Will CBN s postponement of uniform accounting period borrower friendly

The Central Bank of Nigeria (CBN) last week, announced postponement of the uniform accounting year-end period for banks, which it had earlier slated to take effect from December 2008.

The apex bank says that the new date for the uniform year-end of accounting rates of commercial banks in Nigeria will be December 2009 indicating a one-year extension of the earlier policy decision.

Reason given for the postponement are not far fetched, as the CBN, at the end of the Financial System Surveillance Committee (FSSC) meeting held recently, stated that the postponement taken at the meeting, "is in response to the observed desperate behaviour of some banks in deposit mobilisation and hiking interest rates at levels that cannot be justified by the fundamentals."

"The core (non-food) inflation rate is currently at about 3.6 percent, and both the deposit and lending rates that currently prevail in the market are not justifiable. The CBN will investigate these practices by some banks."

From the foregoing, the earlier announced uniform accounting year-end of banks is a cause of the reported high interest rates and inflation rates, discouraging borrowing and venture economic activities in the country also indicating that the postponement will bring down the interest rate charged by banks.

However, with the stipulated period for banks compliance, December 2008, now shifted to December 2009, the question arises as to whether this truly portends a good time for borrowers.

The concern raised by the recent CBN decision is on how it will cause a fall in bank interest charged on loans and how high rates of inflation in the country will be curbed.

This is because although the CBN’s said that its postponement of compliance dates was due to interest rate not rising as a result of fundamentals but on some unscrupulous behaviour by banks to meet up the former deadline, what is what noting is to what extent will this help in reducing the rate of interest and inflation rates.

The argument, analysts say is founded on the grounds that the current rates of inflation and interest rates is a result of more holistic economic phenomena’s occurring both locally and international and is less impacted by Nigerian commercial banks decisions.

Already, prior to the high inflation rates in Nigeria recently reported by the National Bureau of Statistics to be at 12 percent as against last year’s figure, indicating a first time double-digit rise, there has been global agitations inflationary trends.

These agitations bordering on use of food produce like rice and wheat for bio fuels due to of high-energy needs of emerging economies like china, and expansionary fiscal decisions of governments including the Nigerian government pushing prices upwards.

On inflation rates, the whole world have since the beginning of 2008, been grappling with price increases in food items and oil price, going higher by almost double the price last year. Oil production cuts in Nigeria and some middle east countries has resulted in increases in oil prices in the world markets also impacting on general price levels and spending patterns especially as the China and the United States (US) began to use food products like rice and corn for energy purposes.

Nigerian as an import dependent country especially on finished products like machineries, cement, wheat, rice and fuel and other products of crude oil have not been insulated form surges in world prices making her a victim most often of imported inflation. The IMF had also attributed increasing cost of goods to strong demand in emerging economies.

Indications were that global food prices have soared 40 percent, while food reserves were at 30-year lows making rising cost of food, a major source of global social instability and economic hardship. In summary, insufficient supply of food was the major cause of inflation buoyed by a diversion of acreage food production into biofuel-crops production to meet energy needs of advanced countries.

Further more, grains used for livestock and poultry feed has became more expensive, in turn pushing up the cost of beef, wheat, rice, milk, cheese, eggs and other basic foods while increase in the demand for biofuels also affected supplies of fertilizer affecting output of goods.
On the other hand is the increase in world oil price, although Nigeria is an exporter of crude oil, Nigeria and African countries import a large percentage of oil consumed, which is a result of inadequate refining capacity. Oil price as research shows has recorded increases over time from under $25 per barrel in September 2003, the price increased to over $60 by August 2005, in the 3rd quarter of 2006; it had reached $75, falling to about $60 per barrel in the first quarter of 2007. By October 2007, oil prices reached $92 per barrel, the increase has been persistent resulting in a record high of $103.05 per barrel in February 2008 , $110 per barrel in march 2008 reaching $116.10 per barrel as at April 18, 2008 and went as far as $146 per barrel and is currently around $123.23 per barrel . Increase in oil price, was due to pressures on the demand and supply side, which includes cuts in production rates, limited investment in the sector and strong global demand for oil since 2003. Also, mentioned among the reason causing oil price increases is the crisis in developed financial markets such as the U.S. economic down turn that attracted commodities as stores of value rather than the dollar. This demand and supply imbalances reflects in pressures on price that is fueling inflation. Cuts in oil production rates has been occurring all over the world as reports show, for instance, in Nigeria, oil giant Royal Dutch Shell suspended production of 150,000 barrels per day in 2007, owing to unrest in southern Nigeria. The unrest caused a 25 percent drop in Nigeria’s oil production. Reports show that the occurrence in Russian oil production is no different as output fell in the first quarter of the year raising fears over the ability of global supply to keep pace with demand overtime. Russian production averaged 10 million barrels a day in the first three months of 2008, which is 1 percent less than the rates of first quarter 2007 aside the factor of commodities serving as store of value.

On interest rates, the CBN has in 2008, raised it two times, in April from 9.5 to 10 percent and again from 10 percent to 10.25 percent.

The CBN also raised in a bid to control the inflationary pressures also raised the cash reserve ratio by 100 basis point from three percent to four percent, thus impacting on the level of money available to banks in meeting their loan giving obligations.

This invariably, economic analysts say, impacted on making the loan giving process very competitive hence increasing rates since the CBN aimed at tightening the monetary policy by controlling interest rates and inflation rates.

On the other hand was the increase in fiscal spending in Nigeria because of increasing oil revenue and the longing of states for the disbursement of the funds hiked by the increases in world oil prices.

Expansionary fiscal policy in Nigeria, no doubt has impacted on monetary aggregate and inflation since the Nigerian economy possess less capacity to formally absorb the increases in income from oil but the reverse is the case because despite increases in income from oil production suffers.

The concern therefore by economic analysts is that the recent postponement may not have real impact on the interest or inflation rates level as the impact of such measures may be minimal while other fundamentals causes of the high rates of inflation and interest rates in Nigeria remain unabated.

The challenge is on the CBN therefore to make effective its monetary controls of the economy while aiming at expanding the private sector that will create jobs and crowd out poverty and unemployment, which is only possible through a borrower friendly policy.

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Will CBN s postponement of uniform accounting period borrower friendly