Sunday , January 19 2020

Banks on CBN’s life support machine

Banks on CBN’s life support machine: From the available figures, interest rates have  ‘crashed’ to an all-time low. But, surprisingly, the lending rates are still unbelievably dangerously high. These contradictions have led many to wonder what could have been responsible for this anomaly!

What this anomaly is showing is that the Central Bank of Nigeria can’t continue to artificially peg its monetary policy rates. It cannot also continue to artificially determine the value of the naira simply because of its so-called monetary policy tightening that is blind inflation-fighting driven. There’s no way such high costs of pro-speculative interventionist financial stability can be allowed to go on forever.

Since it is from its Standing Lending Facility that the commercial banks have been borrowing in the false name of CBN’s lender of the last resort, understandably, the commercial banks needed such artificially kept low borrowing rates from the CBN. Little wonder, as high as nine per cent is the profit margin these banks easily make by lending to the SLF either to the real sector or simply purchasing Treasury bills.

The difficult-to-answer question is: Why shouldn’t, as the lender of last resort, the CBN lends these commercial banks from their own Standing Deposit Facility? The CBN knows it shouldn’t do that because doing that would quickly negatively affect these commercial banks’ Capital Adequacy Ratio (CAR), which exposing them as undercapitalized banks will trigger depositors’ mass exit from these banks.

So, the next question becomes: For how long should these unhealthy commercial banks remain on the CBN’s life support machine? We all know that this cannot go on forever before their toxic assets are exposed or the urgency for their recapitalisation is known by depositors and investors.

That was why in one of the presidential candidates at the last presidential candidates, Atiku Abubakar’s economic plan, the CBN’s reform was a top priority, starting with the removal of regulatory responsibilities from the CBN by the creation of the Nigerian Banking Regulatory Commission. This would have forced the CBN to focus only on monetary policy making alone.

Another proposed reform by Atiku was to quickly do away with naira’s present dirty float, which has always allowed the CBN to go ahead with its skewed interventionist forex policy, which is known for being responsible for forex speculations. By replacing it with clean float and with the market determining supply and demand, the naira’s true value will be known and with that investors will  be able to make informed decisions on the country’s economy.

Besides, once we clean-float the naira, we do away with most of the perennial problems of artificial forex rates, inflation rates and interest rates that have continued to undermine the country’s real sector economic growth.

But with the CBN governor, Godwin Emefiele, leading this bizarre monetary and regulatory policies, no doubt, nothing will stop these anti-investment, anti-growth and anti-job policies of the apex bank, let alone bring to an end the endless fraudulent manipulations of interest rates that are promoted at the Bankers’ Committee meetings.

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Finally, is it not time we told our commercial banks the hard truth, which is, that their long-term survival does not lie in lending to importers of finished products who only share their huge profits with them? That it is by supporting local producers of these goods and in doing so to help grow the real sector of the economy with jobs that they will eventually and sustainably grow their profits.

From this, you can see that commercial banking as we know today already has the death roll.

If you’re a commercial banker, my advice is that you better begin to look for another job.  This is because commercial banks have so much overheads that are unsustainable. Just like post offices used to have.

And with the replacement of the presentation fractional reserve banking with zero reserve banking, where there is no more commercial bankers as the financial transactions’ middlemen, commercial banking as it has been known since the early 17th century is on its way to disappearing.

Yes, fintechs are already here with us, but there is something more of the creative destroyer than fintech that is on its way.

When that happens, commercial banking will suddenly die the same way post offices died. Or who goes to post offices these days?

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