CBN’s Moves to Cap Treasury Bills Investment Unsettle Banks

•Emefiele seeks stronger fiscal buffers

Obinna Chima in Lagos and Adibe Emenyonu in Benin City

The moves by the Central Bank of Nigeria (CBN) to limit commercial banks’ investment in treasury bills and federal government bonds have started causing disquiet in the banking industry.

This is coming as the CBN Governor, Mr. Godwin Emefiele, Wednesday reiterated the need to enhance fiscal buffers to shield the country from external shocks.
THISDAY gathered that if the policy is implemented, banks would find it difficult to sustain their profitability going forward, given their high appetite for such government securities.

For instance, the five tier 1 banks in Nigeria invested a total of N4.61 trillion in treasury bills and FGN bonds, among others in 2018.
The CBN had on Tuesday unveiled plans to restrict banks’ access to government securities to redirect their lending focus to the private sector.

A treasurer in one of the leading commercial banks, who pleaded to remain anonymous, told THISDAY that if the policy is enforced, banks would be forced to change their investment strategy.

According to him, banks may then be compelled to seek opportunities in other investment outlets such as commercial papers.
“Investment in treasury bills and bonds are risk-free and the returns are guaranteed. So, limiting the amount of investible funds would definitely hit the profitability of banks,” the source added.

Managing Director, Afrinvest Securities Limited, Mr. Ayodeji Ebo, shared the treasurer’s views.
According to him, banks would not be comfortable with the policy because it undermines their chances of making money.
“So, it is going to be a difficult push for the central bank. The CBN needs to look for a more structural way to boost lending to the real sector.
“This looks like more of direct control. It is better to adopt moral suasion on this matter,” he added.

Ebo, cited the difficult operating environment as one of the factors discouraging lending to the private sector.
On his part, the Head of Research and Strategy at FSDH Merchant Bank Limited, Mr. Ayodele Akinwunmi, said there could be a rule directing banks on how to structure their balance.
Akinwunmi also noted that CBN could use moral suasion to achieve its objective of making banks lend to the real sector, just as he highlighted the risks in lending to the real sector.

“The short-term impact of this policy if implemented is that commercial paper market will increase; there would be tendency for banks to rediscount and trading on other papers would increase.

“But everybody will be happy if interest rate in the economy drops and the risks in the economy reduces,” he added.
While announcing the restrictions on Tuesday, Emefiele had said the intention was to stimulate growth in the economy.
Emefiele had said the Monetary Policy Committee (MPC) expressed concern over a situation whereby banks abandoned their key roles of stimulating growth in the economy by investing in government instruments at the detriment of the economy.

He added: “The truth is that yes, according to our own regulations, there is a minimum percentage of treasury bills or government securities that the banks must invest in, in order to remain liquid. But again, we have observed and unfortunately and increasingly so, that the banks, rather than even focusing on granting credit to the private sector, they tend to direct their focus mainly on buying government securities.

“The MPC has frowned on that and has directed the management of the CBN to put in place policies or regulations that would restrict the banks from unlimited access to government securities.

“It is important and expedient that the committee gives this directive to management because this country badly needs growth. For us to achieve growth, those whose primary responsibility that it is to provide credit, who act as intermediaries in providing credit and are called catalysts to credit and growth in the economy must be seen to perform that responsibility.”

Emefiele Calls for Stronger Fiscal Buffers

Meanwhile, Emefiele yesterday reiterated the need to enhance fiscal buffers in order for the country to be able to withstand external shocks.
This he said was essential, considering the uncertainties and threats to global economy.

Emefiele listed other global uncertainties to include the normalisation of monetary policy by the US Federal Reserve System, which could lead to acute capital reversals; increased financial fragilities in emerging markets; volatility of global crude oil market due to the US sanctions on crude oil imports on Iran and Venezuela, along with output cuts by the Organisation of Petroleum Exporting Countries (OPEC) members.

He also mentioned weak and fragile global growth as one of the global uncertainties, saying that with global output growth downgraded to 3.5 per cent in 2019, from 3.7 per cent in 2018, there were suggestions that the expected economic downturn might be more than initially estimated, especially with significant uncertainties brewing around the advanced economies that are expected to lead the growth.
The CBN governor warned that if these uncertainties are not curtailed, they could lead to a slowdown in global supply growth given the sizeable weight of the economies in the global supply chain.

Emefiele, who spoke in Benin City, capital of Edo State, when he presented a paper at the Eminent Persons’ Lecture Series, University of Benin, however, suggested measures that both the fiscal and monetary authorities can implement to overcome any of the uncertainties.

Speaking on the topic, “Beyond the Global Financial Crisis: Monetary Policy Under Global Uncertainty,” the CBN boss stressed the need to strengthen fiscal buffers in order to improve Nigeria’s ability to address potential downturns in the economy as a result of a slowdown in global growth.
He also said efforts should be intensified at supporting targeted interventions in agriculture and manufacturing sectors, adding that given “Nigeria’s high population, efforts should be made to support domestic production of goods by farmers, SMEs and agro-processors that can help diversification efforts and also help insulate Nigerian economy from volatility in the crude oil market.”

According to him, “Proactive fiscal actions, specifically, infrastructure in investment is required to reduce the operational and logistical cost of running business.

Emefiele stressed the need for the “continued restriction on the importation of items that can be produced in Nigeria and tamping up efforts to curtain smuggling of restricted items into the country. These actions will help to support domestic production of goods in Nigeria.’’

The CBN governor pointed out that experience had shown that global cycles have the potential of amplifying business cycles in emerging and developing markets, which are capable of posing significant challenges to monetary policy in these economies.
“Strong macroeconomic fundamentals may not be enough to insulate the real economy from the effect of vagaries of these uncertainties in the global economic and contagion of poor financial conditions in other emerging economies.

“Rather, a wider response incorporating a mix of conventional and unconventional monetary policy measures is needed to combat the multidimensional headwinds emanating from external shocks and global uncertainties,” he added.

Also yesterday, Emefiele assured entrepreneurs set to commence operations at the Edo Production Centre of the availability of favourable financing options through the apex bank’s NIRSAL National Microfinance Bank, to complement other incentives for industrial production at the facility.

The CBN boss, who spoke during a visit to the agency, lauded Governor Godwin Obaseki for his vision in setting up the facility.
He identified the biggest challenges faced by SMEs to include lack of access to finance, absence of conducive environment and irregular electricity supply for uninterrupted production.

But he said Obaseki had provided a solution to these problems with the establishment of the agency.
“For us at the CBN, this facility makes it easy for us to have a place to meet people who are ready to do business. At CBN, we are trying to deal with issues of access to finance and this place provides an opportunity,” he said.

Obaseki said the agency had helped his administration to move towards hitting the 200,000 jobs target of the state government.

“We set up this hub to help us achieve our aim of creating a minimum of 200,000 jobs during the first four years in office in the civil service. We are not expected to give out the jobs in the civil service, but rather create most of them in the private sector. So, we are providing opportunities for industrialisation,” the governor added.
He assured the CBN governor that the Production Centre would be inaugurated by June when the facility will be ready for business.