Godwin Emefiele, CBN Governor


There are growing fears that the continuous debiting of commercial banks’ accounts by the Central Bank of Nigeria (CBN) as a penalty for falling short of the cash reserve requirement (CRR) as well as the stipulated loan to deposit ratio (LDR) may jeopardise the nation’s efforts to recover from the current economic downturn.

The apprehensions are coming on the premise that the deductions are weakening the banks’ ability to play their critical role for the much desired recovery of the nation’s economy from the hits of a combination of the novel Coronavirus (Covid-19) pandemic and global oil price crash.

Since April this year, commercial banks in Nigeria have been under the heavy radar of the CBN over compliance to the 27.5 per cent CRR target. Early this month, the apex bank withdrew a total of N118 billion from the accounts of about 20 banks over alleged default.  Before then, it had debited the banks to the tune of N2.144 trillion between April and June..

The policy makers of the apex bank had in January tweaked the monetary policy instrument (CRR) for the first time in about four years by 500 basis points, to 27.5 per cent from 25.5 per cent.

The CRR is a mandatory part of bank’s total deposit, expressed in percentage, which a bank must maintain with the apex bank at all times and subject to change at the discretion of the regulator. By the decision, banks are now left with low level of funds to the tune of the new CRR, as the amount available for disbursement in the form of loans.

The CBN Governor, Godwin Emefiele, had admitted that the move was part of efforts to curb excess liquidity in the banking system, already adjudged as a contributor to the resurging inflation trend and pressure on the naira, which has been devalued twice this year from N306 to N380 to the dollar in a bid to unify the market rates.

Inflation, as at December 2019, settled at 11.98 per cent, but kept the trend for four months consecutively. The nation’s border policy, which led to the shutting of the land borders in fight against smuggling, strengthened the inflationary pressure through supply shortages.

Since June 2019, the apex bank has been pursuing aggressive policy of credit expansion, with focus on small businesses by setting a minimum LDR for banks from 60 per cent to 65 per cent presently.

“In furtherance of its primary mandate to maintain price and monetary stability and in view of the anticipated medium-term liquidity surfeit from maturing open market operations (OMO) bills held by local private and institutional investors, which would not be rolled over, the Committee considered it prudent to raise the CRR to curtail liquidity surfeit in the banking system”, the communiqué at the end of the January MPC meeting had read in part.

Emefiele, while unveiling the apex bank’s position for 2020 earlier at the Bankers’ Dinner, organized by the Chartered Institute of Bankers of Nigeria, in Lagos, disclosed that CBN would maintain a cautious approach and defend the naira to avoid reversal of gains.

But analysts are of the view that with the outbreak of the economically devastating Covid-19 pandemic which was not envisaged before the policy review, the CBN would have exercised some restraint in its enforcement. They argue that since the pandemic has thrown the Nigerian economy into a state of chaos, one of the things needed the most to ensure a quicker recovery is high liquidity in the system.

“Unfortunately, CBN’s move did exactly the opposite of this. How then does the apex bank expect the economy to recover?, an economic commentator, Kalu Aja, queried.

He said, “It’s just optics. If you are in a crisis where liquidity is tight because of limited commerce, why take away liquidity from the market? All over the world, central banks are injecting liquidity. This is definitely not a good move at this point.

“However, Governor Emefiele is worried about inflation which is his core responsibility. There is also the real fear that naira will start buying dollar and push up exchange rates. So, he is starving the foreign exchange market of cash.”

Yielding to pressure

Before the devaluation in March, the CBN last devalued the currency in 2017 and had since kept the exchange rate relatively stable at N360/$1 at the interbank market. But in March when pressure was beginning to mount on the naira due to fallouts from the Covid-19 pandemic, the apex bank issued a statement threatening to “invoke the full weight of applicable sanctions on any persons” found guilty of speculating about an imminent devaluation.

About two weeks later, the CBN devalued (adjusted) the naira from N305 in the “official” market to N360/$1 and then unified it with I&E window at N380. There is still pressure to devalue more as analysts believe the naira is still overvalued. But while the CBN is still trying its best to keep the exchange rate down, the rate appears to have assumed a life of its own in the parallel market.

Following the May unification, the naira was exchanging at about N380 to a dollar. The rate would soon decline to N500 to a dollar at the forward market. The CBN could be trying to dissuade speculation in the market by enforcing the CRR at a time when some people believe the move is counterintuitive.

