Lagos — In an apparent bid to boost liquidity and moderate interest rates in the economy, the Central Bank of Nigeria (CBN) has reviewed some of its lending guidelines.

The move, according to the circular sent to banks, entitled "Revised Guidelines For Repo Transactions and CBN inter-bank Guarantee", the decision was informed by tight liquidity situation in the inter-bank market - where banks borrow funds from one another to meet their immediate needs.

According to the circular dated July 17, 2009 with reference BSD/DIR/GEN/CIR/ 03/016 and seen by THISDAY, banks are now free to use Federal Government bonds as instruments for repo transactions with the CBN for tenors not exceeding 90 days.

The banking watchdog has also removed restrictions it placed on use of funds obtained from any of its lending windows for placement at the inter-bank market.

In the financial parlance, repo (Repurchase Agreement) is the sale of securities for immediate payment and the commitment by a seller to buy the securities at a later date under an agreed term, while discount window is the outlet through which the CBN grants standing facilities and outright advances to the deposit money banks and discount houses.

The circular, which was signed by CBN's Director, Banking Supervision, Samuel Oni, states: "Our circular to all banks reference BOD/DIR/CIR/GEN/01/23 of March 16, 2009 and BSD/DIR/GEN/CIR/03/012 of July 23, 2009 on the above subjects refer. In view of the tight liquidity situation in the market, it has become necessary to carry out the following review in order to moderate market interest rates in the overall interest of the economy.

"Thus, with effect from the date of these circular, banks are hereby advised to be guided as follows:

"I. FGN Bonds are eligible instruments for repo transactions at the CBN for tenors not exceeding 90 days. This is in order to create additional liquidity for placements and facilitate the free flow of funds in all segments of the inter-bank market.

"II. The restrictions in our circular reference BOD/DIR/CIR/GEN/01/23 of March 16, 2009 that any of the CBN's lending windows should simultaneously place such funds in the inter-bank money market is hereby removed. Consequently, banks that have eligible instruments that qualify for repurchase transactions such as FBN bonds and treasury bills, may engage in repo transactions at the CBN window and place the proceeds of such transactions as the CBN window and place the proceeds of such transactions in the inter-bank market, should they wish to do so.

"With respect to transactions in the inter-bank market the decision of the CBN to guarantee all inter-bank placements including placements with banks by pension fund administrators and custodians from July 2009 to march 31 2010 remains unchanged. Transactions under this arrangement shall also continue to confirm to the requirements on single obligor limit as contained in our earlier circular. However, the interest rate cap placed on such transactions is hereby removed.

"Banks are again reminded that the reason for the above amendments is to inject additional liquidity into the system and deepen the inter-bank market with a view to correcting the disturbing trend in the market especially the rising interest rate that has exerted upward pressure on lending rates in the economy. It is hoped that these reviews will result in a reduction in inter-bank rates as well as interest rates in the system thus aligning them with economic fundamentals and positioning the banks better to support the growth expectations of the economy."

The CBN had after its Monetary Policy Committee (MPC) meeting on June 7, announced a set of measures that further liberalised the lending and foreign exchange markets. The objective was primarily to moderate and stabilise the rates such that they could promote and sustain growth and development.

The Committee announced a reduction in the Monetary Policy Rate (MPR), which is its benchmark interest rate that influences other interest rates in the economy (the rate at which banks borrow money from the CBN), by 200 basis points from 8 per cent to 6 per cent. By the new rules, the overnight, 30, 60 and 90 Day inter-bank placements are to be priced at 2 per cent, 3 per cent, 4 per cent and 5 per cent respectively, above the MPR.

Second, the apex bank said it would provide temporary guarantee for inter-bank lending from July 08, 2009 to March 31, 2010.

Third, to avoid counter-party risk, the CBN will be guaranteeing inter-bank and pension funds placements.

As it became increasingly glaring by the third quarter of last year that the global crisis was encroaching strongly on the health of Nigerian banks, especially on their capacity to continue to meet their obligations to finance businesses, the CBN packaged the first lifeline to the sector last September. That saw the injection of N1.5 trillion into the banks and by extension the economy, using the CBN MPR and the directive instruments.

The measures announced on September 18, 2008 followed the emergency meeting of the MPC conveyed to find solutions to the tightening liquidity in the financial system at the time, which unfortunately was traced to the global credit crunch.

The MPC announced a reduction in the MPR by 50 basis points from 10.25 per cent to 9.75 per cent. The Committee also effected a reduction in the liquidity ratio from 40 per cent to 30 per cent; reduction in Cash Reserve Ratio (CRR) from 4 per cent to 2 per cent. Besides, the CBN allowed banks to buy back their securities and extended the lending window to 365 days (one year), as opposed to overnight lending which obtained in the past. The CBN also suspended the aggressive mop up of liquidity using the Open Market Operations (OMO), all in a bid to boost the cash/ liquidity base of banks and for them to remain vibrant.

But as the global crisis deepened further by the end of 2008, creeping into first quarter of 2009, some of the initial efforts of the CBN to salvage the banks were neutralised. Banks had lost much more from margin facilities, which the CBN put at about N800 billion. Finance lines from foreign financial institutions were also cut further. It even became difficult for the banks to attract or retain deposits as customers asked for as much as 18 per cent for placements. The consequence was that banks' lending was almost totally disrupted as even prime customers of banks accessed credit at about 32 per cent by the end of last February. Nigerian Inter-bank Offer Rate (NIBOR) exceeded 20 per cent by mid March, depicting the huge premium banks were lending even to one another. The scenario, which some observers of the market described as glaring state of illiquidity prompted the CBN to relax further the measures it had announced last September.

At the end of the MPC meeting on April 8 this year, it reduced the MPR further by 175 basis points to 8.0 per cent from 9.75 per cent it was fixed on September 8, last year. It also lowered the liquidity ratio for banks to 25 per cent from the previous 30 per cent. In the third step towards further boosting liquidity in the financial system; the apex bank reduced the CRR to 1 per cent from the previous 2 per cent.

The directive given by the CBN yesterday is in furtherance of the many moves by the apex monetary authority to sustain the liquidity of the banking sector in the face of the global economic crisis.