular that “fiscal and monetary authorities are deploying remedial policy measures to ameliorate these challenges”.
The central bank has been injecting cash into the money markets since September in a bid to ease liquidity and reverse declining growth in Africa’s biggest economy, which has suffered as oil prices fell sharply since mid-2014. However, some lenders seem to be using the funds to invest in bonds rather than lending to households and businesses in a bid to avoid a buildup of bad loans.
Analysts say the new rule will affect dividend payouts as lenders prepare to adopt stricter international requirements. Adesoji Solanke, banking analyst at Renaissance Capital expects more capital strain for FBN Holdings, Skye Bank and Ecobank Nigeria. Stanbic IBTC recently doubled its non-performing loan ratio to 8.8% and cut its 2015 forecast for loan growth to 3% from 10% due to slowing economic activities on businesses. Other lenders such as United Bank for Africa (UBA) and Diamond Bank have also cut loan growth to buy bonds, citing rising regulatory uncertainty and weak output growth.