There were strong indications Thursday that the 75 per cent Cash Reserve Requirement (CRR) imposed on public sector funds in banks by the Central Bank of Nigeria (CBN) was causing disquiet in the industry. THISDAY also learnt that banks are also working out modalities to cover their position in view of the anticipated temporary liquidity squeeze in the industry. Some treasurers of banks who spoke to THISDAY also argued that the hawkish stance of the CBN's Monetary Policy Committee (MPC) would contract growth as well as business opportunities in the banking sector. However, while some financial market analysts argued that the MPC decision would douse the likely impact of excess liquidity as a result of the redemption of the N1 trillion series one, two, three and four bonds by the Asset Management Corporation of Nigeria (AMCON) last December, others noted the fact that AMCON gave the bond holders the option to decide if they wanted to be paid in cash or treasury bills had addressed such concerns. The MPC had at the end of its meeting on Tuesday raised banks' CRR on public sector deposits from 50 per cent to 75 per cent. It, however, left the CRR on private deposits unchanged at 12 per cent. CRR is a monetary policy tool used to set the minimum deposits commercial banks must hold as reserves rather than lend out. The MPC listed the increasing divergence between the official and Bureau De Change exchange rates, inflationary threats, depletion of fiscal buffers, leakages, as well as declining foreign portfolio inflows as the reasons for its stance. Other key policy rates, however, were kept unchanged, with the Monetary Policy Rate (MPR), the benchmark for interest rates, maintained at 12 per cent, while the liquidity ratio was held at 30 per cent. The 50 per cent CRR on public sector deposits that was imposed in August 2013 had led to the withdrawal of an estimated N1 trillion from the system and a spike in interbank rates of approximately 800 basis points. Since then, deposit money banks have been grappling with the tough regulatory regime and this has been predicted to affect their 2013 full year financial performance. A treasurer of a bank, who preferred to remain anonymous, said: "This will impact negatively on industries and businesses. So it would lead to a hike in interest and lending rates. "The decision by the MPC may lead to high risk of loan defaults and poor access to credit in a country where everyone is complaining about lack of funds." He insisted that the aggressive monetary tightening stance of the apex bank clearly contradicts the federal government's goal of economic growth and job creation. To the Managing Director/Chief Executive Officer, Financial Derivatives Company Limited (FDC), Mr. Bismarck Rewane the impact of the decision on the money market would be a "shock effect" in the short-run and a return to equilibrium rates within six weeks. He added: "Approximately N750 billion will be debited on February 4 . This amount is equivalent to 5.09 per cent of M2 (broad money supply). "Therefore, we expect an initial spike of approximately 400 basis points before settling to a 1.5 per cent increase in the effective cost of funds for the banking system. Banking net interest margins and profitability will be affected whilst their liquidity will remain unimpaired. "The federal and state governments will face some difficulty in extracting commissions from bankers." On his part, London -based Economist at CSL Stockbrokers, a division of First City Monument Bank (FCMB), United Kingdom , Alan Cameron , who said he had anticipated the CBN would tighten liquidity conditions later this year, opined that the controversy surrounding the unremitted oil revenue by the Nigerian National Petroleum Corporation (NNPC) was "the main reason for bringing forward the CRR hike." Continuing, Cameron added in an e-mail interview with THISDAY: "A higher CRR will hurt the banking sector. We expect to move towards a 100 per cent CRR on public sector funds between now and the end of Sanusi's term. A separate report by CSL Stockbrokers Limited noted an increase in the CRR would be felt more by the Tier 2 banks, saying it exposes them to capital adequacy challenges. However, Emerging Markets Strategist at Standard Bank , Mr. Samir Gadio noted that the increase in the CRR on public sector deposits would allow the CBN to gradually achieve "the liquidity management benefits of the proposed - but never fully implemented - single treasury account reform through the backdoor." Meanwhile, Sanusi has said his successor's main challenge will be to maintain the independence of the CBN and any undermining of that may hurt the economy. Speaking to Bloomberg TV on the issue yesterday at the World Economic Forum , Davos , Sanusi said: "If anyone tampered with it (CBN), the markets would punish the economy." "It's a very strong institution that needs a strong leader and I think one of the things we've achieved over the last four or five years is to show that we can have an independent central bank in Africa ." Sanusi, 52, will leave his position in June this year when his contract ends. "It's extremely important from the fiscal side, it's extremely important from the governance side, that the governor of the central bank is able to speak independently of political authority and raise an alarm and concerns, and give constructive criticism and advice," he said. President Goodluck Jonathan hasn't yet to decide on who will replace Sanusi. Jonathan hasn't solicited his advice on a potential successor and he hasn't given it either, Sanusi said. The CBN governor said he had "no fears" of tightening monetary policy further to keep inflation down and to stabilise the currency. The bank can increase its key interest rate from 12 per cent and the cash reserve requirement on public sector funds to 100 per cent if needed, he said. He said: I don't think we are at the end of possible tightening cycles, but I do think that the scope for further tightening is getting narrower and narrower. "We do need to rely more on other instruments." Inflation will be kept within a band of six per cent to nine per cent this year, controlled mainly by monetary conditions, Sanusi said. "Government spending has not been huge, the real challenge has been on the revenue side and on the foreign-exchange side," Sanusi said. "I see no reason why from 2015, Nigeria cannot move to within the range of South Africa's three per cent to six per cent, or four per cent to seven per cent" for inflation, he said. While Nigeria's bank earnings will be hit in the short term by the monetary tightening on public funds, it will encourage them to attract more private sector deposits, said Phillips Oduoza, Chief Executive Officer of United Bank for Africa Plc (UBA). "In the short run, it is going to affect every person, but in the long run, I think the system is going to be better off," Oduoza said in a separate interview in Davos yesterday. "Financial inclusion is very, very key. We have a significant number of people that are not in the financial system." Sanusi added that he's unconcerned by "personal relationships", given the backlash he's faced since writing a letter to Jonathan alleging the state oil company had withheld $49.8 billion in revenue. The letter sparked a public outcry when it was leaked to the press last month, with Jonathan criticiaed for failing to tackle corruption. THISDAY had exclusively reported that Jonathan has asked Sanusi to resign over the leaked letter. He said: "We meet at work and people should do their job. I do hope that the president will be happy if I do the job very well." The Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala , told journalists on December 18 , that a reconciliation of the accounts showed unaccounted oil receipts from the NNPC stood at $10.8 billion . The NNPC said it spent the funds on pipeline repairs, fuel subsidies, crude losses and reserve fuel.
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