Liquidity squeeze: Banks bear brunt of oil price fall

Nigerian banks in the last one year, operated under a harsh business environment and tight monetary policy of the Central Bank of Nigeria (CBN). In this report, AMAKA IFEAKANDU looks at the major factors that impacted on the sector’s activities.  

The harsh operating environment in the country following the dwindling prices of crude oil in the international market has continued to impact on the operations of the nation’s banking industry.
The situation which resulted in decline in revenue base of the federal government affected liquidity in the financial system, causing the cost of borrowing among banks to sky rocket.  Recently,  the Nigerian Interbank Offered Rates (NIBOR) retained its upbeat stance as financial system liquidity remained low, partly on the ripple effects of previously auctioned Federal Government Bonds worth N105 billion.

Consequently, NIBOR for overnight funds, one month, three months and six months increased to 11.62 per cent (from 8.04 per cent),  12.0 per cent  (from 9.41per cent), 13.63 per cent  (from 11.47 per cent) and 15.12 per cent (from 12.97 per cent) respectively.
Apart from unfriendly macro-economic policies, Nigerian banks also operated under pressure due to the tightening of the monetary policy instance by Central Bank of Nigeria (CBN) to ensure stability in the financial system.                                        The apex bank also  adopted  accommodative monetary policy  since  July 2015 with the intention of  addressing growth concerns in the economy, effectively freeing up more funds for Deposit Money Banks by lowering both Cash Reserve Ratio and Monetary Policy Rate, with excess liquidity arising from the lower CRR warehoused at the CBN.

Although banks were expected  to access these funds by submitting verifiable investment proposals in the real sector of the economy, the  funds are yet to  impact on the market because the CBN was still processing some of the proposals submitted by the Banks. However, in the first episode of easing which resulted in injecting liquidity into the Banking system, the nation’s Banks did not grant credit as envisaged because of rising non-performing loans (NPLs),
mainly in the oil sector. Available data from CBN showed that credit to the private sector grew by 1.45 per cent in February 2016, with annualized growth rate of 8.70 per cent, below the benchmark growth of 13.28 per cent. Expressing concern over the dismal performance of growth in credit to the private sector, the CBN noted that even at that the credit went primarily to low employment elasticity sectors of the economy.

This had a significant negative impact on output growth.
The apex bank said that  the delay in passage of the 2016 Budget further accentuated the difficult financial condition of economic agents as output continues to decline due to low investment arising from weak demand, adding that the cautious approach to lending by the banking system in the last one year underpinned by a strict regulatory regime conditioned by the Basel Committee in the post global financial crisis era has further alienated investors from access to credit as banks prefer to build liquidity profiles in anticipation of government borrowing.

However, the withdrawal of about N2 trillion from the banking system following the implementation of the Treasury Single Account (TSA) by the federal government  drained  liquidity in the banking environment and impacted on available funds banks needed to use for banking transactions. This single decision placed some banks in a tight corner as majority of them introduced different strategies to mobilise deposits from customers.                                    But as the government is still contending with the shortfall in its revenue due largely to the southward movement of price of crude oil and which is now forcing government to think of how to increase its foreign exchange earnings and how best to fund its budget deficit, the banking system has become the latest to feel the unfriendly harsh realities of the slump in the oil price.

The reason for this according to analysts  is not far-fetched as it points in the direction of the banking system exposure to the oil and gas sector.
Besides the threat of the volatility in the oil market to the nation’s foreign exchange earnings and the scarce foreign exchange, especially the dollar, which has forced  the Central Bank of Nigeria (CBN) to introduce policy that discourage importation, particularly of goods that could be produced locally, the attendant pressure on the naira has continued to haunt the commercial banks in the country.
The  CBN, had  in a bid to salvage the Naira from speculators scrapped the official window where it sells dollar to end users through banks twice a week.
The scrapping of official forex market window and banning  of  foreign exchange for the importation of 41 items  led to the scarcity of foreign exchange and further depreciation of the naira at the Bureaux De Change segment of forex market and parallel market. The policy also created room for round tripping as some of the forex purchased at official rate were diverted to parallel market for profit making due to the wide gap between the official and unofficial rate.  The expectations of likely devaluation of the Naira has continued to mount pressure on the Naira/Dollar exchange rate at the alternative forex market segments. Although, the Central Bank’s clearing rate and interbank exchange rate remained fixed at N197 and N199.10 respectively, the Bureau De Change market segment witnessed further Naira depreciation by 3.64 per cent  from N330 per dollar  to N342/ dollar. Also, the local currency weakened by 3.58 per cent from N335 to a dollar  parallel (“black”) market to N347 to the Dollar.  Similarly, the forwards market suggest likely future depreciation as the Naira weakened by 0.51 per cent, 1.66 per cent, 3.19 per cent and 0.26 per cent  to N201.46/ Dollar, N207.07/Dollar, N215.77/Dollar and N221.71/Dollar for the one month, three months, six months and 12 months contracts respectively.
Meanwhile, the federal government recent directive for oil marketer to source for foreign exchange from secondary market following  the deregulation of the downstream  oil sector will impact negatively on the naira, leading to further  depreciation  of the local currency at the parrallel forex market. Financial analysts said that in view of the resilient pressure on foreign exchange, slowing GDP growth rate and increased inflation outlook, particularly from the petrol price deregulation and likely Naira devaluation, it is expected that at the  Monetary Policy Committee meeting this Month, there may be  an upward adjustment in the Monetary Policy Rate from its current position of 12 per cent to 12.5 per cent,  while still maintaining the corridor. This never happened. They also expected an adjustment in the Cash Reserve Ratio from 22.50 per cent to 25 per cent  particularly with the expected impact of the budget implementation on money in circulation, this also did not happen.

Meanwhile, the apex bank had in the last one year come up with different intervention funds in agriculture to revive the nation’s economy and enhance foreign exchange earnings.
The recent joint launching of the Anchor Borrowers Programme  in Kebbi state by CBN and the banks chief executives  represents the latest effort to tackle problems of  foreign reserves and the value of the naira, due to the  huge amount of foreign exchange spent on food importation.  Anchor Borrowers’ Programme (ABP) aimed at creating an ecosystem to link out-growers (small holder farmers) to local processors.

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