By Babajide Komolafe
•Interbank rates rise by 74%
Governments’ deposits and borrowing undermine competitiveness of banks and corrupt the public sector in Nigeria.
Deputy Governor, Corporate Services Directorate, Central Bank of Nigeria (CBN), Alhaji Suleiman Barau made this observation in his personal statement at the last Monetary Policy Committee (MPC).
Meanwhile, interbank interest rates shot up by 74 per cent in response to the withdrawal of N1.2 trillion from the system by the Central Bank of Nigeria (CBN) for cash reserve requirement (CRR) debit for July
At the end of the its meeting held last month the MPC increased cash reserve requirement (CRR) on public sector deposits to 50 per cent from 12 per cent. The decision effectively reduced idle cash (excess liquidity) in the banking system by N1.2 trillion.
In his argument for the decision, Barau said, “In recent times, one of the causes of malfunctions in the Nigerian financial system is the paradox of substantial government deposits in Deposit Money Banks (DMBs) and high government borrowing from the deposit money banks (DMBs). As at June 13, 2013, the three tiers of government had N2.384 trillion in the DMBs out of which about 90 per cent are in zero interest bearing Current Accounts. To mop up the liquidity at 14 per cent will cost N301.33 billion which is more than the annual budgets of most states.
“Clearly, governments are over-borrowing, are wasteful in the management of public resources and are undermining the competitiveness of the DMBs. This corporate welfare, transfers or subsidy is clearly wasteful and costly. In addition, it undermines and corrupts the public sector and makes public resources to generate inefficient outputs and ineffective outcomes. Improving the market and the state demands the correction of the causes of distortions.
An increase in CRR on government deposits will also “incentivise” the DMBs to seek for deposits from the private sector and, to lend to the private sector. After all, the DMBs and other organised private sector players canvass for a market driven economy. A dependence on Government Deposits breeds complacency among DMBs. This policy is thus compatible with a market driven economic model. The policy therefore, helps DMBs to rethink their business models which have lulled them into complacent rent seeking behaviours.
“Complacency is dangerous in a highly volatile world and complacent financial institutions are the least able to survive in a volatile and highly competitive world. Our recent history and, the costs of cleaning up the consequences of complacent mismanagement of the recent past makes it necessary to support DMBs to develop more sustainable business models. A rate of 50 per cent is strong enough but not debilitating. The future direction is sufficiently strong signal for DMBs to quickly change their business model and adapt to new realities”.