The total claims Nigerian commercial banks have against the Central Bank of Nigeria rose to N21.5 trillion as of June 2022 compared to N19.9 trillion as of the end of December 2021.
This represents an 8% increase in the last year or a N1.6 trillion increase in 6 months.
Bank deposits with the central bank have more than doubled since 2019 rising from about N9.9 trillion in December 2018 to about N21.5 trillion in June.
This follows the central bank’s policy of sequestering bank deposits as cash reserve requirement debits (CRR).
The deposit with the central bank is further divided into “currency”, “reserve deposits” and “other claims” made up of N513.4 billion, N11.8 trillion, and N9.1 trillion respectively.
CRR Debits
The Central Bank of Nigeria introduced a policy that forces banks to retain up to 30% of their deposits in cash reserve requirement, meaning that the deposits are not accessed by the banks for loans and advances.
- The policy which started in 2019 has drawn veiled criticisms from most of the banks who have cited a drop in their interest income as a major consequence.
- The central bank initiated the policy as part of its efforts to curb money supply, especially those channelled towards funding forex purchases and not to productive sectors of the economy.
- Thus, banks that do not meet its loan to deposit ratio targets have their bank deposits debited by the central bank.
What does the CBN do with the money?
The apex bank does not officially reveal what it does with the money and since it does not publish its annual reports, it is often difficult to deduce.
- However, some economists who spoke to Nairametrics suggest it could be the major source of the Central Bank’s intervention funds in the economy in various sectors of the economy including the government.
- For example, provisional data from the CBN suggest Claims to the private sector and Net claims to the Federal Government are a combined N23.4 trillion.
- Claims to the Federal Government are stated at about N24.2 trillion (out of which Ways and Means is about N19.9 trillion) while the CBN owes the government about N11.8 trillion thus a net N12.3 trillion in claims from the FG.
- Meanwhile, credit to other sectors of the economy which includes credit to the private sector is provisionally stated as N11 trillion.
- Thus, the claims owed to the CBN by sectors in the economy could easily have been partly funded by the CRR debits of N21.5 trillion as the chart above depicts.
- Combined, the total loans to the public and private sector is the largest we have seen on record per CBN historical data.
CBN’s Intervention Funds
While the CBN does not state how it funds its intervention or development finance programs it often provides insights into how it spends money. At the last Monetary Policy Meeting communique it explained as follows;
- ABP – under the Anchor Borrowers’ Programme (ABP), the CBN has disbursed a cumulative of N1.01 trillion, to over 4.21 million smallholder farmers cultivating 21 commodities across the country.
- CACs -Under the Commercial Agriculture Credit Scheme, the CBN has disbursed a cumulative of N744.32 billion for 678 projects in agro-production and agro-processing.
- Real Sector Support – Cumulative disbursements under the Real Sector Facility for Manufacturers currently stands at N2.183 trillion for the financing of 414 real sector projects across the country.
- The funds were utilized for both greenfield and brownfield projects under the COVID-19 Intervention for the Manufacturing Sector (CIMS) and the Real Sector Support Facility from Differentiated Cash Reserve Requirement (RSSF-DCRR).
- 100 for 100 Policy -under the 100 for 100 Policy on Production and Productivity, cumulative disbursements under the intervention are about N68.13 billion for 48 projects, comprising twenty-six (26) in manufacturing, seventeen (17) in agriculture, three (3) in healthcare and two (2) in the services sector.
- Healthcare Sector -cumulative disbursements stood at N133.42 billion for 129 projects, comprising seventy-six (76) hospitals, thirty-two (32) pharmaceuticals, and twenty-one (21) other
healthcare services. - Power Sector -Cumulative disbursement under the NEMSF-2 currently stands at N254.46 billion. The money was given to Distribution Companies (DisCos) for their Operational Expenditure (OpEx) and Capital Expenditure (CapEx), under the Nigeria Electricity Market Stabilization Facility – Phase 2 (NEMSF-2)
- Metering – A further N47.82 billion has been disbursed under the National Mass Metering Programme (NMMP), for the procurement and installation of 865,956 meters across the country.
- Thus, according to the CBN, a total of N4.87 trillion has been disbursed by the Central Bank of Nigeria for its intervention or development finance programmes as of July 2022.
Why it matters
Large amounts of cash being sequestered have a three-fold impact on the Nigerian economy.
1) Capital Flow restriction: it restricts the amount of capital flow-through available for the economy, by sequestering funds banks are unable to support “viable” and productive private ventures through loans.
This restriction on loans means the economy is not able to grow in a meaningful manner. Lending to productive sectors such as trade and manufacturing tends to boost economic growth compared to funding government salaries.
2) Lost dividend for bank investors: Sequestered funds result in lost revenue for banks. Consequently, with div payout ratios ranging from 14% to 40%, this means retail investors are losing out on dividends
3) Capital Misallocation: finally, the suspicion that these sequestered funds are being used for interventions, simply amplifies the risk of capital misallocation. Banks as financial intermediaries are better placed to match liabilities with assets. This is done through extensive credit risk assessments to ensure once loans are created, funds are assigned to productive ventures
While Nigeria’s Central bank intervention has helped spur economic growth and saved tens of thousands of jobs, they are neither equipped to create nor administer retail credit effectively. This has been evidenced across the world.
- In Nigeria, this anomaly can be evidenced by the increasing suite of lawsuits now being instituted by the apex bank to recover funds.
- It also explains why we have seen a spike in the inflation rate as Nairametrics recently explained in this article.
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Slm