Rising withdrawals worsen banks’ liquidity

OKEY ONYENWEAKU

Jitters have gripped Nigerian Banks over current lack of liquidity which has pervaded the financial industry. This, industry analysts, believe could worsen the already existing mountain of challenges facing the struggling Deposit Money Banks, especially presently.
BH investigations revealed that many banks may be finding it difficult to meet their financial obligations to customers with huge deposits.
Experts say that liquidity risk is a financial risk that for a certain period of time at a given financial asset, security or commodity cannot be traded quickly enough in the market without impacting the market price.
They further explained that liquidity risk is the risk of a bank’s inability to meet its maturing obligations, including the obligation to fund an asset in a sustainable manner. Its causes experts say
arises because there is a tendency for banks to finance long-term needs with short-term funding. It is related to endogenous liquidity (nature of liquidity assets) and exogenous liquidity (funding liquidity). Exogenous liquidity is very important when banks cannot sell assets quickly or have a ‘mismatch’ between the funding structure of assets and liabilities.
Purchasers and owners of long term assets, industry analysts advise, must take into account the saleability of assets when considering their own short term cash needs. Assets that are difficult to sell in an illiquid market carry a liquidity risk since they cannot be easily converted to cash at a time of need. Liquidity risk may lower the value of certain assets or businesses due to the increased potential of capital loss.
Some of the banks have inadvertently found themselves in the discomforting situation and are struggling to find a way out of it.
However, industry observers argue that the strongest factor which has almost placed the Deposit Money Banks (DMB)in distress is the existing deep depression in the economy. Some have also taken a broader look at why it is feared that banks are suffering from serious liquidity squeeze even though the banks are not crying out now.
In a depressed economy where business activities are deeply depleted and commerce is not adequately on the high pedestal, many industry observers argued, the banks will definitely be struggling for liquidity.
For banks that heavily depend on corporate clients the challenges in the oil and gas sector and energy have left them hollow. These sectors almost do not much activity to generate enough funds to be able to service their loans or pay back let alone having some cash deposits left in the banks.
Resulting from the sharp drop in the crude oil price from $114pbd mid 2014 to $30 and now hovers between $45 and $50, the sectors non- performing loans grew so high that banks that are exposed to it are suffering.
Since the major component of banks non-performing loans comes from that sectors also means that the huge liquidity which used to accrue to financial institutions are no longer there.
For instance; Seplat which used to be attractive to every bank has been posting very weak results.
Some other companies that have similar fate with Seplat Nigeria include Guinness Nigeria and Cadbury Nigeria which accounts are in red.
Research shows that many customers that went G T Bank may have migrated from Union bank and other financial institutions.
But industry experts believe that the effect of the removal of the Treasury Single Account are just simmering in on the liquidity challenge of the banks. They are of the view financial industry are now feeling the impact of the damage done by the implementation of the Treasury Single Account which has removed huge funds from the banks in addition to the gap also created by the removal of public funds from DMB’s.
The Federal Government had deployed the TSA policy to enable it track public revenues.
There is discomfort from the corporate quarters that the removal of huge funds from the financial system, depleting industry liquidity by huge per centage.
Over the years, Nigeria has been described as a country with low savings culture, caused by inability to be productive. As a result, Deposit Money Banks have had to depend partially on public sector funds to survive.
And nobody is sure that this status of Bank depositors in Nigeria have changed. Not even presently when the unemployment rate keeps rising, Company’s and firms are reducing their work force for lack of funds to keep them, inflation at double digit and still rising and the shrinking revenues of the country.
“Banks have been calling and pleading with some investors not to terminate maturing fixed-income debts as a result of liquidity problems; some bankers are also not lending not necessarily because of uncertainties in the economy, but due to lack of liquidity,” a banker added.
More worrisome is that the liquidity challenge is coming not at the normal electioneering period when political spending is usually very high. But the prevailing economic crunch has put many Nigerians under pressure that most people are only withdrawing money to eat without depositing anything in return. ‘’Is it not when you have eaten that you can save. Have you not heard that companies are sacking’’, fred Nwaogazi, a customer of one of the banks said?
But it is not out of place to reason that besides other reasons why banks run out of liquidity, many suspect, that both politicians and other rent seekers may have either moved monies out of the country or hidden cash in home vaults to avoid the long arm of the EFCC which is hunting down those that perceived to be corrupt persons.

Banks have been frequented the Central Bank of Nigeria (CBN) Window to borrow cash to boost their liquidity positions, according to the CBN Economic Report for the second quarter 2016
Twenty-one commercial banks borrowed N4.06 trillion from the CBN’s Window in the second quarter- between April and June. This is a prove that all is not well with the banks, in terms, especially now.

The figure, the report said, was by far higher than N560.8 billion borrowed in the first quarter- from January to March this year, the report released yesterday showed.
The funds came through the Standing Lending Facility (SLF), which is an overnight CBN credit available on banking days between 2 pm and 3.30 pm, with settlement done on same day value. Funds were sourced mainly from time, savings and foreign currency deposits, as well as accretion to unclassified assets. The funds were used, largely, to extend credit to the private sector and payment of claims on demand deposit.
The CBN attributed the huge borrowing figure by banks to foreign exchange illiquidity in the system, which it said, hindered the smooth running of the foreign exchange inter-bank market and this led the bank to float a special foreign exchange auction.
The apex bank said the settlement of these transactions drained liquidity in the money market. Consequently, inter-bank money market rates spiked and the trend in standing facilities reversed as there was more patronage at the Standing Lending Facilities (SLF) than the Standing Deposit Facility (SDF).
‘’There is no reason not to believe that the banks are struggling for liquidity, rising non-performing loans, negative real interest rates (discouraging deposits) and poor forward prospects for international oil pride, signpost very sober times ahead for banks’’ , said Mr. Teslim Shittabay, a Lagos based financial analyst.
Dr. Afolabi Olowokere of Financial Derivatives Company (FDC) limited says whether there is data on the issue or not the banks should be struggling with their liquidity. He explained at a time of economic depression firms sack, pay less salaries which results to less savings and leaves the banks hollow without enough liquidity.
According to Olowokere, ‘’the major determinant of savings is income and if people are not paid salaries they cannot save. Of course you have also heard that some State governments are not paying salaries. In times like this people give priority to food and not saving. Whether the CBN and banks agree or not at times like this savings are very low’’.
Olowokere further told BH that recession results to low profitability, less money to lend, high interest rate and banks also try to hold on to the cash they have in order not run into trouble.
The market share of the largest bank with respect to deposits and assets stood at 15.65 and 14.27 per cent in the second half of 2015, respectively. The average market share of deposits and assets of the five largest banks decreased to 52.99 and 52.94 per cent, from 54.49 and 59.98 per cent in the first half of 2015, respectively while the remaining 17 banks had market shares ranging from 0.29 to 7.19 per cent in deposits and 0.29 to 6.78 per cent in assets, reflecting low competition in the market.
Financial stability report of the CBN for june 2016 reveals that, ‘’The ratio of core liquid assets to total assets declined by 4.5 percentage points to 14.0 per cent at end-June 2016 from 18.5 per cent at end-December 2015. Similarly, the ratio of core liquid assets to short-term liabilities decreased by 5.5 percentage points to 21.6 per cent at end-June 2016, compared with 27.1 per cent at end-December 2015 ‘’,