Liquidity Squeeze: DMBs, Merchant Banks Borrowed N131.42trn from CBN in 2024
Kayode Tokede
Following the tight monetary policy regime by the Central Bank of Nigeria (CBN), which led to liquidity squeeze, Deposit Money Banks (DMBs) and merchant banks borrowed a whooping N131.42 trillion from the CBN in 2024 to meet their daily business obligations.
According to data released by the CBN, the N131.42 trillion borrowed in 2024 is about 636.6 per cent increase over N17.84 trillion banks and merchant banks operating in Nigeria borrowed in 2023.
The CBN data showed that DMBs and merchant banks borrowed the highest amount in March 2024 and the lowest amount in January 2024.
Specifically, about N21.74 trillion was borrowed by DMBs and merchant banks in March 2024, while N2.9 trillion was the lowest amount borrowed in January 2024.
DMBs and merchant banks access lending from the apex bank using the Standing Lending Facility (SLF) window and deposit excess liquidity 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.
According to THISDAY investigations, banks’ and merchant banks aggressively borrowed from the apex bank in 2024, indicating liquidity challenges in the financial sector.
The hike in liquidity can also be traced to low cash deposit by bank customers which has resulted in cash scarcity in banks.
These financial institutions in 2024 borrowed from the CBN at an interest rate of 32.50 per cent as the asymmetric corridor around the MPR at +500/-100 basis points.
The applicable rates for the SDF and SLF in 2023 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 interest rate at which these banks and merchant banks borrow from CBN changed in 2024 amid the Monetary Policy Committee (MPC) of the CBN hike in MPR.
In 2024, the MPC members voted to increase interest rate from 18.75 per cent to 27.50 per cent amid its mandate to tackle inflation rate and unstable Naira at the foreign exchange market.
The Director of the Financial Markets Department, CBN, Dr. Omolara Duke in a circular had stated that the apex bank allowed banks to borrow at a rate of 31.75 per cent when the MPR was at 26.75 per cent.
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.
He stated: “The MPC adjusted the upper corridor of the standing facilities to five per cent from 1.00 percent around the MPR, at its 296th meeting. Consequently, the suspension of the 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 five 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.”
Analysts have hinted that the increasing MPR has forced banks and merchant banks to sustain borrowing from CBN, stressing that the rush for festive season spending has further driven increasing borrowing from CBN.
Analysts at Cordros Securities in a report titled, “Nigeria in 2025. Reform to recovery: Navigating the rebound,” stated that the MPC is set to pause its rate-hiking cycle as inflation begins to moderate in 2025, owing to the high statistical base effect and reduced naira volatility.
“Furthermore, the anticipated reduction in interest rates in the advanced economies will reduce the pressure on the MPC to raise interest rates further. However, the still elevated inflation risks will likely induce the MPC to hold the policy rate steady for a longer period to consolidate gains of previous rate hikes while achieving a lower negative real rate of return.
“Also, GDP growth is poised to remain resilient, which diminishes pressure on the CBN to lower rates prematurely. All told, we anticipate that the MPC will likely keep the policy rate unchanged for most of 2025E after a 25bps hike at the January meeting, with a 50bps rate cut projected for MPC’s November meeting.”
On his part, the 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.”
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.”
However, THISDAY gathered that banks and merchant banks deposit to CBN increased significantly to N38.12trillion in 2024, about 210.15 per cent increase when compared to N12.29trillion in 2023.
The increase is coming on the backdrop of CBN removal of the cap on the remunerable policy, among others.
The CBN governor, Mr. Olayemi Cardoso had disclosed that the apex bank removed the cap on the remunerable SDF to increase activity in the SDF window and manage liquidity.
The bank when issuing the guideline had stated that, “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.”
SDF in 2024 witnessed significant patronage as banks and merchant banks deposit reached highest peak of about N8.12 trillion in August 2024
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.
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.
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, “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.”
