CBN Liquidity Mop-up Drives Banks, Others’ Borrowing to N8.7tn in Two Months

Kayode Tokede 

Following the Central Bank of Nigeria (CBN) sustained drive to mop-up liquidity; deposit money banks and merchant banks in the country have in the first two months of 2024, borrowed a whooping N8.7 trillion from the apex bank.

This is a 787 per cent Year-on-Year (YoY) increase from N982 billion banks and merchant banks borrowed from CBN in the first two months of 2023.

The borrowing was as a result of the financial institutions’ bid to meet their daily business obligations.

Analysis of Data released by CBN revealed that the banks’ borrowing from the CBN via the Standing Lending Facility (SLF) increased significantly in February 2024 amid double-dight inflation rate, scarcity of foreign exchange and liquidity mop-up by the apex banking regulating body.

The SLF is a short-term lending window where banks and merchant banks access liquidity to run their day-to-day business operations.

A breakdown showed that banks and merchant banks in January 2024 borrowed N2.75trillion, representing an increase of 419.95 per cent YoY from N528.2bilion borrowed January 2023, while in February 2024, banks and merchant banks borrowed N5.97 trillion, a growth of 1, 215 per cent YoY from N453.7 billion in February 2023.

Commenting on the development, 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.”

Speaking, the Chief Executive Officer of the Centre for Promotion of Private Enterprises (CPPE), Dr. Muda Yusuf had 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.”

Part of measure adopted by the CBN to tighten liquidity in the financial system was when the Monetary Policy Committee of the CBN in February 2024 unanimously narrowed the asymmetric corridor from +100/-300 to +100/-700 basis points around the Monetary Policy Rate (MPR).

The MPC voted to raise the MPR significantly by 400basiis points to 22.75per cent at its first meeting in 2024, higher than our expectation of 150basis points.

Furthermore, the committee voted to increase Cash Reserve Requirement (CRR) to 45.0per cent from previously: 32.5 per cent and retained the Liquidity ratio at 30per cent.

 The Central Bank has consistently maintained a hawkish monetary policy stance since May 2022, to tackle rising inflation rate (29.90per cent as of January 2024) amid mopping up liquidity in the financial system.

Analysts attributed the increasing borrowing  by banks and merchant banks from CBN to dwindling Naira at the foreign exchange market, coupled with rising inflation rate and mopping up liquidity from the banking system.

Naira as of February 2024 was trading at N1,544.081 against the dollar compared with N460.47 against the dollar it was trading ending February 2023.

Analysts at Cordros Research explained that the CBN is using orthodox monetary tools to manage liquidity already indicated the institution’s maintenance of a tight monetary policy stance.

“Therefore, we stated that the MPC would retain this position at its meeting, raising the policy rate further. Whilst our prognosis was for an increase of the MPR by 150basis points, the MPC surprisingly raised the benchmark rate by a whopping 400 basis points.

“We attribute the aggressive rate hike to the need to manage inflation expectations, which have been primarily stoked by the constant depreciation of the naira and the low credibility of the institution in maintaining price stability.

“Furthermore, we had expected that the CBN would hold other parameters constant; however, in line with the CBN’s goal to extensively mop up excess liquidity, the committee raised the CRR to 45per cent, 125basis higher than the previous rate of 32.50per cent, widened the asymmetric corridor to +100basis points/-700 basis points (previously: +100basis points/-300basis points), whilst retaining the liquidity ratio at 30per cent.

“The committee also noted the global upside risk to domestic inflation, including the trade disruption stemming from the heightened geopolitical tensions. In line with our expectations, the MPC projects that central banks in advanced economies will retain high policy rates whilst global financial conditions remain tight, “they said.

They added, “In the short term, we expect that central banks in advanced economies will keep rates steady due to existing risks to inflation. Nevertheless, we hold the view that global inflation will maintain its deceleration path in the coming months due to declining energy prices and a higher base effect from the previous year.

“Conversely, domestic prices are projected to stay high due to the depreciation of the naira exchange rate, elevated cost of energy products and reduced food supply induced by heightened insecurity in the food-producing middle-belt region. The just concluded MPC meeting mirrors the committee’s zero tolerance for further inflation increases and highlights the need to enforce price stability, which, in their view, supports output growth in the medium to long term.”

On their part, analysts at CardinalStone Research in a report said: “Based on the first and second-order impacts of the rise in auction stop rates and 400 basis points increase in MPR to 22.75 per cent, we now forecast asset yields to rise by an average of 400 basis points across our coverage banks in FY 2024. This adjustment suggests a mean 83.4 per cent increase in interest income for our banking coverage.

“Whilst the discontinuation of daily CRR debits is positive, the recent decision of the MPC to raise statutory CRR to 45 per cent may appear a downside risk to interest income, with direct inference suggesting that banks can now only deploy 55 per cent of new deposits to interest-earning opportunities assuming other rules (such as the loan to deposit ratio) are adhered to.

“We are of the view that the surging interest rate environment may increase pressure on banks to step up on the dividend front in the coming months. This may open avenues for decent dividend income (vs de-annualised return from fixed income options) in the near term.

“In our view, adverse macroeconomic conditions are likely to increase the risk of non-performing loans (NPLs) in FY 2024, with sectors that are heavily reliant on imported raw materials and equipment maintenances such as manufacturing likely to be badly hit by the short-term cost implications of ongoing reforms.”