How Misstatement By Banks Forced CRR Harmonisation | Independent Newspapers Limited
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How Misstatement By Banks Forced CRR Harmonisation

Posted: May 24, 2015 at 12:02 am   /   by   /   comments (0)

By Bamidele Ogunwusi,  Lagos

RISING from its regular meeting, the third this year, members of the Central Bank of Nigeria’s Monetary Policy Committee (MPC), voted by absolute majority to harmonise the Cash Reserve Ratio for the public and private sectors to 31 per cent.

Before then, private sector deposited attracted CRR of 25 per cent, while the public or government sector’s was 75 per cent.

According to The Economic Times, the “Cash Reserve Ratio is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves with the central bank.”

This means that for every N1000 fixed deposited by an individual or company in any bank, for example, the bank is expected to warehouse N310.00 at the CBN, just as a government Ministry, Department or Agency (MDA) of government would.

Before last Tuesday’s decision, N750.00 of federal and state MDAs’ N1000 fixed deposits would have been quarantined at the apex bank.

Note that such deposits do not include those in savings accounts, and that the banks do not earn interest on the warehoused funds.

In arriving at the decision, members of the MPC noted, according to the communiqué issued at the end of their two-day meeting, that “a harmonisation of the CRR was imperative in order to curb abuses and improve the efficacy of monetary policy.”

The communiqué, signed by Godwin Emefiele, CBN Governor and MPC chairman, added “that the current discriminatory CRR on public and private sector deposits has not only constrained the policy space, but could inspire moral hazard by private market participants.”

The MPC members noted the abuse of the former system, hence the need to harmonise the CRR.

What the CBN did not say, according to a reliable source close to the apex bank on Friday, was that as a result of the previous dichotomy, banks were posting government or public sector deposits in their vaults as private fund.

How They Voted

Giving a breakdown of the voting at the week’s MPC meeting, the communiqué noted that one member voted to increase CRR on private sector deposits from 20 to 25 per cent and retain CRR on public sector deposits at 75 per cent, while another member voted to retain the CRR on private sector deposits at 20 per cent and increase that of the  public sector from 75 to 100 per cent.

However, nine members, voted to harmonise the public and private sector CRR at 31 per cent. Two members voted to remunerate a portion of the CRR, that is for the CBN to pay the banks some interests on the warehoused deposits.

All members at the MPC meeting however voted to retain all other decisions taken at the last meeting of the MPC, while improving the implementation of the CRR regime.

Members of the committee recognised that while additional tightening measures may not be appropriate now, to avoid overheating the economy, there is need for proactive measures to protect the reserve buffer and safeguard the value of the Naira, engendering overall stability of the banking system.

Moreso, the committee noted that monetary policy is gradually approaching the limits of tightening, hence the need for complementary fiscal and structural policies. Members were also of the view that the anemic recovery in the Euro Area and Japan and tepid growth conditions in China constitute an additional drag on prospects for crude oil exports.


Expectations are that banks that rely heavily on public sector deposits are mostly affected by the dichotomy of rates. One expert noted in 2014 that an estimated N1.3 trillion belonging to government was sitting in the books of banks at zero per cent interest.

Lamenting the effects of the latest move by the CBN, Bisi Onasanya, chief executive of the First Bank of Nigeria Limited, told shareholders of its parent company, FBN Holdings Plc at its annual general meeting in Lagos: “We got N64 billion debit alert from CBN as a result of the CRR policy today, Thursday May 21, 2015 (two days after the MPC meeting).”

Continuing, Onasanya, a chartered accountant, explained: “This is because our public sector fund is huge as we were debited, other banks were credited. In 2014 financial year, we lost N68 billion to CRR.

“We will join the investing public to call on the CBN that they should consider paying us interest of our deposit with them,” he stressed.

Going forward, Matthew Ogagavworia, a stockbroker and chartered accountant, expects “a further tightening of the economic environment.”

For him also, “it is hoped that the measure would provide more available funds for onward lending to the real sector.

“I also expect that banks in the country should begin to bring down their interest rates as they now have more funds to play with.

“This policy could also be an effort to move into new treasury account. We will now see the CBN becoming the banker to the government ministries and agencies.

“Most of the ministries and agencies have multiple accounts with deposit money banks which give room for corruption.

“Though, it looks contradictory, but I think it is all in an attempt to reduce corruption,” Ogagavworia added.

In a telephone interview with **Daily Independent** on Thursday, Tola Odukoya of Dunn Loren Merrifield Asset Management & Research, believes the CRR harmonisation “is a positive development to the extent that it allows for a temporary flow of liquidity into the banking sector and consequently rates will drop.

“However, this will only subsist until the Treasury Single Account policy of the federal government is fully implemented.”

Odukoya however argued that in the long-term, “government business should be done with tax revenues, rather than with proceeds of commodity sale.


Improving IGR

Continuing, Odukoya said: “Generally, I’m a proponent of using tax revenues and other levies to run government while revenues from sale of commodities such as oil, cocoa et ce tera, are saved for the rainy day, that is a sovereign wealth fund.

“Therefore, I would expect the incoming administration to improve on collection of taxes, duties and levies to fund government expenditure. The success of such a model in certain states in Nigeria is a testimonial to its viability,” he added.

While not supporting further tightening of the monetary system, he “would rather like to see a more growth inclined policy stance going forward. Tightening hasn’t done that for us in the last few years.

“I believe banks will lend when the appropriate credit and risk parameters have been met. In addition, the incentive to lend to the government via Nigerian banks’ propensity to buy government bonds and treasury bills needs to be dampened by deploying the appropriate monetary policy levers.”?

Beyond harmonising the CRR, the analyst agrees that it “is indeed a good idea to keep foreign reserves at respectable levels.

