No Restrictions on Banks from Investing in Treasury Bills, Says CBN

• Central bank still in tightening mood as MPC meets  LCCI backs new lending policy

Obinna Chima

The Central Bank of Nigeria (CBN) yesterday dismissed reports that it had barred commercial banks from investing in treasury bills.

It dismissed a report in the media (THISDAY not inclusive) that it had stopped commercial banks from buying treasury bills so they could be more liquid to give out loans.

A top official of the CBN told  THISDAY that while the central bank would be glad to see less participation by commercial banks in the primary market treasury bills auction, it makes a policy pronouncement to that effect, banks are still free to buy treasury bills.

The central bank had in the past few days taken measures to encourage commercial banks to lend more to operators of micro, small and medium scale enterprises (MSMEs), as it seeks to support the federal government’s economic diversification agenda.

Owing to this, the source, who did not want his name in print because he was not authorised to speak on the matter, said it was the desire of the central bank to see banks channel more of their funds towards MSMEs.

He said: “We have not barred the banks from investing in treasury bills, otherwise we would have released a circular to that effect. But, we did what we did, first of all to let the market know that our interest would be for non-proprietary transactions.

“That is, investors, both local and foreign, can buy our instruments. But, we would like to see less of the banks coming to use their instruments to come to the primary market to buy treasury bills.

“However, banks and any other person can do secondary market transactions. That does not mean that banks have been barred from the treasury bills market. The CBN will use its discretion to see whether it is a general auction or a special auction that the banks can participate in.” 

He added that what the central bank was trying to achieve with the initiative was that “we want the banks to focus more on lending and not buying government securities.  But we are not trying to force them to do so, because we have our Prudential Guidelines that they must comply with.”

“What we are doing is like a signal, we are showing them the direction we want them to go,” he added.

He also said the central bank was not in a hurry to reduce interest rate on its open market operations (OMO) bills.

“As you can see, our OMO rates are higher than treasury bills rates. It is to show that we are not in a hurry to trend downward, because we are still in tightening mood,” he added.

The CBN recently directed banks to maintain a minimum loan-to-deposit ratio (LDR) of 60 per cent by the end of September, which was expected to stimulate consumer lending in the country.

The central bank conveyed the decision on the new lending policy to the banks in a July 3, 2019 letter addressed to them, which was signed by the Director of Banking Supervision, CBN, Ahmad Abdullahi.

The LDR is used to assess a bank’s liquidity by comparing a bank’s total loans to its total deposit.

Meanwhile, the Lagos Chamber of Commerce and Industry (LCCI), in a statement yesterday, described the new lending policy of the CBN as a move in the right direction.

The focus of the policy on SMEs, retail, mortgage and consumer lending under the proposed lending regime was laudable, the Director General, LCCI, Muda Yusuf, said.

“The Nigerian private sector has over the years grappled with issues of credit access, cost of credit and tenure of funds. These challenges are more severe for MSMEs in the economy with huge financing gaps.  The economy has been characterised by profound crowding effect of the private sector in the financial markets owing to more attractive returns from credit to government through the instrumentalities of treasury bills and federal government bonds.

“These developments created considerable distortions in the financial markets and considerably impeded domestic investment.  It created major financial intermediation issues as the banking system became largely disconnected from the investing public.  The real sector investors and the SMEs were the foremost victims of this distortion.

“The high and attractive returns on government debt instruments were a major worry because they have zero risk and the earnings are tax exempt.  Naturally, there was a gravitation of capital towards these investment windows, depriving the investment community of funds, posing major constraints to job creation and the advancement of the economy,” he added.

According to Yusuf, the LCCI saw the new lending policy as a timely policy intervention to normalise the credit markets, spur economic growth and broaden the interface between entrepreneurs and the banking system.

He said the banks would be obligated to be more tolerant of the entrepreneurs and more creative in the creation of financial assets.

“The LCCI expects that with the new lending policy, the quality of financial intermediation will be improved and this would impact the economy better as funding gaps in many sectors are addressed.

“It will lead to reduction of the crowding out of the private sector in the credit market and improvement of economic inclusion as more SMEs and broader range of sectors have better access to credit; and deepening of the money market,” he said.

However, he urged the central bank to address some of the possible downside risks in respect of loans asset quality arising from the new lending policy, by strengthening the Collateral Registry, develop SME rating agencies to support credit assessment an evaluation in the SME space, among others.

And as the CBN’s Monetary Policy Committee (MPC) commences its two-day meeting today, analysts have expressed divergent opinions about the outcome of the meeting.

For instance, analysts at Afrinvest West Africa Limited believe the committee would maintain status quo on all policy rates.

But  analysts at FSDH Merchant Bank Limited anticipated a 50-basis cut in the Monetary Policy Rate (MPR) to 13 per cent.

Also, analysts at Cowry Assets Management Limited predicted that the MPC would retain the MPR in line with its current drive for economic growth.

At the last meeting, the MPR was left unchanged at 13.5 per cent, the Cash Reserve Ratio (CRR) at 22.5 per cent and Liquidity Ratio at 30 per cent.