Nigerian Banks Tap ₦8 Trillion from CBN to Boost Liquidity Amid Rising Interest Rates

Nigerian deposit money banks (DMBs) have collectively borrowed ₦8 trillion from the Central Bank of Nigeria’s (CBN) standing lending facility (SLF) to address liquidity needs. The recent infusion of credit into the financial system has contributed to a surge in liquidity levels, prompting a downward adjustment in short-term interest rates, as reported by data from the FMDQ platform.

Facing double-digit short-term benchmark interest rates, banks have responded by increasing lending rates, aligning with the CBN’s hawkish stance. The recent spike in money market rates is attributed to large auction tickets sold by the CBN, reflecting the perception of increased money supply in the economy, potentially fueling inflation.

The Standing Lending Facility rate has risen to 23.75%, up from 19.75%, according to Afrinvest Limited’s February note. Due to the CBN’s stringent sterilization of liquidity, banks are heavily relying on the standing lending facility for liquidity, having tapped ₦8.6 trillion as of February 29, 2024.

This borrowing activity marks an 11.6x increase compared to the average borrowings in the corresponding period of 2022 and 2023, signaling a sustained effort by banks to manage liquidity challenges. Afrinvest anticipates that continued mopping up of excess liquidity could lead to banks adjusting their rates and adopting strategies for effective debt financing.

The recent settlement of Treasury bills auctions further intensified liquidity tightness in the system, contributing to sustained elevated levels in interbank rates. Nigerian banks, seeking higher yields, are directing investments toward bonds and treasury bills, potentially leading to a slowdown in lending as they aim to optimize earnings with minimal risk.

The overall adjustment in money market rates follows the CBN’s 4% increase in its benchmark interest rate to 22.75% in February 2024. Additionally, the CBN’s issuance of one-year bills at a rate of 2145% aims to attract foreign inflows, addressing foreign exchange liquidity challenges.

Despite the challenges posed by elevated yields, analysts suggest that the high-interest rate environment could dampen banks’ appetite for lending. Investment banking firms anticipate a potential increase in default rates, prompting banks to strike a balance between lending to the real sector and investing in government borrowing instruments.

Reflecting the impact of the heightened interest rate environment, the rate at which deposit money banks borrow from the CBN’s standing lending facility has risen, nearing the upper band of the monetary policy rate. Cardinalstone highlights a significant shift in the banking sector’s operating environment in February, driven by aggressive policy decisions to address currency crises, surging inflation, and enhance banks’ resilience to unexpected changes in key variables.

Cardinalstone Partners notes that adverse macroeconomic conditions may elevate the risk of non-performing loans (NPLs) in 2024, with sectors dependent on imported raw materials and equipment maintenance likely to be particularly affected by the short-term cost implications of ongoing reforms. Afrinvest Limited observes a 4.5 times increase in system liquidity to ₦2.6 trillion, with borrowings at the Standing Lending Facility valued at ₦8 trillion, outstripping repayments by ₦2 trillion.

Data from the FMDQ platform indicates that money market rates, including open repo and overnight lending rates, concluded at 29.82% and 31.00%, respectively. The overnight rate expanded by 281 basis points to 31.0%, reflecting the impact of debits for the previous week’s Open Market Operations (OMO) auction, which contributed to liquidity tightening. The financial system experienced a ₦1.06 trillion outflow for the OMO auction conducted by the CBN.

In summary, the recent borrowing activity by Nigerian banks, coupled with the evolving interest rate environment and policy measures, underscores the complex dynamics shaping the country’s financial landscape. The central bank’s ongoing efforts to manage liquidity and interest rates will likely continue to influence banking operations and economic conditions in the coming months.