CBN’s Mop-up Strategy, Non-lending Grow Liquidity In Banks | Independent Newspapers Limited
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CBN’s Mop-up Strategy, Non-lending Grow Liquidity In Banks

Posted: Apr 20, 2016 at 3:00 am   /   by   /   comments (0)


The non-aggressive mop-up strategy embarked upon by the Central Bank of Nigeria (CBN) and banks’ unwillingness to lend in order to stave off default and or build liquidity profiles in anticipation of government borrowing has contributed to growing liquidity in banks, according to Independent investigations.

The liquidity profile of banks has risen in recent times due to the fact that banks have practically stopped lending and embarked on recovery to reduce their non-performing loans portfolio.

However, the CBN, according to analysts, has practically not been aggressive enough in mopping up the excess liquidity through the weekly open market operations (OMO) auctions.

In the midst of the surfeit, which CBN acknowledges in the monetary policy meetings of March 21-22, 2016, only N180.30 billion was mopped up from the system.

A market and liquidity risk expert, who spoke to Independent, said no bank is lending right now, be it to the real sector or at the interbank market, noting that they are heavily involved in recovery drive because of growing default in the system.

He said the liquidity surfeit experienced from the last elections has not been effectively controlled partly because the CBN is not aggressive enough in the mop up.

“I don’t know why the CBN cannot use other options to mop up these excess funds. I know the CBN specifically raised interest rates in the last monetary policy meeting to encourage banks to lend but they are not lending. It should come out with other options to rid the banks of the excess liquidity,” he said.

Lending to the real sector has practically remain flat and unchanged in the last three months, despite most banks coming out with assurances of growing their loans and advances (LAD) by an average of 6%.

According to the CBN, the first episode of easing, which resulted in injecting liquidity into the banking system backfired, as banks did not grant credit as envisaged hence the liquidity surfeit.

The apex bank stated further: “Moreover, the delay in the passage of the 2016 budget has further accentuated the difficult financial condition of economic agents as output continues to decline due to low investment arising from weak demand.

“The cautious approach to lending by the banking system underpinned by a strict regulatory regime conditioned by the Basel Committee in the post global financial crisis era has further alienated investors from access to credit as banks prefer to build liquidity profiles in anticipation of government borrowing.”

However, some analysts do not see any liquidity overhang in the banks, claiming that the computation used by the CBN may be suspect.

According to Ifeanyi Uddin in an article in an online platform, the consensus amongst banks’ market liquidity managers is that, currently, Federal Government bonds make up about a third of banks’ liquid assets, that though there is a repurchase market for these instruments the repo market functions in such a manner that these bonds properly speaking are not as liquid as the apex bank makes them out to be.

“Therefore, not just can they not be easily deployed in banks’ daily operations, but by including them in the computation of banks’ liquidity, the CBN would always arrive at a high computed liquidity ratio for the industry,” he noted.

The OMO is an activity by the CBN to give (or take) liquidity to (or from) a bank or a group of banks. The central bank can either buy or sell government bonds in the open market or enter into a repo or secured lending transaction with a commercial bank where the central bank gives the money as a deposit for a defined period and synchronously takes an eligible asset as collateral.

In effect, the CBN uses OMO as the primary means of implementing monetary policy. The usual aim of open market operations is – asides from supplying commercial banks with liquidity and sometimes taking surplus liquidity from commercial banks – to manipulate the short-term interest rate and the supply of base money in an economy, and thus indirectly control the total money supply