4 February 2014

Nigeria: Central Bank Withdraws N1 Trillion Public Sector Funds From Banks Today

Lagos — The Central Bank of Nigeria (CBN) will, from today, start withdrawing over one trillion naira (N1 trillion) public sector fund from deposit money banks as part of its new Cash Reserve Requirement policy.

The new policy which called for the withdrawal of 75 per cent public sector funds in order to mop up liquidity in the system, was approved by the Monetary Policy Committee (MPC) recently in Abuja.

The Cash Reserve Ratio (CRR) was pushed from 50 per cent to 75 per cent from today while liquidity ratio and CRR on private sector deposits were also maintained at 30 per cent and 12 per cent respectively.

Since August 2013, when the CBN raised the CRR from 12 percent to 50 percent, banks have continued to struggle to source for deposit from private sector and individuals, through increasing interest rate of savings accounts and other facilities.

Public sector deposits with banks which only fell 2 per cent in October 2013, representing N3.99 trillion from September's N4.06 trillion, stood at N4.02 trillion in November 30.

Other majors reasons behind the policy, according to CBN, were to address the problem of excess liquidity in the banking system and to encourage the banks to mobilize savings from traditional sources, other than the public sector.

A memo from CBN dated September 5, 2013 when the CRR was increased from 12 to 50 percent with reference BSD/DIR/GEN/LAB/06/039, which provide further guidance on the reporting requirements, said public sector deposits should include all Federal Government's MDAs and Companies, State Government MDAs and Companies as well as Local Government MDAs and their Companies.

The statement read in part: "Furthermore, for the avoidance of doubts, deposits from the following institutions should be regarded as public sector for this purpose: NNPC Joint Venture accounts; Sovereign Investment Funds Government MDAs/Companies' Collection Accounts such as: Customs, FIRS, etc Pilgrim welfare Board All accounts belonging to Government Universities".

Vetiva Capital Management believed that the latest development will further constrain bank earnings growth, since additional N1trillion will be sterilized.

President of Lagos Chamber of Commerce and Industry, Remi Bello, expressed his concern over the hike, saying that the current monetary policy regime was inadvertently reinforcing the import dependence of the economy while penalizing domestic production.

According to him, the financial intermediation role of banks would be impeded as the economy is being deprived of the surplus resources from the public sector.

"Financial intermediation is a major function of banks in any economy which makes it possible for resources to be channeled from the surplus segment of the economy to the deficit sectors at any point in time", he said.

Bello said it is important at this time for the CBN to maintain a balance between its pursuit of low inflation and exchange rate stability on one hand, and the need to stimulate the economy, on the other.

There is fear by some banks' workers of losing their jobs due to the new policy.

President of Association of Banks Insurance and Financial Institutions (ASBIFI), Sunday Salako, told Daily Trust that the banks workers would bear the brunt of the policy as they now try harder to meet the new target set for them by their employers.

He said: "When the CRR was at 50 per cent, a lot of our members were laid off and that is likely to be the case this time around. What the policy is saying is that banks should not retain more than 25 per cent of public fund deposited with them. The implication is that there will be scarcity of liquidity while fresh target will be set for workers in their bid to garner more funds."

Salako said the hike came at a wrong time with general elections to hold in about a year from now.

An analysis conducted by MorganCapital Research concluded that looking at the respective banks performances in Q3 -2013, one thing that clearly stands out among the majority of them is the slowdown in revenue growth between Q2 -2013 and Q3 -2013.

The report of the research read in part: "Clearly, the slower growth in interest income on account of the introduction of 50% cash reserve ratio and the comparatively slower reduction in interest expenses because of the desperation of some of the Banks, (especially the mid-tier Banks) to raise deposit, was a major factor in the slow revenue growths."

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