Nigeria’s central bank plans to clear about $10 billion of toxic debts from the banking system by the end of the year as it tries to revive lending and boost growth, says governor Lamido Sanusi.

The debt purchases will cost the bank an estimated $5-billion as commercial banks don’t have collateral to cover the bad loans.

Sanusi says that with the focus on cleaning up banks’ balance sheets, the apex bank is unlikely to change interest rates. He fired the heads of eight of the country’s 24 banks last year and pumped 620 billion naira ($4.1 billion) to recapitalize the lenders after a debt crisis almost crippled the industry.

'We have stopped the hemorrhaging. The hole is not getting any deeper,' says Sanusi said.

Nigeria's benchmark interest rate has been on hold at 6% for a year despite double-digit inflation as the central bank strives to stimulate growth in the wake of last year's banking crisis.

The central bank does not also see any need to alter its exchange rate policy, which has kept the naira at about 150 to the dollar since February, 2009.

'It will take a little while,' the governor said in an interview with Bloomberg TV. 'The general macroeconomic environment has to improve and a lot of that is about soft issues. Its about confidence, its about belief, its about faith.'

The central bank is waiting for presidential approval for a law that will create the Asset Management Company of Nigeria, a government entity that will buy the bad debts, using funds raised through government-guaranteed bond issuance. 

Credit: Bloomberg