The Nigerian Banking system is in a state of flux and is experiencing a liquidity squeeze following a plethora of policies from the central bank of Nigeria which have succeeded in creating sharp increases in money market deposit rates to double digits.
A recent Nairametrics survey suggests banks are offering institutional customers (such as pension funds, fund managers) and high net worth individuals interest rates as high as 16% per annum for fixed deposits or bank placements. This is despite the banks having trillions of naira being held at the central bank at rates close to 0%. In other words, Nigerian banks have their deposits being sequestered by the CBN at ultralow deposit rates whilst the same banks have to turnaround and solicit funds from other sources at much higher rates.
For these banks, it is a price to pay to stay liquid pending when the “madness” blows over.
What the banks are currently experiencing is a remarkable volte-face of the relationship which banks had with the same CBN just 4 years ago.
Specifically, in 2017, commercial banks benefitted immensely from a CBN policy that offered banks high interest rates for government securities such as treasury bills and OMO bills. Back then, the CBN utilized this policy as a strategy to defend the naira and fund the Federal Government’s expenditure, costing it trillions of naira in interest payments. In 2017 alone, the CBN reported an interest cost of about N1.3 trillion.
This time around, whilst CBN’s objective of funding Federal government expenditure and intervention programs remains the same, the strategy of achieving this at a low cost to the apex bank (by forcefully debiting banks via the CRR policy in return for a paltry 0.5% on special bills) reflects a near-direct reversal of what was then known as “Shashe Banking” in the banking space.