The Central Bank of Nigeria (CBN) has barred all banks from making donations or any form of financial accommodation to any political party, a decision analysts say would help the apex banks’ renewed fight against the scourge of inflation and unproductive funding, with its attendant backlash on the economy, BusinessDay investigations have revealed.
Banks have also been prevented from granting loans to persons for investment in public offers of bank stocks or loans to enterprises to facilitate the acquisition of any related entity from which the banks are divesting following the repeal of universal banking.
CBN is said to be worried that in spite of efforts to make banks concentrate on their core functions of financial intermediation so as to lend to the real sector, banks have rather been hedging, leaving the economy worse off.
According to a source, the apex bank is also believed not to be comfortable with the high level of political spending with its negative impact on the economy; stressing that “allowing the banks to further lend to politicians might further compound the problems.”
The new CBN directive to banks, the latest in a series of new regulations aimed at consolidating banking sector reforms, is contained in the “Regulation on the Scope of Banking Activities & Ancillary” circular.
The CBN also directed that effective last November, no bank shall acquire real estate or immovable property other than as business premises for its own use, as may be authorized by the CBN.
Johnson Chukwu, managing director/chief executive, Cowry Asset Management Limited, said the CBN ban is meant to prevent banks from engaging in purely speculative funding and to avoid loans that could attract a political backlash.
“Political activities, by their nature, are purely speculative as they have no realistic measure or estimate of return. Aside from the speculative nature of political activities, funding of political parties by banks can lead to political backlash in the event that the opposing parties win the election,” Chukwu said.
Chukwu noted that the restriction imposed on banks from acquiring real estate or immovable property other than as business premises for their own use is to prevent banks from speculating in real estate, which is illiquid and could lead to asset-liability mismatch, and possibly, liquidity crisis if the level of investment is high.
He added that the ban is also to make the banks focus on their core area of business, which is lending and transactions facilitation.
Another analyst said the ban on banks from lending for the purpose of investing in the primary market equity offer of a bank is to prevent a reoccurrence of the recent crisis in the banking industry whereby banks either lent directly for investment in their stocks or indirectly through some special purpose vehicle, creating a bubble in the capital market.
The CBN noted in the circular that all pending applications for any authorisation, approval and/or consent pursuant to the Universal Banking Guidelines, except those relating to core banking activities permitted under the regulation, shall be deemed withdrawn.
BusinessDay investigations further revealed that the current joint examination by CBN and the Nigeria Deposit Insurance Corporation of Nigeria (NDIC) is targeted at ascertaining the level of compliance by banks, particularly their financial disposition towards political parties.
Most intriguing is the fact that the development is coming on the heels of admonishment by the International Monetary Fund (IMF) that government should immediately take steps to devalue the naira against major world currencies and make it flexible.
The IMF had suggested that further monetary tightening may be needed should inflation pressures continue. The naira currently exchanges for N150 to the US dollar on the official market and up to N157 on the parralel market, while inflation climbed from 11.8 percent in December 2010 to 12.1 percent in January 2011.
