By Babajide Komolafe
Cost of funds hasÂ risen more thanÂ 100 per cent in the interbank money market following massive withdrawal of funds from the market.
Vanguard’s investigation revealed a sharp drop in market liquidity following withdrawal by Nigeria National Petroleum Corporation (NNPC), debit for Cash Reserve Requirement and repayment of matured expanded discount window (EDW) by banks.
Consequently, cost of funds, which closed at four per cent last week, rose sharply to over eight per cent as at the close of business on Tuesday.
Interest rate on Call lending rose to 8.75 per cent from 4 per cent, while interest rate on Colateralised lending or Open Buy Back (OBB) rose to 7.33 per centÂ from 4.1 per cent.
Market operators however said that the rise in cost of funds is temporary, that it will not last till next week.
A senior Treasurer told Vanguard that by next week, the market will begin to experience the full effect of the liquidity easing measures announced by the Central Bank of Nigeria (CBN) at the end of its Monetary Policy Committee (MPC) meeting held last week.
This, he said, is expected to translate to improved liquidity for the market and decline in cost of funds.
It will be recalled that the CBN, in a communique issued at the end of the MPC meeting, announced some measures to improve liquidity in the banking industry.
The communique stated, â€œThe Committee also noted the existing paradox of the co-existence of system-wide liquidity shortages as reflected in the data on mone-tary and credit aggregates and abundant liquidity with some banks as evidenced from the data on standing facilities.
â€œThe CBN has to take a balanced view of the measures required for fostering growth prospects and containing inflationary pressures on a sustained basis and also to further strengthen the liquidity management.
â€œIn the light of the above, the Committee took the following decisions:
*The Monetary Policy Rate (MPR) will remain unchanged at 6 per cent, but an asymmetric corridor of interest rates around the MPR is introduced.
*The rate on the standing lending facility will remain at 200 basis points above the MPR, while the rate on the standing deposit facility will be 400 basis points below the MPR.
*There will be quantitative easing to bridge the gap currently estimated at about N500bn between the levels of the current monetary aggregates and the bench-mark levels for 2009.
*The modalities for quantitative easing include investments in bonds to be issued by Asset Manage-ment Company (AMC). The setting up of AMC, however, is subject to the approval of the National Assembly.
Other modalities include the redemption of promissory notes issued by the Federal Ministry of Finance as well as by the CBN in connection with the retirement of debt and liabilities arising from purchase and assumption of failed banks.
*Purchase of loans by banks under the AMC will be based on terms aimed at strengthening the balance sheets with a focus on asset quality, improving liquidity and capital adequacy as well as on reducing debt overhang relating to the stock market in order to stimulate activity in the capital market.
With effect from November 16, 2009, the temporary ban placed by the CBN on the use of Bankersâ€™ Acceptances (BAs) and Commercial Papers (CPs) will be lifted. Guidelines will be issued by the CBN prior to that date.
In view of the fact that the audit of banks has been concluded and adequate provisions made for non-performing loans and to stimulate credit growth and strengthen banksâ€™ balance sheets, the one per cent general provision on performing loans contained in the existing prudential guidelines is hereby waived for the year 2009 as a counter-cyclical measure. New prudential guidelines will be issued before the end of Q1 2010.
The totality of these measures is aimed at improving system liquidity and financial stability to regenerate confidence in the Nigerian markets and to further stimulate growth.â€