$20 BILLION IDLE FUNDS: WHO IS TO BLAME? – by Kalu Aja
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“we have $20bn lying idle in various domiciliary accounts of many customers at the various banks across the country. Naira is our currency, why are they keeping the foreign currency?”
CBN March 4th 2016
An interesting statesman from the bankers to the Federation.
Nigeria is the number one destination for remittances inflow to Africa, according to the World Bank’s Migration and Development Brief, Nigerians sent home $21b in 2014. So $21b in local commercial banks is understandable.
Why do Nigerians keep US Dollar cash in Nigeria? Well because the CBN says they can.
The Commercial banks have operated domiciliary accounts with the clear approval of the CBN. in January 2016, the CBN reaffirmed that approval by issuing a statement that “The Central Bank would now permit commercial banks to begin accepting cash deposits of foreign exchange from their customers.”
So the CBN approved US dollars in domiciliary accounts, but is now complaining about dollar funds in domiciliary account?
interesting
However, I want to focus on the “idle” part of the statement, Lagos State has borrowed $200m at 2.5% from the World Bank, the Federal government borrowed to repay in 2018 at 5.375%…yet there is $21b sitting “idle” in Lagos banks…
Could the banks not lend in dollars to Lagos State? Or will CBN ask why Lagos, Abia and Edo are borrowing in USD when Naira is their currency?
If according to the CBN, $21b is “idle” who is to blame?
Clearly it’s the fault of bankers in Nigeria. The CBN, the Commercial and the Investment bankers have failed to create products that can be marketed to the owners of these $21b “idle” funds. We cannot blame the owners, it’s their cash, they can choose to leave it “idle”.
Clearly the CBN instead of wailing should have issued guidelines for a Foreign Pay Bond. Unlike the Eurobonds which are issued outside Nigeria in a foreign currency, a Foreign Pay Bond is a bond issued by a local country (Nigeria) but is denominated in a foreign currency (USD). So in this instance the local Nigerian banks can issue a 2%, US dollar denominated Foreign Pay bond to the owners of the $21b in Domiciliary accounts. Coupons will be paid in dollars.
The banks would use these bond proceeds to fund their fx requests from Nigerian importers. This will remove the pressure completely from the CBN fx reserves. The CBN can also restrict these Foreign Pay Bonds to borrowings on capital project and essential exports.
Even with the US federal Reserve loosening rates, Interest rates in America are less than 1%, in Japan and Switzerland they are minus. A foreign pay bond will incentivize the large Nigerian diaspora to move funds back to Nigeria to take advantage of higher rates with no currency risk. If I lived in Japan, I could borrow $10,000, at zero interest, transfer to Nigeria and place in Nigerian bank if a Foreign Pay Bond existed.
This low interest regime in mature economies opportunity won’t last forever, so we should take advantage of it. Even if just 1% is subscribed from recorded 2014 remittances inflow that is $210m.
The CBN seems to vacillate between loving Dollar deposits and demonizing Dollar deposits; they should advise a policy and stick to it…The market as they know hates uncertainty.
It’s our problem, we can fix it
