Arbitrage: CBN orders banks to reverse TB transactions over regulatory breaches

Amaechi Ogbonna and Juliana Taiwo Obalonye, Washington DC

The Central Bank of Nigeria (CBN) has warned it would sanction banks and their customers over shady deals intended to sabotage its recent loan to deposit ratio (LDR) policy.

The banking regulator which initially set the LDR at 60 percent before raising it to 65 percent with a December 2019 deadline raised the alarm at an exclusive briefing in Washington DC, where it lamented Nigerian commercial banks’ recent moves to undermine its good intentions for the economy.

According to the CBN, while the LDR policy has led to lower lending rates, some banks are now giving loans to customers to buy treasury bills (TBs) and other securities at CBN’s open market operations (OMO), with intent of earning abnormal gains or arbitrage by taking advantage of rate differentials in the markets.

It also alleged that some banks that took intervention loans for agriculture and industry from the Bank of Industry at 7 percent later reinvested same in TBs and CBN’s OMO at 14 percent — making a profit of 7 percentage points without putting the funds in the sectors meant for such.

It was against this backdrop that the CBN had instructed banks to reverse the TBs and OMO of customers suspected of arbitraging.

Speaking on the sidelines of the IMF and World Bank meetings in Washington DC, Isaac Okorafor, the CBN spokesman, said the affected banks and their customers will be sanctioned and blacklisted for arbitraging in the market.

“Our policy is meant to spur manufacturing output. We have started to see banks now marketing their customers for loans including consumer credits and mortgages,” he said.

“Now that these loans are coming at low rates, manufacturing companies should concentrate on their manufacturing businesses and not on arbitrage. This is how manufacturing output and GDP can be boosted.

Any customer found arbitraging will be blacklisted, with their names published in the newspapers while the banks will be penalised.” He said

Okorafor said Nigerians have been praying for low rates.