The traditional role of banks in any economy is to act as the financial intermediary. Mediating between the economic or financial surplus and the economic or financial deficit. In other words, collecting from the surplus in terms of deposit and other liability generating products and channels such funds to the deficit sectors in terms of credit and loans.
The surplus refers to savings and other deposit account holders who keeps their surplus funds in the bank till when they are need. Deficit on the other hand refers to businesses that needs fund to increase their market share, take advantage of business opportunities or execute projects but does not have the financial ability and individuals who needs fund to live a better life or take advantage of opportunities and so on.
Banks are expected to source for fund from surplus sectors of the economy at a cost. The cost is the interest bank pays to savings and other deposit account holders while interest and commissions paid by loan and other borrowing customers of the bank is what the bank take as revenues for its financial intermediation role in the economy. The difference in the interest the bank charged its loan customers and what it pays to its deposit customer is what accounts for the bank’s net interest income.
Risks of unpaid loans, loan defaulting customers, recovery cost and other may however makes the bank cautious in lending to the deficits in the economy hence the thorough scrutiny and appraisal of loan applicant and in some cases outright decline of loan request.
The surplus and deficit sectors of the economy does not exclude government. While Government surplus are kept as foreign reserves and sovereign funds in foreign currencies abroad, it sometimes borrows from the domestic economy to fund its projects. Government borrowings are in form of Treasury Bills, Bonds and the Sukuk funds.
The significant difference between government borrowing and other sectors of the economic is that while government borrowing is risk free and does not require credit appraisal or recovery cost. Other sector deficit interventions may be risky and requires thorough credit appraisal and may be prone to abuse.
The Nigerian government have raised over N1 trillion so far from domestic economy this year to fund its budget and programs and the figure may be more in 2018. While banks and financial speculator including foreign investors are happy with this development, the other deficits or succinctly, SMEs and other businesses that needs borrowings to survive will have to remain denied of funding or survive with huge cost of borrowing.
Banks like other business are set up to make profit and exploring government policies to maximize such profit can only be logical. No business will see a risk free investment with sure returns and explore options of a risky investment that may ended up being toxic (bad loans written off).
The high cost of borrowing from bank can only be expected with a treasury bill rate of above 15%. If a bank must lend to other than government, it must factor in the options and cost appropriately before it lend out its depositors funds.
Thus when the government becomes the deficit, businesses and other deficit sector of the economy suffers total lack or high cost of funds to take advantage of opportunities for growth and development with the attendance effect on employment and job creation.