CBN Directs Banks to Lift Restrictions on 440 Accounts

•Apex bank resumes enforcement of LDR policy, urges banks to comply  

•With subsidy gone, FX Unified, MPC raises MPR to 18.75% to curb inflation 

•Shonubi insists rate hike helping to moderate prices   

•Says FX volatility driven by pent-up demand, low supply

James Emejo in Abuja and  Nume Ekeghe in Lagos

The Central Bank of Nigeria (CBN), yesterday ordered banks to vacate a Post-No-Debit (PND) restriction earlier imposed on bank accounts of 440 individuals and companies.

This was just as the CBN yesterday communicated to banks that it would resume the enforcement of the Loan-to-Deposit Ratio (LDR) policy effective July 31, 2023.

However, citing key policy reviews particularly the recent deregulation of petrol price and transition to a unified and market-determined exchange rate – with the attendant inflationary concerns, the CBN’s Monetary Policy Committee (MPC), yesterday resolved to increase the Monetary Policy Rate (MPR), also known as the benchmark interest rate by 25 basis points to 18.75 per cent from 18.5 per cent.

A PND refers to all debit transactions, including ATMs and cheques, on the accounts, have been blocked but can receive inflows.

It is one instrument through which the CBN gives powers to stop customers from operating their bank accounts, with the permission of the courts.

The central bank conveyed the vacation of restriction in circular, dated July 25, 2023 which was signed by A.M. Barau, on behalf of the CBN Director, Banking Supervision Department,  and addressed to all banks.

The correspondence read, “You are hereby directed to vacate the Post-No-Debit restriction placed on the accounts of the underlisted bank customers at our instance.”

The apex bank further mandated the banks to inform the concerned customers of the vacation accordingly.

Some of the affected accounts included Fortune-K Resources and Investment Nigeria Limited,  Voomos Limited,  BoxII Limited,   OP Amber,  KIIPay Limited,  Blake Excellence Resort,  and Vanu Nigeria Limited. Others were Bakori Mega Services, Ashambrakh General Enterprise, Namuduka Ventures Limited, Crosslinks Capital and Investment Limited, IGP Global Synergy Limited, Davedan Mille Investment Limited and Urban Laundry, Advanced Multi-Links Services Limited, Spray Resources, Al-Ishaq Global Resources Limited, Himark Intertrades, Charblecom Concept Limited, Wudatage Global Resources,  Whales Oil and Gas,  Mosinox Oil and Gas and A.A. Gwad Ventures.

Those also listed included Treynor Soft Ventures, Fyrstrym Global Concepts Limited, Samarize Global Nigeria Limited, and Zahraddeen Haruna Shahru, FirmCoin Resources and SIBT Acuracy,  CrossLinks Energy Limited, among several others.

With Subsidy Gone, FX Unified, CBN Raises MPR to 18.75% to Curb Inflation

The MPC also adjusted the asymmetric corridor around the MPR to +100/-300 from +100/-700, and retained the Cash Reserve Requirement (CRR) at 32.5 per cent as well as Liquidity Ratio at 30 per cent.

Addressing journalists after the two-day meeting of Monetary Policy Committee (MPC) meeting in Abuja, the CBN acting Governor, Mr. Folashodun Shonubi, said the modest increase in the benchmark interest rate was targeted at curtailing potential uptick in inflationary pressures resulting from the policy changes.

Shonubi, also clarified that the current volatility witnessed in the foreign exchange market was driven by the fact that the market needs to find its level, adding that there’s a pent-up demand which current supply may not be sufficient to satisfy.

He said the floating of the naira and removal of petrol subsidy were likely to sustain upward pressure on domestic prices in the short to medium term especially considering the negative impact the proposed palliatives would have on liquidity.

The acting CBN governor also insisted that previous hike in MPR had continued to make quite a lot of difference by moderating the rate of increase in the prices of goods and commodities.

According to him, without the tightening stance, the headline would have spiraled out of control.

He said the continued uptick in inflationary pressure to 22.79 per cent in June 2023 from 22.41 per cent in the previous month was driven by the moderate increases to both the food and core components.

According to him, legacy headwinds, including security challenges in major food-producing areas; high cost of transportation driven by the rising cost of energy, and inadequacies in public infrastructure continued to drive the rise in food and core inflation.

Shonubi, who read the committee’s communique, noted that unfolding dynamics in the monetary policy environment and the resultant pass-through to domestic prices would require greater collaboration between the CBN and the fiscal authority to ensure that macroeconomic stability is achieved.

The MPC’s considerations focused on the persisting rise in inflation and its potential adverse effect on output growth and household income, adding that the continued uptick in inflation (month on month) driven by increase in both the food and core components remained a key challenge.

The committee also expressed concerns that the recent policy decisions around subsidy removal, exchange rate liberalisation and disbursement of palliatives would have pass-through effects to inflation.

The MPC therefore, called for decisive measures by the bank to address the likely liquidity surfeit from these developments, including using appropriate monetary policy instruments.

The committee further prevailed on the monetary and fiscal authorities to sustain collaboration towards addressing the inflationary pressure and incentivise domestic investment to reduce unemployment and boost output growth.

It further enjoined the federal government to continue to explore policies to improve investor confidence in the Nigerian economy and pave the way for foreign and domestic investments.

The acting CBN governor also stressed the need to attract investment, particularly to auto manufacturing, aviation, and rail industries to boost non-oil revenues.

He said key policy mechanisms to shield the Nigerian economy from persisting global shocks and other emerging domestic shocks were urgently required for the economy to continue to post positive growth.

The MPC also commended the several measures put in place by the central bank to boost foreign currency liquidity.

