Nigeria banks and financial intermediation
The recent increase of the cash reserve requirement (CRR) on public funds by the Central Bank of Nigeria (CBN) has culminated in the withdrawal of about N1 trillion from the system. Some banks have become jittery, as expected.
It has always be known that a withdrawal of government money from banks’ coffers would make the banking system illiquid within a month. Prior to the squeeze on liquidity, the excess liquidity, mainly government deposits were a cheap source of income, a buffer for banks.
The extent to which this new implementation on public sector deposits shook banks reveal once again that some banks may be depending largely on these government funds, thus neglecting their proper role of financial intermediation across the economy.
Even more, it reveals a structural flaw in Nigeria’s financial system: it is overly reliant on a volatile commodity, oil. Hence the interbank rate fluctuates with monthly disbursement of public sector funds which change tandem with monthly oil revenues.
We have seen recently a surge in interbank dealings leading to unprecedented rise in interbank lending, a renewed reliance on the market and discount window facilities. That the interbank rates moved so significantly showed that there are still fragile institutions in the banking system.
These banks do not have sufficient liquidity, from their equity and deposits, hence their reliance on the interbank market for funds. This unfolding scenario reveals that there is a major weakness in the deposit portfolio structure of the nation’s financial institutions.
Analysts believe that the development has clearly shown the fragility of some banks, an indication that the banks are no longer deposit driven and that their liquidity is not hinged on the volume of real deposits they are able to attract. They further argue that if the trend is not checked it could lead to the continued dominance of few big banks and the marginalisation of smaller ones.
Close watchers of the country’s financial industry observe the failure of some banks to increase their deposit rates in order to remain attractive to customers is disturbing. Higher deposit rates would normally boost naira stability, but more importantly it will boost the transmission mechanism of monetary policy. It will also enhance banks’ drive for a higher and robust savings culture in addition to disentangling the banking industry from a rent-seeking tradition.
Analysts predict that in the near future we may having a banking sector where some of the smaller players will have to be content with being niche players or forced to consolidate in order to adequately compete in the race to generate risk assets.
One niche that has been overlooked for far too long is Nigeria’s underbanked population. Nigeria is grossly underbanked. Only 28.6 million adults, or 32.5 percent of the population, have formal bank accounts. Some smaller banks may choose to try and address the large unbanked segment of the population as a few are already doing by relaxing some restrictive account opening conditions.
Larger banks, too, are likely to seek other streams of income other than interest margins from treasury bills and federal government bonds.
Rather than brood over the negative fallout of the recent directive on public deposits, banks should begin to plot their winning strategy around attracting and sustaining good deposits from surplus segments in the economy.
Nigerians in general and the investing public in particular, are full of expectations that the development will propel banks to properly assume their role as financial intermediaries for the overall benefit of the economy.
By: BusinessDay