Determined to curb artificial pressure on the nation’s currency, the naira, Central Bank of Nigeria (CBN) has further tightened the noose on banks by directing that their current accounts with it be funded two working days before the Retail Dutch Auction System, (RDAS), where banks buy foreign exchange on behalf of their customers.
Coming a day after the commencement of the implementation of the new 75 percent hike on cash reserve ratio (CRR) on public sector funds, analysts said yesterday that some banks will find it difficult to meet their customers’ demand for foreign exchange at the RDAS today.
Besides, banks’ competition for private funds at higher interest rate is expected to shrink their interest margins with the resultant effect of single digit growth rate in their earnings.
The implication of the circular released by CBN on Monday, directing banks to funds their current accounts two working days before the auction and that the accounts must remain funded until conclusion of the auction session, is that all the banks must have funded their accounts since Monday, a development that will lead to a rise in interbank rates (NIBOR).
“Getting funds from other peer institutions at higher rate would mean giving same out at higher rate to customers,” said an analyst last night.
“However, this will mount more pressure on banks’ liquidity position, as funds will only be streamlined for the auction.
“This policy, coupled with the hike in CRR, will predominantly drive the interbank rates higher in the short term,” said analysts at the Afrinvest.
Commenting further the analysts said that this recent development further buttresses the potential challenges on the banks’ earnings which was highlighted in the 2014 outlook, “as banks compete for private funds at higher interest rate, thus shrinking their net interest margin. As a result, we expect single digit growth rate in most banks’ earnings in 2014.”
Another analyst, who pleaded anonymity said, “the CBN can only succeed if it supervises the banks very well. The banks are ready to do anything to make profit and what the CBN should do now, is to continue to tighten the noose on them, to encourage them to go for the real financial inermediation.”
Garba Abdul Ganiyu, a member of the Monetary Policy Committee, in his contributions to the meeting and in his support for increase in the CRR, last week called on government to complement the efforts of the CBN with fiscal discipline.
Ganiyu said, “In voting to increase the CRR on public sector deposit to 75%, I expect the fiscal authorities to speed up the process towards the Treasury Single Account (TSA) which I have consistently argued is “indispensable to avoiding a high interest rate trap and to
preparing the economy to soften the likely adverse effects of the low interest rate trap imploding.
“I have also anchored my vote on the premise that with more efficient and effective cash management which a Treasury Single Account will facilitate; the federal government would be a net lender to the economy. This will have several positive effects: less dependence of DMBs on government securities; improved efficiency in the pricing and allocation of credit; transition from crowding out effects of borrowing to crowding in effects of government lending.”
By: John Omachonu
