Banks Borrowing from CBN Declined by 76.4% in August Amid Rates Hike

Kayode Tokede

Following the increase in the Standing Lending Facility (SLF) rate to 31.75 per cent, banks borrowing from the Central Bank of Nigeria (CBN) dropped by 76.4 per cent in August 2024 to N4.04 trillion from N17.12 trillion reported in July 2024.

According to financial data released by the CBN, the reported N4.04 trillion is the third lowest in 2024 as Nigerian banks exercise caution in borrowing from the apex bank.

At 26.75 per cent Monetary Policy Rate (MPR), financial institutions that borrowed from CBN must now pay 31.75 per cent p.a to bridge if the SLF must be utilised.

Recently, the CBN revised the Asymmetric Corridor around the MPR from +100/-300 basis points to +500/-100 basis points. This significant shift aims to discourage banks from holding excess liquidity at the central bank and to promote increased lending activities.

In a circular signed by the Director of the Financial Markets Department, CBN, Dr. Omolara Duke, the CBN allowed banks to borrow at a rate of 31.75 per cent.

According to the CBN, “Banks can access the SLF through the Scripless Securities Settlement System (S4) within the specified operating hours of 5:00 pm to 6:30 pm. Additionally, authorised dealers are permitted to access the Intraday Lending Facility (ILF) at no cost, provided it is repaid on the same day. The Monetary Policy Committee (MPC) adjusted the upper corridor of the standing facilities to 5.00 per cent from 1.00 per cent around the MPR, at its 296th meeting.

“Consequently, the suspension of the Standing Lending Facility (SLF) is hereby lifted and Authorised Dealers should send their request for SLF through the Scripless Securities Settlement System (S4) within the operating hours of 5.00pm to 6.30pm. To this end, Authorised Dealers are permitted to access the SLF at 31.75 per cent; Permitted to access Intraday Lending Facility (ILF) to avoid system gridlock at no cost if repaid the same day;

“The 5.00 per cent penalty (as stated in the S4 business rules) is retained, for participants that do not settle their ILF, which the system will convert to SLF at 36.75 per cent; Collateral execution (the rediscounting of instruments pledged by participants at the penal rate by CBN) is reintroduced as stipulated in the approved repo guidelines. “The circular takes immediate effect.”

A top director in a Tier-2 bank expressed to THISDAY that lending rate to key sectors would remain high, stressing that real sector of the nation’s economy would suffer.

On his part, the Vice President, Highcap Securities Limited, Mr. David Adnori attributed the decline in banks borrowing from CBN to hike in rate, stressing that key businesses in the economy are seriously impacted.

Professor of Finance and Capital Market at the Nasarawa State University, Professor Uche Uwaleke had expressed that the hike in MPR to 26.75 per cent is targeted at further reducing liquidity from the banking system and jerk up cost of credit with adverse consequences on output.

He stated that, “Having done 750 basis points between February and May this year, I had predicted they would do a minimum of 50basis points or a max of 100basis points in July. I am glad to note that they chose the floor which is a sign that a complete halt is most likely in their next scheduled meeting in September 2024. But the adjustment to the asymmetric corridor around the MPR is a major source of concern for me.

“By implication, with an MPR of 26.75per cent, banks will now get loans from the CBN at 31.75per cent while they will be remunerated for their excess deposits at 25.75per cent. This will further squeeze liquidity from the banking system and jerk up cost of credit with adverse consequences on output and the equities market.”

He added that, “I submit that as far as taming the current elevated inflation in Nigeria is concerned in view of its major non-monetary drivers, the fiscal side holds the ace.”

Banks accessing SLF reached its highest peak of about N21.74 trillion in March 2024 amid liquidity tightening measures of the CBN. 

Financial institutions lend from the CBN using the SLF window and deposit cash with the apex bank using the Standing Deposit Facility window (SDF).

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

On the flip side, SDF increased to N8.12 trillion in August 2024, representing an increase of 269.3 per cent from N2.2 trillion in July 2024.

The reported N8.12trillion SDF is the highest so far in 2024 and it is coming on the backdrop of the new policy of the CBN.

The CBN had introduced a new interest rate structure that allows financial institutions to earn between 19 per cent and 25.75 per cent on deposits held with the apex bank.

A CBN circular noted that commercial and merchant banks will now earn up to 25.75 per cent on deposits up to N3 billion.

It said, “Deposits exceeding N3 billion will attract a lower rate of 19 per cent. Similarly, Payment Service Banks (PSBs) would receive 25.75 per cent interest on deposits up to N1.5 billion, while deposits above this threshold will also earn 19 per cent.”

But Adnori attributed the hike in SDF rate to CBN’s moves to mop-up excess liquidity in the financial sector amid tackling inflation rate.

In addition, analysts at Afrinvest Research stated that MPC’s tinkering of the asymmetric corridor to further tighten liquidity conditions should exert pressure on funding cost for banks, both directly (as lenders tap the window) and indirectly (repricing of rates across money market).

Specifically, they said, “We note the particular importance of the SLF as a support for banks amid liquidity crunch induced by contractionary interest rate policy. Elsewhere, businesses might continue to strain under the weight of elevated borrowing costs — a necessary evil to starve decades-high inflation. That said, we are of the view that MPR as a tool has its limitations in addressing structural issues, like insecurity and weak availability of infrastructure to support productivity, amongst other things.

“We note that fiscal policy reforms are necessary to fix some of these issues and the monetary policy side can only do so much. Therefore, we assert that continued rate hike without complementary and decisive fiscal efforts might only increase the burden on businesses without much effect on inflation. Nonetheless, the decision to decelerate pace of tightening indicates awareness of these underlying complexities.

“In terms of impact, the increase in MPR is expected to lead to an upward repricing of fixed income instrument, especially short-term assets, ranging from treasury bills to commercial papers which will naturally make these investments more attractive to investors compared to stocks.”