IN the last three weeks, the oppressive impact of the myriad charges on the transactions of every owner of a bank account in Nigeria was the subject of discussion.

Governor, Central Bank of Nigeria (CBN), Mr Godwin Emefiele

Several media reports, lately also suggest that these charges, possibly contribute banks income by trillions of Naira in Nigeria annually; indeed, income from retained stamp duty charges, alone, may well exceed N1 trillion annually, if the figures suggested by NIPOST and their agents are ultimately verified.

The substantial incomes from bank charges, therefore, compound hundreds of billions of Naira income from the regular, and very profitable business of banks also lending to CBN, States and Federal Governments and several businesses and a host of individuals nationwide.

The above title “How Banks make Free Money from Government Funds” was first published barely a week, after the key decisions made at CBN’s MPC No. 90 of July 22/23, 2013, were announced. Notably, however, the question still remains, whether or not the oppressive, financial absurdity, which Sanusi condemned, in 2013, still prevails today? A summary of that article follows, hereafter; please read on.

“…First of all, you have got a liquidity surplus in the banking industry; … there is over N1.3tn or so sitting in banks and belonging to government agencies.  Now basically, they (these funds) are at zero per cent interest, while banks are lending about N2tn to the government and charging 13 to 14%!  Now, that is a very good business model, isn’t it?  Give me your money for free and I lend it to you at 14%; so why would I go and lend to anyone?”

(Lamido Sanusi, CBN Governor, July 23, 2013,).

“The above statement was Sanusi’s defence of CBN MPC’s decision to raise the existing cash reserve ratio of 12% across the board to 50% for all public funds, domiciled in commercial banks, in order to reduce the inflationary potential of injurious credit expansion.

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“Invariably, larger cash deposits in banks create liberal opportunities for banks to leverage on such deposits, to expand credit and thereby increase public and private sector spending, which may also, inadvertently, instigate a distortional rise in the price level of goods and services.”

“Some critics may, however, regard the latest adoption of a higher CRR as inappropriate since it would also further reduce the already inadequate credit to cash beleaguered businesses.”

“This column has, for well over a decade, consistently drawn attention to the obvious reckless strategy of banks lending their so-called surplus funds (excess liquidity) at atrocious interest rates to the same CBN, which inexplicably, instigated the flow of systemic excess cash in the first place!!”

“Thankfully, Sanusi may have finally recognized, according to him, that “If you want to discourage such perverse behaviour, part of it is to basically take away some of this money, and therefore, (a) reserve requirement is supposed to make sure that the excess liquidity in the banks’ balance sheet, is evenly distributed”.  Nonetheless, if, in practice, CBN fails to ensure strict compliance with the higher 50% CRR, surplus cash will persist and drive higher inflation rates with disastrous consequences for the cost of loans and economic growth.”

“Nonetheless, Sanusi’s fear that even the higher CRR may not adequately cage inflation is probably embedded in his warning that “if spending continues, and we are concerned about the liquidity conditions, we foresee in the nearest future, continued increase in the CRR (Cash Reserve Ratio) across board….” In other words, the cost of borrowing to real sector businesses may suicidally exceed 30%!, if Sanusi’s threat of CRR beyond 50%  across board materializes.

“In practice, however, what options other than further increases in CRR and Monetary Policy Rate, are available to control our economy’s seemingly ‘eternal’ burden of excess money supply?”

“If reforms serially proposed in this column were adopted in 2005, the perennial “curse” of systemic excess cash would have been eliminated, with hundreds of billions of naira additional savings.

“Undeniably, domiciliation of all government funds with CBN will lead to a significant contraction in liquidity, and thereby restrain inflation; regrettably, however, cost of funds to businesses may not fall significantly if the government remains active in competition with the real sector for both long and short term loans.”

“Ultimately, an enduring cure to high cost of funds and unyielding inflation, would be to tackle the root cause of excess liquidity; i.e. to first recognize excess liquidity as the direct product of CBN’s monthly substitution of naira allocations for dollar revenue, and secondly, to ensure that beneficiaries of the federation pool receive dollar certificates for their share of monthly allocations of foreign distributable income.  Such an arrangement would finally exorcize the seemingly perennial ghost of excess liquidity and its horror train of adverse consequences on our economy and our peoples’ welfare”.

“In its place, socially and industrially supportive minimal inflation rates will evolve with lower single-digit rates of interest in tow!  The naira will become much stronger while fuel prices will plummet and eliminate any remote possibility of subsidizing fuel price, thus achieving the erstwhile seemingly impossible task of benignly deregulating the downstream sector.  The hundreds of billions of naira saved from the elimination of fuel subsidy can then be ploughed into critical social infrastructure and positive welfare programs.”

“In such event, the purchasing power of all income earners will improve and stimulate increasing consumer demand, which industrialists and entrepreneurs would hasten to profitably, satisfy, in a prevailing ambience of low inflation and interest rates and a much stronger naira.”

Postscript April 2019: The Treasury Single Account (TSA) which consolidated all government funds in CBN was ultimately implemented in August 2015, based on an earlier framework developed overtime by Obasanjo, Yar’Adua/Jonathan Administrations.

Regrettably, the reality is clearly that, TSA implementation, also failed to sufficiently reduce the alleged liquidity surfeit in commercial banks. Furthermore, after the MPC No 103 meeting on 23rd September 2015, CRR was reduced, across board, to 25% for all public and private sector deposits and further reduced to 22.5% in March 2016; notably however, despite the disruptive impact, CBN’s Monetary Policy Rate, CRR and liquidity ratio for Banks remained unchanged for well over 24 months, until the MPR was reduced from 14% to 13.5% after the MPC No 123rd meeting in 2019!

In spite of these harsh policy rates, CBN continued to mop-up perceived Naira liquidity surplus at a rate which often correlates with the size of government’s annual fiscal plans! Consequently, CBN may have been compelled to pay inappropriate high double-digit interest rates to banks, in order to remove close to N9.0tn perceived surplus Naira from the system in 2018! Invariably, the banks will conversely earn close to N1tn from such interest payments in 2018.

Notably, these banks have continued to prosper with the prevailing business model, as several annual operating results clearly confirm. Inexplicably, however, businesses in the productive sector have continued to wail!

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