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Nigerian banks and discount houses borrowed a total of N3 trillion from the Central Bank of Nigeria (CBN) through the Standing Lending Facility (SLF) within one week, according to a report by Afrinvest Research. In the same period, these institutions deposited N493.6 billion through the CBN’s Standing Deposit Facility (SDF).
The report highlighted that the surge in borrowing contributed to a 4.7% increase in system liquidity, bringing it to N712.3 billion. The SLF and SDF are monetary tools used by the CBN to regulate liquidity and manage money supply within the financial system.
The increased borrowing follows a recent directive from the CBN aimed at boosting lending to the real sector, which took effect in April. This move aligns with the CBN’s shift towards a contractionary monetary policy, marking a more stringent approach to managing liquidity.
Additionally, the CBN recently lifted its suspension on the SLF for authorized dealers. This decision came after the Monetary Policy Committee adjusted the upper corridor of the standing facilities to 5%, up from 1%, around the Monetary Policy Rate (MPR).
According to Afrinvest, the spike in borrowing indicates an increased demand for short-term liquidity by banks and discount houses. Despite this liquidity injection, inter-bank lending rates showed mixed results. The Open Purchase Rate dropped by five basis points to 31.2%, while the Overnight Rate rose by three basis points to 31.7%.
In response to the rising liquidity, the Debt Management Office (DMO) reduced interest rates to create more favorable borrowing conditions for financial institutions. The report also noted the successful launch of Nigeria’s first dollar-denominated bond aimed at raising $500 million to address the 2024 fiscal deficit. This five-year bond was oversubscribed by $400 million, demonstrating strong investor demand.
Afrinvest analysts believe these developments signal growing confidence in Nigeria’s financial markets. They also expect these shifts to influence market behavior and borrowing strategies as liquidity continues to evolve.
In an interview, Segun Ogundare, an economist at Ajayi Crowther University, explained that central banks serve as lenders of last resort, offering short-term loans at high rates to banks facing liquidity challenges. Ogundare cautioned that frequent borrowing from the central bank could signal underlying financial issues, potentially leading to serious consequences such as liquidation, citing the case of Heritage Bank as a cautionary example.
“Banks may approach the CBN when they face liquidity constraints or have over-traded and need to restore balance. Persistent liquidity shortages, if not managed properly, could lead to bigger problems, including liquidation,” Ogundare warned.
David Adonri, a broker and board member of Highcap Securities, further elaborated that banks typically use the SLF to cover temporary liquidity shortfalls or capitalize on short-term financial opportunities. He noted that system liquidity could increase whenever short-term public debt is redeemed, Federation Account Allocation Committee (FAAC) funds are distributed, or deposit liabilities rise, injecting funds into the banking system.
However, Adonri cautioned that while borrowing from the SLF could boost liquidity, it could also come at a cost to the banks. “Interest obligations from such borrowings may strain a bank’s treasury if the on-lending does not cover interest expenses. Furthermore, injecting large sums of money into the system within a short period could counteract the CBN’s policy objectives,” he remarked.
He stressed that this influx of liquidity could undermine the CBN’s efforts to raise the Cash Reserve Ratio (CRR) and potentially offset contractionary monetary policies aimed at tightening liquidity.
Adonri concluded by emphasizing the dynamic nature of bank liquidity, which the CBN regulates through its liquidity ratio policy. “As banks’ aggregate assets increase, so does their aggregate liquidity. Liquidity is constantly evolving,” he said.
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