Liquidity crisis threatens Nigeria’s banking sector as govt withdraws $13bn

By bne IntelliNews September 14, 2015

Some NGN2.6trn ($13bn), or about 20% of Nigeria’s banking sector’s total assets are set to flow out of the system by September 15, when a deadline expires for all federal government ministries and agencies to comply with the presidency’s Treasury Single Account (TSA) directive. The industry could face significant liquidity pressures, while some banks have already started to lay off staff.

The TSA, which will be operated by the Central Bank of Nigeria (CBN), is aimed to improve accountability and transparency in government finances, but could provoke a serious crisis in the banking sector. The CBN had calculated the public sector deposits at commercial banks at NGN1.24trn in its second quarter report, based on statements it had received from commercial banks. However, according to an anonymous bank executive, quoted by Vanguard, the sum “should be more than double what was reported”, as lenders tended to substantially under-report public sector proportion of their deposits because of the central bank’s dual Cash Reserve Requirement (CRR) policy.

In May, the CBN harmonised the CRR on public and private sector deposits at 31%, saying that the discriminatory CRR had constrained the policy space and inspired moral hazard by private market participants. Previously, the CRR on private sector deposits was 20% and the CRR on public sector deposits was 75%.

According to the executive, a serious liquidity crisis could be looming as the top six banks in the public sector deposits control about 70% of total money market liquidity.

However, he noted that most of Nigeria’s 36 states are not eager to follow the federal government’s policy, providing a breathing space to some of the banks.

At the same time, local media also reports that several banks have already started laying off staff. Leadership writes about a total of 2,500 employees being fired last week by two unnamed banks, which needed to cut jobs in order to survive after liquidity started gradually drying out. The media cited anonymous bank executives, one of whom said that “the banks will […] have to reduce their staff strength or be ready to recapitalise”.

“Some of these funds are not withdrawn for six months or even more and banks trade with them and make profits. So once you shut that angle of business certainly the banks will bleed, so if, other people did not expect sacks, then they must be day dreaming,” the other source said.

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