Nigerian Banks Borrow N3 Trillion from CBN in One Week Amid Rising Liquidity Demands

In just one week, Nigerian banks and discount houses borrowed a staggering N3 trillion from the Central Bank of Nigeria (CBN) through its Standing Lending Facility (SLF), according to a report by Afrinvest Research. During the same period, these financial institutions deposited N493.6 billion into the CBN’s Standing Deposit Facility (SDF), underscoring the growing demand for short-term liquidity in Nigeria’s financial system.

Afrinvest reported that the sharp increase in borrowing led to a 4.7% boost in system liquidity, which now stands at N712.3 billion. The SLF and SDF are tools the CBN uses to regulate money supply and manage liquidity in the financial system.

The report also highlighted the impact of recent CBN policies aimed at promoting lending to Nigeria’s real sector. Since April, the central bank has been implementing a contractionary monetary policy, which has led to adjustments in borrowing costs. Recently, the CBN lifted its suspension on the SLF for authorized dealers after a decision by the Monetary Policy Committee to raise the upper limit of the standing facilities from 1% to 5% above the Monetary Policy Rate (MPR).

Afrinvest noted that this surge in borrowing reflects banks’ increased need for liquidity to meet short-term obligations. Despite this boost in liquidity, the inter-bank lending rates showed mixed results. The Open Purchase Rate (OPR) fell by five basis points to 31.2%, while the Overnight Rate (ONR) rose slightly by three basis points to 31.7%.

To further ease liquidity pressures, the Debt Management Office (DMO) lowered interest rates last week, creating more favorable borrowing conditions for banks and financial institutions. This move, coupled with the successful launch of Nigeria’s first dollar-denominated bond aimed at raising $500 million to address the 2024 fiscal deficit, reflects growing investor confidence in Nigeria’s financial markets. The bond was oversubscribed by $400 million, a strong indication of investor demand.

Expert Opinions on Increased Borrowing

Economists and financial experts have weighed in on the rising borrowing trend. Segun Ogundare, an economist at Ajayi Crowther University, explained that central banks often act as lenders of last resort, offering short-term loans to banks facing liquidity challenges. Ogundare warned that frequent borrowing from the CBN could signal deeper financial issues within the banking system.

“Central banks typically lend at high rates for short-term liquidity needs,” Ogundare stated. “Banks may approach the CBN when they are low on liquidity or have over-traded and need to restore balance. If this becomes a regular occurrence, it could lead to serious financial challenges, potentially even liquidation, as we have seen in cases like Heritage Bank.”

David Adonri, a broker and board member of Highcap Securities, also commented on the situation, noting that banks usually turn to the SLF to address temporary liquidity shortages or take advantage of short-term financial opportunities. He added that system liquidity could rise whenever maturing short-term public debt is redeemed, or when funds are injected through Federation Account Allocation Committee (FAAC) distributions or increased deposit liabilities.

“CBN is the lender of last resort. Banks resort to the SLF to meet temporary liquidity shortfalls or finance emerging short-term opportunities. Redeeming short-term public debt or distributing FAAC can increase system liquidity,” Adonri explained.

However, Adonri also cautioned that an increase in borrowing through the SLF could come with risks. “The interest obligations from such borrowing could harm a bank’s treasury if on-lending does not cover interest expenses,” he noted. He further warned that injecting large sums of money into the banking system in a short period could undermine the CBN’s monetary policy goals, particularly its efforts to raise the Cash Reserve Ratio (CRR).

Adonri emphasized the CBN’s control over bank liquidity, saying, “Liquidity is a moving target. Bank liquidity is controlled by the CBN’s policy on liquidity ratio. As the aggregate assets of banks grow, so does aggregate liquidity.”

Rising Borrowings in 2023

According to a report by The PUNCH, commercial and merchant banks have increasingly relied on the CBN for liquidity in 2023. Borrowings rose by 32.07% to N19.81 trillion, up from N15 trillion in 2022, highlighting the growing pressure on banks to maintain liquidity in an evolving financial landscape.

As the CBN continues to adjust its policies to manage liquidity, financial experts are keeping a close eye on the potential long-term effects on Nigeria’s banking sector. The ongoing demand for short-term funds, coupled with investor confidence in the country’s financial markets, paints a complex picture of the challenges and opportunities facing Nigerian banks in 2024 and beyond.