CBN RAISES INTEREST RATE TO 18%, RETAINS OTHER PARAMETERS

The policy-setting committee of the Central Bank of Nigeria (CBN) has raised the monetary policy rate (MPR), which measures interest rate, from 17.5 percent to 18 percent.

Last week, Nigeria’s inflation rate rose to 21.91 percent amid the lingering scarcity of cash. The monetary policy rate (MPR) is the baseline interest rate in an economy, every other interest rate used within an economy is built on it.

Godwin Emefiele, governor of the apex bank, announced the development to journalists on Tuesday after the committee’s meeting at the CBN headquarters in Abuja.

The development is the second consecutive time the apex bank will be raising the benchmark rate this year. Emefiele said the committee members voted to hike the rate by 50 basis points to 18 percent, retain the asymmetric corridor at +100 and -700 basis points around the MPR, retain the cash reserve ratio (CRR) at 32.5 percent and liquidity ratio at 30 percent. He said although inflation has remained on the increase, the previous tightening measure has continued to reduce the rate of price increase.

Addressing fears of the effect of the hawkish stance on the banking industry, the CBN governor said the apex bank’s stringent micro and macro-prudential guidelines have ensured the stability and sustenance of the banking system.

He cited factors such as the planned petrol subsidy removal as one of the reasons for the tightening stance of the monetary policy committee. “Whether we like it or not, subsidy removal will likely be removed before the end of this administration in May,” Emefiele said.

“To reduce the gap in negative real rates we will continue to tighten but more moderately.”

Source: TheCable

CONFUSION AS CUSTOMERS REJECT OLD NAIRA NOTES DISPENSED BY BANKS

Sequel to the Supreme Court ruling extending the validity of the old N500 and N1,000 notes till December 31, 2023, Deposit Money Banks (DMBs) have resumed paying customers the old currency.

Contrary to expectations that Nigerians who are cash trapped will be eager to receive the old currencies, random visits by Vanguard to some DMBs on Tuesday showed that customers are reluctant to collect the old currency.

Meanwhile, neither the apex bank has issued circular instructing banks to comply with the Supreme Court judgment nor did the presidency react to the ruling.

Recall that a seven-member panel of justices presided over by Justice Inyang Okoro, on Friday, held that the directive by President Muhammadu Buhari to the CBN for the redesigning and withdrawal of old notes of N200, N500 and N1,000, without consultation with the states, the Federal Executive Council and the National Council of State and other stakeholders, was unconstitutional.

The apex court observed that no reasonable notice was given before the implementation of the policy as provided under the CBN Act.

An official of one of the banks visited who spoke on condition of anonymity with Vanguard affirmed that some of the DMBs have started on-the-counter payment of the old currencies to customers in the meantime.

However, the source said majority of the banks are awaiting directives from the Central Bank of Nigeria (CBN) on the Supreme Court ruling.

“We started on-the-counter dispensation of the old currency since Monday (yesterday) following the Supreme Court’s ruling on Friday but we are yet to hear from the CBN on where to go after the ruling. We also notice that customers have been reluctant to collect the old notes. The new notes are also not evenly circulated, hence the large crowd you see at bank entrances and ATMs,” he said.

Source: Vanguard

NAIRA REDESIGN: CBN INTRODUCES CASH SWAP PROGRAMME

CBN SETS AUG 1 FOR ENFORCEMENT OF CREDIT RISK REGULATIONS

The Central Bank of Nigeria (CBN) has mandated the enrolment of other financial institutions (OFIs) on the credit risk management system (CRMS).

CBN gave the directive in a circular published on its website and signed by Chibuzo Efobi, Director, Financial Policy and Regulation Department.

CRMS is the practice of mitigating losses by understanding the adequacy of a bank’s capital and loan loss reserves at any given period.

With this, the CBN and OFIs would be able to track any bank debtor to know if such a debtor owes another institution.

OFIs include development finance institutions (DFIs), microfinance banks, (MFBs), primary mortgage banks (PMBs), and finance companies (FCs).

“All OFls are hereby informed that the provisions of the regulatory guidelines for the redesigned credit risk management system for commercial, merchant, and non-interest banks in Nigeria issued on February 27, 2017 (Ref No. FPR/DIR/GEN/CRM/06/012) and the additional regulatory guidelines for the operation of the redesigned CRMS issued on September 10, 2018 (Ref No. FPR/DIR/GEN/CIR/07/007) have become applicable to all OFls,” the circular reads.

