Currently, the biggest charge before banks is their reluctance to lend. They seem minded to dump their funds in fixed income government securities, where they make a huge killing, rather than lend to businesses without which the economy stagnates. The unanswered question, here, is why banks’ indifference curve…has the current peculiar slope?


Was the decision, last week, by the Central Bank of Nigeria (CBN) to debit the accounts of twelve banks by a combined N499.18 billion a “fine”? The banks were in breach of the central bank’s directive that they give out loans equal to 60 per cent of their deposits by end-September. For a handful of Nigerians, a hefty impost against banks (irrespective of the offence) is always welcome. After all, are Nigerian banks not guilty of price-gouging and a slew of fishy practices? Depending on one’s vantage, the CBN’s recovery of some of the banks’ “ill-gotten lucre” could actually be a positive for the economy. Has the CBN not, for example, become the nation’s lead retail lender? And do such taxes not represent a useful source of additional lending?

Except that all the central bank simply did was to move money from the banks’ vaults into their wallets with it. Depositors’ money, need we add? Banks keep depositors’ funds in their vaults and in their wallets with the central bank. The latter for purposes including settling clearing operations. As part of its management of monetary policy, the CBN requires banks to keep a portion (currently 22.5 per cent) of their deposit liabilities as cash reserve with it. So, ideally, for every naira a bank accepts as deposit, 22.5 kobo is warehoused with the CBN – currently unremunerated.

The theory is that the CBN may raise (reducing banks’ liquidity, pushing interest rates up, and hence their ability to create loans) or lower (increasing banks’ liquidity, pushing interest rates down, etc.) the cash reserve requirement (CRR) as it manages domestic monetary conditions. But then, depositors expect banks to pay interest on their funds, including the portion sterilised with the central bank. So, banks make the 77.5 kobo left with them after the CBN has taken its CRR cut work as hard as N1 would. As if that were not bad enough, the CBN long ago resorted to an unusual expedient.

Were the central bank more transparent in its management of domestic monetary policy, it would either have raised its cash reserve ratio – to keep liquidity at current levels – or leaving the reserve requirement at 22.5 per cent, it would have had to raise its benchmark rate.


As banks raised additional deposits, it enforced the 22.5 per cent reserve requirement; which it then held on to when they lost these deposits. Which is why the effective reserve requirement for the banking industry today is much higher than the regulatory minimum. Higher reserve requirements, remember, reduce banks’ liquidity, and drive interest rates up? But they also help sustain the myth of the central bank pursuing a pro-growth policy by sustaining a low, double-digit benchmark rate. Were the central bank more transparent in its management of domestic monetary policy, it would either have raised its cash reserve ratio – to keep liquidity at current levels – or leaving the reserve requirement at 22.5 per cent, it would have had to raise its benchmark rate.

Much of public policy involves trade-offs of this nature, which are sometimes even more delicate – and with consequences that reach further. Over the years, however, large parts of the electorate have come to be taught that the only obstacle between Nigeria and “El Dorado” is not the need to strike a balance between scarce resources and a growing riot of rival needs. Nor the challenge of sequencing implementation, even when the most pressing need is agreed. But, the wickedness of “interest groups”. And no interest group is currently bigger, nor its effect on the economy more nefarious, than the banks – what with all that mouth-watering profits declared annually. But, as with the rest of society, banks are forced into these trade-offs too.

Currently, the biggest charge before banks is their reluctance to lend. They seem minded to dump their funds in fixed income government securities, where they make a huge killing, rather than lend to businesses without which the economy stagnates. The unanswered question, here, is why banks’ indifference curve (between lending or investing in government securities) has the current peculiar slope? This question could be answered differently. With unemployment (and underemployment) levels where they are, is their enough domestic demand to drive business investment in this economy? And without businesses spending, how big would the opportunities be for banks to grow their asset? And this is before you factor in the innumerable impediments to doing business in the country, including the difficulties banks go through trying to foreclose debt.

With cost of borrowing as low as it is in Europe, most commentators see ample opportunities for strong fiscal interventions. In a sense, our situation is no different. True, the cost of government borrowing is excessive. But, the CBN has hurt its balance sheet trying to ignite domestic growth.


For domestic banks, though, the CBN’s new loan-to-deposit ratio presents a new level of trade-off: lose depositors money through laxer risk appetites (resulting in more dodgy loans) or warehouse the same money with the central bank? A slight codicil ought to be entered here. This is not exactly a local challenge. For in parts of Europe, banks are responding to the same dilemma by paying their central banks to keep some of their deposits. In Europe, much is being made of the fact that central banks have run out of ammunition with which to drive higher levels of domestic growth.

With cost of borrowing as low as it is in Europe, most commentators see ample opportunities for strong fiscal interventions. In a sense, our situation is no different. True, the cost of government borrowing is excessive. But, the CBN has hurt its balance sheet trying to ignite domestic growth. Fortunately, our fiscal responses involve long-established trade-offs. Reforms to make the private sector the engine of domestic growth – not just because we may, then, tax businesses to death. And improve the public expenditure management framework.

Uddin Ifeanyi, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.