CBN Quarantines ₦2.3 Trillion from Banks’ Deposits in 9 Months

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CBN Forecasts Negative Economic Growth for Q2
Godwin Emefiele, Governor Central Bank of Nigeria

CBN Quarantines ₦2.3 Trillion from Banks’ Deposits in 9 Months

  • CBN protecting FX market by curtailing banks participation
  • Debits to raise Banks cost of funds
  • Nigerian Banks CRR more than 10 times of South African Banks

The Banking Sector ability to create credits is threaten follows a humongous amounts that the apex bank sterlised from operators deposits periodically.

In less than nine months, the sum quarantined by the Central Bank of Nigeria (CBN) has increased to ₦2.3 trillion.

Though analysts said the CBN would credit banks in due course, but critics are of the view that the move has effectively slow economic recovery.

The latest cash reserve ratio raised occurred last week where the CBN debited 26 deposits money banks a total sum of ₦460 billion.

Tellimer in an equity research note stated that this is the third time in nine months that the CBN has taken debits from the banks.

However, analysts explained that the latest CRR debits has removed liquidity from the market.

Experts explained that this is in sharp contrast to the behaviour of other central banks around the world, which are actively injecting liquidity into the markets.

It would be recalled that in October 2019, CBN Loan-to-deposit (LDR) penalties was ₦449 billion.

In April, still for LDR infringements, the CBN debited ₦1.4 trillion and now this most recent CRR action of ₦460 billion.Banks Deposits

Commenting on the move, Tellimer stated that the recent debits on banks could jeopardise much needed economic recovery.

MarketForces Research gathered from analysts’ explanation that the CBN’s debits has effectively reduced liquidity.

This, has also been noted to undermine its drive to increase lending as lenders’ groans for improve business activities.

In its equity research note, Tellimer said FCMB, FBNH and UBA could potentially lose 15% to 40% of 2020 estimated profit after tax.

“Some portion of these funds may be returned to the banks as with previous debits, but economic impact is immediate”, Tellimer explained.

“The CBN debited a total of ₦459.7 billion from twenty-six banks, to make up for what it says is a CRR (Cash Reserve Ratio) shortfall.

“This measure comes less than two months after the central bank took ₦1.4 trillion from banks for falling short of the CRR and LDR ratios.

“It should be noted that last week the CBN refunded part of this money in a bid to maintain liquidity in the market”, Tellimer explained.

Market perception of CRR debits

“It appears that the CBN debited the most liquid banks to deter those institutions from making huge demands in the FX market, which the central bank actively intervenes in”, Tellimer stated.

Sentiment in the market suggests that the CBN is actively trying to contain the banks’ cash to prevent them from buying dollars, which could push up exchange rates.

Rising inflation and the recent naira devaluation make a good case for holding foreign currency.

Nigeria currently has one of the highest CRRs in Sub-Saharan Africa at 27.5%, which is more than ten times that of South African banks and about five times that of East African banks.

FBNH, UBA and Zenith hit by all three debits:

Analysts remarked that FBNH, UBA and Zenith bank have been on the receiving end of all three CBN penalties.

FBNH has had 3% of its deposits (using Q1 20 figures) debited YTD, while the figure is a bit higher for UBA and Zenith at 4.3% and 4.2% respectively.

CBN debits undermine its drive for increased private sector lending:

At its most recent MPC meeting, the CBN cut its policy rate by 100 bps.

This was in a bid to boost liquidity to the private sector, which should help revive economic activities and stimulate growth.

However, the latest CRR debits remove liquidity from the market and are in sharp contrast to the behaviour of other central banks around the world.

Across the World, Central banks are noted to be actively injecting liquidity into the markets.

The CBN’s debits will lead to lower liquidity in the system, thereby limiting the banks’ ability to lend to the real sector or meet the CBN’s 65% LDR.

This will potentially slow down the pace of economic recovery post Covid-19.

Recall that failing to meet the 65% LDR attracts a penalty, which could lead to further CBN debits that would inevitably increase the banks’ cost of funds.

The banks in turn would most likely pass on this increased cost to their borrowers, leading to higher lending rates on loans.

Banks May Shake on MPC’s CRR Move – Cardinalstone

CBN Quarantines ₦2.3 Trillion from Banks’ Deposits in 9 Months