Omodele Adigun

The implementation of tight fiscal and monetary policies since the beginning of this administration, which marked its third anniversary last week, may have caused an acute cash shortage in the banking system.

And contrary to the notion that one of these measures, the withdrawal of public sector funds into Treasury Single Account (TSA), would not affect the deposit money banks, but rather help them concentrate on their core functions, the performance indicators of the sector in the last three years have all but pointed downward.
First, as a result of the cash squeeze, credit to the private sector and domestic economy has almost dried up; second, asset quality and capital adequacy ratio of the banks have gone southward, while their net foreign assets have almost evaporated.

And to square-up their positions, the banks have to go a-borrowing.
These are highlights of the 2017 Financial Stability Report (FSR) of the Central Bank of Nigeria (CBN).
Apart from this, the 2017 Annual Activity Report, released at the weekend by the CBN, also revealed that both commercial and merchant banks had to go cap in hand to the CBN regularly to beef up their liquidity shortfall. It adds that they frequented the apex bank’s Standing Lending Facility (SLF) window (to borrow) in 2017 more than ever before.

The report states that “the average daily request for the SLF was N216.34 billion in 246 days, out of which Intra-day Liquid Facility( ILF) conversion (the amount granted) was N130.63 billion, amounting to 60.38 per cent of the total request.

“In 2016, the average daily request was N130.47billion in 207 days, out of which ILF conversion was N84.62billion. The higher patronage at the window in 2017 reflected the effect of the tight monetary policy stance of the CBN.”

The story was the same at the inter-bank funds market, where the banks borrow from one another.The report explains that “the value of transactions there increased significantly by over five-fold to N32,910.37 billion in 2017, from N5,343.22 billion in 2016.

“The Open Buy Back (OBB) transactions accounted for 94.83 per cent of the total value of the inter-bank deals, while transactions at the unsecured inter-bank segment accounted for the balance of 5.17 per cent, compared with 80.62 and 19.38 per cent, respectively in 2016.”
A breakdown shows “an increase in call placements by 76.87 per cent to N1,603.94 billion, from N906.84 billion in 2016.

At the OBB segment, “transactions increased significantly by over six-fold to N31,207.68 billion, from N4,307.62 billion in 2016.

“The sharp increase in the volume of transactions in 2017 was attributable largely to the liquidity squeeze in the banking system,” the report adds.

As for the TSA, which analysts said it remained a big headache for most banks as it has shrunk their balance sheet, President Buhari, in his Democracy Day speech, gave kudos to the initiative for helping him save billions from maintenance fee payable to banks.
The FSR highlights above may have laid credence to the bookmakers’ position that TSA remains a minus for banks, and plus for the government.

An analyst, Olakunle Ezun, told a national daily last year that the TSA remained a big headache for most banks, especially smaller lenders, as its introduction has shrunk their balance sheet and income.
Hear him: “TSA remains a minus for banks, and plus for the government.A lot of banks did not honour their obligations just because of liquidity problems.”

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As if to corroborate this, another central bank document showed that the sector recorded a decline in earnings between April 2015 and April 2016, as unaudited pretax profit for the industry decreased by 10.8 per cent or N24 billion, from N222 billion in April 2015 to N198billion at the end of April 2016. During the period, the total deposits of bank customers dropped by 5.6 per cent or N1.03trillion,  from N18.54trillion to N17.51trillion.

A former Managing Director of Unity Bank Plc, Mr. Rislanudeeen Muhammed, had attributed this partly to TSA.

In a chat with a national daily, he said: “There has been a mismatch between cost and income. Most of the costs of operation in the sector have gone up because there are two major income lines that have actually dropped.

“The first one is the TSA, which had adversely affected their income line, and capacity to create risk assets, and the withdrawal of Commission on Turnover (CoT) charges.”

Details of the FSR, as if to give flesh to Muhammed’s sketches, are far from cheery. The report states: “The asset quality of commercial banks deteriorated in the first half of 2017 as the ratio of non-performing loans to gross loans increased, compared with the level at the end of December 2016.

“This led to a slight capital deterioration and a decline in earnings indicators.

“To test the resilience of the industry, a stress test was conducted on the banks. The test showed that the capital adequacy ratio of the banks deteriorated when the most severe shocks were applied. ”
On credit to the economy, the report states:

“The net domestic credit of the banking system contributed 1.16 percentage points compared with 25.15 percentage points at the end of December 2016.

“Consumer credit reduced by 3.4 per cent to N736.19 billion at the end of June 2017, compared with N762.07billion at the end of December 2016, due to prevailing economic uncertainties which made banks more risk averse to consumer lending.

“Consumer credit constituted 3.54 per cent of the total credit to the core private sector, and was 0.09 percentage point lower than the proportion in the second half of 2016.
“The banking system’s credit to the private sector fell marginally by 1.47 per cent to N15,907.47billion from the position at the end of December 2016.”

Financial inclusion also suffered decline as unemployment, fall in household consumption and loss of income combined to make it impossible for people to operate their various bank accounts.