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CBN bans use of bankers’ acceptance for balance sheet

By Omoh Gabriel , Business Editor
The Central Bank of Nigeria (CBN), weekend, suspended banks’ use of commercial papers and bankers acceptance as financial instrument in banks balance sheet.

This is with a view to determining the financial health of banks operating in the country.

CBN, it was learnt, was highly disturbed by trends in the banking industry in which a bank will borrow from the interbank market using commercial paper and bankers acceptance as off balance sheet items to beef up its liquidity position and two or three days after its annual general meeting, the supposed liquidity reflected in the account will disappear as the bank will return the money so borrowed days after.

The statement noted that: “The Central Bank of Nigeria has observed with concern the abuse of the use of Bankers Acceptances (BAs) and Commercial Papers (CPs), by Deposit Money banks and Discount Houses.

“The abuse ranges from repackaging of troubled assets into CPs/BAs for purported sale to other institutions, non-existence of underlying transactions for the CPs/BAs, and frequent rollovers beyond the allowable tenor. In addition, Commercial Papers and Bankers Acceptance are often used as the instrument of choice for raising liquidity in an attempt to conceal the extent of dependence on the Inter-bank market for banks funding needs. Consequently, the sell-down of Bankers Acceptance and Commercial Papers as off balance-sheet instruments is hereby suspended.”

“All maturing Commercial Papers and Bankers Acceptance’s are to be either fully liquidated or treated as on balance-sheet items. If a bank is likely to exceed its single obligor limit as a result of this circular,

it is advised to seek the CBN’s approval for exemption in line with BOFIA, Section 20(1)A as amended, subject to the loans being performing and a plan for regularization by 31st March 2010″, the apex bank said.

The apex bank has also warned banks against the non compliance of their subsidiaries to the stamp duty act saying “The attention of the Central Bank of Nigeria has been drawn to the non adherence to the provisions of the Stamp Duties Act 2004 by some securities subsidiaries of banks, despite several appeals from the Nigerian Postal Service. It has been observed that most brokers/ dealers do not affix revenue stamps on their contract notes contrary to the provisions of the Stamp Duties Act 2004, thus depriving the Government of accruable revenue from securities transactions and inhibiting the development of the postal system in Nigeria.

“Banks are hereby reminded of the provisions of the Stamp Duties Act 2004 under: Section 89(2) that every receipt given by any person in acknowledgment of goods purchased or services rendered should be denoted by an adhesive postage stamp worth N50 issued by the Nigeria Postage Service; and Section 14(2) which makes it mandatory for a receipt to be so denoted.

All banks are by advised to ensure that their securities subsidiaries are in full compliance with the provisions of the Stamp Duties Act 2004 failing which the penalties spelt out in Section 92 of the Act would apply”.

In another development and in a bid to improve the liquidity in the banking system the apex bank also said that in “view of the tight liquidity situation in the market, it has become necessary to carry out” a review “in order to moderate money market interest rates in the overall interest of the economy. Thus, Federal Government Bonds are eligible instruments for repo transactions at the CBN for tenors not exceeding 90 days. This is in order to create additional liquidity for placements and facilitate the free flow of funds in all segments of the inter-bank market.

Secondly the apex bank said that “the restriction in our circular reference BOD/DIR/CIR/GEN/01/23 of March 16, 2009 that any Deposit Money bank/Discount Houses that obtains funds from any of the CBN’s lending windows should not simultaneously place such funds in the inter-bank money market is hereby removed. Consequently, banks that have eligible instruments that qualify for repurchase transactions such as FGN bonds and Treasury Bills, may engage in repo transactions at the CBN window and place the proceeds of such transactions in the inter-bank market, should they wish to do so”.

Thirdly that “With respect to transactions in the inter-bank market, the decision of the CBN to guarantee all inter-bank placements (including placements with banks by Pension Funds Administrators and Custodians) from July 2009 to March 31, 2010 remains unchanged.

Transactions under this arrangement shall also continue to conform to the requirement on single obligor limit as contained in our earlier circular. However, the interest rate cap placed on such transactions is hereby removed. Banks are again reminded that the reason for the above amendments is to inject additional liquidity into the system and deepen the inter-bank market with a view to correcting the disturbing trend in the market especially the rising interest rate that has exerted upward pressure on lending rates in the economy.

It is hoped that these reviews will result in a reduction in inter-bank rates as well as interest rates in the system, thus aligning them with economic fundamentals and positioning the banks to better support the growth expectations of the economy.


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