CBN’s cap on banks’ purchase of govt bonds

AT the end of its meeting in Abuja last week, the Monetary Policy Committee of the Central Bank of Nigeria (CBN) announced that it was putting a ceiling on Money Deposit Banks’ investment in treasury bills and Federal Government bonds. CBN Governor, Godwin Emefiele, who read the committee’s communiqué, said the apex bank took the decision to encourage commercial banks to lend money to the real sector as a way of stimulating economic growth. He added that commercial banks had become hooked on treasury bills and government bonds as a vehicle to making easy money which has steered them away from adequately supporting the real sector.

The move by the CBN to redirect commercial banks to their original role is commendable because, as the apex bank observed, it has the propensity of birthing a new dawn of economic revitalisation and industrial rejuvenation in the country. For too long, the country’s commercial banks have been so profit-oriented that they have downplayed their critical role as economic development drivers. Unless banks understand this function and play it well, both economic growth and social stability will remain elusive. However, if the CBN insists on strict enforcement of this new regulation, many banks will be adversely impacted and they will post negative results. The consequence of this on the banks, their staff and the economy as a whole can only be imagined.

The question the CBN should have sought answer to ahead of the imposition of  the new regulation is: why would banks feel more at home mopping up treasury bills and government bonds rather than lending money to the productive sectors, which would enable them to engender capital formation and commerce facilitation? The answer to the question is not shrouded in any mystery; it is because the nation’s productive sectors are not really productive due to low capacity utilisation. The real sector is not productive principally as a result of the high cost of production. Power generation is so poor in the country that most companies spend a huge fortune on generating their own power. Consequently, most Nigerian companies are uncompetitive and have experienced dwindling fortunes. Quite a number of foreign and Nigerian companies have relocated their operations outside the country as a result of the high cost of alternative power generation.

Many companies have closed down because they cannot meet up with the high cost of power generation. Those who have not closed down are producing far below their installed capacities, thus they keep falling back on repayment of facilities taken from banks. This is the major reason for the rising case of non-performing loans in banks, a factor that has forced banks to scale down lending to the real sector. Banks stay afloat when they give out loans and such loans are repaid. When loans go bad, banks go broke. To play safe and remain afloat, banks have been investing their resources in treasury bills, which are risk-free and have guaranteed returns.

So, while the CBN’s thirst for economic growth is understandable, legislating banks away from treasury bills and government bonds is not the route to achieving it. The best strategy is to make lending to the real sector so attractive that banks will, out of their own volition, shun treasury bills. That will only happen when the critical infrastructure required for the optimisation of companies’ installed capacity is put in place by the government.

The apex bank needs to sit down with MDBs to work out modalities to reinvigorate the real sector while not emasculating commercial banks. Insisting on the full implementation of this new directive at the moment will only hamper the banks without necessarily helping the real sector.