“However, this will be a critical challenge for monetary authorities against the backdrop of current level of, and outlook for, oil prices versus the high cost of governance in Nigeria. I therefore anticipate that there will be further pressure on the domestic currency in the months ahead once the euphoria of the successful elections is lifted and market realities set in.”



Commenting on the MPC’s decisions, analysts at Standard Chartered Bank had expressed surprise at the harmonisation of the CRR, while retaining other rates.

According to them, the full impact of these measures would however “depend on the policy steps that are implemented soon after Nigeria’s political transition on 29 May.

“Currently, with growing anecdotal reports of public-sector arrears involving the payment of salaries by state governments as well as payments to contractors, this combination of measures is likely to signal an eventual tightening of policy.

In an e-mailed statement to our correspondent on Tuesday, Ms. Razia Khan, Head, Africa Macro, Global Research of the bank, noted that “public-sector deposits in the banking system have been under pressure for some months – following the reduction in oil prices and consequent pressure on the monthly allocation of oil earnings to the three tiers of Nigerian government (the Federal Accounts Allocation Committee). Plans to eventually move to a more comprehensive Treasury Single Account (TSA) should, in future, reinforce the tightening bias of the CRR harmonisation. Private-sector deposits are expected to dominate the Nigerian banking system. The private-sector CRR hike is therefore the more important element of the harmonisation.”

She added that while “comments by the CBN governor suggest that no restrictions are in place, the current system is unlikely to be sustainable, given that FX (foreign exchange) reserves bear the brunt of Nigeria’s adjustment to external shocks. We believe that eventual FX liberalisation will still be required.”

Bismarck Rewane, economist and CEO of Lagos consultancy Financial Derivatives, told Reuters that the change to the CRR is “a tacit way of increasing money supply and bringing down interest rates. The downside is that it will create extra liquidity and increase the pressure on the naira in foreign exchange markets.”


Beginning of Dichotomy

The dichotomy between private and public sector deposits of banks for the purpose of the reserve ratio began after the August 2013 meeting of the MPC. At that meeting, the MPC members voted nine against one, to introduce a 50 per cent CRR on government deposits.

This, according to the communiqué issued at the end of that meeting, “will be applied on Federal, State and Local Government deposits and all MDAs. (Meanwhile), for other deposits, CRR will remain 12 per cent,” in what was seen as a bid to encourage Nigerian banks to mobilise more deposits from the private sector and concentrate less on public funds. They are known to aggressively fight over such government deposits, especially after the monthly ritual of sharing Federation Account Allocation Committee (FAAC) funds. The banks have always been known to dangle irresistible carrots at state governors, so as to corner and keep the FAAC accounts of their states.

Rewane was quoted as estimating that an estimate of N1 trillion or 6.84 per cent of Money Supply (M2) was debited, following that decision.

At that time, he said, “the impact was a spike in interbank rates of approximately 800 basis points (bps) to an average of 21 per cent per annum. Also, it coincided with the failure of two discount houses which exacerbated the situation. Eventually, the rates declined to pre CRR levels.”

The decision of the committee was reaffirmed in September, when members retained the rates, expressing satisfaction that the decisions “taken at the last MPC (meeting) have the purpose of helping the Naira avoid the fate of other developing-country currencies by keeping it relatively stable.”

By January 2014, the MPC again jerked up the already controversial CRR on public sector deposits from 50 to 75 per cent from February 4, following a vote to that effect by all 12 members, leaving that of the private sector at 12 per cent.

The decision by Nigeria’s Monetary Policy Committee, MPC, to increase the already controversial Cash Reserve Ratio, CRR, on public sector deposits from 50 to 75 per cent would in the short term, have a shocking effect on the nation’s money markets.

Rewane said at the time that “the impact of this decision on money markets will be a shock effect in the short run and a re-turn to equilibrium rates within six weeks.”

Also, Yvonne Mhango, Sub-Saharan Africa Economist, Renaissance Capital, an investment bank, said MPC’s tightening of the monetary policy by the raise of public sector CRR would further tighten liquidity, and is positive for the Naira.

“The MPC believes firm action is needed to stabilise the Naira. Absence of fiscal savings implies that stability of naira depends on inflows. (The MPC) Believes cost of weaker Naira (large capital outflows, in our view), outweighs benefits,” she said.


Successful Elections

The MPC at its meeting that ended on Tuesday, also noted the salutary effects of the successful conduct of the 2015 general elections on the macro-economic environment, expressing optimism that the confidence and goodwill arising from the polls would stem the spate of capital reversal, reduce pressure in the foreign exchange market and stabilise the financial markets in the short to medium term.

The committee however expressed concerns about the creeping headline inflation since January 2015, but noted that the causal factors were largely transient and outside the purview of monetary policy, adding that “furthermore, the significant rising trend in credit to government was regarded as potential headwinds to growth with negative spillovers to the already elevated lending rates, credit to the private sector and aggregate domestic investment including inflationary pressures.”


Diversification Sermon

While agreeing on the need for the incoming Mohammadu Buhari administration to focus more on truly diversifying the non-oil economy, particularly the need to increase the tax net, analysts want that government to work towards raising the fiscal buffer. They draw attention to the need to amend the constitution such that government depends less on oil revenue and more on the non-oil by expunging the customary sharing of the FAAC allocations that has made most states and local government heavily dependent on such funds.


Early this month, the three tiers of government shared just N388.339 billion, considered to be the lowest amount distributed in all of 10 months. The cash crunch has also resulted in the inability of about 30 state governments to pay salaries as and when due. Some of them, including the Federal Government owe as much as nine months of salaries. Expectedly states like Lagos, which has since 2006 realised early, the need to depend less on Abuja and more on Internally Generated Revenue (IGR) for funds.