CBN’s new directive will increase lending to the productive sector of the economy

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The recent directive given by the Central Bank of Nigeria (CBN), for Banks not to deposit funds above N2 billion at its Standing Deposit Facility (SDF) window, will now stimulate positive growth, as it has freed over N750 billion for loans.

The guideline issued on Wednesday, July 10, by the Apex Bank, took effect yesterday. It reduced the remunerable daily placement of SDF, from N7.5 billion to N2 billion.

According to reports, commercial Banks are expected to deposit excess funds at the CBN, daily, and earn interests on such funds.

The SDF is the excess reserve funds that Banks deposit at the SDF window of the CBN, at the end of each business day. The Standing Lending Facility (SLF), is fund borrowed by Banks from the Apex Bank, to square up their positions in the market.

The SDF attracts an interest rate of Monetary Policy Rate (MPR), minus 500 basis points, which is 8.5 percent per annum, up to the limit of N2 billion. Any deposit over and above the maximum, will attract zero interest rate.

The CBN Director, Financial Markets Department, Angela Sere-Ejembi, said that renumerable daily placements by Banks to the SDF, shall not exceed N2 billion.

She said: “With reference to the circular to all Banks and discount houses, on guidelines for accessing the CBN Standing Deposit Facility.

“The SDF deposit of N2 billion shall be enumerated at the interest rate prescribed by the Monetary Policy Committee from time to time. Any deposit by a Bank in excess of N2 billion, shall not be enumerated. The provisions of the circular take effect from today.”

The Head, Currencies Market, at Ecobank Nigeria, Olakunle Ezun, said that the CBN had earlier announced regulatory guidelines to stimulate lending to Small and Medium Enterprises (SME), retail, mortgage, and consumer lending, with mandate to Banks to maintain a minimum loan to deposit ratio of 60 percent, (compared to current industry average Loan to Deposit Ratio (LDR), of 58.5 percent, as at May 2019, and regulatory maximum of 80 percent), subject to quarterly review.

By this regulation, the CBN aims to improve market liquidity, and subsequently, encourage deposit money Banks to increase lending to the productive sector of the economy. This comes with additional incentive of a weight of 150 percent, to the preferred sectors in the computation of the LDR.

Ezun added that the impact of the new guideline on SDF, would force the Banks to carry out their core responsibility of inter-mediation (the circular capped the preference of Banks to keep idle balances at the CBN in the SDF window).

“In the immediate, the money market liquidity is expected to rise by N750 billion, thereby lowering inter-bank market rates by 150 basis point.

“The CBN’s recent move could be positive, as we expect improved lending to the productive sector, and reveals the risk appetite for the productive sectors of the economy”, Ezun said.