Examining The Effects Of CBN Policy And Its Impact On Real Estate

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Commercial, Merchant Banks’ Borrowing From CBN Drops By 33.2% To N505.36bn In October
Commercial, Merchant Banks’ Borrowing From CBN Drops By 33.2% To N505.36bn In October

In Q3-2019, the CBN, in a bid to improve lending to specific priority segments of the economy released a circular directing banks to maintain a minimum loan-to-deposit ratio ( LDR) of 60% (later reviewed to 65%).

The  CBN also announced it had assigned a weighting of 150% to the Real estate, Mortgage,  Creative arts, and Consumer lending sectors to enhance lending to these sectors.

Nearly 2 years after, we examine the success of this policy lasering in on the real estate sector. The National Bureau Statistics recently released it select banking data report for Q4-2020; the report showed that total credit provided by the banking sector rose 18.5% y/y in FY-2020.

However er, credit allocation to the Real Estate sector grew 8.2% y/y to N654.2bn. This was encouraging considering that credit allocation to Real Estate Sector declined by -8.0% on average (CAGR) from Q4-2016-Q4-2019. Clearly, the CBN’s decision to improve credit to these target segments may have paid off somewhat, as banks have been forced to lend more to the real estate sector.

Also, we suspect the deliberate attempt to improve allocation to the industry contributed to the first q/q GDP expansion in the real estate sector since Q4-2016.

Going forward, while credit allocation to this sector has yielded some positive outcomes, evidenced by the positive growth in Q4- 2020, its sectoral allocation remains below pre-2016 levels.

Credit allocation in the real estate sector in Q4-2016 was N782.3bn, 19.4% higher than the figure reported in Q4-2020. Lastly, whilst we applaud the CBN’s efforts to force the hand of banks to lend to the sector, we suspect that the impact of the policy may soon begin to taper if the momentum in the real sector is not sustained due to protracted FX challenges.

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To bolster sustainable growth in the real estate sector, the Nigerian mortgage market must be reformed in the context of the housing deficit in the urban centers, land ownership/tenor system, and proper regulatory framework.