CBN and the lending rate

THE Central Bank of Nigeria (CBN) recently issued what may be termed a new regime of monetary policy anchored on the declaration of new monetary policy rates which the commercial banks are expected to observe with every sense of responsibility. From April 14, 2009, lending rate by commercial banks must not exceed 22 per cent while the deposit rate is capped at 15 per cent.

In order to ease the cost of sourcing funds by commercial banks from the CBN, the rate has been brought down from 9.75 per cent to 8.0 per cent. Besides, and to further ease the monetary policy environment and expand the scope of lending by the commercial banks, the CBN also overhauled its rules and regulations guiding the management of cash and liquidity by the commercial banks. For example, the liquidity ratio which each bank must observe must not fall below 25.0 per cent (formerly set at 30.0 per cent) while the cash reserve requirement has been reduced from 2.0 per cent to 1.0 per cent.

The situation now created will give the commercial banks more room to respond to their customers who need cash and at the same time more customers can be given loans. Banks can even increase their loans to deserving customers. Indeed, the CBN has responded to the need of the country for a lower cost of funds by stipulating a cap on lending rates (22.0 per cent).

The Central Bank of Nigeria must be commended for taking this decision long awaited even before the global financial meltdown. Easing the credit situation to enable production to improve across the country and across the spectrum of the economy removes Nigeria from the siege-economy framework foisted on the country by a myriad of conditions. Prominent among these were the corruption and spending-mania of the state and local governments coupled with the lack-lustre and slow-pace performance of the Federal Government in addressing critical bottlenecks in the economy.

The CBN faces a major challenge especially in a situation where global demand for Nigerian products has retreated. Demand for our products must be encouraged moreso as a vast amount of national resources has been either unemployed or under-employed. This much is evident in a growing capacity under-utilisation and possibly in the bourgeoning inventory in companies and all because credit has become rather expensive and hard to access. Rather than respond to the situation by developing new products to handle the situation given unreasonable prohibitive interest rates they charge, the penchant of the commercial banks is to open branches overseas in Africa, Europe and the United States. Indeed, the initial deposit for opening an account in some of our banks is hundreds of thousands of naira.

The new interest rate regime will stimulate the economy and possibly help to refocus the banks. Rather than opt for fiscal stimulus, the CBN has engineered a response from the other end of policy, which is more appropriate at this point given the weakness of fiscal policy.

However, the pressing question is whether the CBN should directly intervene in the determination of interest rates even at this point in our economic experience. Rail-roading the Bankers Committee into the framework as if they were part of the decision is not convincing and it looks like the old trick of the Obasanjo presidency. Bankers do not enjoy being hamstrung in matters of deciding how much they sell their products as this amounts to price control. It is worse when the regulator does not control the price at which they buy their inputs, ranging from labour and utilities to the taxes on infrastructure. The danger in what the CBN has done is that this may in the long run degenerate into a clamour for the control of input prices and who knows where all that will lead to if the financial meltdown does not abate in the short to medium-term range.

The sanctions the CBN promised defaulters and recalcitrant elements in the fold may be well-intentioned but may not be wise. There are some bank charges for services which the banks cannot be expected to provide free. This includes administrative charges and the smaller the loan the more burdensome. This is not to mention the problem of risk which the global Bassel Accord advises banks to handle with utmost seriousness, because poor risk management by banks is at the root of bank failures. How much freedom is allowed banks in the context of these global accords, which must be domesticated, remains to be seen.

Paying sanctions and fines has never been a problem or a deterrent for Nigerian banks as they turn in billions of profit, pre or post-tax annually. The threat of a sack for the Managing Director can also be ignored given the profit expected from a particular decision. What the CBN needs is what it has never been able to accomplish - efficient banking supervision. There is hardly any alternative to this if our banking system must improve. Banning interest-rate-violating banks from the Retail Dutch Auction System (RDAS) does not also show a correlation in terms of offence and punishment.

What all this amounts to is that there are dangers ahead in the implementation of this policy which the CBN must not ignore and should actively place under its watchful eyes. All said, the overriding question is what happens to inflation which underlying indicators show is on the rise. With the ease in credit we certainly cannot afford a return to a two-digit inflation rate as has become the order of the day. If the CBN policy is to work, then fiscal responsibility and discipline cannot be toyed with and the finger is pointing at corruption which this administration is doing too little to curb. Besides, the control foisted on interest rates must be short-term, to be brought to an end before it damages the economy beyond easy mending. Instructively, the market is yet to respond to the policy. Not much lending has been going on in the banking sector. What has been lacking is an efficient co-ordination of our monetary and fiscal policies and measures. The Nigerian economy must be free, guided but not controlled.