• Friday, March 29, 2024
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BusinessDay

Is it time for interest free banks to blossom?

Banks

In my intervention on the subject matter of interest rates, especially as it pertains to Nigerian depositors (see Business Day, Tuesday, 01 September 2020, p.9), it became clear that this is not the best of times for depositors as they appear to be holding the short end of the stick. For deposit money banks (lenders), are they actually holding the long end of the stick? As the majority of them earn their bulk revenues through interest incomes, the pertinent issue to interrogate is how they are faring given the conscription in the interest regime space as occasioned by plethora of Central Bank of Nigeria (CBN) policies and initiatives.

Time was when many banks were content with deploying most of their deposit liabilities to CBN’s treasury bills and other such investments and reaping bountifully thereafter. Not anymore! Today, deposit money banks are required to maintain a loan to deposit ratio of 65 percent. Failure to comply attracts severe debiting of their accounts with the apex regulatory institution. In addition, they are required to maintain liquidity and cash reserve ratios at 30 percent and 27.5 percent respectively. The anchor rate – the monetary policy rate (MPR) – remains at 12.5 percent.

What the CBN had sought to achieve through moral suasion all this while, namely lending to the real sector of the economy, it has deftly done through this deliberate policy. Even if deposit money banks are to rely heavily on government instruments for the bulk of their revenues as they were wont to, the rates are today abysmally low. From double digit rates the instruments used to attract, they are today below half of 10 percent. Save for the 364-day Treasury bill that attracts about 5.3 percent (a little above half of 10 percent), others are below half of 10 percent. A 182-day instrument of the same complexion, for example, attracts about 3.78 percent whilst the popular 91-day instrument attracts just 2.49 percent. This is in an era the inflation rate as recently released by the National Bureau of Statistics (NBS) for the month of July has peaked at 12.82 percent – the 11th straight month of such increases!

What is true of Treasury bills applies mutatis mutandis to other instruments like the Federal Government of Nigeria (FGN) Bonds, Euro and Diaspora Bonds.

With the grim picture starring many deposit money banks that rely heavily on interest incomes for their revenues, what is the strategic position of interest free banking institutions in the emerging scenario? Are they the Daniels that have come to judgment, in a manner of speaking? Is it their time now to blossom?

True, many Nigerians are yet to understand the concept and philosophy behind interest free banking in contra-distinction to the conventional banks whether Commercial, Merchant, Development or Mortgage. That there are about just two of such banks existing today in Nigeria, with one – Jaiz Bank Plc – quoted on the Nigerian Stock Exchange (NSE) eloquently buttresses the point. To some that want to make any meaning out of the concept, it simply refers to Islamic banking (that abhors usury) by another name!

But interest free banking goes deeper than that. It simply connotes a system where customers of the bank involved in the practice are regarded as partners. In other words, instead of lending money to such customers and amortising the loans, the bank pools resources from its customers (read partners) and invests in a business/project of which it is part of by taking part of the equity. The bank participates in the running of the venture. If profit is realized, it is shared according to predetermined ratio(s). Equally, losses are not spared!

Is it not safe for one to insinuate that by requiring deposit money banks to maintain a loan to deposit ratio of up-to 65 percent, the apex financial institution is encouraging the blossoming of the existing free interest banks and the coming on stream of new ones through the back door? Fortuitous promotion by the CBN may be another way of looking at the emerging scenario!

In an economy where conventional banks are pursuing halfheartedly the policy of lending massively to the real sector in order to promote industrialisation and curb the growing unemployment level which at the last count as released by the National Bureau of Statistics (NBS) stands at 27.1 percent, the strategic position of interest free banks cannot be over-emphasized. By directly participating in business ventures, interest free banks can no doubt contribute to the technical aspect of these businesses, thereby enhancing their profiles, aside from reducing the unemployment rate in the country. The so-called disruptive aspect of the CBN policy of LDR of 65 percent may actually turn out to be the building blocks needed in constructing new interest free banks and strengthening the pillars of the existing ones.

Dr. Okolo is a chartered stockbroker and management consultant based in Lagos