Liquidity Pressure: Banks Borrow N3.76tn from CBN in Three Weeks

Kayode Tokede

Following monetary rates tightening by the Central Bank of Nigeria (CBN), which has led to illiquidity in the banking system, banks and merchant banks in Nigeria in just three weeks of June 2024, borrowed an estimated N3.76 trillion from the CBN to meet their daily obligations.

The central bank has continued to tighten its monetary rates amid spiralling inflation and unstable foreign exchange market.

In May 2024, financial institutions borrowed about N10.87 trillion from the CBN.

This brings total borrowing by banks from the central bank in five months of 2024 to N53.7 trillion as against N10.02 trillion in five months of 2023.

The CBN provides a Standing Lending Facility (SLF) window, a short-term lending window for banks and merchant banks, to access liquidity to run their day-to-day business operations.

THISDAY findings showed banks and merchant banks have since the beginning of this year consistently borrowed from the CBN to meet their daily obligations amid rising inflation and unstable foreign exchange market.

Analysts have attributed the increasing banks borrowing from CBN to dwindling naira at the foreign exchange market, coupled with rising inflation rate and the mopping up of excess liquidity in the financial sector by the CBN.

 “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, ”said Vice President Highcap Securities, Mr.  David Adnori said.

On his part, the Chief Executive Officer of the Centre for Promotion of Private Enterprises (CPPE), Dr. Muda Yusuf stated, “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.”

Conversely, banks and merchant banks deposited about N2.57 trillion with the CBN in three weeks of June 2024, bringing total deposit between January to June 2024 to N5.55 trillion.

Financial institutions deposited cash with the apex bank using the Standing Deposit Facility window (SDF). SDF has recorded significant increase this year despite CBN directive to lend 50 per cent of deposit to real sector. 

Recently, the CBN governor, Mr. Olayemi Cardoso announced that the removal of the cap on remunerable SDF is to increase activity in the SDF window and manage liquidity.

CBN in a circular dated 2014 had disclosed that the remunerable daily placements by banks at the SDF shall not exceed N2billion.

According to the CBN, “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.”

However, the CBN has over the years maintained that strong patronage at the SDF confirms 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.

Analysts believe financial institutions prefer depositing with the CBN, as it is safe and risk-free.

Commenting, Investment Banker & Stockbroker, Mr. Tajudeen Olayinka, stated, “There is increased level of threat in the environment of business in Nigeria, arising from insecurity, supply chain problems, inflation and poor purchasing power, low level of productivity, unemployment, liquidity overhang and paucity of risk-free financial instruments.”

The financial sector has since the beginning of 2024 witnessed significant challenges ranging from foreign exchange scarcity, and CBN numerous policies in tackling rising inflation rate, among others.

Part of measure adopted by the CBN to tighten liquidity in the financial system include attractive yield on government securities and Monetary Policy Committee (MPC) members of the CBN increasing Monetary Policy Rate to 26.25 per cent from 18.75 per cent and moving Cash Reserve Requirement (CRR) to 45.0 per cent from 32.5 per cent.

Nigeria’s headline inflation rate has continued to climb reaching 33.95 per cent in May 2024.

Additional upward pressure came mostly from prices of housing & utilities (28.8 per cent vs 27.6 per cent) and transportation (25.4 per cent vs 25.5 per cent), attributed to the recent increase in electricity tariffs and fuels.

Cardoso in his personal statement at the last MPC said, “Emerging markets and developing economies (EMDEs) continued to see positive capital flows and foreign capital inflows to Nigeria recorded a significant uptick in the first quarter of 2024, a direct response to our policy and market reforms.

“Given the high pass-through of exchange rate depreciation to headline inflation and inflation expectations, it is important to sustain the momentum of capital inflows and strive to deliver positive real interest rates in the near term to further mobilise savings and investments in the domestic economy.”

He expressed further that, “From the foregoing developments, the MPC was confronted with two major policy options which were either to retain or tighten further to sustain the disinflation trend. Many reasons may suffice to make a credible argument for holding the policy rates.

“Firstly, it will moderate the cost of borrowing to government and the private sector, especially small-scale businesses considering debt sustainability concerns in a lingering high interest rate environment. “Secondly, it will ameliorate the prevailing challenging economic conditions and the resulting pressures being exerted on the financial system.

“Lastly, it can also be argued that positive results of previous tightening rounds are enough indication that adequate policy actions have already been taken and this will become more evident as the transmission effects further takes hold on economic activities.

“On the other hand, there are compelling arguments to progress with the tightening regime. There is no evidence that the downward trend in month-on-month inflation rate is sustainable and would eventually manifest in downward trend in headline inflation.

“More so, considering the various upside  risks to price development from both the global and domestic economies, there is sufficient reason to be concerned about the continued uptick in inflation if we rest on our oars at this critical point. Furthermore, tightening will help to sustain the current momentum of capital inflows into the economy and provide necessary support for the currency in the near term.

“It is important to highlight that lingering high interest rates in advanced economies presents a real dilemma for emerging market economies seeking to attract capital inflows, and we must ensure that interest rates differentials remain sufficiently competitive by achieving positive real rates in the short term.”