Aug 20 2012
By Bukky Olajide
AGAINST the backdrop of the continued free-fall of the naira to the dollar and other international currencies, the Central Bank of Nigeria (CBN) has taken steps to check alleged sharp practices of the Deposit Money Banks (DMBs), which it linked to the weakening of the Nigerian currency.
Another area of concern to the CBN, The Guardian learnt, is the way banks now invest massively in government’s securities, which they consider relatively safe. By the action, the banks are accused of crowding out private sector credits and thereby stalling the growth of the economy.
The CBN is reportedly disturbed that the banks had shirked from their primary duty of deposit mobilisation and taken to full-blown speculation, thereby undermining its efforts to check inflation and the depreciation of the naira.
And to force the banks to concentrate on their core mandate, the CBN has increased the cash reserve ratio (CRR) from eight per cent to 12 per cent.
The policy, industry sources said, is already yielding positive results as the banks have reinvigorated their quest for deposit mobilisation.
The monetary policy allows the CBN to debit the accounts of banks at the new rate thereby forcing them to take seriously their primary duty of deposit mobilisation.
The implication of the higher CRR is that the banks now have less cash to trade and one of the most feasible ways to lighten the burden of a higher CRR is aggressive fund mobilisation to bolster their deposit profile, a senior banker said.
The Guardian learnt that some banks, which have been operating with very little cash relative to their portfolio, might find it difficult to cope under the current CRR.
The CRR was introduced in 1950 primarily to ensure the safety and liquidity of bank deposits, but over the years, it has become an effective tool for directly regulating the lending capacity of banks and controlling the money supply in the economy.
It refers to keeping a portion of net demand and time liabilities of banks with central banks. The apex bank can change this percentage as a monetary measure to control the availability of funds in the economy. That is, to inject liquidity or to suck liquidity.
It was also learnt that the CBN was disturbed by the banks’ increasing shift away from their primary role of mobilising deposits to using the excess liquidity in the system to speculate, that is, buying dollars, a practice believed by the regulators to have weakened the naira in the foreign exchange market.
An official of the apex bank, who gave details of the CBN circular on the issue, told The Guardian that “the policy is mainly intended to prevent banks from engaging in speculative activities and to make them concentrate on their core lending function.
“It is widely believed that the free-fall of the naira against other major currencies, especially the dollar, is a result of banks’ speculation. This, they were able to do because of excess liquidity at their disposal,” he said.
“Banks, which are supposed to be development partners of the government, eventually are the ones frustrating the government’s efforts at nation-building and engaging in several activities that fuel inflation,” an financial analyst said.
This is one of the areas that the CBN wants to correct by the latest efforts to mop up sufficient cash from circulation.
The banks are now engaging in cut-throat competition to ensure that they are able to mobilise as much cash as possible so that their operations will not be negatively affected when the effect of the policy becomes more pronounced.
An official of one of the affected banks said in the DMBs as at now, “cash is king.”
According to him, the management of one of the banks has since the latest directive of the Monetary Policy Committee (MPC) been sparing no effort to let the members of staff know that as at present, “liquidity is given preference over profitability. This is the situation on ground and if you have to keep your job, the message is clear. The pressure is just too much on us.”
Another analyst said: “ In order to prevent the effect of this otherwise necessary policy from snowballing into another unexpected and unintended crisis, the CBN must be on top of it and watch the unfolding events carefully to know when to ameliorate the situation where necessary.
“The whole scenario must therefore be managed to ensure that the stability of the fragile economy of the nation is not derailed at this time when the country is facing numerous challenges.”
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