Nigeria: Liquidity Crunch Triggers 261% Rise in Banks’ Borrowings from CBN

In a stark reflection of liquidity challenges within Nigeria’s interbank money market, borrowing by banks from the Central Bank of Nigeria (CBN) surged by an extraordinary 261.3 percent year-on-year (YoY) to N106.3 trillion in 2024, up from N29.42 trillion in 2023.

The CBN facilitates short-term lending to banks through two key mechanisms: the Standing Lending Facility (SLF) and Repurchase (Repo) agreements. The SLF allows the CBN to lend money at an interest rate of 500 basis points (bpts) above the Monetary Policy Rate (MPR). Meanwhile, the Repo arrangement involves the CBN purchasing securities from banks with an agreement to resell them at a predetermined date and price. Conversely, banks deposit surplus funds with the CBN using the Standing Deposit Facility (SDF), which attracts an interest rate of MPR minus 100 bpts.

A detailed analysis of CBN’s quarterly financial data for 2024 reveals a significant growth trajectory in banks’ borrowing from the apex bank. In the second quarter of the year (Q2’24), borrowing rose by 190.5 percent to N23.3 trillion from N8.02 trillion in the first quarter (Q1’24). By the third quarter (Q3’24), this borrowing increased further by 24.3 percent to N28.98 trillion and saw another jump of 55 percent to N44.92 trillion in the fourth quarter (Q4’24).

Similarly, banks’ deposits with the CBN via the SDF also recorded a YoY increase of 98 percent, reaching N35.53 trillion in 2024 compared to N16.3 trillion in 2023. The quarterly breakdown shows a staggering 553 percent rise in deposits to N11.56 trillion in Q2’24 from N1.77 trillion in Q1’24. However, deposits dropped by 39.7 percent to N6.96 trillion in Q3’24 before climbing again by 118.3 percent to N15.2 trillion in Q4’24.

The sharp increase in banks’ borrowing was largely driven by the CBN’s tight monetary policies aimed at curbing inflationary pressures. Key measures included a hike in the Monetary Policy Rate (MPR) and adjustments to the Cash Reserve Ratio (CRR). The CRR for commercial banks rose to 50 percent, while that for merchant banks was increased to 16 percent from their respective rates of 32.5 percent and 10 percent at the start of the year.

Additionally, the CBN intensified liquidity mop-up operations by regularly selling Open Market Operations (OMO) treasury bills. Findings indicate that the apex bank sold OMO treasury bills worth N12.83 trillion from January to December 5th, a significant jump from N716.7 billion sold throughout 2023.

The scarcity of funds exacerbated by these measures led to a sharp rise in interbank money market rates. By the end of 2024, the average interest rates for Collateralized Open Buy Back (OBB) and Overnight lending had risen to 26.5 percent and 26.83 percent, respectively, compared to 15.4 percent and 15.75 percent at the close of 2023.