How banks make free money – CBN Governor

 

By Henry Boyo

In an address to Pressmen, about 5 years ago, in Abuja, Lamido Sanusi, who was then CBN Governor (2009-2014), unexpectedly, decried the prevailing monetary framework which facilitated banks’ access to make free money from their portfolio of government funds.

Although this writer has, since 2004 consistently condemned this obvious rip-off, in several articles, in retrospect, Sanusi had inexplicably remained silent, while First Bank Plc, probably, Nigeria’s largest bank, where he earlier served as a Director, was possibly the major beneficiary of this scam in public finance.

The above title “How Banks make Free Money from Government Funds” was first published barely a week, after the key decisions made at CBN’s MPC No. 90 of 22/23 July 2013, were announced. Notably, however, the question still remains, whether or not the oppressive, financial absurdity, which Sanusi condemned still prevails? A summary of that article follows, hereafter; please read on.

“…First of all, you have got liquidity surplus in the banking industry; … there is over N1.3tn or so sitting in banks and belonging to government agencies. Now basically, they (these funds) are at zero percent interest and the banks are lending about N2tn to the government and charging 13 to 14%!. Now, that is a very good business model, isn’t it? Give me your money for free and I lend it to you at 14%; so why would I go and lend to anyone?”

(Lamido Sanusi, CBN Governor, July 23, 2013,).

“The above statement was Sanusi’s defence of CBN MPC’s decision to raise the existing cash reserve ratio of 12% across board to 50% for all public funds, domiciled in commercial banks, in order to reduce the inflationary potential of harmful credit expansion.

“Invariably, larger cash deposits in banks create liberal opportunities for banks to leverage on such deposits to expand credit and thereby increase public and private sector spending, which may inadvertently instigate an injurious rise in the price level of goods and services.”

“However, some critics may regard the adoption of a higher CRR as inappropriate, since it would also further reduce the already inadequate credit to cash beleaguered businesses.”

“This column has, for well over a decade, consistently drawn attention to the obvious reckless strategy of banks lending their so-called surplus funds (excess liquidity) at atrocious interest rates to the same CBN, which inexplicably, instigated the flow of systemic excess cash in the first place.”

“Thankfully, Sanusi may have finally recognized, according to him, that “If you want to discourage such perverse behaviour, part of it is to basically take away some of this money, and therefore, (a) reserve requirement is supposed to make sure that the excess liquidity in the banks’ balance sheet, is evenly distributed”. Nonetheless, if, in practice, CBN fails to ensure strict compliance with the higher 50% CRR, surplus cash will persist to drive higher inflation rates with disastrous consequences for cost of loans and economic growth.”

“However, Sanusi’s fear that even the higher CRR may not adequately cage inflation is probably embedded in his warning that “if spending continues, and we are concerned about the liquidity conditions, we foresee in the nearest future, continued increase in the CRR (Cash Reserve Ratio) across board….” In other words, cost of borrowing to real sector businesses, may suicidally exceed 30%!, if Sanusi’s threat of CRR beyond 50% across board materializes.

“However, in practice, what options other than further increases in CRR and Monetary Policy Rate, are available to control our economy’s seemingly ‘eternal’ burden of excess money supply?”

“If the reform proposed in this column was adopted in 2005, the perennial “curse” of systemic excess cash would have been eliminated, with hundreds of billions of naira savings. Although, former President Olusegun made a move to domicile all government funds with CBN, however intense pressure from the beneficiaries of the easy, free cash tradition quickly killed this initiative!”

“Undeniably, the domiciliation of all government funds with CBN will lead to a significant contraction of liquidity, and restrain inflation; regrettably, however, if government remains actively in competition with the real sector in the market, for both long and short term loans, excess cash may diminish, but cost of funds to businesses may not fall significantly.”

“Ultimately, an enduring cure to high cost of funds and unyielding inflation, is to tackle the root cause of excess liquidity; i.e. to first recognize excess liquidity as the direct product of CBN’s monthly substitution of naira allocations for dollar revenue, and secondly, to ensure that beneficiaries of the federation pool receive dollar certificates for their share of monthly allocations of foreign distributable income. Such an arrangement would finally exorcize the seemingly perennial ghost of excess liquidity and its train of adverse consequences on our economy and our peoples’ welfare”.

“In its place, socially and industrially supportive minimal rates of inflation will also become available with lower single digit rates of interest in tow! The naira will become much stronger and fuel prices will plummet and eliminate any remote possibility of subsidizing fuel price, thus achieving the erstwhile impossible task of benignly deregulating the downstream sector. The hundreds of billions of naira saved from the elimination of fuel subsidy can then be ploughed into critical social infrastructure and positive welfare programs.”

“The purchasing power of all income earners will improve and stimulate increasing consumer demand, which industrialists and entrepreneurs would hasten to satisfy, profitably, in a prevailing ambience of low inflation and interest rates and a much stronger naira.”

Post-Script August 2018: The Treasury Single Account (TSA) which consolidated all government funds in CBN was ultimately implemented in August 2015, based on an earlier framework developed overtime by Obasanjo, Yar’Adua/Jonathan Administrations.

Regrettably, the reality is clearly that, TSA implementation, still failed to sufficiently reduce the alleged liquidity surfeit in commercial banks. Furthermore, after the MPC No 103 meeting on 23rd September2015, CRR was reduced, across board, to 25% for all public and private sector deposits and further reduced to 22.5% in March 2016; notably however, despite the disruptive impact, CBN’s monetary policy rate, CRR and liquidity ratio for Banks have remained unchanged for well over 24 months!

Consequently, CBN, has therefore continued to mop-up Naira liquidity surplus at a rate which often correlates with the size of government’s annual fiscal plans; thus, CBN may be compelled to pay inappropriate double-digit interest rates to remove close to N9.0tn perceived surplus Naira from the system in 2018. Invariably, the banks, will conversely earn close to N1tn from such interest payments in 2018.

Notably, these banks have continued to prosper with the prevailing business model, as several annual operating results clearly confirm. Inexplicably, however, businesses in the productive sector have continued to wail!

Credit: Vanguard Newspaper.