By NKIRUKA NNOROM

The cost of borrowing from Nigerian banks will witness further increase by at least five per cent following the recent increase of Cash Reserve Ratio (CRR) by 400 basis points by the Central Bank of Nigeria (CBN) in its last Monetary Policy Committee (MPC) meeting, the Managing Director, Financial Derivatives Company, FDC, Mr. Bismark Rewane, has said.

In its quest to maintain monetary stability and tighten liquidity, the MPC had in its last meeting raised the CRR by 400 basis points to 12 per cent and kept the Monetary Policy Rate, MPR, at 12 per cent, while the foreign exchange net open position (NOP) of shareholders  funds was also reduced to one per cent from three per cent.

Cash Reserve Ratio (CRR) is the minimum balance that the banks are expected to keep with the apex bank. This will go a long way in reducing the amount of cash in circulation.

In his Bi-monthly Economic and Business Update, Rewane said the move could lead to an additional increase in banks’ cost of funds by about 100- 150 basis points or two to five per cent, adding that withdrawal of liquidity would push money market rates higher than their recent levels.

Rewane said, “The impact of a 400 basis points hike in CRR is expected to significantly affect the lending ability of banks. The amount of cash that banks have to keep with the CBN will increase, thus lowering the volume available for transactions. As a result of this, we expect borrowing costs for individuals and companies to increase by an estimate of 2-5 per cent.

“According to the CBN’s annual report for 2011, total bank deposits were N6.86 trillion. Using this figure as a proxy, the initial CRR of eight per cent led to an estimate of N548.8billion being withdrawn and kept with the CBN; at 12 per cent, N823.2billion will be deducted.

Thus, the 400 basis points hike will reduce bank deposits available for lending by an estimate of N274.32billion, a quicker way of mopping up liquidity.”

He explained that this could negatively affect the entire economy in the long run, saying, “subsidizing the naira, and keeping a cap on inflation is one thing, strangling growth is another. The CBN is now treading on a tight rope that could lead the economy to a hard landing.”

He also stated that reduction in the NOP will result in banks having less forex to trade with, adding that this would increase the demand pressure at the inter-bank market and a possible widening in the spread between markets.