Commercial and merchant banks increasingly depended on liquidity from the Central Bank of Nigeria in 2023 as their borrowing from the apex bank grew by 32.07 per cent to N19.81tn in the year.
From January to December 2023, the banks’ borrowings from the CBN outgrew the N15tn they borrowed in 2022, according to a CBN data.
Commercial and merchant banks borrow from the apex bank using the Standing Lending Facility window and deposit cash with the apex bank using the Standing Deposit Facility window.
The SLF is a short-term lending window for commercial and merchant banks to access liquidity to run their business operations.
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The CBN lends money to banks through the SLF at an interest rate of 100 basis points above the Monetary Policy Rate.
According to a document from the CBN website titled, ‘Standing Facilities and Liquidity Management in Nigeria: Progress so Far and Challenges Under an IT Environment,’ standing facilities (deposit and lending) are instruments of liquidity management and serve as avenues to invest surplus funds overnight and to boost the market whenever it is short of supply.
It notes that ideally, operators in the money market (banks and discount houses) are supposed to trade among themselves. However, the standing facilities ensure interbank rates are not volatile.
The increase in borrowing is happening against the backdrop of the CBN’s tightening monetary policy stance. The CBN data showed that banks borrowed N12.64tn from the CBN between January and August. Between September and December, they borrowed N7.17tn from the apex bank.
Unconfirmed reports said the increase in borrowing might be due to the CBN’s mopping up of excess cash circulation to rein in inflation.
While commenting on inflation recently, the CBN Governor, Olayemi Cardoso, said, “Concerning the real issue of inflation, as we know there are different components of inflation, there is money supply which is very critical and imported inflation and structured issues.
“On money supply, we have taken bold steps to control money supply. We have gone to the extent of increasing open market operations activities both in terms of volume and supply, all to rein in the money supply. The central bank clearly focuses on exactly where it expects the money supply to be, and we will do everything possible to defend that.”
Explaining the reason why banks had been dependent on the apex bank for liquidity recently, a former Director-General of the Lagos Chamber of Commerce and Industry, Dr Muda Yusuf, said: “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 requirement of N25bn is no longer adequate if discounted for inflation.”
A financial expert at Chapel Hill Denham, Tajudeen Ibrahim, added, “The development points to a 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 CBN. This development is not positive but negative. We cannot continue to tighten because it will reflect economic growth.”
