Nigeria: Increase in Bank Borrowings from CBN Signals Liquidity Challenges, Hits N19.8tn

Throughout 2023, commercial and merchant banks in Nigeria experienced a notable surge in their dependence on liquidity provided by the Central Bank of Nigeria (CBN), with their borrowings from the apex bank witnessing a significant uptick of 32.07%, reaching N19.81tn for the year.

Comparatively, this figure surpassed the N15tn borrowed in the preceding year, as revealed by data sourced from the CBN and accessed by The PUNCH.

Banks typically utilize the Standing Lending Facility (SLF) window to borrow from the CBN, concurrently depositing funds with the apex bank through the Standing Deposit Facility window. The SLF acts as a short-term lending avenue for commercial and merchant banks to secure liquidity for their day-to-day business operations.

The CBN extends loans to banks through the SLF at an interest rate of 100 basis points above the Monetary Policy Rate.

A CBN document titled ‘Standing Facilities and Liquidity Management in Nigeria: Progress so Far and Challenges Under an IT Environment’ emphasizes that standing facilities (both deposit and lending) function as instruments for liquidity management. They serve as avenues for investing surplus funds overnight and boosting the market when faced with a shortage of supply, preventing undue volatility in interbank rates.

This surge in bank borrowings comes amidst the CBN’s adoption of a tightening monetary policy stance. CBN data indicates that banks borrowed N12.64tn from January to August, with an additional N7.17tn borrowed between September and December.

While unconfirmed reports suggest that the increased borrowing might be attributed to the CBN’s efforts to mop up excess cash circulation and curb inflation, the CBN Governor, Olayemi Cardoso, emphasized the central bank’s commitment to controlling money supply to address inflation concerns.

Former Director-General of the Lagos Chamber of Commerce and Industry, Dr Muda Yusuf, suggested that the increased borrowing reflects liquidity pressures faced by some banks. He noted that these facilities are typically short-term and may not necessarily indicate stress or instability among banks. Yusuf also highlighted the overdue need for bank recapitalization, stating that the minimum capital requirement of N25bn is no longer sufficient, considering inflation.

Tajudeen Ibrahim, a financial expert at Chapel Hill Denham, expressed concerns over the liquidity challenges signaled by increased bank borrowings. He attributed the trend to the tightening monetary policy, emphasizing the need for a balanced approach to avoid negatively impacting economic growth.