Deposit Money Banks (DMBs) in Nigeria have received yet another blow from the Central Bank of Nigeria (CBN) as the apex bank exempted the lenders from participating in Open Market Operation (OMO) Bill.
In a quiet move by the CBN on Thursday 18th July 2019, it excluded the banks from buying OMO Bills into their position but only customer-backed demand was allowed, industry sources told BusinessDay.
“This is the first time banks won’t be participating in Special OMO Auction. It’s normally clients/non-bank investors that are not allowed to participate in special OMOs,” Ayodeji Ebo, Managing Director, Afrinvest Securities Limited said.
Commenting on the development, a senior executive from the Treasury Department of one the tier-one banks confirmed that DMBs were not allowed to participate in the OMO auction.
“CBN asked all banks to submit only the bids of their customers in their continuous plan to stop buying bills, so that’s what we did,” the source said on the condition of anonymity.
“I agree that the CBN should not force the banks to lend. The best way to achieve this is to take away other cheap sources of earning income like investment in government securities and placement with the CBN, I don’t see why any bank should be paid interest for placing funds with the CBN,” Ebo said.
Recall that the central bank began its quest to ensure commercial banks increased their lending to the private sector through the introduction of the order to lend at least 60 percent of their deposits to small businesses. Then a measure that cut how much money lenders can keep in interest-bearing accounts with the apex bank by 73 percent followed.
According to Shakirat Anifowoshe, Investment Research Analyst at Lagos-based United Capital, the move by CBN to exclude the banks from taking part in the OMO auction “didn’t come as a surprise because of the recent policies by the central bank.”
She added that “we have not seen any official document from the apex bank but we heard banks were not allowed to participate in the OMO auction.”
Industry stakeholders believe the central bank may have more in stock for the commercial banks going by its recent efforts to boost credit to the real sectors and accelerate the pace of economic recovery in a country that has the highest people in extreme poverty.
“Yes, CBN is trying to take out most of the cheap sources of income for the banks. Despite significant T-Bills maturities, the CBN has issued OMO just twice this month. With significant liquidity, bid rates are lower; hence CBN is able to fill its offers at lower rates,” Ebo said.
OMOs are issued by the CBN for monetary policy management – to control the volume of money in circulation. Such bills are also discount instruments which means that a participant gets interest upfront and they can be bought in the primary and secondary markets. Depending on the objective and aggressiveness of the CBN per time, it might be possible to get higher rate on OMOs than T-Bills. OMOs are also exempted from taxes and are issued at irregular intervals.
“The Thursday offering was a Special OMO auction which the central bank will likely continue to offer at certain intervals. It was designed to prevent banks from doing proprietary trading,” an industry source said in a statement.
OMO and T-Bills are similar and work almost the same way. Whilst OMOs are issued by the CBN for monetary policy management, T-Bills are issued to finance government budget deficits.
According to the most recent data by the CBN on Nigerian Treasury Bills Primary Market Auction Result for 17-Jul-19, stop rates dropped across all tenors with the 364-day bill enjoying the most interest with a bid-cover ratio of 5.0x
A check into the data revealed that Stop rates for the 91-day, 182-day and 364-day bills reported 9.74 percent, 10.75 percent and 11.14 percent, respectively. This is compared to the previous Stop rates of 10.50 percent (91-day), 11.7 percent (182-day and 11.91 percent (364-day).
“What the CBN is probably not considering is that by pushing banks to reduce proprietary trading in T-Bills, it could well jeopardise the secondary market liquidity of these bills which is one of the things that make them attractive in the first place,” an industry analyst argued on the condition of anonymity.
The two-day Monetary Policy Committee (MPC) chaired by Godwin Emefiele, governor of the CBN, is scheduled to hold 22nd and 23rd of July, 2019.
Recall that the financial regulator had a rate cut by 50 basis points from the 14 percent it maintained for over three years to 13.5 percent.
