Helloooo 🤗
Whether you've ended up here through happenstance or decision,
Grab a chilled bottle of Fanta and explore with me a breakdown of the newest CBN policies.
MPR- Monetary Policy Rate
MPR serves as a benchmark for banks and Other Financial Institutions (OFI) to establish their interest rates. Prior to now the MPR was at 18.75% and the MPC just increased it to 22.75%.
This implies that when you request a loan from any Nigerian bank, they assess you and give you an interest rate of X + 22.75% on the loan, therefore we can expect the rate to be about 30% to 35%.
This was between 25%-30% when MPR was 18.75%
Scenario: Ajoke Collections used to borrow money from Zenith at 25% on every 1 million, now the lowest rate she’ll probably get from them will be 30%
The purpose of this is to discourage people from borrowing, this means less cash in circulation, less spending and inflationary pressures will be reduced.
How this will work:
If companies borrow less money, they won't have as much cash to spend.
When there's less money to spend, people buy less stuff.
And when people buy less stuff, prices for things can go down, which is called reduced inflation
Another way of reducing cash in circulation is to make people want to invest their money,
Offering better returns on their investments,
For instance, let's say you have a lot of money saved up in your bank account that you don't need right now. You could talk to your bank manager about putting it into something called a fixed deposit account.
If the interest rate used to be 10%, this MPR increase will get you over 15% interest depending on how well you are able to negotiate or how fat that fund is.
More funds in investments, less cash at hand,
Less cash at hand, less jaiyejaiye spending
Less spending, less demand
Less demand, lesser prices, which can reduce inflation.
While these might seem theoretical, please don’t argue with me.
There’s also the adverse effect, yeah sure. There’s that
Now that Ajoke collections is paying higher interest on loan, you know the price of her sneakers will increase right??
Brain Teaser from BBM - Does the CBN think that Nigeria's inflation is driven by high money supply?
Anyways let’s move on to the next,
Cash Reserve Ratio
CRR was adjusted from 32.5% to 45%. What does this mean?
CRR is a regulation that mandates banks to keep a certain percentage of their total deposits as reserves in the form of cash with the CBN.
Increasing this means banks need to keep more of their money with the CBN instead of using it to give out loans.
Scenario: Bank of Tomero has 10 million in total customers deposit, they must keep 4.5m with CBN.
So, while high interest rates discourage companies from borrowing money, the increased reserve requirement makes it so banks can't give out as many loans either.
Liquidity Ratio was increased to 30%
The liquidity ratio is a regulation that says banks must always have at least 30% of their deposits available as cash or easily accessible funds.
Scenario: For every 10 million that we all deposit with Bank of Tomero, the bank has to keep 3 million in their vaults.
This is to make sure that if we want to withdraw our money right away, the bank has enough cash to give us.
It's a way to protect the people who deposit money in the bank.
Imagine going to the ATM to withdraw your last 2k and you see “the bank has insufficient funds”.....
Asymmetric corridor
The asymmetric corridor is a term used to describe the difference between the interest rate at which the CBN lends money to commercial banks (the lending rate) and the interest rate at which it accepts deposits from these banks (the deposit rate).
100 basis point = 1%
700 basis point = 7%
MPR is 22.75%
If Bank of Tomero borrows money from CBN, they will pay interest of 23.75% (22.75% + 1%)
If BOT has excess funds and wants to deposit this with CBN, they will get 15.75% (22.75% - 7%) as deposit interest.
Now, as the MD of Bank of Tomero, why would I choose to deposit my extra cash with the CBN and only earn a low 15.75% interest rate?
Instead, I’d rather lend that money to people who need loans and charge them a higher interest rate of 35%. It’s a simple decision for me.
But here's the thing
Remember my Cash Reserve Ratio (CRR) is 45% and my Liquidity Ratio (LR) is 30%, where would I even get extra cash to lend out in the first place?
Scenario: Out of 10m, 4.5m is with CBN, 3m must be within the bank, so is 2.5m excess funds?
I’ll love to hear from you 😊
Are these policies in the right direction?
Are these what will save Nigeria?
A wise man once said “Increase MPR till tomorrow, that alone will not bring down inflation in Nigeria. Policies won't fix Nigeria, actions will.”
Like a Nigerian wedding, policy-making is a blend of tradition, celebration, and the occasional drama – but in the end, everyone dances.
Stay happy and stay hydrated.
