The Nigerian Banking system is in a state of flux and is experiencing a liquidity squeeze following a plethora of policies from the central bank of Nigeria which have succeeded in creating sharp increases in money market deposit rates to double digits.
A recent Nairametrics survey suggests banks are offering institutional customers (such as pension funds, fund managers) and high net worth individuals interest rates as high as 16% per annum for fixed deposits or bank placements. This is despite the banks having trillions of naira being held at the central bank at rates close to 0%. In other words, Nigerian banks have their deposits being sequestered by the CBN at ultralow deposit rates whilst the same banks have to turnaround and solicit funds from other sources at much higher rates.
For these banks, it is a price to pay to stay liquid pending when the “madness” blows over.
What the banks are currently experiencing is a remarkable volte-face of the relationship which banks had with the same CBN just 4 years ago.
Specifically, in 2017, commercial banks benefitted immensely from a CBN policy that offered banks high interest rates for government securities such as treasury bills and OMO bills. Back then, the CBN utilized this policy as a strategy to defend the naira and fund the Federal Government’s expenditure, costing it trillions of naira in interest payments. In 2017 alone, the CBN reported an interest cost of about N1.3 trillion.
This time around, whilst CBN’s objective of funding Federal government expenditure and intervention programs remains the same, the strategy of achieving this at a low cost to the apex bank (by forcefully debiting banks via the CRR policy in return for a paltry 0.5% on special bills) reflects a near-direct reversal of what was then known as “Shashe Banking” in the banking space.
Why the CBN is doing this?
There are a variety of reasons why the CBN is doing this. Primarily, the CBN is trying to accomplish a high-wire balancing act to mitigate its competing concerns regarding (a) how to avoid excess liquidity adding to existing inflationary pressures, (b) how to continually stimulate the economy to protect jobs and (c) also how to keep funding FGs expenditure and meet all these objectives whilst at the same time trying to avoid paying market interest rates for all the funding required.
Excess liquidity and inflationary pressures
The CBN governor admitted interventions to stimulate the economy and protect jobs. Since the pandemic broke in early 2020, triggering a fall in oil price, the Central Bank ratcheted up its heterodox monetary policies which it started the year before. A cornerstone of its heterodox policies was a different form of liquidity tightening which mandated banks to lend more to the private sector or risk being sanctioned via CRR debits.
The Apex bank believes private-sector lending can spur economic growth if rates are low and banks are forced to lend more. This is in spite of galloping inflation which it hitherto addressed via increases in its monetary policy rates.
In its monetary policy communique last month, the CBN Governor, Godwin Emefiele announced that the apex bank was keeping rates the same, especially the monetary policy rate which remains at 11.5% but explained its seeming quagmire.
The MPC noted that economic growth could be hampered in an environment of unstable prices. To this end, the choice, therefore, was between loosening the stance of policy to ease credit further or tighten to moderate price development or maintain a hold stance in order to allow previous policy measures continue to permeate the economy while observing global and domestic developments.
It continues…
The Committee noted that an expansionary stance of policy could transmit to reduced pricing of the loan portfolios of Deposit Money Banks and result, therefore, in cheaper credit to the real sector of the economy. On the converse, this expected transmission may be constrained by persisting security challenges and infrastructural deficits. On the other hand, while a contractionary stance will only address the monetary component of price development, supply side constraints such as the security crisis and infrastructural deficits can only be addressed by policies outside the purview of the Central Bank. A tight stance, in the view of members, will also hamper the Bank’s objectives of providing low-cost credit to households, Micro Small and Medium Enterprises (MSMEs), Agriculture, and other output growth and employment stimulating sectors of the economy.
This statement underpins the central bank’s strategy of surreptitiously adopting a twin policy of tightening monetary policy and at the same time funding development activities. It is funding private sector borrowing by extracting money from banks at very low rates and in turn lending this money through intervention loans to the business at rates of 5% (to rise to 9% in 2022). In its own form of “Shashe Banking” the banks mobilize deposits from customers, which is then sequestered by the CBN and then lent to the private sector via intervention loans. If banks won’t lend, then they will.
Finding themselves on the other end of the stick, commercial banks have no choice but to seek liquidity elsewhere at competitive rates.
Bankers think policy is “crazy”
Bankers who spoke to Nairametrics on the condition of anonymity think the policy is “crazy” by all counts. One analyst lamented that “banks face a liquidity problem because of the CRR debits” which stifles them of cash required to meet their obligations.
Some banks even have more CRR debits than the amount of loans and advances on their balance sheet. Another maintained this is not really about lending to the private sector but a grand scheme which in parts includes the CBN’s “stubborn exchange rate policy” targeted at keeping the naira from depreciating to the detriment of banks and funding the revenue short-fall of the federal government. The CBN under Godwin Emefiele has relied on liquidity tightening to curb the demand for foreign exchange in the economy.
The Ministry of Finance recently admitted the government had borrowed over N10 trillion from the CBN via its Ways and Means programme. The CBN’s funding of the federal and state governments is viewed as expedient in the wake of the government’s revenue shortfall. This has led to the creation of “Special Bills” a new government instrument of borrowing.
The Special Bills are given to banks in exchange for CRR debits allowing banks to discount it for cash should they face liquidity challenges. Unfortunately, banks who wish to go this route end up taking a haircut. According to our findings, the CBN Special Bills carry a coupon of 0.5% per annum but trade in the market for yields as high as 10%. This means that any bank or investor holding this yield that wants to sell will end up recording a capital loss on the underlying asset.
This places some banks in a precarious situation requiring that they choose between taking a loss on the Special Bills or keep the bills and borrow from via fixed deposits or placements at high yields just to meet short term liquidity positions. Interbank rates have also risen for banks looking to borrow from each other when they face short liquidity squeezes. Most banks do not want to be in the habit of selling down their special bills or unwinding treasury bills positions to boost their short-term liquidity. They will rather offer placements.
Thus, to meet their liquidity demands, especially from customers looking to withdraw money, banks resort to offering placements from pension funds institutions or high net-worth Nigerians at double-digit interest rates.
Cash is king
This situation is favouring none other but Nigerians or local institutions with a significant cash hoard. Depending on the cash you have yields can range from 8% to 16%. Nearly “all commercial banks are on this table,” a banker informed Nairametrics.
Even Microfinance Banks and smaller Asset Managers are also offering “juicy yields” in exchange for cash. Some use the funds for payday loans while others find themselves in the same soup as commercial banks albeit triggered by higher interest rates on their margin loans instead of CRR debits.
The paradoxical status of Nigeria’s money market has left a lot of investors flummoxed and perplexed. Treasury bills yields remain in the lower single digits while banks are offering higher yields on fixed deposits or bank placements.
Asset Managers with significantly large leverage-backed treasury bill positions are also under pressure to exchange them temporarily for cash under repo programs. Just like banks, they are willing to offer their treasury bills security as cash collateral in exchange for interest rates that are lower than what is obtainable from their banks. This cash is used to close their positions with banks, while the HNI’s, Pension Funds or institutions with good treasury float receive interest rates on their deposits that are higher than what the banks offer.
In this new version of Shashe banking, everyone seems to benefit except the banks.
Source: Nairametrics
