The members of the Monetary Policy Committee (MPC) have raised concern on the excess liquidity in the banking sector, occasioned by open market operations (OMO) ban for non-bank investors and corporates, saying it is a threat to foreign exchange stability and the country’s external sector.
Net banking system liquidity position rose by 266.9 percent from N160.03 billion on December 31, 2018 to N587.21 billion on December 31, 2019.
Edward Adamu Lametek, former deputy governor of the Central Bank of Nigeria (CBN) was of the view that persistent excess liquidity would no doubt exacerbate pressure on the country’s external sector, which outlook is currently not very strong in view of the protracted low prices of oil (the country’s most important export) and unstable capital inflows.
“Excess liquidity in the banking system is a real threat to the stability of the naira exchange rate just as it is to inflation. And so, I voted specifically to raise the CRR from 22.5% to 27.5% in order to address this risk,” Lametek, who was recently appointed as Chairman of the Asset Management Corporation of Nigeria (AMCON), by President Muhammadu Buhari, said in his personal statement.
However, Godwin Emefiele, governor of the CBN, said he does not anticipate that liquidity glut would fuel speculative demand for dollars with an adverse effect on the naira either in the near or medium term.
The banking industry’s liquidity ratio stood at 45.6 percent last December compared to the minimum requirement of 30.0 percent. The capital adequacy ratio of 14.5 percent is good in relation to the prudential requirement of 10 – 15 percent. The rates of return on equity (25.8%) and assets (2.3%) are robust and indicate the high profitability of the banking industry.
The rates are higher than those of comparator countries: Turkey, South Africa, and Malaysia, according to Obadan, Mike Idiah, MPC member in his personal statement.
In addition, for the banking industry, total assets, deposits, and aggregate credit have grown substantially. The growth in assets has been steady and impressive, rising by 15.36 percent (or by N5.36 trillion) between December 2018 and end-December 2019.
The structure of total assets has also changed in favour of more loans and advances, and less of government securities. It shows that the impact of the loans to deposit ratio (LDR) policy has been positive, said Obadan.
The growth in total deposits has also been steady; total deposits recorded an increase of N2.34 trillion or 10.73 percent between December 2018 and December 2019. Besides, aggregate credit growth has also been impressive; total credit increased by N2.23 trillion or by 14.54 percent between December 2018 and December 2019, largely due to the CBN policy on LDR. This has encouraged banks to increase lending to the economy.
Aisha Ahmad, deputy governor, noted in her personal statement that Gross credit in the industry grew by N1,997.72 billion between end-May 2019 and end December 2019; channelled primarily to employment-generating sectors such as agriculture and manufacturing. This is in addition to increased lending to the retail and SME segments, expected to help boost domestic output growth in the short to medium term in support of the economic diversification agenda of government.
According to her, the significant growth had positive impact on industry LDR ratio, which grew by 319 basis points from 57.45 percent at end-May 2019 to 60.64 percent at end-December 2019. The industry also recorded growth in average customer deposit and aggregate funding, which grew 6.9 percent over the same period – a positive indication of an expanded capacity of the financial sector to sustain further lending to the real sector.