The Central Bank of Nigeria, CBN, has come under increasing attacks from banks and other stakeholders in the financial sector over the sequestration of a sizeable chunk of banks’ funds under the Cash Reserve policy. The funds which were not only removed from the banks’ vaults, but also do not attract any interest payment from the CBN, thereby impeding their contributions to banks’ performance.

Analysts as well as Nigeria’s banks including shareholders are demanding that the CBN should be paying at least nominal rate on the cash reserve portfolio requirement from deposit money banks (DMBs).

The banking industry scorecard for the year 2014 has shown quantum growth in sterilised funds due to increased cash reserve ratio in the industry.

The cash balances sterilised by CBN is regarded as soft cyclical liquidity currently out of the market, and also removed from calculating the banks liquidity asset portfolio. As part of their requests, banks are asking the CBN to pay some level of interest on the balances and/or allow the operators to use that “balance to count as a part of our liquidity asset portfolio”.

It may be recalled that the CBN increased CRR both on the public sector and private sector funds from 12 per cent progressively to 50 per cent and then to 75 per cent on public sector, and for private sector from 12 per cent progressively to 20 per cent in less than a financial year.

Thus, this has effectively increase aggregate cash and balances reserves with the apex bank as some operators hinge their increased costs to the trend.

In addition to the increase in reserve ratio, DMBs witnessed the introduction of treasury single accounts, which is effectively taking away collections from federal government agencies from the banking system into the CBN.

Practically, there are no cheap funds for banks, which explain the industry rising costs trend as business and competitive environment become so uptight, forcing them to seek new stream of income to maintain historical earnings.

Babs Adewumi, Chartered Financial Analyst, said cash reserve at zero interest rate helps the CBN to control money supply at minimal cost. If CBN pays the downside is that the banks may become profitable without actual lending.

“So, I think the CBN is trying to control money supply and the ensuing inflation at minimal cost on the one hand, and also encouraging the banks to lend without hoping on interest from cash reserve on the other hand.

With this policy, banks excess cash is mopped up at minimal cost”, he said.

Prof. Enyi Enyi, FCA, Accounting and Finance department at Babcock University, said that he believes it is equitable for CBN to pay interest on Banks cash reserves because it is partly depositors money as well as shareholders money.

In whichever way case it is not equitable for it to stay idle since CBN itself invests this money by way of the sale of interest bearing treasury bills and some other ventures of it.

The interest to be paid may not necessarily be up to overall general interest rate. That will lift the heavy pressure on banks and allow them to them to reduce their lending rate to the public.

Analysts said that the effect of the hike in CRR which just manifested in the operator’s performance is damning. They further emphasise that there should be an opportunity cost for the apex bank to holding such magnitude of funds that could be channeled for use while other precautionary measure should be considered.

Since other precautionary measures are not feasible given the dynamics that often play out in the financial services sector, CBN ought to be paying certain value on the sterilised funds as these funds are at cost to the deposit money banks.

Ogochukwu Ndubuisi said that increased regulation is causing so much profit retracting even as deadline set for zero rate commission on turnover (COT) will come into effect in the coming year. The CBN should, perhaps under the Bank’s moral suasion code, pay nominal or worthwhile interest on the operators’ cash and balances to help them stay in business.

“It won’t help to regulate a business out of business but to give them support while the apex bank maintains eagle eyes on their operations.

The amount of Banks credit reserves sitting at CBN at zero cost is much. CBN should look at underlining economic value of doing business with the aggregate deposits, if it ever applies the funds as expected, at any rate to achieving added value”, he said.

Money does not sit at a place, money works. At various annual general meetings (AGMs) of banks shareholders, there were complain about how CRR had impacted profit performance and relative effects on the dividend as earnings per share panned out low in the year.

Some shareholders expressed dismay as to the reason why their banks achieved an improvement in performance but down through the line, there were not much for shareholders to show for it in term of returns.

In the recent time, analysts have been asking DMBs about the industry readiness to take on the zero COTs rate regime. However, Hallmark gathers that there are discussions with the authorities to review its directive to relent on its glide path to nil commission on turnover.

An inside source in the banking industry said that the banker tariff is up for review.

“I understand that there is consensus amongst all the banks to keep and cap COT at the current level. I can tell you authoritatively that representations have been made to the Central Bank at the highest level”, the source said.

Adesola Adeduntan, Chief Financial Officer at First Bank while reacting to analysts questions at a presentation, said “…we are just hopeful that this will be sustained because we have made sufficient representation that COT is key to the banks given the significant investment that we have all made in infrastructure. It is our expectation that it should be capped at least N2 per mille.

To banks, the shareholders and analyst, cost of regulation has been following an uptrend in the financial service sectors due to its connections with the economic prosperity of the nation.