‘How financial inconsistency is worsening liquidity problem’


By Nike Popoola   Tuesday, 14 Sep 2010


The immediate past President of the Association of National Accountants of Nigeria, Dr. Samuel Nzekwe, has canvassed the need to check the inconsistency in the financial system, which is crippling economic activities.

He said that the financial inconsistency as a result of the widening gap between the lending rate and interest paid on deposit had continued to worsen banks, liquidity problem.

Nzekwe said, ”Currently, the banks lending rate stands between 18 per cent and 28 per cent, while the rates paid on deposit by banks stand between two per cent and three per cent. This is completely abnormal and I continue to wonder why the CBN allowed this dangerous disequilibrium to continue unabated because the economy will be hurt in the long run.”

He said that this had continued to frustrate inflow of funds into the financial system through savings by individuals and institutions because the return on investment was lower than the rate of inflation and the real income or earnings received.

Nzekwe said, ”The implication of this situation is that the banks will be illiquid because of the scarcity of loan-able funds and as such, would not be able to play their financial role of collecting funds from surplus unit and lending to the deficit unit.”

The accountant observed that presently, people were not interested in saving money in the banks because of the low interest receivable on savings, but were rather looking for alternative investments where they could earn higher returns.

He added that most investors were not ready to approach banks for loan-able funds due to high lending rates because it was difficult for them to make profit at such rates.

If this continued unchecked, he warned, the economy would be stunted in the long run.

He said, ”The ideal thing the CBN would have done was to reduce the lending rate to about 10 per cent since the interest payable on deposit was reduced from 14 per cent to between two per cent and three per cent. The gap between the lending rate and interest paid on deposit is unnecessarily too high and should be closed to create healthy monetary environment.”

He said that if the economy is growing too slow and unemployment is rising very high, the government can use its monetary policy to lower lending rates in order to stimulate borrowing and investment, which will in turn, create employment, guarantee economic development and improve the Gross Domestic Product.

Source: The Punch



Comments are closed.