Amid Excess Liquidity, Banks, Others Borrowed N30.45tn from CBN in Q1 2024

Amid Excess Liquidity, Banks, Others Borrowed N30.45tn from CBN in Q1 2024

Kayode Tokede

Amid excess liquidity, Nigerian banks and merchant banks in the firs quarter of this year, borrowed a sum of N30.45 trillion from the Central Bank of Nigeria (CBN), an increase of 514 per cent Year-on-Year (YoY) from N4.96 trillion in first quarter of 2023.

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

THISDAY analysis i=of CBN data revealed that banks and merchant banks borrowed N2.75 trillion in January, a 419.95 per cent YoY increase from N528.16 billion in January 2023, while in February 2024, a total of N5.97 trillion was borrowed by banks through the SLF, a significant increase of 1,214 per cent YoY from N453.7 billion February 2023.

In addition, banks and merchant banks borrowed N21.74 trillion from CBN in March 2024, a growth of 446.9 per cent YoY growth from N3.98 trillion borrowed in March 2023.

Experts attributed the increasing banks borrowing from CBN to dwindling Naira at the foreign exchange market, coupled with rising inflation and apex bank mopping up excess liquidity in the financial sector.

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

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.”

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

The MPC of the CBN voted to raise the MPR significantly to 24.75 per cent at its second meeting in 2024, higher than our expectation of 150 basis points.

Notably, the meeting reflects the committee’s commitment to ensuring price stability and managing inflation expectations in the near term.

The committee voted to retain Cash Reserve Requirement (CRR) at 45.0 per cent and retained the Liquidity ratio at 30per cent.

Furthermore, they adjusted the CRR of merchant banks from 10 per cent to 14.0 per cent

The data also revealed that banks and merchant banks deposit with CBN dropped by 7.29 per cent to N1.6 trillion in Q1 2024 from N1.73 trillion in Q1 2023.

Banks and merchant banks use Standing Deposit Facility (SDF) to deposit excess funds with the apex bank and it comes interest.

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

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

In January 2024, Banks and merchant banks deposited N1.07 trillion with CBN, an increase of 83.37 per cent YoY from N584.79billion in January 2023, while in February 2024, it stood at N330.72billion, a decline of 50.6 per cent from N668.9 billion in February 2023.

It dropped further in March 2024 to N196.37 billion, a decline of 58.34 per cent YoY compared to N471.4 billion in March 2023.

Amid removal of cap on SDF, banks and merchant banks have maintained strong position in borrowing rather than depositing with the CBN.

The CBN had in a circular 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.

Expert explained that financial institutions prefer depositing with CBN, as it is safe and risk-free, stressing that the present business environment has forced banks and merchant banks to deposit less with CBN.

Speaking, Investment Banker & Stockbroker,  Mr. Tajudeen Olayinka, stated; “The most significant factor of banks and merchant banks have suspended depositing with CBN 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.”

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