“It appears that the CBN has debited the most liquid banks to deter those institutions from making huge demands in the FX market, which the central bank actively intervenes in,” a financial analyst Charles Eke noted.

Sentiment in the market suggests that the central bank is actively trying to contain the banks’ cash to prevent them from buying dollars, which could further push up exchange rates. It looks more so as rising inflation and the recent naira devaluation make a good case for holding foreign currency.

“Nigeria currently has one of the highest CRRs in Sub-Saharan Africa at 27.5%, which is more than ten times that of South African banks and about five times that of East African banks”, a report claimed.

But banks are silently upset. The move, in addition to similar policies by the CBN, has left many banks cash-strapped and unable to pursue various profitable ventures, observers say. While reacting to the latest development, a banker who refused to be identified said:

“What we’ve seen in recent times is that the CBN just indiscriminately debits banks, usually towards the tail-end of every week. They will look at your bank account and if your liquidity is plenty, they will debit you.

“You know the central bank also does what we call retail FX intervention that is when they sell FX to corporates. Now, because they don’t want banks coming with huge demands, what they do is that a day before the FX sales, they debit the banks so that the naira you have available is small and you cannot put them under pressure because of your FX demands. That has really been the driver.

 “We understand that the central bank had set up a special CRR team that is supposed to monitor banks’ CRR once a month. But now, the team monitors banks’ CRR on a weekly basis. This is why the central bank is effectively debiting banks on a weekly basis. Some weeks ago, they debited some banks about N1.4 trillion. That was one of many.

“Between that time and now, there have been more debits that have happened. But the debits that are huge/significant are what is troubling the banks. There was a N300 billion that happened about two weeks ago and then yesterday that was this N459.7 billion that was also debited.

“These are huge amounts that are leaving the banking sector. It’s a squeeze on the banks. A bank like First Bank, for instance, has about N1.4 trillion in CRR with the Central Bank. And there is Zenith Bank with equally as much as N1.5 trillion. These are monies that banks can potentially put in loans at 52% at 30%, or even put in money market instruments at maybe 10%.

“So, for a shareholder of these banks, this CRR debits are impairing the banks’ ability to increase their earnings because they are not able to use the funds that are legitimately theirs to create money for their shareholders. And the question is that under what framework is the Central Bank choosing to take people’s money?”

Representatives of some of the country’s top banks (Zenith Bank Plc, FBN Holdings Plc, United Bank for Africa Plc, Guaranty Trust Bank Plc, and Stanbic IBTC Holdings Plc) who recently attended Standard Chartered Bank’s 2020 Africa Investor’s Conference, raised similar concerns.

“Banks are more concerned about the arbitrary nature and lack of understanding of the CRR debits as it makes it difficult for them to plan”, a portion of the document containing the executive summary of the conference said.

Unintended conflict

At its most recent MPC meeting, the CBN cut its policy rate by 100 basis points in a bid to boost liquidity to the private sector, thereby helping to revive economic activity and stimulate economic growth. However, critics say, subsequent CRR debits have removed liquidity from the market and are in sharp contrast to the steps of other central banks around the world, which are actively injecting liquidity into the markets.

“The CBN’s debits will lead to lower liquidity in the system, thereby limiting the banks’ ability to lend to the real sector or meet the CBN’s 65% LDR and potentially slow down the pace of economic recovery post Covid-19”, Eke argued.

“Recall that failing to meet the 65% LDR attracts a penalty, which could lead to further CBN debits that would inevitably increase the banks’ cost of funds. The banks in turn would most likely pass on this increased cost to their borrowers, leading to higher lending rates on loans.”

But Mr. Emefiele recently said there was “ample liquidity buffers for the sector, even with the over N10 trillion maintained today in the cash reserve balances of the CBN.”

According to him, there has been strong growth in the sector as a result of the central bank’s policy.

“Under our loan to deposit ratio policy, total gross credit increased over N3 trillion to about N15.5 trillion at the end of May 2019, to about N18.6 trillion as at the end of April 2020. The credit growth was largely recorded in manufacturing, consumer credit, general commerce, information and communication and agriculture. And of course, we also saw interest coming from borrowers because of reduced lending rate,” he had said.