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    Wednesday, March 22, 2023

    Operating Licence Not a Right, Emefiele Warns Banks’ Chiefs

    In the face of excruciating credit squeeze, high cost of production, restrictive fiscal space and cost of living crisis, the rate-fixing arm of the Central Bank of Nigeria (CBN), the Monetary Policy Committee (MPC), voted overwhelmingly to increase the benchmark interest rate by another half point.

    The decision has pushed the Monetary Policy Rate (MPR), a benchmark that determines the pricing of commercial loans, to 18 per cent – the highest the market would see in decades.

    The monetary authority raised the benchmark interest rate by an aggregate of 6.5 per cent since May last year, when it adopted an aggressive tightening to rein in inflation and stave off capital outflow.

    Sadly, inflation has continued to tick upward, contrary to expectations of the market, hitting a new high of 21.91 per cent last month. But the monetary authority said it would be worse if it did nothing to restrict liquidity.

    With the maximum lending rate already exceeding 27 per cent in January when the MPR was 17.5 per cent, businesses that are suffocating under an exclusive operating environment, cloud face tougher funding conditions in the days ahead. Banks would also reprice existing and fresh consumer loans, which could significantly increase the cost of living and weaken consumption.

    The raise in MPR also has severe consequences for Federal and state governments, which rely majorly on borrowing to fund their budgets. This year alone, over 52 per cent of the FG’s N21.83 trillion spending envelope is to be funded with fresh debt. An increasing interest rate means the government will pay more for loans.

    Existing debts are not spared of rising costs. For instance, the existing ways and means (W$Ms) facilities held by the CBN, which is estimated at N22.7 trillion are being serviced at MPR plus 300 basis points. When the MPR was 17.5 per cent, the projected cost of servicing the facility was 21.5 per cent. With the new interest rate, the price has moved by 22 per cent.

    The Interest rate hike comes on the heels of fears over the possible impact of the United States bank failure on the Nigerian financial market. While conveying the decision of the MPC at a media briefing yesterday, the Chairman of the Committee/CBN Governor, Godwin Emefiele, said adequate actions have been taken to insulate Nigeria’s financial system from the contagion, threatening to spread elsewhere.

    The possible impacts of the brewing crisis that has swallowed three banks and threatening more especially start-ups are on focus as innovators, investors and world leaders converge in Silicon Valley, California, United States, to discuss the future of Africa at the African Diaspora Investment Symposium (ADIS), today. Attention will be divided over the ripple effect of the collapse of Silicon Valley Bank (SVB), the bank of choice for most startups and venture capitalists, and the influence its collapse could have on the startup world, especially fintechs in Africa.

    This is as a new study has said 186 more banks are at risk of failure even if only half of their depositors decide to withdraw their funds in reaction to SVB’s earlier this month. According to the study by economists in a paper published on the Social Science Research Network, a run on the banks could pose potential risk to even insured depositors – those with $250,000 or less in their accounts.

    SVB was closed after the bank announced it had lost $1.8 billion in the sale of treasuries and securities. Millions of dollars banked by startups and venture capital funds were at stake until the U.S. Federal Reserve acted to save the day.

    The closure of SVB triggered panic on the African continent, and that fear is not without reason, according to the head of American technology startup accelerator Y-Combinator (YC), which has 80 African startups in its portfolio.

    “About 30 per cent of our companies exposed through SVB can’t make payroll in the next 30 days,” said YC president, Garry Tan. “All the startup founders groups I’m in are in full-on panic mode. Everyone is moving money around. Nobody knows which banks are safe.”

    SVB was the bank that lent to startups and asked that startups have deposits in the bank as collateral. The bank offered loans against shares for founders and cashflow loans. Since 2019, SVB has been the preferred bank for startups.

    In the wake of the bank’s collapse, founders in Africa are reviewing their banking options to cushion their startups from such eventualities.

    African fintech unicorn, Chipper Cash, was among several startups that could not access a portion of their funds after SVB failed, but CEO Ham Serunjogi downplayed the company’s exposure. “Most of our funds are in various other banks in U.S. and around the world. SVB was a great supporter and partner of Chipper. Sad to see them go down,” he tweeted.

    It was gathered that there were 100 most funded startups in Africa at the end of 2022 by SVB — among them Nigeria with 27 and Kenya with 23. The other two members of the big four, South Africa and Egypt, are represented by 34 startups, which means the big four represent 84 per cent of the 100 startups.

    In light of the increasing difficulty to obtain funds, the Federal Government last week announced a $672 million tech fund to support young entrepreneurs in creative and tech sectors who struggle to raise capital in Africa’s largest economy.

    The African Development Bank will contribute $170 million to the fund, while the other $116 million would come from Agence Francaise de Development and $70 million from the Islamic Development Bank.

    Adedeji Olowe, founder and CEO of Lendsqr, a fintech company, offered some assurance, saying that while some startups may have funds trapped in the failed bank, the funds have not disappeared.

