Special Bills as CBN’s tool to grow economy

Last week’s announcement by the Central Bank of Nigeria (CBN), that it had introduced special bills to the financial system, is yet another policy measure by the apex bank to ensure financial stability and economic growth in the country, writes TONY CHUKWUNYEM

The slump in the price of oil (the commodity that accounts for over 90 per cent of the nation’s export earnings), coupled with the coronavirus(Covid-19) pandemic, undoubtedly put the Nigerian economy and banking industry under severe strain. Consequently, the Central Bank of Nigeria (CBN), since March this year, has been quite proactive in terms of rolling out measures to ensure that it continues to achieve its mandate, especially as relates to ensuring monetary and price stability, promoting a sound financial system in the country and boosting economic growth.

N3.5trn stimulus package

For instance, less than a month after the virus spread to these parts, the CBN quickly introduced a combined stimulus package of about N3.5 trillion in targeted measures to households, businesses, manufacturers and healthcare providers, which according to its Governor, Mr. Godwin Emefiele, “are deliberately designed to both support the Federal Government’s immediate fight against COVID-19, but also to build a more resilient, more self-reliant Nigerian economy.” To ensure that the stimulus package is effectively implemented, the apex bank developed a policy response timeline-Immediate-Term Policies (0-3 Months); Short-Term Policy Priorities (0 – 12 months) and Medium-Term Policy Priorities (0 -3 Years). Specifically, under the immediate-term policies, which, as Emefiele explained at the time, was expected to last for a period of 0-3 months, the regulator activated the following: “Ensuring financial system stability by granting regulatory forbearance to banks to restructure terms of facilities in affected sectors; triggering banks and other financial institutions to roll-out business continuity processes to ensure that banking services are delivered in a safe social-distance regime for all customers and bankers; granting additional moratorium of 1 year on CBN intervention facilities; reducing interest rates on intervention facilities from 9 percent to 5 percent and creation of N50 billion targeted credit facility for affected households & SMEs.”

Special Bills

It was clearly thus in keeping with this proactive stance, that in a move, it said was part of measures to, “deepen the financial markets and avail the monetary authority with an additional liquidity management too,” the CBN, announced through a circular, last Wednesday, that it was introducing Special Bills to the financial system. According to the circular, key features of the bills include: A tenor of 90 days, zero coupon, and applicable yield that will be determined by the CBN at issuance. In addition, the bills will be tradable amongst banks, retail and institutional investors and also qualify as liquid assets in the computation of liquidity ratio for lenders. The statement further said that the bills will not be accepted for repurchase agreement transactions with the CBN and will not be discountable at the apex bank’s window.

CRR debits Analysts’