“Accordingly, and more specifically, enforcement of Section 3.1(a) of the guidelines on CRMS that captures the ‘submit before disbursement’ requirement shall commence on August 1, 2022.”

Section 3.1(a) of the regulatory guidelines for the operation of CRMS states that “rendition on the CRMS is required before the disbursement of any loan or credit facility.

“This process of submission does not interfere with any participating bank’s decision to extend a loan or credit to its customer. Consequently, rendition is only required after approval to disburse is given.”

The apex bank also reminded OFIs to ensure that all their customer accounts comply with the 10-digit Nigeria uniform bank account number (NUBAN) format, and are tagged with bank verification number (BVN) or tax identification number (TIN) for individual and non-individual accounts of the account holder and profiled on the Nigeria Inter-Bank Settlement System’s (NIBSS) industry customer accounts database (CAD) not later than June 20, 2022.

“These remain prerequisites for enrolment onto the CRMS,” CBN said.

CBN further warned that failure to comply with the stipulated timelines would attract appropriate sanctions.

Experts charge insurance professionals on industry’s development

Insurance professionals who gathered at this year’s 2022 edition of Fellows’ Hangout in Lagos organised by the Chartered Insurance Institute of Nigeria (CIIN) have been urged to structure their area of specialisation to promote industry awareness.

The Chairman, Examination Committee, CIIN, Olusola Ladipo-Ajayi, who spoke on a paper titled: ‘Contributions of Fellows to the growth of the Institute’ at the CIIN 2022 Fellows’ night, said there is a need for collaboration between the institute’s relevant stakeholders to promote insurance awareness and place the industry on the path of growth.

Ladipo-Ajayi tasked insurance fellows to hold meetings regularly and make recommendations that would assist the institute saddled with the responsibility of promoting insurance awareness.

He implored them to join hands with the institute to audit course books; help to supervise examinations and assist in determining skills and knowledge programmes.

Chairman, of the Society of Fellows, Prof. Joseph Irukwu, who was represented by the past President, Sunny Adeda, decried the number of fellows of the institution, which is 121, compared to India with 3,767 insurance fellows.

Adeda beseeched insurance practitioners and the public to embrace the institute’s examinations, stressing that the insurance industry currently has less than 4,000 professionals.

The President, CIIN, Dr. Muftau Oyegunle, charged the institute to determine a high standard of knowledge and skills for persons seeking to become registered members of the professional body, adding that he has strong confidence that this would help grow the industry.

What CBN’s interest rate hike means for Nigerians, the economy

The Central Bank of Nigeria’s Monetary Policy Committee on Tuesday raised the benchmark interest to 13 per cent. The governor of the Central Bank, Godwin Emefiele, said the action was to tame the rising inflation rate in the country.

Inflation in Africa’s most populous country soared to 16.8 percent in April, according to a report by the National Bureau of Statistics (NBS). The soaring rate was driven by fuel price increases and accelerating costs for food, including bread and cereals.

The CBN on Tuesday said that the global economic outlook remains uncertain amid rising commodity prices worsened by the Russia-Ukraine war.

Earlier in the month, a 0.5 percentage points interest rate hike announced by the United States’ Federal Reserve had reverberated around the globe, spurring other economies to hike rates.

The U.S. Fed raised its benchmark interest rate to a target rate range of between 0.75% and 1%, the largest hike in 22 years. The decision followed a 0.25 percentage point increase in March, the first increase since December 2018.

Like the US, other big economies of the world have raised their rates.

Monetary Tool

The interest rate is one of the key tools deployed by central banks across the world to manage the flow of money and productivity in their respective countries. A change in the interest rate could have an effect on macroeconomics and other key economic indicators like consumer spending and borrowing.

In Nigeria, the tool allows the apex bank to effect changes in broad monetary policies designed to facilitate the government’s planned fiscal policy.

Mr Emefiele explained on Tuesday that at the MPC meeting, six out of the 11 members of the committee voted to raise the key rate.

The committee also voted to retain the asymmetric corridor at +100 and -700 basis points around the MPR, just as it maintained the Cash Reserve Ratio (CRR) at 27 per cent.

