Ayodele Aminu and Moses Obajemu
21 July 2008
Lagos — From now till December 31, 2008-when all banks in the country are expected to have a uniform financial year end-interest rates are expected to keep rising as banks continue to bolster their balance sheets in the race to determine the industry leaders.
THISDAY investigations revealed that banks, especially those that have over-stated their financials over the years, have sent out their staff to mobilise deposits at mouth-watering interest rates.
The rates range between 16-20 per cent, depending on the value of the deposit.
This is, however, with a proviso that such deposits should be fixed with the bank till December 31, when all banks are expected to comply with the uniform financial year policy.
Until the Central Bank of Nigeria (CBN), the banking watchdog, compelled all banks and discount houses to adopt a uniform financial year, many banks, because of different accounting periods, usually went to the inter-bank market (where banks borrow funds from one another to meet their immediate needs) in order to boost their balance sheets.
As soon as the regulatory authorities finished verifying their financials, the funds were usually returned to the inter-bank market.
Currently, the average lending rate, which hovered between 13-16 per cent some three months ago, has nudged upwards to 23 per cent, minus fees and commission. If other costs are added, the lending rate may stretch to 29 or 30 per cent.
This, however, does not apply to some low-risk companies such as Cadbury and Shell, whose interest rates are usually lower.
Although, the CBN has raised its benchmark interest rate (Monetary Policy Rate) twice this year, citing rising inflationary pressures, the marginal increase in MPR does not warrant the soaring interest rate.
The MPR, which is the interest rate at which the banking watchdog lends to commercial banks, was jacked up by 50 basis points, from 9.5 to 10 per cent last April and further by 25 basis points to 10.25 per cent last May.
By raising its rates, the apex bank, which was taking a pre-emptive move to cage inflation which had already inched up to 12 per cent (year on year as at last June), was encouraging savings through additional interest. It is at the same time discouraging spending.
Justifying the MPR move, CBN governor, Prof. Chuk-wuma Soludo, had expressed concern over the current level of inflation, warning that if the deficit envisaged in the 2008 budget was financed through ways and means (printing money), it would further increase the level of inflation.
This implication of unfolding "uniform year" scenario is that if banks mobilise deposit at such high rates and eventually have to lend to customers, they would have to add extra cost to the rates in order to make a margin. This, according to operators who spoke with THISDAY, means that interest rates would continue to rise for the rest of this year.
A chief executive of one of the big banks, who confirmed this development to THISDAY, said the balance sheet size of some banks that had overstated their accounts would shrink by December.
"Some banks, which over the years have been borrowing funds from the inter-bank market, would record a shrink in their balance sheet size by December. Banks are now instructing their staff to get deposits at all cost with a caveat that such deposits must cross over to December when we (banks) would all have same financial year.
"So, if they (banks) are going to pay at higher rate, they must lend at higher rate. And as we move closer to December, the rates would go up further. The only banks where you can get lower lending rate now are the big banks (old generation banks) which have not been overstating their balance sheet size over the years. For these banks, there is not likely to be a drop in their balance sheet size," he explained.
Similar views were also expressed by the Managing Partner, Ashford & McGuire, Mr. Alex Okoh, who said the most important thing to banks now "is to grow their balance sheet even if it means sacrificing their profitability".
He said interest rate would not start rebounding until early next year when banks are expected to focus on profitability to cover the loss incurred while growing their balance sheet.
"When you have banks reporting performance for the same period, they are expected to use a uniform platform to compete for size and capacity and that platform is deposit. The import is that banks need to grow their balance sheet between now and December. And once you have competing forces for the same product (deposit), the price would automatically go up, so that's why interest rate would keep going up for the rest of the year.
"Banks are more concerned about size than profitability. And you know the Nigerian banking system is more or less being driven by ego. Hitherto, the same deposit circulated among different banks because they have different financial year ends. But with the adoption of same financial year end, this would not be possible. This (uniform year end) has also affected loans and margins. Lending rate is going up because cost of funds (cost of sourcing the deposit) has also gone up.
"Also, don't forget that the uniform financial year end has also affected the capital market. This is because liquidity from the capital market has migrated to the money market where you are sure of getting an interest rate of 16-17 per cent depending on the value of the money you invest. Because the capital market has been sluggish within the last four, five months, people have moved their funds to the money market," he said.
Commenting on these developments, the spokesman of the CBN, Mr. Festus Odoko, acknowledged that interest rate has been moving up, but said the CBN does not expect banks to behave "irrationally" because of the uniform financial year end policy.
He said the apex bank would soon come up with the appropriate policies to cage the astronomical rise in interest rate.
"We don't expect them (banks) to react that way at all because we are still in July and the uniform year end is December. So, what happens in January? The authorities don't expect them to behave that way because it doesn't make sense.
"Why will a bank want to be number one at a cost to shareholders? Why are you in business? It is not to satisfy all your stakeholders? You see there are various criteria that can be used in measuring the strength of a bank. You can say your bank has the largest branch network. Assets, capital and the likes also count. If your capital can remain the same and your profit increases, is it not better? For instance, The Banker magazine used Tier 1 Capital to rate banks in its latest publication. So, everything should not just be about the size of the balance sheet," he said.
THISDAY also gathered that the "self-correction" in the capital market, which has led to some bearish run in recent weeks, made some institutional foreign investors in banks to offload their shares.
Added to this is the fact that some banks are also very exposed to the capital market.
These developments, it was gathered, prompted the "stabilising" steps being taken by banks to shore up their balance sheets.
Given this scenario, some banks have stopped granting term loans or long-tenor loans to avoid having the bulk of their assets outside at the crucial moment (December) when they are needed.
For the term-loans that have already been granted, efforts, THISDAY gathered, are being made by the affected banks to call them in.
However, the Caretaker Chairman of the Money Market Association of Nigeria (MMAN), Mr. Bolaji Senjobi, said banks still lend on long-term basis, although he said the December year end would still be a factor in banks' lending decision.
"Banks have not stopped lending totally. Recently, some banks syndicated a $1.2 billion facility to the Dangote Group. And this was in the naira equivalent of the money. By all standards, it qualifies to be called a mega facility," said Senjobi, who was the immediate past president of MMAN.
He explained that banks were only taking stock and assessing their portfolios, especially after the confusion generated by the rumour of whether or not marginal facility was stopped.
On why interest rates are up, the MMAN chairman said there is a direct relationship between the level of inflation and interest rate at any given time, saying this is logical.
"As inflation rises, cost of goods goes up. As prices go up, even the depositor asks for increase in deposit rate. Banks have no option but to raise interest rates," he explained.
He said the CBN might have to open the window to allow liquidity to go up.
Another bank treasurer explained that levels of interest rate continued to remain high than required to compensate for inflation because of the funding mix of banks. He said banks depend more on deposits to fund their operations.
"Since these deposits come at a price which is high right now, interest rates are bound to be high as well," he said.
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