Rethinking Nigeria’s Monetary Policy
Olatunde Bakre
In the fast-paced, technology-driven world of today, Nigerian banking institutions have fared excellently in an era where banking systems in the advanced world have created a more fluid and intuitive financial ecosystem where banking services are being seamlessly integrated into the lifestyle through the use of artificial intelligence, blockchain and Internet of Things (IoT).
This also facilitates effortless and automatic financial transactions. However, in Nigeria, despite this remarkable leap as reflected in market penetration and huge profit, their operation has not fueled and energised the real sector as expected hence our undelectable economic situation.
Within the sphere of critical reasoning, it will not be far-fetched to aver that the failure of the banks to catalyse the expected growth in the real sector, is fueled by the incongruent use of monetary policy metrics by the Central Bank of Nigeria(CBN) over the years.
The metrics are Monetary Policy rate (MPR), Cash Reserve Ratio (CRR) and Liquidity Ratio (LR). The policy metrics are not set in a way that will invigorate the expectations in the real sector and in consequence, CBN appears to have created an ecosystem in which the productive sector of the economy struggles to thrive.
Most experts agree unanimously that we need single-digit interest rates to foster a growth environment for the real sector. However, some of the CBN’s monetary policies, such as the CRR, MPR and LR (Liquidity Ratio), as they are presently determined, can never drive growth in this economy.
For instance, the Credit Reserve Ratio (CRR) is one major fiscal metric that can never allow the interest rate to come below 20 per cent because it effectively increases the cost of funds by a factor of 1000 basis points.
In corollary, high CRR essentially reduces bank liquidity and hinders lending ability. To bring this to the level of the non-financial person, when customer A deposits N100.00 into the bank at a 10 per cent interest rate (that is N10.00 interest amount at the end of 1 year), the CRR policy of CBN stipulated that 45 per cent of the deposit will be deposited with CBN zero-rated, also NDIC will take one per cent as premium.
This implies that the bank is left with only N54.00, which it will have to use to generate N10.00 interest amount meant for the initial deposit of N100.00.
Assuming customer B now approached the Bank to borrow the N54.00, the bank must lend at a minimum of 17.27 per cent to earn an interest amount of N10. 00 with which it will settle customer A. Factoring in the margin the bank will add to cover her cost to be six per cent, this implies that the loan rate cannot go below 23.27 per cent.
Additionally, MPR which is an indication of CBN risk tolerance is now at 26.5 per cent, if CBN being the bankers’ last resort lend to banks at such a huge rate, then it will be foolhardy to expect the banks to lend to the real sector at single digit.
With MPR, the CBN has effectively reduced the risk appetite of commercial banks because the higher the MPR, the more the Banks are discouraged from lending.
This regime of high MPR only encourages high interest rates on deposits. Juxtaposing this with the CRR factor as elucidated above, it should be obvious to the discerning why Nigeria is becoming less relevant in the global supply chain.
Looking at the current MPR and CRR, coupled with the inflation and dearth of infrastructure, no productive sector can survive. Whatever thinking pattern pushed CBN to this CRR and MPR regime needs a disruptive review because the supposed benefits have been outweighed by the effect of systemic annihilation of the real sector.
In this economic situation, whatever argument that may have been advanced for need of the CRR and MPR regime is no longer compelling. Therefore, there is a need to revolutionize the thinking behind these metrics. CBN must create the desired impact by ensuring that both MPR and CRR are within the 3% – 5% band.
This is the interest rate threshold in the developed world, making their economy stimulated progressively, if we emulate this, it will give a glimmer of hope that our commercial Banks have the conducive monetary policy framework to lend at a single-digit rate.
Furthermore, due to CBN non-stimulating framework, the real sector companies are not provided with enabling financial architecture to thrive because the banks no longer play the roles they should do traditionally.
This approach has turned the banks from being a key economic driver to mere payment agents largely. A good analysis of interest income of Banks shows that 60 per cent is accrued from investment in sovereign instruments (FGN bonds, Treasury Bills, Omo Bills).
This is indicative that the Banks are no longer pivoted to create credit portfolios, they have been disincentivised because sovereign instrument yield is at 19 per cent on average, more secured, it costs far less to manage the portfolio (armchair banking), the portfolio counts for Liquidity of the Bank, highly predictable cash flow.
So, why will a bank give preference to create a credit portfolio that has a high risk of default, high cost to manage, does not count for liquidity, attracts high regulatory scrutiny, and unpredictable cashflow unless it chooses to hedge all the above risks with a high interest rate well above the 17,27% crystalised through CRR obligation.
Meanwhile, one of the reasons CBN is increasing interest rate is because they are focused on Foreign Direct Investment (FDI) in foreign currency.
The thinking is that, to bring FX inflow, the interest rate has to be attractive, 19 per cent and above. This effort amounts to “Labores nihilum tendere” because an appreciable portion of the recorded FDI does not go to the real sector, hence it is only a short-term palliative to our situation which Is conundrum and perplexing. It is obvious that while we are trying to attract FDI we are in effect plunging our economy into helplessness, where there will be no job and a majority will live a lifetime in penury.
To create a pathway out of these economic woes, CBN must be prepared to rethink and rejig conventions, viewed through the lens of the current metrics, the CBN’s thinking is influenced primarily by her low-risk tolerance for commercial banks. While the failure of any bank is not desirable, it must not be attained at the expense of our real sector. Bank failure should be mitigated through an enhanced supervisory and compliance framework that is focused on their internal structure, code of conduct and corporate governance. However, most Nigerian banks are weak on this index.
At this junction obliterating CRR and MPR at five per cent or less should be considered. Also, only a maximum of 30 per cent of a bank’s sovereign portfolio should count for liquidity. Credit to selected blue-chip companies should count for liquidity, and any other credit that has performed more than three-quarters of its tenor should also count for liquidity, especially if it is for the manufacturing sector.
It is my belief that in this economic situation, we have found ourselves as a nation and conventional thinking will not take us out of the hole. CBN needs to stop being routine in its approach to solving economic problems.
Effective management of CRR, MPR and LR will increase the liquidity of banks, hence boosting their capability to lend more to the economy, thereby increasing the growth rate in the real sector. It is through the bold and fearless craft of these metrics that CBN can extricate our economy from the doldrums, the rate must be brought down, even if it means we must obliterate our conventional thinking. For emphasis, a situation where CBN dwell in the culture of short-termism and high-risk aversion will not stimulate the banks to create an enabling financial ecosystem for economic growth
Bakre, is a Digital Ethicist and Managing Partner
at Homo Economicus Limited in Lagos.
