• Saturday, March 02, 2024
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Of CBN and retail lending

As Naira continues free fall, CBN offers yet more promise to act

Recent World Bank report has it that the Central Bank of Nigeria’s (CBN) intervention funds are fuelling inflation in Nigeria. This is a disturbing development because all along, the CBN has been battling with the challenge created by imported inflation, Nigeria being an import dependent economy with inflation having a direct link with exchange rate fluctuations, which has not been in favour of the Naira.

It is disturbing because inflation arising from CBN activities as a regulator in all intents and purposes cannot be contained with conventional tools of inflation management. This is because the CBN has derailed from its functions as regulator to an operator in an environment it is statutorily mandated to stabilise. If one may ask, is the CBN re-inventing the wheel?

For the avoidance of doubt G.O Nwankwo (1984) ‘Nigerian Financial System p.19 ‘as a banking institution, the CBN discharges the actual banking functions which any Central Bank elsewhere normally undertakes. It is for instance the issuer of the Naira currency and the bank to the Federal Government, and at their discretion to the state government. It is also a banker to commercial banks for whom it acts as a lender of last resort … Like most Central Banks elsewhere, the CBN does not engage in commercial banking operations and does not have private accounts. “Thus, direct or indirect retail lending to business units is the function of deposit money banks, not the CBN.”

We must however give credit to to the CBN for keeping the Nigerian economy afloat, especially in the face of abysmal failure by the Federal Ministry of Finance to implement a robust and sustainable Fiscal Policy to complement CBN Monetary Policy in the maintenance of a stable economy in which inflationary trend is contained. Thus, the Nigerian economy is driven almost exclusively by CBN monetary policy, which is a radical departure from what it should be.

The genesis of the CBN derailment from its traditional function is the ill-advised Federal Government policy in withdrawing public sector funds from deposit money banks to the CBN in a bid to fight corruption through maintenance of a Single Treasury Account (TSA). This policy was initiated by Dr Goodluck Johnathan administration. That regime understood economic management of keeping the economy optimally funded for any meaningful economic activity. They left public funds in TSA with deposit money banks because the economy thrives on the liquidity position of banks. They did put structures in lac to check unauthorized use of the funds and other sundry abuses.

Read also: Another CBN rate hike expected as inflation hits 20.52%

There was absolutely no need, as events have proved, for the present government to centralise the collection go government revenue in CBN via TSA. The previous regime took care of abuses that may arise in the course of administering TSA BY Ministries, Departments and Agencies of government. The decision to withdraw the funds from deposit money banks to the CBN was largely political to spite the previous regime as clueless and incompetent. In doing so, they failed to learn from experience.

In May 1989, the Babangida administration, through the Accountant General of the Federation, ordered all government agencies to transfer their accounts and funds from the deposit money banks to the CBN. At that time, CBN was under the Federal Ministry of Finance.

The effect was a drain of liquidity from the banking system. Many banks, especially the Merchant Banks went insolvent. This action led to multiple failures of banks in the early 1990s. The bank failure got worse with the annulment of the 1993 Presidential election that led to run on banks and more bank failures were recorded by 1995.

Like we said earlier, credit must be given to the CBN for keeping the Nigerian economy afloat. Centralising TSA in the CBN instead of deposit money banks negatively affected the ability of banks to lend. That state of affairs made the CBN to rely on its developmental function to boost credit to the real sector by indirectly creating funds as a lending window to banks for on-lending to their customers on interest rate and other flexible terms directed by the CBN to sectors like agriculture, aviation, small and medium enterprises, etc. This is what is fuelling inflation according to the World Bank report. That in essence explains the ever-rising inflation trend in the economy which the CBN so far has been struggling to contain.

Engaging in retail lending is not the function of the CBN. Nigeria being a developing economy, the CBN may justify their action by citing their developmental function. But this has led to development by inflation.

This writer and many other professionals are of the view that engaging in retail banking by the CBN is not the way to go. There is no economy in the world where the public sector component of the money supply to the economy is almost zero. Warehousing TSA in the CBN has altered the component of money supply because domiciling TSA in CBN distorts the circular flow of liquidity in the economy. For development to thrive, the Nigerian economy must be optimally funded. This is much so because the easiest way to kill an economy is to withdraw liquidity from the banking system willingly. As things stand now, neither the Nigerian economy nor the banking system is optimally funded. Without deposits, banks cannot lend. Not many analysts will disagree that the Nigerian economy has become a stationary economy . Nothing is moving, repeat nothing is moving. Factories are daily closing down; other multinationals are relocating from Nigeria to Ghana.

It is this writer’s considered view for the Federal Government to make a U-Turn and return TSA to deposit money banks so that banks will have enough deposit base to lend to the deficit units and reflate the economy, provide employment and reduce crime. This is more so since centralizing TSA in the CBN has not in any way stopped treasury looting by government officials at all levels which is the reason adduced by the present government in centralising TSA in the CBN.

Government is a continuum. The previous government introduced the TSA to fight corruption and has a template for checks and balances to take care of abuses. It will do us a world of good if this model by the previous government is reintroduced especially as it is an economic not a political decision which can vary from government to government. . Need we say more?

Enyinnaya, a Fellow of Chartered Institute of Bankers, writes from Lagos