The CBN governor argued that the sharp rise in inflation across both the advanced and emerging market economies has generated growing concerns among central banks across the world, adding that the progressive rise in inflation driven by rising aggregate demands and wage growth has put sustainable pressure on price levels.

Inflationary Pressure

The major determinant of the CBN’s hike in rate on Tuesday was the need to tame rising inflation. Until Tuesday, Nigeria hadn’t altered its interest rate since September 2020 when the CBN reduced the monetary policy rate from 12.5 per cent to 11.5 per cent.

In the midst of the global hike, the nation faces a dicey situation amid efforts to contain inflation, keep domestic prices stable, and ensure economic growth.

Mr Emefiele addressed this concern on Tuesday, thus: “On the need to tighten, MPC feels compelled that tightening would help moderate inflationary trade-off from the steady growth so far recorded and improve real GDP.

“It also feels that tightening would help rein inflation before it assumes the galloping frame considering the rising increase in headline inflation month-on-month.”

By hiking the interest rate to 13%, it is expected that borrowing would become more difficult and consumers would have less money to spend. By implication, amid lower demand among consumers, manufacturers of goods would be wary of raising prices. In effect, all of these would combine to reduce inflationary pressure.

But the hike could also fail to tame inflation if other macroeconomic indicators go wrong.

Manufacturers’ nightmare

A hike in interest rate is often considered manufacturers’ nightmare as it stifles productivity and expansion.

As the apex bank raises its rates to 13%, manufacturers hoping to borrow from banks may have been shut out of the windows due to the higher cost of borrowing amid falling demands.

When the benchmark rate was pegged at 11.5 per cent, banks typically charged manufacturers and other lenders between 12 to 30 per cent on loans. With the hike in rate (13%), the charges could skyrocket.

Earlier in the year, the Manufacturers Association of Nigeria had said the average rate at which its members borrowed money from banks was 20.75 per cent and 21.25 per cent in 2020 and 2019, respectively.

“It is important for the CBN to carry out a coordinated reduction in the monetary policy rate and lending rate,” MAN said in a statement.

Employment and Productivity

A hike in interest rate slows down productivity, as manufacturers struggle to keep machinery in operations and pay salaries. Those who look forward to borrowing for expansion and production would have to shelve such ideas in the face of the high cost of accessing funds. Persistent low interest rates favor larger companies because it allows them to increase production, employ more people, and expand. When the interest rate is hiked, the reverse is the effect.

In terms of job creation, a hike in interest rate could have effect—if marginal—on the number of jobs created or lost.

Unemployment Rate in Nigeria averaged 13.55 percent from 2006 until 2020, climbing to an all-time high of 33.30 percent in the fourth quarter of 2020. Even if the impact may not be significant in the immediate, the hike in interest rate and attendant fall in productivity could throw a number of people out of jobs.

Stocks, Bonds, and Forex

By default, low interest rates can cause the stock market to go up, just as the market records depreciation when the apex bank raises interest rates.

By implication, change in central banks interest rates affect prices of various assets such as bonds, stocks and houses.

The exchange rate can also be affected by the increase in rates, because a hike in a nation’s interest rate relative to other countries makes the domestic currency denominated assets more attractive to foreign and domestic investors. This can lead to a rise in demand for the domestic country’s currency in relation to other foreign currencies.

Meanwhile, as domestic currency strengthens, imported goods would become cheaper while locally produced products would become more expensive in the foreign market. This could as well affect demand, and lead to reduction in foreign exchange earnings with possible impact on balance of payments.

In the case of Tuesday’s increase in Nigeria’s interest rates, it remains uncertain how much this would affect the nation’s foreign exchange in the light of the widespread hike in rates across different economies around the globe.

As of press time Wednesday, numerous central banks across the world have hiked their rates in the wake of the United States’ hike in rate earlier in the month. Like the US’ apex bank, the Bank of England increased interest rates from 0.75% to 1% in order to tackle soaring inflation that is expected to rise above 10% in the coming months. The bank also warned that the cost-of living crisis could plunge the economy into recession in 2022.

Similarly, Australia’s central bank as well as the Reserve Bank of India (RBI) raised their rates to accommodate the changing dynamics.

Source: Premium Times