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CBN likely to hold interest rate

By on March 24, 2015

The Central Bank of Nigeria (CBN) which commences its second monetary policy committee (MPC) meeting for the year this Monday, is likely to maintain interest rate and other monetary policy tools.

The committee is expected to consider the domestic and international economic and financial conditions in order to implement policies that would influence the Nigerian economy in the next few weeks.

Most analysts have argued that at the end of the two-day meeting which holds a few days to Nigeria’s presidential election, members of the MPC would largely vote for a ‘hold’ position.

At the end of its last meeting held in January 2015, the MPC maintained all its rates, as well as the mid-point of the foreign exchange rate at $1/N168 with a band of +/-5 per cent.

However, following the persistent demand pressure at the foreign exchange market in the face of the declining oil price and the external reserves, the CBN last month suspended the Retail Dutch Auction System (RDAS) window,
leading to a devaluation of the naira. Although, presently, there is scarcity of the United States dollars in the economy, the central bank has been able to hold the greenback at N197 to a dollar at the interbank market.

The latest inflation figure as at February 2015 was 8.4 per cent, higher than the 8.2 per cent recorded the previous month.

The external reserves position has declined to $30.077 billion as at March 19, 2015.

To this end, analysts at FSDH Merchant Bank Limited argued that: “Looking at the current and the short-to-medium term outlook for the Nigerian economy and the financial system, we are of the opinion that the MPC would vote to maintain rates at the current levels, as any decision to increase rates would hurt the fiscal position of the government at all levels and that of the private sector.

“A rate cut may lead to a capital flight, which would hurt the economy and the financial system.”

On their part, analysts at BGL Securities Limited noted that in between the last MPC meeting and now, there have been mixed feelings in terms of gauging performance against expectations.

According to a BGL report, the MPC meeting would focus on the exchange rate market as it affects the foreign reserves and its impact on macroeconomic stability.

“The latest actions by the CBN to deal with the exchange rate volatility appear to be achieving desired results; hence no need for further action at this meeting. We had earlier argued in favour of supporting the closure of the official exchange rate market with a low interest rate regime so as to encourage domestic production as a substitute to the now more expensive imported goods and to stimulate local exports to take advantage of the low exchange rate to be more competitive globally.

“However, the recent increase in inflation and a heightened risk of further increase in inflation due to continuing electioneering spending dampens the possibility of such an action at this time. The current higher money market rates also suggest reduced liquidity in the banking system; hence an increase in interest rate may not be justified at this time. We therefore expect the committee to take a ‘HOLD’ position on key policy indicators,” it stated.

Meanwhile, as part of efforts to stimulate growth in the insurance sector and ensure synergy in the financial sector, the CBN has unveiled a framework for the offering of bancassurance products in the country.

THISDAY learnt that the guidelines were designed after a recent meeting between the Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, and stakeholders in the banking and insurance sectors. The federal government aims to use the initiative to deepen insurance penetration in the country and also to unlock the potential of the sector.

The federal government has in recent times shown its desire to have an insurance company that contributes significantly to the country’s gross domestic product (GDP).

Okonjo-Iweala had expressed concern that Nigeria’s insurance penetration was very low compared to most countries in the continent.

The CBN had in 2010 stopped banks from undertaking any form of Bancassurance when it repealed the universal banking model.

Bancassurance is an arrangement in which insurance companies leverage on the customer base of banks to sell insurance products to banks’ customers.
The CBN, in the letter dated March 16, 2015, titled: “Guidelines on Bancassurance- the Referral Model,” signed by its Director, Banking Supervision, Mrs. Tokunbo Martins, described the referral model as a system where a bank refers its customers to its partner insurance companies. In return, the bank receives a commission on each lead closed by the insurance company.
The bank is not to be involved in marketing of the insurance products.

The 10-page document addressed to all banks stated further: “The bancassurance products are insurance products which fall under the general and life insurance business that are sold to banks’ customers by the insurance company under a bancassurance referral model agreement.

“The product is distinct from insurance covers that serves as mitigants for losses against credit and other risks.”

However, it stated that under the arrangement, banks shall not be allowed to engage in any other model of bancassurance other than that permitted under the current guidelines for which approval has been obtained from the central bank.
It added other prohibited businesses for banks to include: “Banks shall not offer banking products that incorporate insurance features. Banks shall not offer free premium payments as a feature of any of their products.

“Banks shall not provide the bancassurance products in a manner that contravenes these guidelines or any other statutory provision or law that applies to insurance products and services.”

According to the guidelines, the referral model bancassurance arrangement between a bank and an insurance company shall not be valid without executed bancassurance agreement. Furthermore, it explained that banks shall not undertake any insurance marketing, underwriting or claim settlement, without a clearly stated bancassurance agreement.

“Banks shall ensure that no risks are transferred to it and shall not assume any fiduciary responsibility or liability for any consequences, financial or otherwise, arising from the subscription to insurance policies by customers.

“Banks shall conduct a thorough due diligence/periodic assessment for the selection of partner insurance companies, which would be restricted to two insurance companies.

“Banks shall ensure that only bancassurance products approved by relevant regulatory authority are offered to their customers by the insurance companies.

“Banks shall not enter into bancassurance arrangement with insurance companies that do not hold a valid operational licence from the National Insurance Commission (NAICOM),” it added.

However, it pointed out that the offering of bancassurance products by a bank would be subject to the central bank’s approval. It also stated that a bank that intends to offer bancassurance is expected to submit an extract of its board resolution approving the product, a draft bancassurance agreement between the bank and the insurance company, the bank’s assessment of risks and mitigants put in place, the product brochure stating feature and benefits of the product, the evidence of ‘no object’ obtained by the insurance companies from NAICOM and the referral agent approval obtained by the bank from NAICOM.

The federal government seeks to increase the level of participation of Nigerians with insurance cover to 300,000 people by next decade and widen access by growing the number of insurance policy holders in the country.

 

[ThisDay]