The Chartered Institute of Bankers of Nigeria (CIBN) has urged banks to rethink how they deploy their capital, saying declining returns on government securities and lower lending rates for large corporate borrowers are making traditional investment strategies less attractive.
President and Chairman of Council of CIBN, Dele Alabi, said banks could no longer depend heavily on government securities and top-tier corporate borrowers to generate strong returns.
Alabi spoke in Lagos during a world press briefing ahead of the 19th Annual Banking and Finance Conference of the institute.
The conference, themed “Building a Resilient Economy in an Era of Disruption,” is scheduled to hold on September 8 and 9 in Abuja.
According to Alabi, the banking industry is changing as interest rates and yields on government securities decline.
He said banks must therefore find more productive ways to deploy the fresh capital raised through the ongoing recapitalisation exercise.
“Capitalisation provides a buffer for shocks. It sort of insulates banks’ balance sheets,” Alabi said.
“But it does not stop there. Banks must now think more strategically about how to deploy the capital raised,” he added.
He said yields on government securities were falling, while large corporate borrowers were also demanding lower interest rates on loans.
Alabi described capital as the most expensive source of funds and said banks must therefore deploy it in ways that generate sustainable returns while supporting economic activity.
He identified Micro, Small and Medium Enterprises (MSMEs) as a major opportunity for banks, saying financial institutions would need to move further down the lending ladder to serve smaller businesses.
“Smart bankers and smart bank CEOs have to think of a more ingenious way of utilising this capital,” he said.
Alabi said increased lending to MSMEs would also support CIBN’s wider financial inclusion agenda under its IMPACT vision.
The vision focuses on six areas: inclusion, membership economy, professionalism and ethical conduct, accountability and enhanced financial performance, competence and skills development, and technology, automation and innovation.
He said financial inclusion would remain incomplete if businesses that play a major role in the economy, particularly MSMEs, could not access funding.
“MSMEs represent a critical source for the growth of the economy. Not only in Nigeria. Globally, for emerging markets, MSMEs are the ones that drive the economy,” Alabi said.
However, he acknowledged that lending to Nigerian SMEs comes with challenges.
He identified weak corporate governance, lack of audited financial statements, unreliable financial records, poor accounting systems and the failure to separate ownership from management as some of the problems limiting access to credit.
To address these challenges, CIBN plans to organise MSME forums that will bring businesses and banks together and help move discussions from general engagement to actual lending transactions.
The institute also plans to establish SME clinics to strengthen the capacity of small businesses and make them more attractive to lenders.
“We’re going to come up with SME clinics where we’re going to build the capacity of our SMEs, with a view to ensuring that we bring them to a level where banks can lend to them,” Alabi said.
He said CIBN was also working on plans to develop SME clusters, drawing lessons from countries such as China and India, where business clusters have been used to support small enterprises.
According to him, the institute has already discussed the idea with the Lagos State Government, which has agreed to provide space for what could become the first SME hub under the initiative.
Alabi also rejected the idea that lending to SMEs profitably and securely cannot be achieved at the same time.
“We have said to our colleagues, the bank CEOs, that lending to SMEs in a profitable and secure manner are not exclusive. You can achieve both simultaneously,” he said.
He said stronger lending to SMEs would benefit not only banks but the wider economy through increased employment, lower economic vulnerability and higher productive activity.
The CIBN president also linked effective deployment of bank capital to Nigeria’s ambition of building a $1 trillion economy.
He said the financial services industry would have to play a central role in providing the capital needed to finance businesses and productive activities.
“It has been widely accepted, and there is empirical evidence to support the fact that an economy cannot grow to a $1 trillion market without the support of the financial services sector,” Alabi said.