The Nigerian banking system is changing rapidly and experiencing a liquidity shortage following a plethora of policies by Nigeria’s central bank that have succeeded in creating sharp increases in double-digit money market deposit rates.
A recent Nairametrics survey suggests that banks offer institutional clients (such as pension funds, fund managers) and high net worth individuals interest rates of up to 16% per year for term deposits or bank investments. . This despite the fact that banks hold trillions of naira in the central bank at rates close to 0%. In other words, Nigerian banks are having their deposits sequestered by the CBN at ultra-low deposit rates while the same banks have to turn around and solicit funds from other sources at much higher rates.
For these banks, it is a price to pay to remain liquid while waiting for the “madness” to pass.
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What banks are currently experiencing is a remarkable about-face in the relationship that banks had with the same CBN just 4 years ago.
Specifically, in 2017, commercial banks benefited enormously from a CBN policy that offered banks high interest rates for government securities such as treasury bills and OMO bills. At the time, the CBN used this policy as a strategy to defend the naira and fund federal government spending, which cost it billions of naira in interest payments. In 2017 alone, the CBN reported interest charges of around 1.3 trillion naira.
This time around, while the CBN’s goal of funding federal government spending and intervention programs remains the same, the strategy of getting there at low cost to the umbrella bank (by forcibly debiting banks via CRR policy in exchange for a paltry 0.5% on bills) reflects an almost direct reversal of what was then known as âShashe Bankingâ in the banking space.
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Why is CBN doing this?
There are a variety of reasons CBN does this. Primarily, the CBN is trying to accomplish a high-level balancing act to alleviate its competing concerns about (a) how to avoid excess liquidity that adds to existing inflationary pressures, (b) how to continuously stimulate the economy to protect jobs and (c) also how to continue to finance FG expenses and achieve all of these goals while trying to avoid paying market interest rates for all required funding.
Excess liquidity and inflationary pressures
The governor of the CBN has admitted interventions to stimulate the economy and protect jobs. Since the pandemic erupted in early 2020, triggering a drop in the price of oil, the Central Bank has stepped up its heterodox monetary policies it had initiated the previous year. One of the cornerstones of his heterodox policies was a different form of liquidity squeeze that forced banks to lend more to the private sector or risked being sanctioned via CRR debits.
Apex Bank believes that lending to the private sector can boost economic growth if rates are low and banks are forced to lend more. This despite galloping inflation that it has so far fought with increases in its key monetary rates.
In his monetary policy statement last month, CBN Governor Godwin Emefiele announced that the umbrella bank was keeping rates unchanged, particularly the monetary policy rate which remains at 11.5% but explained its quagmire. apparent.
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The MPC noted that economic growth could be hampered in an environment of volatile prices. To this end, the choice was therefore between easing the policy stance to further ease credit or tightening to moderate price developments or maintain a hold position to allow previous policy measures to continue to permeate the economy throughout. by observing global and national developments.
The Committee noted that an expansionary policy could result in lower prices for deposit bank loan portfolios and, therefore, lead to cheaper credit to the real sector of the economy. Conversely, this expected transmission may be limited by persistent security concerns and infrastructure deficits. On the other hand, while a restrictive stance will only deal with the monetary component of price development, supply side constraints such as the security crisis and infrastructure deficits can only be addressed. by policies beyond the control of the Central Bank. A strong stance, members believe, will also hamper the Bank’s goals of providing low-cost credit to households, micro-small and medium-sized enterprises (MSMEs), agriculture and other sectors of the economy. the economy stimulating the growth of production and employment.
This statement underpins the central bank’s strategy of surreptitiously adopting a dual policy of tightening monetary policy and at the same time financing development activities. It finances private sector borrowing by extracting money from banks at very low rates and in turn lending this money through intervention loans to companies at rates of 5% (to increase to 9%). % in 2022). In its own form of âShashe Bankingâ, banks mobilize customer deposits, which are then sequestered by the CBN and then lent to the private sector via intervention loans. If the banks refuse to lend, they will.
Finding themselves on the other end of the stick, commercial banks have no choice but to seek liquidity elsewhere at competitive rates.
Bankers think politics is “crazy”
Bankers who spoke to Nairametrics on condition of anonymity believe the politics to be “crazy” in every way. One analyst lamented that “Banks face a liquidity problem because of CRR debits” which stifles them of the liquidity necessary to meet their obligations.
Some banks even have more CRR debits than the amount of loans and advances on their balance sheet. Another argued that this was not really lending to the private sector but a big project which partly includes the CBN’s “stubborn exchange rate policy” aimed at preventing the depreciation of the naira to the detriment of foreign currency. banks and to finance the federal government’s shortfall. government. The CBN under Godwin Emefiele relied on tight liquidity to dampen demand for foreign exchange in the economy.
The finance ministry recently admitted that the government has borrowed over 10,000 billion naira from the CBN through its Ways and Means program. CBN funding of federal and state governments is seen as timely as a result of government shortfall. This led to the creation of “special bills”, a new government borrowing instrument.
The special vouchers are given to banks in exchange for debits from the CRR allowing banks to discount it for cash in the event of liquidity problems. Unfortunately, banks that wish to go this route end up having their hair cut. According to our findings, CBN Special Bonds carry a coupon of 0.5% per annum but trade in the market for yields of up to 10%. This means that any bank or investor holding this yield that wishes to sell will end up recording a loss in value on the underlying asset.
This puts some banks in a precarious position requiring them to choose between taking a loss on the special bills or holding the bills and borrowing through fixed deposits or high yield investments just to meet short-term liquidity positions. Interbank rates have also increased for banks looking to borrow when faced with short-term liquidity shortages. Most banks don’t want to make a habit of selling their special bills or unwinding treasury bill positions to increase their short-term liquidity. They will instead offer internships.
Thus, to meet their demands for liquidity, especially from clients seeking to withdraw cash, banks resort to investing with pension fund institutions or wealthy Nigerians at low interest rates. two digits.
Money is king
This situation benefits no one other than Nigerians or local institutions with significant cash flow. Depending on how much cash you have, returns can range from 8% to 16%. Almost “all commercial banks are on this table,” a banker told Nairametrics.
Even microfinance banks and smaller asset managers also offer âjuicy returnsâ in exchange for cash. Some use the funds for payday loans while others end up in the same soup with commercial banks, although triggered by higher interest rates on their margin loans instead of CRR debits.
The paradoxical status of the Nigerian money market has left many investors perplexed and bewildered. Yields on treasury bills remain in the lower single-digit bracket while banks offer higher yields on term deposits or bank investments.
Asset managers with significantly large positions in leveraged treasury bills are also under pressure to temporarily swap them for cash under repo programs. Like banks, they are willing to offer the security of their treasury bills as cash collateral in exchange for lower interest rates than they can get from their banks. This liquidity is used to close their positions with banks, while HNIs, pension funds or institutions with good cash flow receive higher interest rates on their deposits than those offered by banks.
In this new version of Shashe banking, everyone seems to benefit from it except the banks.