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Arbitrage: CBN directs banks to reverse loan funded TB transactions

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Warns against circumvention LDR directive

By Emeka Anaeto & Babajide Komolafe

The Central Bank of Nigeria (CBN) has directed banks to reverse customers’  investments in treasury bills funded with loans, describing the practice as arbitrage and circumvention of its 65 per cent loan-to-deposit ratio (LDR).

CBN
CBN Governor, Mr Godwin Emefiele

Recall that the CBN in an attempt to increase lending to the private sector especially small and medium enterprises (SMEs) directed banks to give out 60 per cent of their deposit as loans to customers. The benchmark was later raised to 65 per cent while the CBN sanctioned 12 banks who failed to comply with the directive as at the September 30th initial deadline.

But in a bid to avoid the hammer of the apex bank some banks in circumvention of the directive gave out loans to customers who later used the money to invest in treasury bills.

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But the Director of Corporate Communication, Isaac Okoroafor, disclosed that the CBN is aware of this practice which is tantamount to arbitrage and has directed that such transactions should be reversed.

Speaking at the sidelines of the ongoing annual meetings of the World Bank and the International Monetary Fund, in Washington, DC, he said: “We are saying banks must lend. So we prescribed the LDR. Now that they are ready to lend and at reasonably low rates not buying securities, people should not borrow to buy securities thereby arbitraging. The economy must see growth induced by higher consumer and manufacturing output. We will crack down on banks and companies that would attempt to game our policies through financial markets arbitrage

“Nigerians have been praying for low rates. So if borrowing rates from banks are coming down, companies should take the loan to conduct their manufacturing business and not get involved in arbitrage

“No circular but the banks have been told through a text and they are being monitored. We have already told them to reverse some TBs and OMO of customers suspected of arbitraging

“This is a policy meant to spur manufacturing output. We have started to see banks now marketing their customers for loans including consumer credits and mortgages

“Now that these are coming at low rates, manufacturing companies should concentrate on their manufacturing businesses and not in arbitrage. This is how manufacturing output and GDP can be boosted. Any customer found arbitraging will be blacklisted, names published and the banks penalised.”

Vanguard

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