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N750bn boost in interbank liquidity underway

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By Babajide Komolafe

THE reduction in the remunerable limit for bank deposit placement in the Standing Deposit Facility, SDF, of the Central Bank of Nigeria, CBN, is expected to inject about N750 billion into the interbank money market prompting further decline in cost of funds.

In a bid to compel banks to increase lending  to the economy, the CBN last week reduced the remunerable limit for bank deposit placement in its SDF.

“The remunerable daily placements by banks at the SDF shall not exceed N2 billion. The SDF deposit of N2 billion shall be remunerated at the interest rate prescribed by the Monetary Policy Committee, MPC, from time to time. Any deposit by a bank in excess of N2 billion shall not be remunerated,” the CBN said in a circular signed by Director, Financial Markets Departments, Dr Angela Sere-Ejembi.“

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This move, according to financial market analysts, will increase liquidity in the interbank money market which will lead to a decline in interbank interest rates.

While noting that the measure will also compel banks to lend to each other as well as lend to the economy, they stressed that it could, however, lead to decline in bank’s interest income as well as  trigger increase  in non-performing loans in the banking industry.

“In the immediate, the money market liquidity is expected to rise by N750 billion, thereby lowering interbank market rates by 150 basis points”, said Kunle Ezun, research analysts at Ecobank Nigeria Limited.

Speaking on the implications of the CBN measure, he said: “The CBN’s recent move could be positive, as we expect improved lending to the productive sector and revive the risk appetite for the productive sectors of the economy.

“However, depending on market reaction and behaviour, the following scenarios could materialise: The inter-bank money market rates could further drop and average 2.0 percent to 5.0 percent in the days ahead. While the liquidity in the market will rise, the liquidity could be locked up in a large portfolio of government securities in contrast to the overall objective of lending to the real sector.

“In the longer term, more stringent regulations can be positive for the economy but negative for the lending institution (in terms of NPL):Stringent regulations can force banks  to increase their risk appetite, which could lead to higher non-performing loan and further deteriorate the industry’s asset quality”.

Making a similar projection, Ayo Akinwunmi, Head of Research, FSDH Merchant Bank, said: “This, in a way, will reduce the interest income of banks going forward. It will also force banks to trade more with one another in the interbank market than before.

“It may also reduce the cost of managing system liquidity for the CBN as the apex bank will now have access to more funds from the banking system at no cost than before. In addition, interbank interest rates may drop further as a result of increased system liquidity.

“This is part of the efforts of the CBN to increase banks’credit to the real sector of the economy in order to stimulate growth of the economy. As noted earlier, it is important that the efforts of the CBN are supported by appropriate fiscal policies and incentives to reduce the risk of lending to the economy and also develop new businesses and sectors that bank loans can be directed to.”

Analysts at Lagos based Cowry Asset Management Limited, though affirmed that the measure will lead to increased lending and also boost the nation’s Gross Domestic Growth (GDP), they however stressed that it portends risk to the inflation rate.

“As CBN prioritised the flow of money to businesses in the Small and Medium Enterprises (SMEs), retail, mortgage and consumer lending space, coupled with the anticipated implementation of the minimum wage, we expect to see improvement in GDP growth from the second half of the year. Nevertheless, we expect CBN to keep tabs on the inflation rate as the risk becomes imminent”, they said.

Cost of funds falls

In line with the above projections, cost of funds in the interbank money market fell last week in response to increase liquidity occasioned by the CBN measure.

According to FMDQ, interest rate on Collateralised (Open Buy Back, OBB) lending fell by 165 bpts to 2.21 percent last week from 3.86 percent the previous week. Similarly, interest rate on Overnight lending dropped by 164 bpts to 2.93 percent from 4.57 percent the previous week.

Analysts at Lagos based Zedcrest Capital Limited, projected that cost of funds will remain stable at this level this week courtesy of system liquidity level of N334 billion at the close of business on Friday.

The improved liquidity prompted by the  CBN measure according to Cowry Asset analysts will this week occasion increased demand at the treasury bills auction to be held by the apex bank.

They stressed that the liquidity level will also positively impact prices of FGN bonds this week with yields heading south.

“In the new week, CBN will auction T-bills worth N107.05 billion. We expect their stop rates to decrease marginally due to increase demand amid boost in system liquidity which, in addition to maturing T-Bills worth N41.68 billion, is also expected to result in decline in Nigeria Interbank Offered Rate (NIBOR).

“Against the backdrop of boost in financial system liquidity, we expect FGN bond prices to rally (with corresponding drop in yields) at the Over-the-Counter (OTC) market amid financial system liquidity ease”, they said.

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