immediate reaction to the CBN’s announcement was that the special bills will help improve banks’ liquidity ratios, which have been under pressure due to Cash Reserve Requirement (CRR) debits by the regulator. The CRR is the minimum amount banks are expected to retain with the CBN from customer deposits. As part of measures to curb inflation and naira instability, the CBN’s Monetary Policy Committee (MPC) had in its bid to soak up liquidity from the banking system, increased the CRR by 500 basis points from 22.5 per cent to 27.5 per cent at its meeting in January this year. It thus debits banks’ accounts periodically for missing the CRR target and non-compliance with a 65% Loan-to-Deposit Ratio (LDR) policy, which is aimed at driving credit growth, especially to the real sector of the economy. Indeed, analysts estimate that between January and July 2020, the CBN sequestered about N4.8 trillion from DMBs with excess cash holdings. Commenting on the CBN’s introduction of special bills, the Director for Frontier and sub-Saharan Africa banks at Renaissance Capital in London, Adesoji Solanke, said in an email to Bloomberg: “That the securities are tradable between market players but not discountable at the CBN window however implies that new liquidity won’t be coming from the CBN,” adding, however, that it still “gives the banks room to pledge the securities for liquidity from other sources.” Similarly, in their reaction, analysts at FBNQuest Research noted in a report, obtained by New Telegraph that the apex bank’s introduction of the Special Bills was particularly significant as the liquidity ratios of lenders, especially Tier 2 banks “are already close to the regulatory minimum of 30 per cent.” They, however, contended that the CBN’s announcement had its positive and negative sides. On the former, the analysts stated: “A boost to banks’ liquidity ratio. Prior to the circular, excess Cash Reserve Requirement (CRR) had been sterilised with the CBN on a nil return basis. Most banks have CRRs north of 40 per cent vs. the regulatory minimum of 27.5 per cent. “Going forward, the excess CRRs will be eligible for conversion into the special bills and used in the computation of liquidity ratio. As such, banks will see an improvement in their liquidity ratio. This is quite significant, particularly for Tier 2 banks because their liquidity ratios are already close to the regulatory minimum of 30 per cent. Also, although the yield has not been determined by the CBN, the circular indicates that banks will be able to earn some return on the bills as opposed to the zero yields on their excess CRR.” Commenting on the “negatives” of the special bills, the analysts stated: “The CBN’s press release mentions a 90-day tenor. However, we understand that the CBN has the discretion to roll the bills over with a view to extending its maturity. It appears that this clause is meant to address concerns around the impact of the potential excess liquidity on fx/exchange rate stability. Consequently, its utility for immediate risk asset creation is limited. Given this caveat, the bills may not be as liquid an asset as they appear initially.” In an earlier report titled, “Faltering increases in private sector credit expansion,” the FBNQuest Research analysts, citing CBN data, had noted that while net domestic credit to the private sector increased by 12.4 per cent y/y to N29.06trillion at end-October, “the rate of growth had slowed for two successive months, and had actually gone into reverse on a m/m basis.” They further said: “Our own explanation is that most Deposit Money Banks (DMBs) have reached the minimum 65 per cent threshold for the loan-to-deposit ratio set by their regulator (the CBN). This is also our take from the data on aggregate domestic credit that is cited in last week’s communique from the Monetary Policy Committee (MPC). The y/y growth in the series is at least ahead of nominal GDP growth, so the credit/GDP ratio, one of the weaker points in the Nigeria macro story, is improving.” In fact, as the analysts said: “The MPC (and CBN) view the rise in Private-Sector Credit Extension (PSCE) as one reason for their bringing forward Nigeria’s forecast emergence from recession to the current quarter (Q4). Another is the recent discovery of successful vaccines for Covid-19, which has improved prospects for the external demand for crude oil to Nigeria’s obvious benefit.” New Telegraph recently reported analysts at CSL Research as saying that the CBN has been successful in using the LDR policy to drive credit growth in the last one year. The analysts said: “According to data sourced from the National Bureau of Statistics (NBS), aggregate banking sector credit to the economy stood at N18.8tn at the end of Q2 2020 which represents an increase of 15.8 per cent from the aggregate banking sector credit of N16.3 trillion at the end of Q3 2019 before the minimum LDR was raised to 65.0 per cent. Much more impressive is the 24.4 per cent growth in aggregate banking sector credit when compared with the total of N15.1trillion at the end of Q2 2019 before the minimum LDR of 60.0 per cent was announced. This compares with a decline of 2.3 per cent and 3.9 per cent in aggregate banking sector credit in 2017 and 2018. Thus, on the credit growth front, it can be said that the CBN has been successful at driving credit growth.” Also evaluating the impact of the LDR policy on borrowing costs in the economy, the analysts stated: “We believe many corporates moved to refinance their expensive loans following the steep decline in borrowing costs. We note that this was evident in the financial performance of deposit money banks as many reported steep declines in cost of funds. In addition, we note that several corporates have taken advantage of the lower borrowing costs to raise cheap financing (long term & short term) from the debt capital markets. “For example, corporates like Flour Mills, Nigerian Breweries and Dangote Cement have all raised funding via commercial papers at low and mid-single digits in 2020. That said, we note that the LDR policy was not the sole driver of the decline in borrowing costs but it was one of many policy levers implemented by a dovish CBN.”


Although analysts are still awaiting more details from the CBN on the special bills, the consensus among industry watchers at the weekend was that like most of the policy measures introduced by the apex bank to help tackle the coronavirus crisis, the latest instruments are highly likely to yield the desired results for the financial system and the economy.




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