Banks N22 trillion Claims with Central Bank seen funding largest intervention funds in Nigeria’s his

This follows the central banks 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 Banks 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.

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 Nigerias 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.