CBN Forcing Companies To Expand, As Nigerians Now Pay Banks To Save Money

The Central Bank of Nigeria (CBN) is indirectly trying to force companies in Nigeria to expand regardless of the company's objective. In CBN's response to the Nigerian Economic Summit Group (NESG), it stated that companies are now saving their money rather than expand their business.

The apex bank said companies need to reinvest their capital into their business in order to create employment opportunities. This is why the CBN reduced the savings rate in the first week of September 2020. CBN reduced the interest rate on bank savings to 1.25% per annum.

With the inflation rate at 12.8% in Nigeria, it seems Nigerians are now paying banks for saving their money. This is done by the CBN to discourage big companies from saving, and instead invest in expansion, however, the decision of CBN will have a spiral effect on individual and small business savings in banks.

The NESG had described the decision of CBN to reduce the savings rate as “price-fixing”, but CBN disagreed, stating that it only set a cap on the interest rate. While explaining its reasons for the decision, CBN said savings have skyrocketed beyond investment capital or capital going into the economy.

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“Based on very limited information and cross-country exposure, the NESG refers to the CBN’s recent directive, which simply sets a floor on saving rates as “price-fixing”. Given that in an ideal economic textbook/theory, saving should be equal to investment, we expected total deposits should closely mirror total loans.

“Yet, over the past several months, we have noticed an increasingly large gap between total deposits in the banking system and total credit to the economy. While total deposits stood at about N25 trillion in January 2020, total loans stood at N17 trillion. As of August 2020, while total deposits have increased to N29.7 trillion, total loans were only N19 trillion.

“Many rich cooperates have simply been content with saving their cash balances and collecting huge interest payments, rather than expanding their investment, which should lead to hiring more people and producing more goods.” CBN said.

CBN further stated that central banks in other countries adopted the same policy, “In fact, some Central Banks, including the European Central Bank, the Bank of Japan, Denmark’s Central Bank and the Swiss National Bank, are now operating “negative interest rates”, which means customers pay banks to keep their deposits."

CBN Tackle NESG On Forex Management

The NESG had faulted the CBN on transparency in disbursing foreign exchange. The economic group said there's no clarity in the management of forex by CBN. In its response, CBN said due diligence is done before banks before disbursement.

According to CBN, banks compile the names of the forex applicants after scrutinisining them, "In the retail window, banks submit a detailed list of applicants who are then allocated foreign exchange based on availability.

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"Given that these submissions are first scrutinized by the banks and are accompanied by the provision of significant documentation, we do not understand the extra transparency being called for by the NESG."

Is CBN Trying To Evade Judicial Review?

NESG had argued that the CBN obtained immunity and will not be answerable to a Judicial review due to the revision to the Bank and Other Financial Institutions Act 2020 (BOFIA).  But the CBN said such statement was “total ignorance or malicious intent on the part of the NESG”.

CBN said the provision already exists as section 53 in the old act and section 49(1) of the then BOFIA of 1991 while disclosing other existing similar clauses in the Central Bank of Nigeria Act 2007 (section 52), the NDIC Act 2006 (section 55), the Investments and Securities Act 2007(section 302) and AMCON (Amendment) Act 2020.

“The said provision is to set a threshold against which suits against public officers must be filtered, such that for a suit to be maintainable it must scale that threshold by proving bad faith on the part of the pubic officer. It is not a bar against action,” it said.