*Says CBN is driving down bank interest rates, charges
BY DOTUN IBIWOYE
Deputy Governor of the Central Bank of Nigeria, CBN, Mr Tunde Lemo, in this interview, speaks on the performance of the economy, the exchange rate in the last two years and Asset Management Company of Nigeria, AMCON. Excerpts:
Some critics allege that the Asset Management Company of Nigeria, AMCON, is lumping performing loans together with the non- performing ones. What is your perspective?
I don’t know where the allegation is coming from; and I think people need to understand the role of AMCON. AMCON is a child of necessity. AMCON came because of the need to address the issue of non-performing loans. I won’t call them toxic assets because they are impeding the growth of commercial banks. This is at the aftermath of the global financial crisis. And so what AMCON did was to simply buy off these non-performing loans from banks so they can have a fresh breathe. AMCON also assisted in restructuring and recapitalizing the banks that were affected by the global financial crisis and currently they have significant investments in three of those institutions. AMCON has been very successful, and, between now and the next 10 years, we expect it to have recovered all its investments from three main sources: One, the assets they are sitting on which they bought from the banks and which they are going to sell, but the sale will be done in such a systematic way as not to cause a major stir in the property or capital market.
So, a significant amount of income would come from that area. The second area is through the sale of the banks where they have significant investments. Now that they have sold Union Bank, and talking about Enterprise Bank, Mainstream Bank and Keystone Bank, it is expected that they will also earn a lot, because they have repaired those banks. The banks have bounced back and they are doing well now.
The third will be the sinking fund which the Central Bank and the Bankers Committee have created. CBN, year in year out, is putting N50 billion into the fund, while the banks are committing five percent of their total assets into the fund. So when you look at the funding from these three sources over a period of 10 years, AMCON should be able to service its bond obligations.
What is the drive for the reinforcement of the policy to publicise the lending rate by the CBN ?
The CBN has counselled banks that they need to be transparent in the publication of their interest rates the margin and deposit rate. The reason is because the banks are different in shapes and sizes, and some of them are big players while some have branches all over the country. So cost structure will differ from bank to bank, and, depending on what their strengths are, it is important to have transparency on the part of the customers. In fact, the transparency that they are advocating in industries means that banks should be transparent in all to let the public know what the deposit rates are and what the lending rates are for different kinds of credits; that is basically what the (CBN) governor re-echoed at a recent Bankers Committee meeting. This will also enable everyone know how competitive he is and then there is a valid explanation around the kind of interest rate that you charge.
What is the possibility of lowering credit rates which many people say are too high?
It is very rational for you to think interest rate could be as low as possible, but what are the major components of interest rate of financial institutions? Of course interest rate would depend on the prevailing money market rate, which is currently 12 percent. It may seem high, but you have to look at where the inflation number is, inflation currently is around 9.6 percent, almost 10 percent. So two and a half or three percent spread over inflation is not too high because if you don’t allow depositors to have positive real interest rate, it would affect savings mobilization; it would affect deposits mobilization. What do I mean by that? When you buy Pounds, for instance, or Treasury Bill, if you do not have a rate that is above inflation rate, then you are poorer by so doing. And so it’s important for you to be competitive and also have rate size, which will assist in mobilizing deposits. The resources are optimally utilized between savers and users of funds. If the savers are a little above some points above inflation rate, which is why we cannot just drop our policy rate, if inflation is where it is. On top of that is what we call the risk premium on credit risk and some other operational risks. In Nigeria, you find out that the cost of doing business is high, because of structural factors like the roads are not good, security and electricity challenges, and so on and so forth.
When we fix those infrastructure, and then doing business in Nigeria becomes less voluminous, of course we are going to have a much slimmer margin for banks. So when you look at the risk we reach, which is currently around 10 to 11 percent, and then you add the risk premium and then the administration cost for banks, you land where we are.
Back to your question, whether or not, interest rate could be lower? Interest rate could be lower if we deal with those structural factors.When all of that happens , then inflation comes down and the Central Bank policy rate comes down. The lending rate will also come down. This will make banks to be very efficient. In the last three years, we have learnt how to embark on share service; of course you know I drove that personally, and, because of that, the banks are building skills now and they are lot more efficient than before.
So the share service is reducing the interest rate in banks?
That is what is transmitting now into some reduction in interest rate. Banks themselves have come together and they are making commitments that they would also be willing to reduce interest rate in the interest of the economy and the real sector.
The logic of share service is for banks to reduce their cost structure, they need to have a rethink on the way they do business at areas of assets they are acquiring now; in other words, it may be more cost effective for them to jointly own some assets and share service and that we have seen in the area of infrastructure. We have seen that also in the area of currency distribution and haulage. Today, we have CIT companies which is cash in transit companies that run bullion activities for the industry as a whole instead of individual banks doing it all by themselves. We have also seen that in cashless; the essence of cashless is to ensure that our payment system is structured such that transactions are done using the electronic payment channel.
It also means that cost of doing business, cost of payment will also drop; our plan really is to save as much as possible 30 percent of the operating cost. We are not there yet, but there have been significant reduction in the bank operating expenditure and because of that bank charges are already coming down. In the review of the guide to bank charges, we have started to see even banks themselves coming to commit to reduction in charges. One of them is the commission of turnover; commission of turnover before was maximum of five percent; now they charge only three percent, and then, with the commitment that over time, in the next two to three years, it will further drop. Today we talk about high cost of borrowing but, if you look at the big boys, the big companies, the companies that have good rating, they are not borrowing at high rates. The big banks have large exposure to these big companies and the real sector has started to attract credits at very reasonable rates. You will also remember that the Central Bank is also intervening directly in some sectors of the economy which is agriculture and real sector through SME lending, and aviation. So the way it works is that some funds were deposited with Bank of Industry for lending to commercial banks, and these are also lent out at commercial rates.
With reasonable stability credit rates, has the country been able to stay afloat of the global credit crunch?
Today, the customers in the sectors that are mentioned have been able to access costs at single digit interest rate. The macro economy is a lot more stable today than before and, when you look at the key industries , it starts from inflation. Inflation number has been consistently in single digit since January, that is commendable and the exchange rate volatility has almost disappeared. Today we have very stable exchange rate in the last two years. Plus or minus one percent, 156 to 157 to a dollar, which is very commendable in this kind of clime and the external reserve level is well over 48 billion US dollars, which is almost like the highest point since the outset of the global financial crisis.
So when you look at these achievements, you know that they are an index of a very strong economy. The economy is very strong. About 25 percent of the xternal reserve that we were talking about is inflow of foreign capital, portfolio funds and FDI which, of course, is a confirmation and endorsement of the economy because, when you begin to see the inflow of portfolio funds and FDI, it will naturally not come unless you are voting for the economy.