    Beyond the impact of SVB’s failure on African startups, the symposium hosted by the African Diaspora Network (ADN) at the Computer History Museum, Mountain View, will see techies and members of the diaspora community discuss how the continent can move away from sole reliance on grants and remittances from abroad.

    Recorded remittances from the Africa Diaspora reached over $95 billion in 2021. This is in addition to aid from foreign investors and partners.

    According to Almaz Negash, Founder and Executive Director of ADN, ADIS is looking forward to bringing this critical dialogue beyond remittances back to Silicon Valley.

    “With a median age of 20 years and 60 per cent of the population under 25, Africa is the youngest continent in the world and holds the future. Projections show that a quarter of the world’s people will be African by 2050. Africa has an opportunity to drive major transformations that adapt to this drastic demographic shift and build resilience in an era of disruption.”

    In 2019, Africa received $82.7 billion in personal remittances, nearly double foreign direct investment (FDI) flows of $46 billion. Remittances to Nigeria alone were $23.8 billion compared to $3 billion in FDI. Egypt saw remittances worth $26 billion. Those are just the formal, countable remittances.

    These payments provide a financial crutch to millions of households. This is why smaller, poorer and more fragile economies are so dependent on them.

    Africa’s top remittance recipients as a proportion of their economies are South Sudan, Lesotho and The Gambia with 35 per cent, 21 per cent and 15 per cent of GDP respectively, coming from remittances, according to World Bank statistics. Between 2004 and 2017, remittances as a share of GDP grew from one per cent to 7.5 per cent in Ghana.

    “Remittances from the diaspora constitute one of the major sources of revenue in many African countries. Unlike foreign direct investment flows, remittances directly reach the most vulnerable and are less likely to end up in the pockets of corrupt officials,” said Aleix Montana, Africa analyst at Verisk Maplecroft, a risk intelligence company.

    Participants at the symposium will for three days discuss what can be done to tap into and engage the diaspora community and leverage their strengths for Africa’s benefit.

    Meanwhile, some experts believe marking up the interest rate by 50 basis points reflects the realities not just in Nigeria but around the world.

    The managing director of 3Data Concept Limited, Jonathan Izuchukwu, said with what is happening in the United States and Switzerland, where the banking systems are confronting challenges, it is heartwarming that the Central Bank is taking a step to ensure such economic calamity does not befall Nigeria at this time.

    His argument: “Raising the interest rate by 50 basis points by the CBN is in reaction to the upward movement of inflation. It is basic economic 101 that once inflation goes up, the interest rate has to equally move up proportionately. There must be a balance within the economy.”

    On his part, Kelvin Emma Emmanuel, who is the Chief Executive Officer at Dairy Hills, said that hiking MPR to tighten monetary policy to avoid a negative real rate of return is a viable tool for aligning inflation to the interest yield curve on institutional capital. He wants the MPC to realise that as the cost of capital becomes more expensive in the debt capital markets, the increase in Cost Price Index (CPI) caused by demand-pull inflationary buffers will only rise because companies that borrow to produce will pass on the cost to end consumers.

    But Head, Equity Trading, Plane Capital, Paul Uzum said the rate hike would increase the cost of borrowing from banks, especially for loans that are based on a floating interest rate just as many listed consumer goods firms especially the breweries and other sectors that depend on debt financing would continue to witness rough times.

    Another stockbroker with Kapital Care Trust Limited, Andy Tsaku, said the real sector would witness higher production cost, which naturally will translate in ballooned prices of goods and worsen inflationary pressure.

    He described the development as a misalignment between the pursuit of monetary aggregates and fiscal policy direction, stressing the need for both authorities to work together and move the economy forward.

    “On the whole, it is my considered opinion that the current strategy by the MPC in attempting to chase inflation using the MPR might just be a wild goose chase unless there is a fundamental shift of focus towards enhancing our actual productive base of both goods and services.

    “Without an intentional fusion of between the monetary and fiscal authorities, we may continue to turn and turn in a widening gyre, until the Falcon can no longer hear the Falconer,” he said.

    Chief Executive of Wyoming Capital and Partners said the stock market already understands the reasons for periodic MPR hikes and has adjusted fully to its impact, the reason there was not much aggressive selldown or repricing that tends to unsettle the markets yesterday.

    However, he stated that except there is a huge supply of government securities to back up the decision of MPC, which comes at a huge cost to the government, it is unlikely there would be much impact on yields in the fixed income space.

    Emefiele, in his address at the end of the MPC meeting, explained that the apex bank cannot afford to over-tighten the economy, pointing to the United States and Switzerland’s financial system crisis.

    He allayed the fears that what happened in the two counties could happen in Nigeria.

    “The prudential regulations put in place even before I started banking have ensured that the banks are insulated against such a crisis,” he stated.

    The bank also cautioned bank shareholders to desist from ‘misbehaving,’ saying, a banking licence is not a right but a privilege that can be withdrawn at any time.

    “The bank has always warned shareholders of the banks against misbehaving. They should know that depositors’ money in most banks is bigger than shareholders’ funds. The banks are owned by depositors and not the shareholders because of the amount of money that comes from these two groups,” he warned.

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