Banks’ credit to oil & gas crowds out other sectors

Credit allocation by banks have shown that the bulk of their loans in the past two years went to oil and gas sector to the detriment of other sectors. The sector attracted over 26 per cent of the total bank loans to the economy despite its relative low contribution of about 11.2 per cent to the economy’s Gross Domestic Product, GDP, suggesting a crowding out of other productive sectors of the economy. For instance, the agriculture sector which contributed more than 20 per cent to the nation’s GDP last year received only 4.4 per cent of total credit allocation in 2014.

This indicates a disturbing misalignment in credit structure of Nigeria’s banking industry when compared to other countries in the MINT (Mexico, Indonesia, Nigeria and Turkey) economic bloc as well as BRICS (Brazil, Russia, India, China, Singapore) economic bloc where banks’ lending structures tilt, though with differentials, in favour of sectors with greater contributions to GDP which mirrors dynamics of the stages of growth and development, economic structure, financial sector framework and banking regulations in the respective countries.

The Nigeria’s structure has, however, come to hurt the banking industry as the plunge in global oil prices put their non-performing loan ratio, NPL, at border line. Afrinvest Group banking survey released recently revealed that tier-2 banks are more exposed to the oil and gas sector, with the banks allocating 27.4 per cent of their gross loans to the sector relative to tier-1 banks’ 26.5 per cent. Afrinvest said ‘’the preference is based on high revenue/profitability upside, stronger cash flow and developed supportive infrastructures that have lowered risk perception”.

It added, ‘’however, the current challenges of lower crude oil prices has significantly weakened the assets quality of banks, with Oil and Gas related NPLs contributing the highest average of 12.7 per cent to NPL ratio across banks. “Our prognosis is that lending structure in the next decade should reflect the changing economic structure in Nigeria, thus we expect banks to take advantage of the faster growth and expanding opportunities in the non-oil sectors of the economy”, the report said.

“We believe banks will need to moderate credit to the Mining/Natural Resources sector while directing to the utilities, manufacturing and services (including household, real estate, education, health, transport and communication) sectors in line with the overall macroeconomic outlook of the country and in furtherance of the recent drive to boost non-oil revenue by the new administration.

“ We believe banking in the next decade should focus on re-allocating risk assets by tapping into lending opportunities in the non-oil oil sector. However, we do not expect banks to reduce funding of the oil and gas sector, rather, we expect banks to deepen funding structure to grow their presence in non-oil sectors”. Within the tier-1 group of banks Guaranty Trust Bank Plc, at 33 per cent, had the highest proportion of loans to the oil and gas sector in 2014 while First Bank of Nigeria followed with 32 per cent.

Other banks in the tier-1 group that were exposed to the sector include Access Bank, Zenith Bank and United Bank for Africa, UBA. Within the tier-2 group Sterling Bank was leading with 35.4 per cent exposure to oil and gas followed by Skye Bank, Union Bank and FCMB.

Afrinvest suggests that Central Bank of Nigeria, CBN, should review its prudential guidelines to come up with a maximum threshold regarding banks’ exposure to single sector as a proportion of banks’ shareholders’ funds. This, according to them, would be in addition to the existing threshold which measures banks’ lending to a single sector as a proportion of the total loan.

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