Price collapse: Oil sector exposure may impact Nigerian banks, CBN says

*Central Bank of Nigeria.

*Central Bank of Nigeria.

Oscarline Onwuemenyi
06 October 2016, Sweetcrude, Abuja – The Central Bank of Nigeria (CBN) has disclosed that oil and gas exposures, which constitute about 40 per cent of the banks’ loan portfolio, may have an untoward impact on the nation’s banks.

The Deputy Governor (Economic Policy) of CBN, Dr. Sarah Alade, who disclosed this in an interview with The Banker magazine, pointed out however that only about 50 per cent, of the 40 per cent mentioned above, was to the upstream sector, where the greatest risk currently resides.

She said, “These loans were booked when the price of oil was $140 per barrel. Now that oil has fallen to about $40 per barrel, the obligors are finding it difficult to meet repayment obligations. Consequently, most of these facilities have been restructured.”

The reduced repayments have exacerbated the foreign currency liquidity stress of the banks, as some of these loans were granted in foreign currency.

However, Alade emphasised, the stress tests conducted by the CBN showed that if up to half of these exposures are lost, the banking system is resilient enough to absorb these losses with their exceptionally high capital ratios, which is made up mainly of loss-absorbing Tier 1 capital.

After experiencing an average growth rate of seven per cent over the past decade, gross domestic product [GDP] growth in the second quarter of 2016 stood at -2.6 per cent.

The Nigerian economy is facing a number of challenges as a result of the oil price slump. These include low government revenue, low capital inflow, a high unemployment rate, large currency depreciation and low financial buffers.

According to Alade, to reverse this trend and restore macroeconomic stability, a number of short-term and long-term monetary and fiscal policy measures geared towards resuscitating the economy are being implemented.

She said: “The fiscal policy measures have included mobilising non-oil revenue through broadening the tax base to increase the fiscal space; liberalising the fuel price regime to remove risks to public finances; and implementing policies to remove impediments to growth, such as measures to improve governance.

The latest International Monetary Fund (IMF) Article IV 2016 report admitted that Nigerian banks are ‘generally well-capitalised and more resilient’ today than during the period of the global financial crisis of 2008/09, which resulted in several banking failures around the world and intervention in the Nigerian banking sector.

Alade noted that on the macro-prudential front, the central bank has implemented a number of policies to help strengthen and ensure stability in the banking system. One of the policies implemented was to increase the requirement for general provisioning on performing facilities from one per cent to two per cent with effect from November 11, 2015.

She explained that, “The tight monetary policy stance adopted by the bank is aimed at attracting foreign investment in the country and containing inflationary pressure. The persistent upsurge in inflation calls for monetary policy intervention. The increase in monetary policy rate will help to dampen inflation pressure, and also attract foreign inflows into the country to cushion the lost revenue from both lower oil prices and lower output.

“This shows that there is an adequate and effective mix of both monetary and fiscal policies to deal with the emerging challenges. Nigeria’s fiscal and monetary architecture is robust enough to contain the emerging threats to monetary and fiscal stability.”

Responding to a question on what the central bank was doing to support private sector’s access to capital, she said: “Access to capital is crucial to realising the growth objective of the Nigerian economy. The CBN has always been conscious of the need to support growth, and to provide an environment conducive to growth through the formulation and implementation of appropriate monetary policies and development finance initiatives.

She added that in order to address the dearth of capital to the private sector, the bank has taken a number of steps. “These include strengthening financial capacity and managerial support for development finance institutions via an injection of equity or long-term loans and the provision of board or management personnel to provide technical expertise and governance support.

“The central bank has also deferred the implementation of the domestic systemically important bank capital buffer of to enable banks to have sufficient headroom for lending. Other forbearances on some prudential requirements without compromising the safety of the banks were granted,” she added.

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