Why MPR, CRR Hike Will Be Bittersweet Experience For Banks —CBN

MONEY MARKET
By China Nwokoji

Godwin Emefiele, CBN governor
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THE Central Bank of Nigeria (CBN) has explained that the decision to raise interest rates to 15.50 per cent and as such, the cash reserve ratio (CRR) to 32.5 per cent, is likely to positively impact banks’ bottom line.

Speaking at a post-MPC hybrid media briefing to unravel the facts behind the decisions, the Director, Banking Supervision of the CBN, Haruna Mustapha, said high interest rate would boost banks’ interest income, adding that interest on government securities would go up and also add to banks’ non-interest income.

According to him, banks would reprice loans as interest rates rise.

Mustapha said that “banks will make more profit from interest charged on loans and will reprice existing loans to borrowers.”

This, according to him, “will be transferred to bank customers and this will add to the cost of borrowing.”

He noted that “interests on government securities will also go up,” while noting that the CBN has given approval to banks to increase interest on savings deposits to 30 per cent.

“We increased it from 10 per cent to 20 per cent and it stands to reason that since we hiked MPR on Tuesday to 15.5 per cent, it will change the equation. The effective date is September,” Mustapha said.

Mustapha expressed hope that the latest increases in MPR and CRR could be the silver bullet needed to address other macroeconomic challenges facing the country.

He said inflation remained the biggest elephant in the house, and needed to be defeated in an aggressive manner.

Mustapha said though the impact of the CBN monetary policy decision would be, “bitter-sweet” the overall objective was to rein in inflation.

He said the CRR serves both monetary and prudential functions and would have far-reaching implications for the economy going forward.

He said the decision of the MPC was complementary to what had been done to rein in inflation, stressing that, “they are not conflicting policy goals, they are complementary and they are working in line with our earlier intention.”

However, CBN Director, Monetary Policy Department, Dr Hassan Mahmud, clarified that the CBN was not following the bandwagon by raising rates because other countries were doing so.

He said that rather, rate increases were affected according to the peculiarities of the economy, stressing that liquidity surfeit in banks and pent-up demand would always evoke rates hike.

Mahmud insisted that the volume of money in circulation was too much as this would continue to drive up prices, adding that the main objective of the CBN’s aggressive rates hike was to make the cost of funds more expensive.

He also said as financing of government remained a major issue, the CBN was, “very mindful of this and making sure that this is highly moderated because it is also fuelling the liquidity that we have within the system.”

On her part, the CBN Director, Trade and Exchange Department, Dr Ozoemena Nnaji, said the Central Bank was ramping up its policy on increasing foreign exchange supply by looking at other avenues of attracting investment from the diaspora into the Nigerian economy.

She said, “As long as we keep increasing supply, we will continue to see the narrowing of the gap. You also know that we have an election coming up and some of these elections would require some kind of exchanges and things but we are ramping up our supply and that Is what the Central Bank is doing so that supply can go up and the differential in rate will continue to narrow.”

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Analysing the decisions, dealers at Cowry Assets Management Limited said Nigeria’s Central Bank’s aggressive monetary policy tightening measures would see more liquidity crunch in the system as an additional regulatory requirement.

The committee justified its action and said there was the need to consolidate the effects of the previous two rate hikes, stating that it believes that an aggressive rate upsurge would reduce capital outflows, possibly attract capital inflows, and strengthen the Naira.

Meanwhile, at its last meeting which was held in July, committee members stressed the need to further tighten policy in order to stop the inflationary trend from continuing unabatedly.

As such, committee members voted to raise the monetary policy rate by 100bps to 14.0 per cent.

Also, there was the emphasis by the committee on the likely impact of lingering uncertainty from supply chain bottlenecks as a result of the Ukraine unrest and the detrimental effect the decision would have on global trade, sustained rise in inflation globally in the face of interest rate increases by Central Banks globally, as well as the likely attendant impact of another recession on majorly fragile economies and emerging markets who are still healing from recession.

“What we can deduce from the hawkish stance of the Central Bank in the wake of its inflation-served a’ la carte lies in the policy impact of a rate hike to arrest inflation in the short-term period, especially at the point when there exists a disconnect between the nominal anchor rates and the market rates.

Nevertheless, it is not far-fetched to say that it is a fear that, obviously, high commodity prices in Nigeria are primarily driven by unresolved structural factors such as insecurity, exchange rate fluctuations, and high energy costs.

“From the foregoing, we assert that the decision will, for the short-medium term, condense capital flights out of the economy and on the other end of the curve, drive a possible rise in dollar inflows.

“Also, the decision to raise interest rates to 15.50 per cent is expected to fight inflationary pressures and give incentives to Nigerians to save.

“On the contrary, a liquidity squeeze in the financial system is inevitable as the cost of borrowing to both the public and private sectors would see a surge which may bring about a slowdown in the rate of economic activities, a decline in aggregate spending and consumption which is likely to bring about a sluggish gross domestic product (GDP) growth,” the Cowry Assets experts stated in a note to clients.

According to him, the MOU was particularly significant not just to the Agency but to the MSMEs ecosystem.

Specifically, Fasanya observed that there was no doubt that Fidelity Bank is one of the few commercial banks in Nigeria that have shown immense interest in providing support to the large MSME community.

“I am very aware of some of your products purposely designed to serve the MSMEs. This explains why the Agency is very excited entering into this relationship that we believe will help change the narratives of the sub-sector.

“The Agency is confident that the Memorandum of Understanding will be kept active providing opportunities for reviews at intervals,” he stated.

The number one challenge, according to him, that the MSMEs have complained about over time as a major constraint is the access to funds to either start or grow their enterprises.

Fasanya made reference to the 2020 survey on MSMEs, jointly conducted by SMEDAN and the National Bureau of Statistics, which showed that limited access to funds was the biggest challenge at 27.9 per cent, far ahead of other challenges such as weak infrastructure, inconsistent policies, among others.

The study also revealed that most of the MSMEs (59 per cent) relied heavily on personal savings to start and grow their businesses.

While banks are supposed to spearhead a funding revolution for businesses, especially the MSMEs, the general trend is that most commercial and even development banks shy away from funding enterprises captured within the MSME space, Fasanya lamented.

Worst hit, according to him, are the Nano and Micro enterprises. According to the World Bank, Nigeria’s financing gap for MSMEs is estimated at $158.1 billion and it is in this area that SMEDAN is eagerly seeking partnerships to close up the gap, the SMEDAN DG stated.

Nevertheless, “We are aware that some banks have come up with innovative solutions to provide tailored financing windows to viable enterprises within the MSME space.

“Our findings have, however, revealed that Fidelity Bank loan portfolio to MSMEs is one of the biggest from the commercial banks. The Agency is aware of the risk component hence, our proposal/offer to provide BDS to some of the MSMEs that have benefited from your products across the country.’

For emerging markets such as Nigeria, access to capital should be fast and seamless.

Digital tools are improving the speed and ease with which credit can be disbursed and SMEDAN is willing to partner with as many funders as possible.

Fasanya further said that the day was therefore very memorable not just to SMEDAN but also to the entire MSME community and other enablers as the expectations are high that the narrative would soon change especially as it concerns MSME funding.

“I am confident that the support by Fidelity Bank to MSMEs will allow other funding institutions to follow your trail,” he further emphasised.