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“How Banks Make Free Money From Govt. Funds” – CBN Governor

By Henry Boyo

The oppressive impact of the myriad
charges on the transactions of every owner of a bank account in Nigeria
was subject of discussion, in this column in recent weeks. Media reports
have also suggested that these charges, may contribute trillions of
Naira income for banks annually. Indeed, the income from retained stamp
duty charges, alone, may have exceeded N6 trillion, if figures bandied
by NIPOST and agents are ultimately verified.

The substantial
incomes from bank charges, invariably, supplement hundreds of billions
of Naira income from the regular and extremely profitable business of
granting loans to the CBN, States and Federal Governments and several
businesses and account holders nationwide.

The above title “How Banks make Free Money from Government Funds” (
was first published soon after key decisions made at CBN’s MPC No. 90
of 22/23 July 2013, were announced. Notably, over 5 years thereafter,
the question still remains, whether or not the oppressive, financial
absurdity, which incumbent CBN Governor Sanusi Lamido Sanusi condemned,
in 2013, still prevails today? 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 N1.3trn or so sitting
in banks and belonging to government agencies. Now basically, they
(these funds) are at zero percent interest, while banks are lending
about N2trn to the government and charging 13 to 14 per cent! 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 percent; so why would I go and lend to
anyone?” (Lamido Sanusi, CBN Governor, July 23, 2013)

“The above
statement, which corroborates views regularly canvassed in this column,
was Sanusi’s defence of CBN’s Monetary Policy Committee’s decision to
raise the existing CRR (Cash Reserve Ratio) of 12 per cent to 50 per
cent on all public funds, domiciled in commercial banks, in order to
reduce the inflationary threat from aggressive credit expansion by

“Invariably, larger cash deposits create liberal
opportunities for banks to leverage on such deposits, to expand credit
and thereby increase public and private sector spending, which may,
inadvertently, drive higher inflation rates.”

“Thus, this latest
requirement for banks to hold higher cash reserves is really an
admission that the existing 12 per cent CRR, unduly, instigated credit
expansion and drove higher inflation rates.” “Some critics may however,
regard the much higher CRR as inappropriate, since it would also further
reduce the already inadequate credit to cash beleaguered businesses.”

column has, consistently drawn attention to the patently reckless
strategy of banks lending their so-called surplus funds (excess
liquidity) at atrocious interest rates to the same CBN, which
ironically, induced the systemic excess cash supply!!

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

“Nevertheless, 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 across board….” Consequently, if surplus cash deposits persist
despite the new measure, CBN would further increase its already
oppressive CRR beyond 50 per cent for both public and private sector
deposits; predictably, this may drive interest rates beyond 30 per

“This writer has consistently decried the foolhardiness of
government’s borrowing back its own cash deposits with banks, at
extortionist interest rates and consequently advised instead that it
would be more businesswise, for Ministries, Departments and Agencies to
domicile their monthly naira allocations, internally with CBN.
Regrettably our external debt strategy also follows the same
self-oppressive model of borrowing what one has in undeniable excess!”
(see for “Will you
Borrow Back Your Own Money and Pay 17 per cent Interest? …Ask CBN!” –
27/12/2004 and “MPR Hike: Failure of CBN’s Monetary Framework”,

“All the same, Sanusi’s new directive of 50 per cent
CRR for government deposits is clearly, an uneasy half way measure, and
critics may wonder why the CBN Governor cannot, in his characteristic
style, take the bull by the horns, and demand that ALL government funds
should be banked with CBN!”

“Invariably, total domiciliation of
Government revenue in CBN, will lead to a significant contraction in
systemic cash surplus, and thereby restrain inflation; regrettably,
however, cost of funds to businesses may not fall significantly if
government remains actively in competition with the real sector for both
long and short term loans.”

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

“In its place, minimal, socially
and industrially supportive, inflation rates will evolve with lower
single-digit interest rates in tow! The naira will become much
stronger, and eliminate any remote possibility of subsidising fuel
prices, thus achieving the erstwhile seemingly impossible task of
benignly deregulating fuel price, so that, hundreds of billions of naira
saved can be ploughed into critical social infrastructure and positive
social welfare programs.”

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

Postscript April 2019: 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.

however, TSA implementation and 50 per cent CRR still did not remove
the perceived liquidity surfeit in commercial banks, as the secluded
Government funds filtered into the open money market the moment MDAs
made expenditures from their treasury allocations. Indeed, the Bankers’
Committee Chairman had even declared that banks’ liquidity position was
not seriously affected by the reductions in CRR. Inexplicably however,
after the MPC No 103rd meeting, on 23rd September 2015, CRR was reduced
to 25 per cent for all public and private sector deposits and later to
22.5 per cent in March 2016. Thereafter, CBN’s CRR, MPR and liquidity
ratios remained unchanged for well over 24 months, despite the attendant
disruptive economic impact, until after the MPC 123rd meeting in 2019
when the MPR alone was singled out for marginal reduction from 14 per
cent to 13.5 per cent!

Despite these subsisting harsh policy
rates, CBN has continued to mop-up perceived Naira liquidity surplus at a
rate which often correlates with Government’s annual fiscal plans!
Consequently, CBN may have been compelled to pay high counterproductive
double-digit interest rates to banks, in order to remove close to N9.0tn
perceived surplus liquidity from the system in 2018! Invariably,
conversely, the banks may have earned close to N1tn from such interest
payments in 2018.

Instructively, however, banks have continued to
post humongous profits annually with the prevailing business model;
inexplicably, however, businesses in the productive sector have
continued to wail.

Source:- Independentng


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