Shonubi said, “Particularly, members were of the view that the recent policy on exchange rate unification would increase market transparency and encourage more foreign capital inflows. It, therefore, urged the bank to leverage on effective policies to attract remittances from diaspora to help moderate exchange rate pressure.

“The committee also commended the CBN’s role in the effective oversight of the banking system, evidenced by the relative stability in key financial soundness indicators and resilience of the sector, despite tight global and domestic financial conditions.”

The MPC, however, noted the likely impact of the recent policy reforms on the valuation of commercial bank assets and called on the central bank to act proactively to ringfence the banking system from any possible second-round effects, as well as sustain its micro-prudential surveillance over the banking system.

Shonubi, pointed out that staff projections showed that output growth recovery in 2023 would remain positive as economic agents adjust to the recent policies on zero subsidy on the price of Premium Motor Spirit (PMS) and unification of the exchange rate.

On the global outlook, the MPC reviewed developments impeding the smooth recovery of the global economy, notably the continued hostility between Russia and Ukraine, as Russia reneged from further renewal of the Black Sea Agreement until all conditions are met.

The CBN acting governor said the development would likely push commodity prices much higher than current levels, adding that China’s slow recovery, post-Zero-COVID Policy, was dampening global trade, while the increasing polarisation of the global economy with several economies seeking macroeconomic alliances with the group of BRICS countries are increasing uncertainty in the direction of trade flows.

Shonubi said, “On hiking rate, the first thing I’d like to highlight is that it has made quite a lot of difference. And I believe in previous MPC as we had indicated and shown that everytime we have had a rate increase, it has actually moderated the rates of inflation. But that’s not all that we’ve been doing.

“And during this MPC, we had quite a lot of time talking about inflation, talking about the various tools and mechanisms that we could use to manage inflation. We agreed that one of the key challenges now was liquidity overhang and we needed to look at the various tools we had.

“As a matter of fact, in the communique, you would have noticed that we made a reference to that same fact. So, in addition to interest rate hikes, we’ve also come up with various ways to tighten liquidity because we believe that if liquidity surfeit actually runs across not just inflation, but also has some impact on the exchange rates and other parts of the economy.

“So, I can confirm that it is not only rates change, that we’re looking at to moderate inflation, we’re looking at every tool in the box that would help us reduce liquidity and that should have a positive impact on reining in inflation.”

Also addressing issues around the floating of the local currency, he said, “We’re not trying to unify the rates. We believe that we need to encourage the markets to be more efficient and to be more effective and that takes a bit of time.

“Some of the volatility you’ve seen over the period has been driven by that same fact that the market needs to find its level and also the reality that there’s pent-up demand which current supply may not be sufficient and as we ease and satisfy the pent-up on demand, we’ll begin to see a more efficient market that runs but you also need to understand that the dynamics of pricing in the market and we feel we should actually stop calling it the I&E because it is now much more than the I&E.

“For us, it’s a market where everybody and anybody through licensed institutions can participate. So, we expect that over time, sooner rather than later. The volatility assumed would normalise.”

He said, “The role of the central bank is to intervene and keep the market at a fairly stable level. We have our views as to what that level is and as the market continues to oscillate around that level, if there’s a need for us to intervene either by buying or selling, that’s the role of the central bank.

“We have started intervening, and we have been doing it for a while and we will continue to intervene to bring the markets to the levels that we believe they should be.  Right now, and in the short term, these volatile times are expected but we expect them to moderate sooner rather than later.”

CBN Resumes Enforcement of LDR Policy, Urges Banks to Comply

Meanwhile, the CBN yesterday said it would resume the enforcement of LDR policy effective July 31, 2023.

The central bank said the move followed the January 7, 2020, directive which required banks to maintain a minimum LDR of 65 per cent.

The apex bank, in a letter addressed to the banks and signed by Abu Shebe, on behalf of the CBN Director, Banking Supervision, further explained that the resumption of enforcement was in line with the objective of the policy and the need to moderate industry excess liquidity.

Consequently, the CBN warned that DMBs with LDR below the minimum requirement as of the date, and monthly thereafter, would be liable to a Cash Reserve Requirement (CRR) surcharge of up to 50 per cent of the lending shortfall implied by the target LDR.

The bank added that the DMBs would be duly notified of their respective LDR position and basis of surcharges if any.

On July on July 3, 2019, the central bank, in an effort to stimulate the economy, mandated banks to keep a minimum LDR – defined as loan to funding ratio – of 60.0 per cent which was later reviewed upward to 65.0 per cent on September 30, 2019, to encourage banks to increase consumer, mortgage, and corporate credits thereby stimulating aggregate demand, output growth, and employment.

The LDR is the total value of loan facilities issued divided by the aggregate value of deposits mobilized and has both liquidity and solvency implications in the short-medium, and medium to long-term horizons.

According to the CBN, this underscores the need to measure the impact of LDR on banks’ liquidity to ensure

the achievement of the mandate of the bank – to promote a sound financial system in the country – without compromising the health of domestic banks.

The justification for the LDR policy was also to encourage banks to enhance credit delivery to the real sector of the economy.

The apex bank in the January 2020 letter to all banks, stated that it noticed a remarkable increase in the size of gross credit by the DMBs to customers.

Accordingly, the apex bank decided to retain the minimum 65 per cent LDR in the interim and directed the banks to maintain the level.

The CBN noted that the incentive which assigned a weight of 150 per cent with respect to lending to SMEs, retail, mortgage, and consumer lending shall continue to apply, while failure to achieve the target shall continue to attract a levy of additional CRR of 50 per cent of the lending shortfall of the target LDR on or before March 30, 2020.

The banks were further advised to maintain strong risk management practices regarding their lending operations.