CPPE Urges New CBN Governor to Clear Forex Backlog
The Center for the Promotion of Private Enterprise (CPPE) has urged Olayemi Cardoso, the newly appointed Governor of the Central Bank of Nigeria, to give top priority to addressing the backlog of forex exchange obligations.
This appeal was communicated through a press statement titled "Ten-Point Agenda for the CBN Governor," issued by the non-governmental organization on Sunday.
Muda Yusuf, the Managing Director of CPPE, who endorsed the statement, emphasized that "Clearing the backlog of forex obligations should be a high-priority task to restore confidence among both domestic and foreign investors."
Yusuf also called upon Cardoso to implement policies aimed at enhancing stakeholder engagement and improving the efficiency of the financial system.
On Friday, the Nigerian naira hit a record low, plummeting to N995 against the U.S. dollar, primarily driven by increased demand and a lack of adequate supply.
He proposed that the recently appointed CBN management team should, alongside the existing Investor and Exporter FX exchange window, establish an independent banking system window where the currency can be freely traded without any hindrances.
This step would assist in reducing the tendency to exchange remittances on the parallel street FX market, commonly known as the black market, he suggested.
Yusuf also pointed out another critical concern facing the new CBN leadership: the need to enhance the deposit money banks' role in financial intermediation, which is their primary function within an economy.
"This responsibility involves channeling financial resources from areas with a surplus to those with a deficit. Currently, the private sector faces significant challenges in terms of access to and the cost of credit, resulting in tight financial conditions.
In Nigeria, as of 2022, credit extended by the banking system to the private sector accounted for only 20.6 percent of the nation's GDP. This figure falls short of the sub-Saharan African average of 28 percent and the global average of 145 percent.
Furthermore, small businesses, which constitute an estimated 50 percent of the GDP, have access to just about one percent of the credit available within the banking system. This situation highlights a significant disconnection between the banking system and the investing community, particularly small businesses in the economy."
"The financial gap within the small business sector has been estimated to exceed N600 billion. This discrepancy demands correction. These factors collectively underscore the necessity to enhance collaboration and synergy between the banking system and economic participants, notably the MSMEs.
Furthermore, Yusuf recommended that the new CBN leadership should address the efficiency of the financial system, particularly the wide gap between deposit and lending rates in the Nigerian banking system, which reflects significant efficiency challenges.
In Nigeria, this spread exceeds 20 percent, ranking among the highest globally. Sub-Saharan countries have an average spread of 10 percent, while the global average stands at approximately 6.6 percent. The substantial spread hampers investment growth and acts as a disincentive for savings."
Yusuf also urged the new CBN governor to prioritize the recapitalization of banks.
"During the banking consolidation initiative in 2004, the minimum capital requirements for banks were increased from N2 billion to N25 billion, which equated to $187 million at the time."
"Presently, that same N25 billion is equivalent to just $32.5 million, underscoring a significant erosion of the banks' capital base. Consequently, bank recapitalization has become a necessity, ensuring that their capital base can adequately support their current exposures to maintain financial system stability.
Regarding methods for financing the fiscal deficit, he advised the new CBN leadership to keep it "within statutory limits to prevent the detrimental effects of excessive money supply on the macroeconomic environment, avoiding a repetition of the experiences of recent years."
As for the naira redesign policy, he recommended its indefinite suspension, emphasizing that it should not be a current priority. Yusuf pointed out, "There was no compelling rationale for initiating the naira redesign in the first place. Nevertheless, the drive towards a cashless economy should continue without resorting to the crude methods of cash seizure employed by the previous CBN administration."
However, the apex bank is encouraged to sustain the momentum observed in the growth of the cashless economy.
Regarding the tenure and cost of funds within the banking system, CPPE emphasized the necessity of addressing macroeconomic fundamentals to rectify the current maturity structure of funds in the banking sector.
The organization noted that the high lending rates prevalent in the economy are profoundly detrimental to investment and overall economic growth, with SMEs sometimes encountering interest rates as high as 30 percent on loans.
Non-bank financial institutions face even more exorbitant rates, creating an unfavorable environment for investment expansion and job creation. To reduce interest rates, a combination of monetary and fiscal policies will be required.
Concerning the concentration risk within the banking sector, it was advised that measures be taken to diminish such risks, serving as a strategy to effectively manage systemic threats to the banking system.
He pointed out that having the top ten banks in the country responsible for 80 percent of bank assets, total loans, and deposit liabilities not only presented an unhealthy scenario but also posed "systemic vulnerability risks" for the economy.
Yusuf argued that it would be desirable for the CBN to ensure a more even distribution of assets and liabilities within the banking system.
Leave A Comment