Banks’ Borrowing from CBN Hits N2.68trn on Liquidity Pressure

Kayode Tokede

There are indications that banks and merchant banks are increasingly depending on the Central Bank of Nigeria (CBN) for liquidity as their borrowing from the apex bank intensified in September 2023 to the tune of N2.68trillion.

Analysts believe consistent monetary policy tightening has led to low liquidity in the banking sector stressing however that illiquidity may not necessarily indicate that the banks are stressed or unstable.

The financial sector in August had borrowed N1.77trillion from the CBN, representing an increase of 51.24 per cent Month-on-Month (MoM).

In the last nine months of 2023, banks and merchant banks have borrowed N15.62 trillion from CBN, representing 100.34 per cent increase from N7.8 trillion reported in nine months of 2022.

Deposit money banks and merchant banks access lending from the apex bank using the Standing Lending Facility (SLF) window and deposit cash with the apex bank using the Standing Deposit Facility window (SDF).

According to findings, banks and merchant banks during the first nine months of 2023 accessed the SLF window against the backdrop of CBN’s tightening monetary policy stance.

The apex banking regulating body has the SLF, a short-term lending window for commercial banks and merchant banks, to access liquidity to run their day-to-day business operations.

The CBN data obtained by THISDAY showed that between January and June this year, banks and merchant banks borrowed N10.25trillion from the CBN via the SLF window, an increase of 138 per cent Year-on-Year (YoY) from N4.3trillion borrowed during the corresponding period of H1 2022.

The CBN data showed that the first quarter figure, which stood at N4.95trillion, was higher than the half-year data for 2022.

The monthly breakdown revealed that commercial banks and merchant banks in January borrowed N528.16billion from the CBN but the figure dropped to N453.7billion in February 2023.

In March, it rose significantly by 776.22per cent to N3.98trillion, the second highest after the N4.47trillion recorded in April 2023.

However, the CBN data showed a N590.29billion and N235.06billion borrowing for May and June 2023.

In addition, SLF’s figure stood at N908.43billion in July 2023. The CBN data also revealed that in   September 2023, banks and merchant banks deposited N601.57billion, representing a decline of 18.5 per cent from N738.03 billion in August 2023. SDF so far this year has witnessed significant patronage as banks and merchant banks deposit reached highest peak of about N876.87billion in July 2023, highest so far this year.

The applicable interest rate on SDF moved to 15.75per cent at an asymmetric corridor of +100/-300 basis points around the 18.75 per cent MPR in July 2023.

The Monetary Policy Committee of the CBN unanimous narrowed the asymmetric corridor from +100/-700 to +100/-300 basis points around the MPR.

However, the CBN has over the years maintained that strong patronage at the SDF confirm healthier liquidity in the banking system.

CBN had maintained that the strong patronage at the SDF confirmed healthier liquidity in the banking system, stressing that banks and merchant banks were in search of better yields.

THISDAY can report that the current inflation rate in Nigeria (25.8 per cent of August 2023) is above yield on Treasury bills (T-Bills) and banks are looking for risk-free investments, which SDF has provided since MPR hike.

“Furthermore, activities in fixed income securities increased as investors navigate difficult economic conditions and underlying pricing pressures in search of better yields,” according to CBN.

THISDAY gathered that banks and merchant banks between January and September 2023 have deposited N5.2 trillion with CBN, an increase of 87 per cent from N2.78 trillion in corresponding period of 2022.

Analysts belive financial institutions prefer depositing with CBN as it is safe and risk-free, stressing that present business environment has forced banks and discount houses to lend cautiously in the real sector.   

Commenting on the borrowings from CBN, the Chief Executive Officer of the Centre for Promotion of Private Enterprises (CPPE), Dr. Muda Yusuf stated that, “This is a reflection of liquidity pressure some of the banks are going through.  The facility is typically short term.  This may not necessarily indicate that the banks are stressed or unstable.   Meanwhile, the recapitalisation of banks is long overdue.  The minimum capital requirements of N25 billion is no longer adequate, if discounted for inflation.”

A financial expert and Vice President Highcap Securities, Mr.  David Adnori, said,  “The development points to lack of liquidity on the part of banks. Monetary policy has been tightening and this has led to low liquidity. It is cheaper for banks to borrow from the CBN. This development is not positive but negative.”

“We cannot continue to tighten because it will reflect of economic growth,” he added.

Speaking with THISDAY, the CEO, Wyoming Capital & Partners, Mr. Tajudeen Olayinka, noted that the surge in banks deposit with CBN to uncurtaining in the business environment over rising insecurity, among others.

He stated that, “The most significant factor is the increasing level of threat in the environment of business in Nigeria, arising from: insecurity, supply chain problems, rising inflation and poor purchasing power, low level of productivity, rising unemployment, liquidity overhang and paucity of risk-free financial instruments.”

He added that, “As a result, most banks prefer to be debited by CBN for running short of LDR limit, as against extending credit to businesses that are finding it difficult to survive. It is all about managing risk.”

The Chief operating officer of InvestData Consulting Limited, Mr. Ambrose Omordion stated that CBN is the last resort where DMBs deposit excess liquidity that comes with an attractive yield.

He explained that, “When a bank goes to borrow from CBN, it is a sign the bank is having liquidity challenges. The latest report by CBN revealed stability in the banking sector and most of them have a strong capital base to lend to the real sector and expand.

“The LDR policy of CBN is meant to encourage bank to lend to the real sector and of recent, the private sector lending has witnessed trajectory and a bit disruption due to hike in global interest has slowed down customers borrowing from the banks. The hike in interest rate has impacted the cost of funds, which is expected to change the direction on who banks lend to customers.

“For me, the growth in deposit with CBN is a sign that these banks have enough liquidity and are taking preventive measures to checkmate Non-performing Loan (NPL).  In addition, the high interest of seven per cent depositing with CBN also another alternative to for banks to make more money and improve on profitability.”

Managing Director/CBO, Optimus by Afrinvest, Ayodeji Ebo added banks will be placing money with the CBN at 16.75 per cent. If they want to borrow money from the CBN, it will be at 19.75 per cent.

He said the SDF, which is the overnight deposit, will allow banks to deposit their excess liquidity and earn interest. He noted there is a cap on the amount banks can place with the CBN, which is N2 billion.