As the Central Bank of Nigeria (CBN) is working to improve the payment system, the expectation is that the resultant reduction in the cost of doing business for the? banks should conversely lead to a drop in the cost of funds, writes Stanley Oronsaye.
The traditional role of banks is to attract funds from the surplus segment of the economy and disburse to the deficit segment.? That way, savings culture is encouraged while entrepreneurial spirit is kindled.
However, Nigerian banks have largely failed in that role over the years due to the high cost of capital. With deposit rate at very dismal levels, and lending rate exceedingly high; too high to support business incubation and growth,? the economy has not been strengthened enough to support a robust manufacturing base.
The failure of banks to play their traditional roles is due to a number of factors. The first? is the high rate of inflation which makes real returns on capital negative. With deposit rate at single digit and inflation at double digit, the incentive to save is practically non-existent. What this means is that money saved actually loses value over time instead of the other way round.
Also, due to the mismatch of banks’ access to short term capital, the borrowing pattern often reflects the duration of available funds and the need to make profit. Banks usually give out short term loans owing to the difficult operational system and the inconsistencies in government policies which does not really encourage long term lending. What this means is that critical sectors of the economy are denied funding as banks prefered to lend to short term trading businesses.
In all of these, the economy is the loser as citizens are not encouraged to save, while the high attrition rate confirms the fact that only few businesses could survive on bank loans.
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IMPROVED COST OF FUNDS
In the last few months, the Central Bank of Nigeria (CBN) has been working to improve the cost of funds, as well as create an enabling environment for businesses to have access to cheaper long term funds. This has yielded little result as the economic underpinnings still create a hostile business environment.
Nigeria is largely cash- driven economy, which, in addition to the attendant problems, comes with great cost. According to CBN deputy governor in charge of operations, Tunde Lemo, banks incur additional cost due to the cash based status, adding that when cashless economy policy was eventually implemented, the costs would be reduced by 30 per cent.
According to the CBN, between 2009 and August last year, the Central Bank and the banks spent N114.5billion to print, distribute, sort and destroy local currencies. “As a result, the CBN projected that in 2012, we will be spending a whopping sum of about N200 billion if we continue printing cash for cash transactions. So, the CBN and the 24 Nigerian banks decided to sit down and think on how to reduce the operational cost of our banks and also discuss the benefits of a cashless economy,” Mr. Lemo said.
It is against this backdrop that analysts expected that the reduction in cost of business that would be achieved should also translate to lower cost of capital so that banks could support the economy at more critical levels.
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BENEFITS OF BETTER PAYMENT SYSTEM
Now that the cashless policy has taken off, the sight is beyond the immense benefit of improving the payment system, it is on how it could actually drive down the cost of funds in the economy. The belief is that effort to reform the payment system would bring many unbanked Nigerians into the financial system. This would lead to increased savings which would invariably have impact on the cost of funds.
Samuel Nzekwe, former president of the Association of National Accountants of Nigeria (ANAN) and a financial consultant said the effort to introduce a new payment system was well thought out but called for its effective implementation so that immense collateral benefits could be harnessed. According to him, banks would need to also improve on the deposit rates so that more Nigerians could be encouraged to save and so make more money available for lending.
“The new cashless system will encourage more people to come into the financial system. We expect this to have an impact on the cost of borrowing. Banks need to also develop new products that will encourage people to patronise the banking system.”
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EYE ON BENCHMARK RATE
He said the current high cost of capital was due to? the poor operational environment which the banks were building into the borrowing cost. He also said the benchmark interest rate at 12 per cent was also keeping the lending rate on the high side.
This is coming on the back of divergent forecast that the CBN would alter the benchmark monetary policy rate (MPR) in the first quarter. While many expected the rates to remain unchanged at the end of the first monetary policy committee (MPC) meeting scheduled for the end of the month, the expectation is that the rates would be tampered with by the second before the half year.
“We expect the CBN to lower the MPR to 11.5 per cent around second quarter, 2012,” stated analysts at FSDH, a Lagos based financial advisory firm in its weekly report. The analysts also expected that the CBN would employ other monetary tools to manage liquidity in the system.
According to Razia Khan, Regional Head of Research, Africa at London-based Standard Chartered Bank, the savings that could be saved from adopting the cashless payment system could actually be channeled into lower loan-to-deposit spreads. “The reforms could be far-reaching, ultimately bringing more of the money in circulation into the banking sector, lowering bank costs and improving the transmission of monetary policy.”