Naira devaluation: CBN withdraws N300bn from circulation

Posted by admin CBN (Central Bank of Nigeria), Headlines Monday, December 8th, 2014

BY BLAISE UDUNZE

The Central Bank of Nigeria (CBN) has withdrawn N300 billion from the banking system to support the naira, which has been hit by falling oil prices.

The development made the overnight rate to spike to 30 per cent on Friday, up from 12 per cent last week.

This was as overnight lending rate more than doubled to a record high of 70 per cent on Monday, amid a cash squeeze after the apex bank soaked up naira liquidity to support the ailing currency, dealers said.

CBN is struggling to prop up the naira, which has taken a hit over the past few months as falling oil prices shook confidence in the assets of Africa’s leading energy producer. Oil hit a five-year low on Monday.

“Banks are scrambling for funds to cover their positions,” one dealer said.

The naira eased 1.1 per cent on Monday, below the central bank’s new target since an 8 per cent devaluation two weeks ago to save declining foreign reserves, despite the bank selling dollars onto the market.

“The tighter monetary policy – higher cash reserve requirement as well as higher policy rate – will filter through to the real economy via an increased cost of borrowing,” said Melissa Verreynne of NKC Independent Economists, adding that the spike in overnight rates was likely to be shortlived.

The central bank, which is trying to curb naira liquidity, recently hiked banks’ cash reserve ratio for holding private sector bank deposits to 20 per cent, from 15 per cent previously.

The bank also raised its benchmark interest rates by one percentage point to 13 per cent and devalued the naira by eight per cent, as it sought to stem losses to its foreign reserves from defending the currency against weaker oil prices.

The deposit brings total sterilised private sector funds to N1.47 trillion, which is 9.72 per cent of total banking deposits and 8.87 per cent of money supply. The total private sector deposits now stand at N7.38 trillion.

A consultancy firm, Financial Derivatives Company (FDC) Limited, said the additional CRR was expected to push up interbank rates by about 200 basis points in the short term.

Its Managing Director, Bismarck Rewane, said: “Borrowing costs will rise and banking sector profitability is set to take a hit as net interest margins diminish further.”

A comparison of core regulations across key banking systems in sub-Saharan Africa revealed that the banks operate under some of the toughest regulations, which have led to decline in earnings.

Report from Renaissance Capital (RenCap,) an investment and research firm, said Nigeria’s blended CRR, at 31 per cent, is almost three times that of Ghana, at 11 per cent, and six times those of Kenya and Rwanda, at 5.25 per cent and 5 per cent, respectively.

The minimum Capital Adequacy Ratio (CAR) is 15 per cent for international banks (10 per cent for local banks), compared with 10 per cent in Ghana, 14.5 per cent in Kenya and 15 per cent in Rwanda.

“We expect the SIB rules in Nigeria to indicate a minimum CAR of 15 per cent for SIBs, with tier 2 capital capped at 25 per cent of total qualifying capital. Above the 15 per cent, SIBs will be required to maintain a one per cent capital buffer that comprises entirely of tier 1 capital, which will raise the minimum CAR for SIBs to 16 per cent.

The first set of identified SIBs include FirstBank, Zenith, UBA, GTBank, Access, Ecobank Nigeria, Diamond and Skye Bank,” it said. The minimum capital requirement is $150 million for local banks and $310 million for international banks in Nigeria, compared with $15 million in Ghana and $11 million in Kenya.

Basically, the lower end of the absolute minimum capital requirement for commercial banks in Nigeria is 10 times more than the minimum for the next closest country, Ghana.

According to RenCap, other regulatory constraints the Nigerian banks face include AMCON-introduced levy following its acquisition of non-performing loans from the banks.

Last year, a reduction in commission on turnover was announced. This is a fee charged to retail banking clients on transactions, and the measure is very much oriented towards consumer protection.

The permissible fee was initially reduced to 0.3 per cent of total monthly debit transactions, from the previous 0.5 per cent, with a timeline of reducing the cap further to 0.2 per cent in the year and 0.1 per cent in 2015, before finally abolishing it in 2016. The lower commission on turnover has had a negative impact on non-interest revenue across the sector.

-Sunwp_posts