Amid Excess Liquidity, DMBs, Others’ Deposit with CBN Hit N2.41tn in 13-days

Kayode Tokede

Amid excess liquidity fuelled by injections from Federation Account Allocation Committee (FAAC), Nigeria’s Deposit Money Banks (DMBs) and merchant banks in the past 13-days deposited a whooping N2.41 trillion with the Central Bank of Nigeria (CBN).

The banks’ rush to deposit cash with the CBN is in a bid to abide by the apex bank’s regulation on Capital Adequacy Ratio (CAR).

Through the CBN’s Standing Deposit Facility (SDF), DMBs and merchant banks have deposited N2.41 trillion so far in November 2023, rather than lending to the real sector.

A SDF is an overnight deposit facility that allows DMBs and merchant banks to park excess liquidity (money) to CBN and earn interest.

According to financial data released by the CBN, DMBs and merchant banks, through the Standing Lending Facility (SLF), borrowed N377.71billion from the CBN in the past 13-day.

THISDAY gathered that increased liquidity position in the banking sector is influenced by injections via the Federation Account Allocation Committee (FAAC) of about N903.48 billion in September, N1.80trillion in August and N1.89trillion to the three tiers of government in July 2023.

With the excess liquidity, Money Supply (M3) increased to N67.18 trillion as of September 2023 from N49.33trillion in September 2022.

M3 is a measure of the money supply as well as large-time deposits, institutional money market funds, short-term repurchase agreements (repo), and larger liquid assets.

The applicable rates for the SDF and SLF has increased by 50 basis points to 11.50 and 19.50 per cent, respectively, following the hike in the policy rate by 50 basis points to 18.75 per cent in June 2023.

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

The Central Bank has consistently maintained a hawkish monetary policy stance since May 2022, to tackle rising inflation rate (27.33per cent as of October 2023).

SDF so far this year has witnessed significant patronage as DMBs and merchant banks deposit reached highest peak of about N876.87billion in July 2023, highest so far this year.

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 is above yield on Treasury bills (T-Bills) and DMBs are looking for risk-free investments, which SDF has provided since MPR hike.

Conversely, DMBs and merchant banks deposited N2.95 trillion with CBN in October 2023, representing an increase of 273 per cent from N790.9 billion in September 2023.

Between January and October 2023, DMBs and merchant banks deposited N8.34 trillion with CBN, an increase of 158 per cent from N3.24 trillion in corresponding period of 2022.

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

The CEO, Wyoming Capital & Partners, Mr. Tajudeen Olayinka, noted that the surge in DMSs 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 of 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 of 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 depositing with CBN is also another alternative  for banks to make more money and improve on profitability.”

On his part, the Managing Director, Highcap Securities Limited, Mr. David Adnori said the SDF policy has not completely driven DMBs and merchant banks lending to the real sector.

According to him: “The banks were investing in government bonds and Treasury bills rather than lending to the real sector. The federal government is aggressively issuing bonds and T-Bills to finance budget and it is where banks are investing.”

He added that: “It is noted that interest income of the banks decline as the rate on T-bill and bonds dropped for the first six months of this year. If banks had granted loans to real sector as directed by CBN, they could have charged higher interest and generated more money.

“Mind you, the risk of lending to the real sector is high even though the CBN wanted them to lend. Most of the DMBs and merchant banks are very sceptical lending to the real sector. The SDF policy introduced in 2019 is a very good policy but unfortunately, the operating environment does not support its impact.”

Analysts at CSL Stockbrokers Limited had in a report said, “In our view, measures such as these fail to address the fundamental issues behind banks’ reluctance to lend and would only result in banks looking for innovative ways to get around the rules.

“The low-risk appetite among banks for lending to the real sector can be attributed in no small measure to the high risks in the operating environment which hinders the survival of SMEs and the profitability of businesses in general. Also, the absence of reliable credit history and effective institutions also hinder banks from lending to the real sector.

“Consequently, banks prefer investing a huge chunk of their liquid assets in the government instruments given that they do not have CAR implications, are tax-free and do not result in Non-Performing Loans (NPLs)”

The bank had when issuing the guideline said, “With reference to the circular to all banks and discount houses, Re: Guidelines on accessing the CBN Standing Deposit Facility, Ref: FMD/DIR/GEN/CIR/05/020 and dated November 6, 2014, after further review, the remunerable daily placements by banks at the SDF shall not exceed N2billion.

“The SDF deposit of N2billion shall be remunerated at the interest rate prescribed by the Monetary Policy Committee from time to time. Any deposit by a bank in excess of N2 billion shall not be remunerated. The provisions of this circular took effect on July 11, 2019.”