By: Sir Henry Olujimi Boyo (Les Leba), first published in October 2008


In continuation of last week’s article titled “Bleeding Us to Death with Debt”, the Rational Perspectives column presents 

part 2 as this week’s publication. Last week we started off by drawing comparisons between an article that was published 

just two weeks ago and the aforementioned article which was published as far back as 2008.
This week’s article further examines the issues discussed last week in part 1 of this series and once again asks the all-

important question: Why does the CBN keep borrowing at high costs in the face of increasing idle reserves?
It is quite clear that if we continue to operate as we always have, we should not expect progress of any kind. They say 

that knowledge is power, if we as a people remain ignorant, Nigeria will continue in this endless loop and we will remain 

unable to forge ahead. Let us read on, and in so doing, may enlightenment lead to better days ahead.

(These articles are also available on the Late Sir Henry’s web portal,

In a recent article titled “CBN to the Rescue” in this column, we discussed the meltdown in which the market capitalisation 

of the Stock Exchange fell by almost N4000bn or 33% within six months this year.  The causes of this massive downturn have 

never been accurately identified even though market analysts fingered reckless somersaults in government monetary policies 

as the major instigator.  

However, if a dividend of one naira or less is paid for equity with a market price of, say, fifty naira, it does not 

require the knowledge base of a rocket scientist to conclude that most shares, particularly bank shares, were grossly 

overpriced.  Thus, the fall in share prices was seen by some analysts as an attempt to create some rational equilibrium.  

But this was not to be, as the financial regulators tinkered unsuccessfully with various measures to restore confidence in 

a market characterized by weak fundamentals, particularly with regard to price/earnings ratio of market shares.

In a desperate bid to sustain or enhance the enormous capital gains on the market rather than allow an appropriate 

correction of share prices, the financial regulators ignored prudence and transparency to featherbed the fortunes of the 

banks!  There was always the suspicion that the annual financial statements of banks were cooked up to look sexy and their 

staggered accounting years made it possible for weak positions to be beclouded by funds raised between banks for short term 

cover up of gaping holes in their books.  In this manner, all banks in turn continued to appear healthy, but the projected 

good health was never reflected in increasing dividends!  

Our Central Bank’s attempt to dissipate the foggy mist around these financial statements so that investors can make 

accurate comparisons between the performance of competing equities by insisting on a common year for all banks, was an ill 

wind that exposed the ugly behind of the chicken and it precipitated demand on debtors to liquidate those loans which the 

banks had advanced for share purchase.  Regrettably, the CBN had to reverse this otherwise responsible directive after only 

five days to reduce pressure on debtors to pay back their loan obligations.

The CBN’s policy reversal was a green card for banks to return to their old ways of presenting falsely padded results which 

were designed to deceive investors.  In other words, the CBN slaughtered accountability, accuracy and transparency on the 

inappropriate alter of support for a continuous rise in share prices!  The result of CBN’s hasty policy retreat may 

eventually spell doom for the Nigerian Stock Exchange as it would become increasingly difficult to evaluate performance 

while giving the banks more ominous yardage to cloak ugly reality at the expense of the investor.

However, CBN’s alignment with the underlying falsehood in the market failed to halt the decline in share prices, and it 

appeared that more supportive measures were necessary from the apex Bank, which concluded that the main problem with the 

market was a severe shortage of cash in the system!  At this point, one expected that CBN would blame itself for 

inadvertently bringing about this cash shortage with its unceasing, aggressive cash withdrawals from the system every month 

when it sells treasury bills and bonds to reduce the deluge of too much cash in the hands of the banks whenever the monthly 

statutory allocations were paid into the accounts of beneficiaries.

Needless to add that the bloated cash payments result from the substitution of the dollar component of monthly 

distributable revenue with loads of naira!  In the event that monthly allocations continued to increase rather than 

decrease, it is hard to imagine how this could have suddenly transformed into a cash shortage and triggered a pressurized 

demand for debtors to redeem the incestuous loans accepted for share purchases!

A rational observer would expect that in such scenario CBN would suspend further borrowing from the market in order to 

create additional liquidity, so that banks would let off pressure on their customers for loan repayment and push share 

prices upwards.  But, surprise, surprise, the reverse is actually the case!  The CBN which identified shortage of cash as 

the villain in the market only a week or so before has again found it imperative to withdraw N65bn from the money market as 

reported in the media to curb liquidity;“The N65bn was raised from six different treasury bills as well as three- and 10-

year bonds… the two federal government bonds were over-subscribed by investors by an increase of N25.11bn and N26.2bn 

 “… the issue rates for the banks were 11% and 12.45% respectively”. Guardian of 3/10/2008, pg 15.

The sudden massive surge in market liquidity within days must appear suspicious and inexplicable.  Share prices fell 

steadily all through the course of this year while the CBN continued to mop up so called excess cash from the system, even 

at the same time that it was blaming lack of cash for the market downturn!  The current borrowing of N65bn is a 

confirmation that credit crunch may not truly be the villain of share price fall, as the banks appear equipped to even lend 

more than the N65bn the CBN and Debt Management Office were ready to remove from the market!  The question is, how did cash 

starved banks suddenly have so much surplus to lend back to government in a matter of days?

Well, we recall that a few weeks back, the CBN reviewed certain ratios which control the level of liquidity in the system; 

for example, a reduction of banks’ cash reserve and liquidity ratios would immediately release a lot of loose cash in their 

asset portfolios, thus making more money available for onward lending.  Conversely, an increasein both of these ratios 

would also reduce the amount of money available for lending!  In other words, these ratios are useful tools for control of 

liquidity in the system.  The CBN’s recent reduction of cash reserve from 4 to 2% and liquidity ratio from 40 to 30% is 

estimated by the CBN to release additional N1000bn lending money to the banks so as to stem the fall of share prices on the 

stock exchange.  In the event that prices continue to totter, in spite of the cash release, it must be obvious that the 

banks decided to divert their new cash chest of N1000bn for other more lucrative investments!  Thus, the willingness of 

government to borrow some of these funds from the banks and pay over 10% as interest charges is a welcome blessing for 

these banks!

The losers in this financial rigmarole are the people, who watch helplessly as public officers borrow moneys that are not 

applied in any meaningful way to improve infrastructure deficit or to lift our people from poverty.  Anyhow, the question 

now is, if reduction of cash reserves and liquidity ratios will put uptoN1000bn in the hands of the banks, why does the CBN 

seem unwilling to use aggressive increases in both ratios to curb the unyielding scourge of excess liquidity rather than 

continue borrowing at such high cost (about N400bn in 2007) with treasury bills and bonds, and then storing the borrowed 

funds as idle cash in its vaults or simply as accounting book credits?

Save the Naira, Save Nigerians!