Nigerian Deposit Money Banks borrowed N5.38 trillion from the Central Bank of Nigeria (CBN) in the first five days of July 2024.
This was a 245 percent increase from the N1.56 trillion borrowed in the same period in June 2024 and a 202 percent rise from the N1.78 trillion borrowed in the first week of July 2023, according to data released by the CBN.
The surge in borrowing was facilitated through the Standing Lending Facility (SLF), a mechanism that allows the central bank to provide liquidity to commercial banks.
Analysts suggest that this spike indicates short-term liquidity shortages within the banking sector, necessitating borrowing to meet immediate obligations, such as covering withdrawals or funding loans.
“We are currently experiencing an illusion of money. In absolute terms, the amount appears lower,” said Ayokunle Olubunmi, head of financial institutions ratings at Agusto Consulting.
Olubunmi explained that while the figures seem substantial, converting them to dollars and comparing their value to three years ago reveals a significant decline.
The dramatic increase in borrowing coincides with the CBN’s recent monetary policy adjustments.
In May 2024, the CBN raised its benchmark interest rate, the Monetary Policy Rate (MPR), by 750 basis points to 26.25 percent from 18.75 percent in July 2023.
This move was aimed at controlling inflation, which stood at 33.95 percent as of May 2024.
Also, the CBN has issued over N1.5 trillion in Open Market Operation (OMO) bills since Olayemi Cardoso assumed office as governor, in an effort to manage inflation and support the naira.
The liquidity tightening by the CBN has driven banks to the SLF window. Alatise Yusuf, chief investment officer at Cowry Asset Management, noted that banks see the CBN as their lender of last resort, especially in a high-interest-rate environment.
“On Thursday, we saw the Overnight NIBOR at 32.4 percent, indicating that system liquidity is thinning while lending rates are trending upward,” he said.
Yusuf added that the CBN’s actions aim to mop up excess liquidity, leading to a reduction in the total banknotes in circulation.
“Banks’ treasuries are drying up due to investors reclassifying their assets because of high rates. So, banks need to shore up with CBN as the lender of last resort.”
In February 2024, the CBN raised the Cash Reserve Ratio (CRR) of banks from 32.5 percent to 45 percent.
In March 2024, it adjusted the CRR for merchant banks from 10 percent to 14 percent, further tightening liquidity.
Ayodele Akinwunmi, senior relationship manager at Corporate Banking Group, FSDH Merchant Bank, explained that borrowing from the CBN is a standard practice globally.
“When banks need to cover short positions, they can turn to the interbank market or borrow from the central bank. This lending is always secured and typically short-term to cover immediate needs.”
In contrast to the surge in borrowing, commercial banks’ deposits with the CBN under the Standing Deposit Facility (SDF) dropped to N172.17 billion in the first week of July 2024, compared to N232.18 billion in the same period in 2023.
This decrease follows the CBN’s decision last year to lift the N2 billion daily limit on funds placed at the SDF window, resulting in increased net deposits from banks over the past year.
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