CBN’s OMO Policy crashing lending and deposits rates

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The Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele’s decision to completely prohibit individuals and local firms from investing in both its primary and secondary Open Market Operations (OMO) auctions about two months ago is having a positive impact on deposit and lending rates.

Following the CBN circular that was announced in October, there has been noticeable decline in lending rates of commercial banks by at about six per cent.

Similarly, deposit rates paid by banks to customers have also dropped drastically to between two to three per cent, while interest rate has nosedived from as high as 18% to around 11%.

Awash with liquidity as a result of the CBN’s OMO exclusion policy, banks became afraid that accepting priced deposits would result in the decline of their loan-to-deposit ratio and subsequently resorted to refusing large fixed deposits from their customers.

The banks are jostling to meet with the 65 per cent minimum loan-deposit-lending ratio that they were directed to comply with by the end of this month.

It was gathered that the exclusion of the pension fund administrators from OMO and the CBN LDR policies have created intense competition by banks for loans, which has resulted in the observed drop in lending and deposit rates.

Additionally, recent surveys conducted showed that banks are offering as low as two per cent to customers on fixed/ term deposit. This refusal has also helped in stimulating activities in the equities recently.

A bank chief executive officer, who pleaded to remain anonymous, confirmed this in a chat with a newspaper.

“The average interest rate on deposits is presently about four per cent. For lending, some of the large corporates today are borrowing at about 12 per cent, depending on the bank.

“For medium term corporate borrowers, it is about 15 to 17 per cent. Indeed, last week, the Dangote Group did Commercial Paper where it raised N45 billion at seven per cent,” the bank CEO added.

Market analysts have hailed the CBN’s unconventional monetary policy approach given that whereas the monetary policy rate (MPR) has remained unchanged at 13.5 per cent, the discovery by the CBN of certain structural inefficiencies in the interest rate structure where OMO, which is monetary policy tool meant for only the banks and the foreign portfolio investors, had been infiltrated by the Pension Fund Administrators (PFAs).

The co-founder of Cardinal Stone Partners Limited, Mr. Mohammed Garuba, had pointed out that until the CBN decided to restrict its OMO auctions, it was only in Nigeria that private sector and individuals were allowed to invest in the securities.

He had explained that OMO auction was supposed to be strictly between the central bank and banks.

“It is a liquidity management tool. PFAs and the rest were never supposed to invest in OMO. For normal Nigerian Treasury Bills (NTBs), it is open to everybody, you fill your forms and go for auction. But OMO is 100 per cent at the central bank’s discretion. The central bank can decide to issue it anytime or any day they like. That is how it is everywhere in the world apart from Nigeria,” Garuba explained.

The Nigerian stock market had rebounded in November, primarily as a result of the CBN policy that restricted individuals and local firms from investing in its OMO auctions.

Contrary to a decline of 4.9 per cent suffered by the Nigerian Stock Exchange’s (NSE) All-Share Index (ASI) in October, the market benchmark gauge had appreciated 2.4 per cent in November. Similarly, the market, which dipped by N642 billion in October, had gained a total of N204 billion in November.

While the NSE ASI had appreciated from 26,355.35 to 27,002.15, market capitalisation had risen from N12.829 trillion to N13.033 trillion.

In the same vein, a report by Cordros Securities Limited, at the weekend showed that overnight (OVN) rate undulated last week before settling lower by 0.28 percentage points at 2.8 per cent.

The report showed that this week, treasury bills maturities worth a combined N73.30 billion – OMO (N51.30 billion) and PMA maturities (N22.00 billion) and Federal Government Savings bonds coupons (N13.33 million) – from the 11.418% JUN-2021 and 12.418% JUN-2022 instruments – were expected during the week.

In combination with the already substantial system liquidity level, we expect the rate to remain moderate during the coming week.

“In our view, the restrictions on trading in OMO will continue to drive volumes in the treasury bills market. Consequently, we expect the average yield in the market to settle in the single-digit territory by 2019 ending,” the Lagos-based firm added.





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Author: abokimallamfx