Banks and public sector funds

Deposit money banks (DMBs) in Nigeria are once again treading on thorny path. The full implementation of the revised cash reserve requirements (CRR) on public funds by the Central Bank of Nigeria (CBN) a week ago, which culminated in the withdrawal of about N1 trillion from the system, is now a cause for worry for the banks.

Expectedly, the withdrawal caused an unprecedented rise in interbank lending rates by about seven basis points or 68 percent, sign-posting liquidity challenges facing most of the banks.

Industry watchers are of the opinion that the renewed reliance on interbank market for funds indicates a major weakness of the nation’s financial institutions, noting that last week development was capable of creating a run on weak banks.

The timing of the withdrawal, which coincides with the two-day holiday, did give the banks a breather for them to absolve the heat and strategise on ways to boost their liquidity.

Some analysts believe that Sanusi Lamido Sanusi, the CBN governor, should have, in his characteristically bold manner, tackled the issue of government borrowing back its own cash deposits in the banks at extortionist interest rates, which had been in practice for quite some time.

To them, it makes sense for ministries, departments and agencies to domicile their humongous monthly allocations with the CBN itself, rather than keeping same with banks only to borrow back their own non-interest-yielding savings at a cost, thereby making the banks to abdicate from their inter-mediation role.

They observe that while the intervention will lead to a significant contraction in the cash available, and make it possible to better control inflation in the system, government’s uncontrolled expenditure could jeopardise the good intention.

There is also the need to recognise that surplus cash is the direct product of the CBN’s monthly substitution of naira allocations for dollar revenue, and also the need to ensure that beneficiaries of the federation pool receive dollar certificates for their share of monthly dollar denominated revenue.

Inadequate as the intervention may be, they are of the opinion that this can go a long way in ensuring that banks justify the confidence of the public in them through playing their mandatory role on cutting-edge technology for the benefit of customers.

Indeed, the Nigerian Interbank Offered Rates (NIBOR) spiked for all tenor buckets on the back of CBN’s withdrawal, bi-weekly forex auction as well as cautionary play by the DMBs at the money market.

Consequently, NIBOR for call, 30 days, 60 days and 90 days accelerated to 19.50 percent (from 10.67%), 20.75 percent (from 11.71%), 21.13 percent (from 12.00%), and 21.50 percent (from 12.46%), respectively.

Also, this week, the CBN will auction treasury bills worth N172.06 billion (viz: 91-day bills worth N22.06bn; 182-day bills worth N60bn, and 364-day bills worth N90bn) via Primary Market today (Thursday, 15).

Although they are inflows through maturities of treasury bills of various tenors to boost liquidity, analysts at Cowry Asset Management, said, however, “we presage NIBOR to remain relatively unchanged for all tenor buckets,” this week.

The naira also fell slightly against the dollar, closing at 160.10 to the dollar on the interbank market, weaker than the 159.65 to the dollar it closed before the withdrawal, to which dealers said was because banks had already sold their dollar positions to meet the new requirement ahead of Wednesday.

“The central bank finally debited our accounts, draining the market of liquidity and the overnight rate went up to 19 percent,” one dealer said.

Some of the traders said many banks had already sold down liquid assets and dollars to replenish their cash balances in preparation for the withdrawal. “The market had priced the effect of the huge cash withdrawal since the announcement two weeks ago, while fresh dollar demand and lack of dollar flows are expected to push down the value of the naira next week (this week),” another dealer said.

“The market had priced the effect of the huge cash withdrawal since the announcement two weeks ago, while fresh dollar demand and lack of dollar flows are expected to push down the value of the naira next week,” another dealer said.

To some analysts, the development has clearly shown the fragility of some banks, an indication that the banks do not have enough liquidity from their deposits. They further argue that the development if not checked could lead to continued dominance of few bigger banks and marginalisation of smaller institutions.

Chuka Mordi, director, CBO Capital Partner, said “that the rate moved so significantly, shows that there are still fragile institutions in the banking system – they do not have sufficient liquidity from their equity and deposits, hence their reliance on the interbank market.

“Essentially, some of the smaller players will have to be content with being niche players in the banking sector, or consolidate, in order to adequately compete, in the race to generate risk assets.

Whatever the case, the bigger banks (if they remain well managed) will continue to marginalise the smaller banks in the Nigerian banking sector.

“That said, the Nigerian population is much under banked, and some smaller banks may choose to try and address that sector of the economy – not necessarily a good strategy, as these are higher risk, less valuable customers.

“The banking sector is going to look very interesting and significantly different, in the next five years.”

Analysts at Ecobank, in their daily research note, said “this is capable of increasing pressure on investors to divest from longer maturity fixed income securities and move into shorter dated securities. Not only will there be the attraction of now higher yields at the shorter end of the curve, but for foreign investors there will be the benefit of reducing currency risk exposure by moving down the curve.”

Edgar Ebinum, head, investment research, Cowry Asset Management, said “this, if sustained will definitely hamper banks earnings, particularly from interest and trading income. The increase in interest rate will exert upward pressure on inflation as manufacturers incur higher cost of fund.”

Sewa Wusu, head of research, Sterling Capital Markets Limited, said “I also believe the ingenuity of banks should begin to play out in this regard in terms of innovation and other ways of mobilising funds and lending same to the deficit sectors to create good returns.”

Razia Khan, analyst with Standard Chartered Bank London, said “a shock of this nature was what was required in order to start the process that will deliver higher deposit rates and naira stability. It’s only the first day of implementation, so in time things should settle.”

By: John Omachonu