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New CBN policy threatened by rising counterparty risks, competition

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Rising counterparty risks and unhealthy competition for funds to meet uniform year-end requirements, among others may limit the objective of the new loose monetary policy as envisaged by the Central Bank of Nigeria (CBN), analysts said yesterday.


While the risks have resulted in high inter-bank rates, the aggressive competition among banks has resulted in hoarding with the consequent short-term lending and other short cuts for quick profits aimed at building financial base for the year-end.


Acknowledging that CBN acted aggressively and decisively, analysts and manufacturers said that the uncertainty in banks’ balance sheet will still engender suspicion among players. Consequently, they called for consolidated supervision so that the real sector can access funds at lower cost.


Fundamentally, the analysts said the decision to remove the interest rate cap, and to return to Wholesale Dutch Auction System (WDAS) in the foreign exchange auctions, was positive as there is need for unification between interest rates and forex markets to allow price discovery and avoid distortions.


For instance, UBA Capital, group of research analysts, said: The Central Bank obviously felt the need to act aggressively in the face of near 22 percent inter-bank rates. However, it is unclear how quickly market rates will react to this move as counterparty risk remains elevated and banks are still competing aggressively for year-end funds.


“The Central Bank has noted in the past that liquidity remains adequate in theory, but that an element of US-style cash hoarding by banks has been taking place. This latest easing by the CBN is a step in the right direction toward its elimination, but only when there is greater certainty about bank balance sheet conditions will commercial banks have full confidence to lend to each other. It is largely for this reason that we believe the Central Bank and the Bankers’ Committee will resist recommendations to delay the commencement of the common year-end for a second time.’’


Renaissance Capital said while the new policy has the potential to improve liquidity conditions and ultimately boost to some extent the relevance of MPR, “we view the guarantee of inter-bank activities as a positive step forward, although it has yet to affect the markets. We think further insight will be needed about the practicalities of such a stance (for example, regarding the cap for individual institution), before there is a clear turnaround in inter-bank liquidity.”


Henry Boyo, an economist and public commentator, agreed that the measure will shore up the liquidity situation when CBN guarantees inter-bank lending, but questions the rationale behind the apex bank’s “injection of liquidity today and is tomorrow mopping up the same liquidity through the Open Market Operation (OMO).”


Boyo added that it is not enough to reduce the Monetary Policy Rate (MPR) to six percent, but that it is equally important to ensure a reasonable margin, stressing that what is seen internationally is a plus/minus five percent between the MPR and the real lending rate. He wants a situation whereby lending rate in the country should be in the neighbourhood of 11 percent.


Martin Oluba, an economic analyst, while commending CBN said that the ability of banks to contain their toxic assets will largely affect the availability of credits to the real sector, advising that “liquidity should not be created for an endless hole.”


Shuaibu Idris, executive director, Dangote Flour Plc, said, “I think the new governor of the Central Bank of Nigeria appears to be in a rush or a kind of hurry. Policy positions on issues such as interest rates, exchange rates, foreign ownership of banks, etc, should only be made after a careful review and scrutiny of the implications of the outcomes of various positions. They are complex, complicated, and interrelated with other fiscal monetary actions of any government. It may be wise for any new comer to the system to take time to study the current situation, the basis and/or rationale behind the position taken by the institution and the impact of such policies before making comments or even taking a position.”


According to him, “It is most unwise to allow Naira to freely float. Removal of foreign exchange restrictions is thus ill advised. We are not matured to have a free foreign exchange market. Many unpatriotic elements would attempt to take advantage of the system and thus put pressure on the Naira leading to possible devaluation, particularly with our porous borders and sea ports and a fairly disorganised Customs Service”, he noted.


However, Bismarck Rewane, chief executive officer of Financial Derivatives is confident that the Central Bank of Nigeria (CBN) guarantee on inter-bank lending will open up the liquidity vault of banks to one another.


Rewane waived aside insinuations that the competition by the banks to have a swell balance sheet by December 31, 2009 may scurry the planned injection of liquidity into the system, saying “so long there is money to be made, and that the apex bank has guaranteed all such transactions, there is no way banks could shy away from making some extra money.’’


Bashir Borodo, president of the Manufacturers Association of Nigeria (MAN), said the move by CBN to bring down the MPR to 6 percent means there will be more liquidity, less fear for the banks and will guarantee inter-bank lending rate.


“Low interest rate will reduce the number of defaults and will encourage banks to give more loans to operators in the real sector of the economy”, Borodo said.
Muda Yusuf, director-general, Lagos Chamber of Commerce and Industries, also commended the development, saying, “Cost of fund has been an issue. It has been one of the major complaints by manufacturers and other business persons. If the move will have an impact on cost of fund then we are home and dry.”




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