After months of forcing lenders to extend more credit, Nigeria’s central bank last week stunned markets with a measure that could result in the opposite response.
Governor Godwin Emefiele increased the percentage of deposits that lenders need to park with the regulator — and which doesn’t earn interest — by 500 basis points to the highest level in more than four years. By upping the cash reserve requirement to 27.5%, the central bank is draining lenders of the funds they would typically use to create loans.
“The Central Bank of Nigeria’s decision, designed to reduce excess banking sector liquidity in an attempt to curtail high inflation, clashes with its competing objective to stimulate lending,” Fitch Ratings said in a report on Wednesday. The “increase is an example of the kind of unpredictable regulatory intervention, seen especially since 2019, that poses challenges for Nigerian banks, one of the reasons for our negative sector outlook.”
The measure reduces returns banks could make from investing the capital or putting it to work through lending and comes after a blizzard of other regulatory changes that threaten profit. Banks have opened the lending taps since Emefiele threatened penalties for those who don’t, raising concerns of deteriorating asset quality and rising defaults.
Emefiele in July ordered banks to use 60% of their deposits for loans by Oct. 1, when the target was raised to 65%. At the beginning of January, banks also had to cut charges across a range of services from cash withdrawals to account-maintenance fees.
The governor said the hike in cash reserves, the first in nearly four years, is needed to mop up excess liquidity that has piled pressure on inflation, which reached a 20-month high in December. He said the move is consistent with the bank’s drive to bolster lending and jolt an economy growing at just over 2% a year.
But, the central bank may itself have opened the flood gates for excess cash to build up in the system.
In October, the regulator banned individuals and non-banking firms from buying high-yielding government securities known as OMO bills, leaving corporates and pension funds with few options to invest their money. About $10 billion worth of OMO bills mature in the first quarter, according to data compiled by Bloomberg.
The prohibition was part of the central bank’s efforts to discourage cases where individuals or companies would borrow money and then buy government debt or invest offshore instead of using the loans in projects that will generate economic growth.
“Banks are being pulled in two different directions,” said John Ashbourne, senior emerging markets economist at Capital Economics Ltd. “It is negative in the sense that it adds confusion. The central bank has set many goals for itself and that makes their actions unpredictable.”
Nigerian banking stocks have declined each day following the regulator’s decision, extending losses in the Nigerian Stock Exchange Banking 10 Index this week to 4.2%. Regulatory risk for Nigerian banks is among the highest in Europe, Middle East and Africa, Fitch said.
A spokesman for the central bank didn’t immediately respond to an email seeking comment or answer a call to his mobile phone.
“This is not the right time to push for more credit,” said Yvonne Mhango, a sub-Saharan Africa economist with Renaissance Capital. “I understand they are trying to lift growth, but I think their policies undermine what they are trying to do.”
–With assistance from Tope Alake.
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