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Bond yields fall sharply as CBN eases liquidity

By BusinessNews Staff on November 12, 2015

Yields on Nigeria’s bonds fell sharply across maturities on Tuesday as liquidity surged on the interbank money market, traders said, adding that the Central Bank of Nigeria (CBN) had loosened monetary policy to spur credit growth.

Nigeria’s 2017 bond fell the most, down 110 basis point to 6.9 per cent, a level last seen more than five years ago, a report by Reuters showed. The 10-year benchmark bond shed 72 basis point to 10.25 per cent. Overnight lending rates traded between 0.5 and 1 percent on Tuesday as banks’ balance on the interbank market stood at a credit of N850 billion.

THISDAY had reported that the CBN’s decision to suspend its open market operations (OMO), a monetary policy tool it had been using to periodically mop-up liquidity in the system has since increased the volume of liquidity in the system.

Essentially, the CBN has been in easing mode from a quantitative perspective as it has been increasing the quantity of money in the system, while keeping the cost of money (the monetary policy rate) constant.

With that, the volume of cash in the banking system has since increased .The move, according to analysts was to make banks reduce their lending rates and also increase lending to critical sectors of the economy so as to stimulate growth and expand the economy. But while deposit rate has remained as low as about five per cent, lending rate being charged by banks is still high, currently between the band of 21 and 25 per cent.

“Interest rates across the money market and the government debt market have fallen precipitously over recent weeks. The driver is easily identified – a surge of liquidity resulting from the CBN’s decision to not roll-over open market operation securities that have matured over recent week,” analysts at City Stockbrokers Limited stated in a recent report.

However, a former Executive Director of Diamond Bank Plc, Mr. Abdulrahman Yinusa, explained in a chat with THISDAY that beyond efforts by the central bank to spur lending, there are other variables affecting lending rates in the country. These he listed to also include the operating cost and risk premium.

Yinusa said further: “The rate a bank charges on loans beyond paying for the cost of fund is operating cost. In Nigeria, operating cost has not changed. All the banks are still running on generators and there are other infrastructural challenges. Yes, the NIBOR rate has reduced as a result of the intervention by the central bank, but has operating cost reduced?

“Another reason why lending rate is still high is because of the risk-return premium. If a bank is lending to a multinational and well-structured firm, it may choose to charge maybe one or two percent risk premium.

“But if it is giving loan to a Nigerian company, the percentage would be far higher. In Nigeria today, the risk environment has even worsened. We have to address a lot of fiscal issues in the country. As I speak, we are just about to get a finance minister. So, this is not something that the central bank can do alone. The CBN can only address the monetary aspect, but we still have fiscal issues to tackle.”

[ThisDay]

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