Nigerian state governments are looking for alternative ways of financing their recurrent and capital projects as banks’ claim on sub-national bonds rose significantly by 267 percent to N68.22 billion in the first quarter of 2019 compared to N18.6 billion in 2018.
Despite the surge, however, growth in banks’ claim on state bond slowed in Q1 2019 compared to the Q1 2018 figure when the claim jumped 514 percent from N3 billion to N18.6 billion.
The quarterly statistical bulletin of the Central Bank of Nigeria (CBN) for the month of March 2019, under the commercial and non-interest banks’ statement, showed that banks’ loans and advances to state government fell for the first time since 2016. Credit to state government fell by 7.57 percent to N2.63 trillion in Q1 2019, from N2.85 trillion a year ago.
The decline came after a 38 percent surge in N2.85 trillion in 2018 which is the highest in the latest five-year period.
Ayodele Akinwunmi, head of research, FSDH Merchant Bank Limited, said more governments at all levels are looking to the capital market to fund long-term projects, which is good for the economy.
The implication, he said, is that banks can concentrate more on their intermediation functions meeting both the short-term and long-term needs of both individuals and corporates. It will also help to deepen the capital market. Bond is part of capital market financial instruments.
States have depended on alternative financing arrangements to fund their year-on-year budget deficit since the re-emergence of the bond market in 2003.
Some of the states that have issued bond for the past 10 years include Lagos (N107.5 billion) for series one and two; Imo (N18.5bn); Kwara (N17bn); Niger (N6bn); Bayelsa (N50bn); Kaduna (N8.5bn); and Ebonyi (N16.5bn).
“An increase in the amount of state bonds banks are holding makes sense given the decline of sovereign yields in the first quarter due to increased appetite of foreign investors,” Nnamdi Olisaeloka, a fixed income analyst at Zedcrest Capital, explained. “It is likely banks looking for yield pick-up have invested in state bonds which have higher yields,” he said.
Meanwhile, a salary loan of about N338bn was disbursed to states for a 20-year tenor at 9 percent interest rate in 2015.
BusinessDay gathered that some of the intervention funds to the states may have been securitised. Securitisation is the conversion of an asset, especially a loan, into marketable securities, typically for the purpose of raising cash by selling them to other investors.
In his five-year policy thrust, Godwin Emefiele, governor of the CBN, said the apex bank would work in developing a framework that will enable banks to securitise mortgage loans, which can then be sold in the capital markets.
The report revealed that bank credit to the private sector grew by 0.27 percent to N40.8 trillion in Q1 2019, from N40.69 trillion in the corresponding period of 2018. The latest performance implies that credit to private sector has expanded by 12.9 percent since 2015.
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