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CBN’s special interest rates for real sector


A report the other day that the Central Bank of Nigeria’s idea on how it intends to drive down interest rates for critical sectors such as manufacturing and agriculture is remarkable and long expected. Godwin Emefiele, the Governor of CBN who announced the new deal said the apex bank would commence lending money directly to big companies especially in the real sector. The key output sectors that make up the real sector are the primary sector (agriculture and mining), the secondary sector (manufacturing, building and construction and the tertiary sector (services and commerce)…

The mechanism would be for such a company to issue Commercial Papers (CPs) with “single-digit interest rates of 9% or below 10% and for a long tenure as high as five years or seven years with a two-year moratorium, and for specific purposes”. CBN would then “compliment the efforts of the banks through any mechanism to support that by lending to that corporate body at that single-digit rate”. That is, CBN would buy the debt instrument at the single-digit rate at which it was issued.

Long subsisting high interest rates in the country has been a serious threat to national economic growth and development. The Central Bank of Nigeria (CBN) has been trying to bring the rates below 10%, that is, single-digit.

Indeed, there have been reports of the handicaps of the apex bank to lower interest rates by fiat. The constraints emerged years ago when the country’s economic managers abandoned administrative determination of financial market rates and embraced deregulation and the primacy of market forces. Unfortunately, operative interest rates determined market forces have been significantly above single-digit, a situation that has raised financial costs beyond the threshold at which products and services from Nigeria would be competitive in both the domestic and international markets.

Consequently, high interest rates in the country have occasioned, among other things, drop in industrial/manufacturing capacity utilisation, sluggish gross domestic product (GDP) growth, rising market prices, rising unemployment rate and escalation of armed robbery, abductions, ritual killings and suicide as well as other anti-societal challenges.

To point market interest rates towards single-digit, CBN had initiated several intervention funds with single-digit interest rates and a number of years of moratorium. Among others, the interventions have featured in the power, agriculture, small and medium enterprises and aviation sectors. But sadly, the expected result is yet to be achieved as interest rates still remain significantly above 10%.

Although Emefiele promised that details on the new funding mode, which he described as “novel”, would be out later, he pleaded that the approach should be given a chance as he was certain that it would succeed in achieving the objective of “lowering interest rates especially to agriculture and manufacturing”. There is a glimmer of hope, in this regard.

There is hardly any doubt that this “novel” funding approach by CBN would cause the raising of some serious observations and questions. For instance, how would CBN avoid being in competition with DMBs that it regulates? The Governor’s reported assurance that, “it is not meant to be competition with banks, it is meant to compliment their efforts”, does not remove the fears of such impending competition. If we recall that CBN had, not too long ago, contemplated abandoning its “lender of last resort” responsibility, it would not be out of place to assume that this CBN’s “novel” lending approach would fast-forward the Bank into its aspiration of becoming a lender of other resorts but last. At that point, the legislature would need to either amend the subsisting laws or the leadership of CBN would be required to comply with the provisions of the law.

Another key issue is whether CBN would have the capacity(especially human) to function in the role of “lender of first resort” that DMBs perform? Furthermore, when CBN embarks on its planned direct lending to big corporate bodies, it would be subjecting itself to being supervised; who would be its supervisor? Or would it be an island unto itself?

It should be noted that, as explained by the Governor, a major force driving CBN into direct buying of corporate Commercial Papers (CPs) is that, “DMBs had frustrated past incentives by CBN aimed at encouraging them to lend to the real sector of the economy”. In other words, it is to overcome non-compliance behaviour of banks that is forcing CBN to adopt this model of a central bank lending directly to private sector companies. How that would be statutorily and legally correct would need to be interrogated under the nation’s subsisting laws.

Rather than activate the enormous powers conferred on it by both the Banks and Other Financial Institutions Act, 1991(as amended) and Central Bank of Nigeria Act, 2007 (as amended) to attract compliance from DMBs, CBN is uniquely and publicly acknowledging its failure in ensuring DMBs’ compliance with its regulations. This qualifies to be described as a profound leadership failure. It is both inexplicable and unacceptable.

Therefore, the CBN should not enter the hazardous terrain of commercial and merchant banking simply because its licensees are frustrating its regulations, policies and guidelines. What situations like this call for is effective supervision and monitoring as well as proper deployment of the forces of the law, to extract obedience from all licensee-deviants/trouble-makers. CBN has the authority and power to accomplish this, except its leadership has succumbed to what has long been described as ‘regulatory capture’.In the main, the expediency of stimulating the real sector for us to be an entrepreneurial nation is remarkable but that should not propel the regulator to migrate to the realm of an operator without strategic feasibility, in this connection.

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CBNGodwin Emefiele
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