The Central Bank of Nigeria’s Special Bills creates an avenue for banks to retrieve their excess Cash Reserve Ratio (CRR) cash idling away at the apex bank’s coffers at zero-interest while also aiming to control liquidity and deepen the financial market.
On Wednesday, the CBN announced that it was introducing what it called 90-day special bills with zero-coupon as part of efforts to deepen the financial markets.
The CBN had released an earlier circular which stated that the special bills were a way of returning excess CRR in its possession to the banks.
While the official Cash Reserve Ratio (CRR) for banks is 27.5 percent, bankers say the CBN currently holds as much as N12 trillion in CRR, which is well in excess of the regulatory threshold and is instead closer to 60 percent.
“The CBN’s so-called special bills are a way of giving the banks bills in lieu of cash,” a Lagos-based analyst said.
“But it is also a liquidity management tool that ensures you don’t have too much naira chasing scarce dollars,” the analyst said.
Bankers say the issue size could be anywhere between N1.2 trillion and N3 trillion, but the CBN is yet to confirm.
BusinessDay gathered that the CBN has discovered that the excess CRR charges on bank deposits were counterproductive to its push to boost lending in an economy that has slipped into its second recession in five years.
But rather than injecting the money back into the system as cash, the CBN decided to offer special treasury bills for banks to discount and trade.
The instrument can be traded amongst banks, retail and institutional investors. It will qualify as liquid assets in the computation of liquid ratio for deposit money banks, according to the CBN.
For investors, they will have their eyes on the yields and if it will offer any respite in an environment of low-yields and where treasury bills return less than 0.5 percent.
“I suppose any instruments that help with the fine-tuning of liquidity management in Nigeria will help a great deal,” Razia Khan, managing director, chief economist, Africa and Middle East Global Research at Standard Chartered Bank, said.
“Depending on the yield, it might see demand from retail investors,” Khan said.
Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited, said the move is to deepen the financial market by introducing new instruments that will be tradable and to inject liquidity into the system.
“I think the CBN is being innovative by creating a new liquidity management tool in a manner that supports economic recovery,” said Uche Uwaleke, professor of capital market and president, Capital Market Academics of Nigeria.
Uwaleke said the special CBN Bills are in connection with Deposit Money Banks’ excess cash reserves with the CBN.
Many analysts from Fitch to the International Monetary Fund (IMF) have criticised the high effective CRR rate in Nigeria and said it was credit-negative for the banking sector and contradicted the CBN’s lending mantra.
Higher CRR hurts the banks’ liquidity ratios, compels them to borrow and take extra trading risks.
Fitch Ratings says one of the reasons it has a negative outlook for Nigerian banks is due to the high CRR ratio.
“It is credit-negative for the sector as it restricts banks’ ability to lend and dampens their profitability,” analysts at Fitch Ratings said in a note to clients.
The CBN raised the CRR to 27.5 percent in January 2020 from the previous 22.5 percent rate, citing the need to mop up excess liquidity in the banking system to curtail inflation.
Banks do not only have to contend with the world’s highest CRR but a regulatory directive to maintain a loan to deposit ratio of 65 percent, which means for every N100 naira in deposits with the CBN, banks must lend N65.
Both policies, including another mandate to maintain a 30 percent liquidity ratio, make it mathematically impossible to satisfy the CBN’s regulatory ratio requirements.
