John Omachonu
For banks heavy on savings deposits, cost of funds would definitely go up following directive by Central Bank of Nigeria (CBN) reviewing upwards minimum interest rate payable on savings deposits to 4.2 percent.
Analysts are waiting for the next reactions of the banks with the possibility of either upward review of interest paid on loans, which is highly discriminatory in favour of high networth individuals and corporate organizations, considered less reskier by the banks, paying less than 20 percent while others pay over 30 percent as lending rates.
Already customers are currently burdened by series of charges from VAT, mentainance, administrative to Telco, among others.
Most tier one banks like First bank, Union Bank, UBA, among others had relied heavily on savings deposits mobilization, considered as the cheapest sources of revenue as they were paying peanuts.
MetroBusinessNews (MBN) investigations show that some of these ‘old generation’ banks are sitting atop on ‘unclaimed’ savings deposits either because the account holders are dead or some customers may have decided to ‘forget’ the accounts as they consider them ‘inconsequential’.
Although, CBN’s directive implies moving from 0.15 to the new rate, 30 percent of the Monetary Policy Rate (MPR), the returns are still negative, considering the level of inflation at over 19 percent.
However, it is expected that the new rate, while adding to cost of funds by banks, would open up for more deposits as some customers might as well capitalize on the new rate.
“It’s like double-edged sword as it might result to a win-win approach for both the banks and customers, despite persistence of distortions in the system, “ says an analyst.
Speaking further, he said, “technically it’s still like paying banks for keeping and using depositors’ funds and considering the high level of insecurity in the country, one will not have option other than to deposit with them, “
CBN, in a letter to all banks titled “review of interest rate on savings deposits”, dated August 15, 2022, and signed by Haruna Mustafa, director of banking supervision said effective August 1, 2022, the negotiable minimum interest rate on local currency savings deposits should be 30 percent of the Monetary Policy Rate.The CBN had within two months this year, raised the MPR, its benchmark interest rate by first, 150 basis points in May and 100 basis points in July, bringing the current MPR to 14 percent.
The move was a decision taken by the Monetary Policy Committee (MPC) to curtail rising inflation in the country, which is also happening across the globe.
Godwin Emefiele had in the July MPC communique said, “MPC noted that broad money supply (M3) rose significantly to 11.52 per cent in June 2022, compared with 10.86 per cent in May 2022.
This was largely driven by the growth in Net Domestic Assets (NDA) of 18.02 per cent in June 2022, compared with 17.37 per cent in the previous month.
The sustained growth in Net Domestic Assets (NDA) was attributed to the increase in claims on the Federal Government and other sectors (public nonfinancial corporations, private sector, and state and local governments).
Money market rates oscillated within the asymmetric corridor, reflecting prevailing liquidity conditions in the banking system.
Consequently, the monthly weighted average Open Buy Back (OBB) and Inter-bank Call rates increased in June 2022 to 10.89 and 11.10 per cent, from 9.39 and 8.38 per cent in May, respectively.
The increase in both the Open Buy Back (OBB) and Inter-bank Call rates reflected the tight liquidity conditions in the banking system.“
Bismarck Rewane, chief executive officer of Financial Derivatives Company and member of President Muhammadu Buhari’s Economic Management Advisory Council in the outlook for August edition of LBS Breakfast session said, “Primary T/Bills for 365 days will rise to 9% p.a, 91
days to 3.5% p.a, Oil price will be stuck in the $95pb – $100pb range, FAAC disbursement will drop again to N650bn, Naira will likely depreciate again towards the N695/$-N700/$ range at the parallel market. “
Continuing, he said, “The CBN will allow for a partial crawling peg in the forex market, bring the I & E rate down to
N440/$ in September, interbank money market rates already surging, will test 18%p.a. – 20%p.a. and total outstanding at the CBN discount widow will reach N1.5trn.
Nigeria’s headline inflation surged to 19.64 percent in July 2022 on a year-on-year basis, the highest since 2005, according to data from the National Bureau of Statistics (NBS).
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In September 2020, the CBN reduced the minimum interest rate payable on local currency savings deposits from 30 percent to 10 percent of MPR, as part of efforts to ameliorate the impact of Covid-19 pandemic.
This, according to the banking sector regulator, was aimed at stimulating growth in the larger economy manifesting slow and fragile growth occasioned by the pandemic.
However, CBN had in the letter, claimed its action is based on the return to full normalcy and considering the prevailing macroeconomic conditions.