Increasing funds banks have to maintain with the Central Bank of Nigeria (CBN) contradicts asking them to give more loans. The decision of the CBN to increase the Cash Reserve Ratio (CRR) by 500 basis points to 27.5 percent from 22.5 percent contradicts what the apex bank is really trying to communicate. The CBN made clear the objective to encourage banks to direct the flow of credit to the private sector. However, the decision to increase CRR we believe is counterproductive to its intention to spur business activities through increased lending to the private sector; besides banks will struggle to comply.
The CBN at Friday’s Monetary Policy Committee (MPC) meeting was faced with the headache of rising inflation. Inflation rose consecutively for months settling at 11.98 percent in December 2019, higher than the monetary authority’s target of 6-9 percent. This is largely attributed to the federal government’s move to close the land borders and its impact on food prices. This is also coupled with the CBN’s Open Market Operation (OMO) ban which resulted in a liquidity glut in the system.
In 2016, Godwin Emefiele, the CBN Governor, stated among other things his pursuit to achieve price stability – a situation where price level in the economy does not change much over time, either too high (inflationary) or too low (deflationary). The inconsistencies of its policies together with the border closure have pushed inflation to its current level.
While the increase in CRR is expected to reduce liquidity in the system, the consequence of the banking sector is disturbing. This is because the current driver of rising in general prices is largely out of the control of the CBN. The spike we are currently experiencing is largely cost-push – i.e. a type of inflation caused by substantial increases in the cost of important goods or services where no suitable alternative is available – and can be corrected if the land borders are reopened instead of putting the banks in a despicable position, choked up with multiple risks created as a result of regulatory policies.
The outcome of the MPC meeting last Friday confirms that the CBN supports the indefinite closure of the border and it is an indication that the federal government may further extend the closure of the land’s borders since the CBN is taking measures to ameliorate its effect.
This is evident from the remarks of Godwin Emefiele while assessing the gains of the border protection a few weeks after the government’s action. He encouraged the government not to be in a hurry to quash its decision until it was able to receive concrete commitment from her neighbours whose ports serve as landing pads for goods supposedly meant for local consumption but transhipped or smuggled into Nigeria.
A 27.5 percent CRR – a percent of a bank’s total deposit kept with the CBN that cannot be easily recalled or made available to the bank, 65 percent loan to deposit ratio (LDR) and a 30 percent liquidity ratio will leave banks with little room to be profitable; instead, they risk dipping hands into shareholders fund to comply with CBN’s directives or source for fund elsewhere. Let’s not forget the risk of increasing non-performing loans that the initial increase in LDR exposed banks to in an economy growing at snail pace.
In the fourth quarter of 2019, the CBN cut fees that banks can charge for various services rendered coupled with declining yields which has depressed interest income.
This is bad for banking earnings and stocks. On Monday for example, investors’ immediately reacted negatively to the MPC outcome with most big banks shedding value. This is likely to linger till the companies begin to their results which should provide some respite
