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Real Sector Support Facility: Enhancing investment opportunities in the real sector

Governor, Central Bank of Nigeria (CBN), Mr Godwin Emefiele

By Babajide Komolafe

With economic growth slowing to 1.5 percent in the second quarter of the year and unemployment stubbornly high at 18.8 percent, Nigeria needs new policy initiatives that will expedite job creation and stimulate economic growth in order to avoid the risk of another economic depression.

Emefiele

This requires creative measures targeted at the manufacturing and real sectors, which have huge prospects for job creation and great impact in terms of the multiplier effect on the economy.

In spite of their potentials, the manufacturing and agricultural sectors are at the receiving end in terms of credit allocation, which, according to Kola Ayeye, Managing Director Chief Executive, GDL Limited, determines the sector that will thrive or die in any economy. According the Financial Stability report of the Central Bank of Nigeria (CBN), the agricultural sector receives a paltry 3.25 percent of total bank credit to the private sector, while the manufacturing sector receives 13.59 percent. Also given their long gestation period (up to five years) and high risk involved, the sectors are at disadvantage in a banking industry where  62 percent of  credits have maturity of less than three years, and lending rates of 30 percent.

Real Sector Support Facility

This prompted the Bankers Committee led by the CBN to introduce a creative facility named Real Sector Support Facility (RSSF), to address the unique funding needs of the two sectors, with the aim of stimulating economic growth and job creation by facilitating flow of credit to the two sectors.

The facility involves the CBN and banks lending to large corporates in the manufacturing and agricultural sector at 9.0 percent for up to 10 years, with a moratorium of two years.

This will be done either through the Differentiated Cash Reserve Requirement (DCRR) regime, where banks will be  allowed to access their Cash Reserve funds with the CBN to lend to approved corporates  or through Corporate Bond Funding programme, where the CBN and members  of the public will  invest in corporate bonds issued by Triple-A rated companies.

Speaking on the guidelines for the RSSF, Acting Director, Corporate Communication, CBN, Mr. Isaac Okorafor disclosed that Corporate/Triple-A rated companies would be encouraged to issue long-term Corporate Bonds (CBs), adding that a  Corporate Bonds (CB) Funding Programme had been put in place.  The programme, according to him, involves investment by the CBN and the general public in CBs issued by corporates subject to the intensified transparency requirements for participating corporates. He also noted that such requirements would include publishing through printing of an Information Memorandum spelling out the details of the projects for which the funds are required together with terms and conditions showing that these are long term projects that are employment and growth stimulating.

Furthermore, he disclosed that the  apex bank  had put in place a programme under the Differentiated Cash Reserves Requirement (DCRR) Regime whereby banks  interested in providing credit financing to greenfield (new) and brownfield (expansion) projects in the real sector (agriculture and manufacturing) could request for the release of funds from their CRR to finance the projects; subject to DMBs providing verifiable evidence that the funds shall be directed at the approved projects by the CBN.

Making further clarifications, he said that the tenor for the Differentiated CRR would be a minimum of seven years with a two-year moratorium.  For the Corporate Bonds (CBs) programme, he said the tenor and the moratorium would be specified in the prospectus by the issuing corporate.  He added that the maximum facility shall be N10 billion per project and facilities are to be administered at an all-in Interest rate/charge of 9 per cent per annum.

Explaining the rationale for creating the RSSF, CBN Governor, Mr. Godwin Emefiele said that the decision to invest in corporate organizations became necessary because Deposit Money Banks (DMBs) had frustrated past incentives by CBN aimed at encouraging them to lend to the real sectors of the economy.

He said:  “The Monetary Policy Committee (MPC) deliberated extensively on what can be done to encourage banks to lend to the private sector because of the number we looked at during the main meeting, the MPC was concerned that credit to the real sectors was sliding and there was need to incentivise the banks to lend to the private sector.

“At this meeting, we saw improvement which was gratifying but we feel we must still do what we want to do.  In order to achieve lowering interest rate especially to agriculture and manufacturing sectors, we will encourage large corporates to issue CPs into the market.

“We feel this is novel.  It is something that we should give a chance.  In the past, we had reduced CRR and released liquidity into the market but the liquidity was not channelled into the high-impact, employment-generating sectors and productivity sectors of the economy.

“That is why we feel we should approach it through this means.  We believe this will work.  We will, from time to time, monitor the level of liquidity in the market and we feel that rather than the banks using their monies to buy treasury bills, they can put money into these sectors and we will provide the liquidity to fund these transactions, as long as they meet these specified terms and conditions.”

Experts comment

Director-General, Lagos Chamber of Commerce and Industry (LCC), Mr. Muda Yusuf, commended the introduction of the RSSF, saying it is in line with the expectations of the real sector.

He said: “The current commercial rates are not the kind of funds that the real sector can deploy and run a successful business with. So it a welcome development that the CBN has come up with a creative way of making credit available at single digit and also ensuring that the credit is a long tenure credit, because the challenges of the real sector are so much hat to be taking credit at 25 percent makes it impossible to operate.”

He however called for the extension of the facility to other sectors of the economy, and that the CBN should allow it for refinancing of loan.

He said: However we will want the CBN to also extend it to other sectors because what is good for the real sector is also good for other sectors, in so much that those sectors are also creating jobs, paying taxes, and adding value to the economy because some of these other sectors are playing important roles in complementing the real sector.

“Also we have so many manufacturers that are struggling to run their businesses. Some of them are having issues with high capital, some of them have borrowed money at high rate from commercial banks, so we should not be excluding those people because those are people keeping the economy before we start talking about new project, let us support the existing ones.

They are carrying heavy load of debt, we should give them a window to refinance it, because the circular is saying it is not for refinancing, I don’t think it is the right approach.

He also stressed that there is need to complement the facility with measures to address the nation’s infrastructural challenge. “If we don’t fix infrastructure it will be difficult to turn around the real sector.

Funding is very important but the fundamental problem that is creating high failure rate in the industry is infrastructure.”

Similarly, Head of Research, FSDH Merchant Bank, Mr. Ayo Akinwunmi, stressed the need to for complementary measures to ensure effectiveness of the RSSF

He said that: “We believe that the Corporate Bond Funding Programme will increase the issuance of CPs in Nigeria in H’2 18. The yields on the CP may also drop or trail the yields on the treasury bills.

The measure will reduce the finance cost for large corporates and increase their profitability.

“We believe that these measures may increase credit creation and business expansion to stimulate growth. However, complementary fiscal measures are required to de-risk the economy.”

 

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