CBN orders banks to build cash buffers against bad loans

Nigeria’s central bank has ordered commercial lenders to double provisions on performing loans to 2 percent to build adequate buffers against unexpected losses, the regulator said in a circular.

General provisions on performing loans had been fixed at one percent before the new regulation, said the circular which came into effect on Wednesday.

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 build up 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 on Monday doubled its non-performing loan ratio to 8.8 percent and cut its 2015 forecast for loan growth to 3 percent from 10 percent 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.

President Muhammadu Buhari on Wednesday appointed former investment banker Kemi Adeosun as finance minister, putting her in charge of handling the Nigeria’s worst economic crisis in years and raising expectations of a clearer fiscal policy direction.

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