Nigeria central bank has announced the introduction of what it calls the “Nigeria Special Bills” in what it claims is an effort to deepen the financial markets.
The apex bank also claims the instrument avails it with an additional liquidity management tool for Nigeria’s financial system.
In a disclosure, signed by the Director of Banking Supervision of CBN, Bello Hassan, and seen by Nairametrics, it said the Special Bills contained the following features
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- It has a Tenor of 90 days
- It comes with Zero coupon, as the applicable yield at issuance will be determined by the CBN.
- The instrument will be tradable amongst banks, retail and institutional investors.
- The instrument shall not be accepted for repurchase agreement transactions with the CBN and shall not be discountable at the CBN window.
- The instrument will qualify as liquid assets in the computation of liquidity ratio for deposit money banks.
The central bank, yanked off retail and instituional investors from accessing the highly lucrative Open Market Operations bills where yields were previously high. It is unclear if this bills will replace the OMO bills or is permamnent.
What this means: With the introduction of the new Special Bills, the CBN aims to securitize the excess Cash Reserve Requirement balances of local banks by offering them short-dated zero-coupon special bills.
- Since May 2020, the central bank has sequestered over N6 trillion as part of its CRR debits of the accounts of deposit banks.
- Nigeria’s central bank expects commercial banks to maintain a loan to deposit ratio of 65% and thus debits the accounts of commercial banks who do not meet this target for excess deposits.
- According to Nairametrica analysts, this new bill provides the banks with an instrument which they can offer to investors in exchange for a return. For example, the banks can sell the “Special Bills” to investors who need fixed income instrument.
Why it matters: The claims the Special Bills is in line with the “CBN’s goal of ensuring optimal regulation of systemic liquidity and promoting efficient financial markets in support of economic recovery and sustained growth,” however Nairametrics undertands there could be more to this.
However, Nairametrics believes pressure from the banks who have complained about the frequent debits may have resulted in this new Special Bills. In some of the earnings calls listened into by Nairametrics, banks have often cited the drop in their interest income and margins.
What they are saying: A part of the recent CBN disclosure read thus: “The Central Bank of Nigeria (CBN) hereby announces the introduction of Special Bills as part of efforts to deepen the financial markets and avail the monetary authority with an additional liquidity management tool.”
What to expect: The CBN is expected to further clarify the issue and pricing of the recent instrument in coming days.
The CBN is doing a good job with regulating financial institutions, but should be cautious not to overdo it. However, it is obvious that the ability of the financial sector to spur the larger economy remains very low despite the best efforts of the CBN. Decades of misappropriation and embezzling of funds meant for infrastructural development at all levels, are taking their toll on the economy and there are no shortcuts to bridging this infrastructural gap. Even the current government seem overwhelmed, while the impact of her borrowings for capital expenditures remains very insignificant. We are now reaping the end results which include poor business survival rates, lack of effective production value chains, skyrocketing costs, poor production potential and competitiveness. These are evident, even in the performance of most top publicly quoted local manufacturers in the country who have seen the size of their businesses shrink significantly over the years due to exploding costs etc, thereby limiting their capacity to expand into and compete in other regional markets. Even when a handful of these companies see occasional growth in certain performance ratios, it still lags behind the rate of the local currency devaluation. For SMEs in production, it’s more of a battle for survival than anything else.