January 19, 2021
  • January 19, 2021
CBN

Compelling need to review CBN policies on minimum savings rate, abolition of s/deposit by MSMEs~Obadan

By on December 23, 2020 0 116 Views

By Mike Obadan

 

The financial sector has continued to demonstrate soundness and resilience even under a debilitating covid-19 environment.

The performance confirms the robustness and efficacy of the monetary policy measures. 

However, although the CBN’s measures influenced interest rates downwards, lending rates are still high and there is unacceptable disparity between lending and deposit rates.

The spread between the two rates is wide standing at 26.47
percentage points in November. Such a wide spread discourages savings and unnecessarily favours the Deposit Money Banks (DMBs).

After some months of implementation, there is need for the Bank to review two extant policies relating to savings/deposit interest rates and corporate savings/deposits.

They have been described as promoting financial repression.

The abolition of savings accounts by corporate enterprises/organisations – micro, small, medium and large enterprises including private educational institutions, foundations and even small associations/clubs, and so on.

There is need to review this policy to allow corporate MSMEs to operate savings accounts just as the DMBs save money even through investment in government securities.

To the extent that the savings account is one of the financial products of the DMBs, MSMEs have a right to put some money in savings deposits for the rainy day. Importantly,

Savings deposits will help them to withstand shocks to which they are highly vulnerable by putting their small balances in savings accounts to earn interests which contribute to their sustenance.

MSMEs will be able to avoid double jeopardy which they suffer at present; not only do they lose interest income, they are now exposed to all sorts of charges on the current accounts which they operate.

READ ALSO: Total credit to economy rises 10.5% to N19.54 trln in Nov ~CBN

The abolition of corporate savings deposit accounts could undermine the attainment of the objective of reducing the size of the informal sector as some informal sector operators could be discouraged from assuming the character of formal sector operators.

No doubt, the CBN has good intentions but the policy is having unintended adverse effects that are larger than the benefits to the banks.

And so, allow corporate savings deposits for MSMEs but direct the DMBs to charge stamp duties on such accounts, if it was not done before.

Also, large enterprises that have huge amounts of surplus funds can be barred from operating corporate savings accounts.

They have more negotiating power and easier access to other savings instruments than the vulnerable MSMEs.

ON THE REDUCTION OF MINIMUM SAVINGS DEPOSIT RATE

Reduction of the minimum savings deposit rate to a minimum of 10 percent of the MPR subject to negotiation of the rates with customers.

The banks never negotiate with customers but fixed the rate at 1.25 percent with MPR of 12.5 percent and later 1.15 percent from September under 11.5 percent MPR regime.

Again, like the above policy, stakeholders perceive this policy as promoting the profit interests of the DMBs.

I know that this is not the intention. But with widening disparities between lending and savings deposit rates, the DMBs are smiling at the expense of ordinary citizens and MSMEs.

Therefore, there is the need to review the minimum savings deposit rate upwards to encourage small savings and narrow the unacceptable interest rate spread.

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