By Babajide Komolafe

The Central Bank of Nigeria of Nigeria (CBN) has banned indebted banks from lending to other banks in the interbank money market. It also banned banks that lend funds in the interbank market from accessing its lending facilities.

Announcing this ban in  a letter titled: Revised guideline for accessing CBN lending windows and repo transactions, to all banks and discount houses, Director of Banking Supervision, CBN, Mr. A. O. Idris said: “As part of the process of unwinding the extraordinary measures introduced in the wake of the global financial crisis and to ensure the effectiveness of monetary policy, any Deposit Money Bank/Discount House that  obtains funds from any CBN lending window is not allowed to simultaneously place funds in the inter-bank market.

Deposit Money Banks/Discount Houses that also place funds in the inter-bank market are not allowed to concurrently access the window.

Any institution that contravenes any provision of this circular will be suspended from CBN’s money market window. In addition, the institution shall forfeit the profits it would have made on the transaction.  This circular takes immediate effect and supercedes all others relating to the above subject.”

Meanwhile, an inflow of N266 billion Federation Accounts Allocation (FAAC) funds rescued interbank market from severe scarcity of funds and rising cost of funds. The inflow revived liquidity in the market from a deficit of N222 billion on Wednesday to N186 billion at the close of business on Friday.

Short-term interest rates also fell sharply on Friday in response to the inflow. For example, interest rate on Overnight borrowing and OBB (open buy back or colaterised) borrowing which had risen to 18.5 per cent and 17 per cent in response to the decisions of the CBN to further tighten money supply fell to 13.5 per cent and 13 per cent on Friday.

Meanwhile, experts have commended the decision of the CBN to jerk up the cash reserve requirement (CRR) and the foreign exchange net open position (NOP) limit  of banks.

The CRR is the  portion of total deposits that banks are mandated to keep in cash, while the NOP is the amount of foreign exchange banks are allowed to keep per time.

On Tuesday, the CBN at its monetary policy committee meeting (MPC) raised the CRR to 12 per cent from 8.0 per cent. It also reduced the NOP to 1.0 per cent of banks’ shareholders’ funds from 3.0 per cent. This, according to experts, will help to checkmate inflationary pressures and stabilise foreign exchange.

In a comment sent to investors, Afrinvest, an investment and research firm said: “The upward adjustment of the CRR in our view, is primarily a risk management initiative, taken by the CBN to reduce the excess liquidity in the banking system and minimize the upward movement in the MPR. This move should fine- tune the quality of assets in the loan books of deposit money banks (DMB) going forward.

“The downward adjustment of the net foreign exchange open position for DMB’s implies that the net difference between assets and liabilities of foreign currencies in bank balance sheets should narrow to 1.0 per cent. Thus, DMBs with excess foreign exchange assets have to sell down such positions by the announced deadline and this could lead to a re-evaluation of the naira in the near term.”

Commenting on the decisions, Razia Khan of standard Chartered Bank, London said: “We expect the naira  to be the immediate beneficiary of the policy measures announced today, with dollar/naira rate  likely to trade lower on the interbank market, falling again within the CBN’s official +/-3% band around N155 exchange rate peg.

In the absence of a more significant impact on Nigeria’s oil earnings, the peg is likely to be sustained, helped by the CBN’s latest tightening. However, global growth risks and the impact on oil prices, will still have to be monitored.

The CBN has consistently maintained the ‘soft’ nature of the naira peg. In the event of a severe global shock, the currency peg might still change. For now, it remains unchanged, supported by the latest policy action.”