In a strategic move to comply with regulatory requirements set by the Central Bank of Nigeria (CBN), the country’s Deposit Money Banks (DMBs) and merchant banks have collectively deposited N2.41 trillion with the CBN in the first 13 days of November 2023.
This financial surge is fueled by a liquidity surplus resulting from injections from the Federation Account Allocation Committee (FAAC).
The rush to deposit this substantial amount with the CBN is primarily driven by the need to meet the apex bank’s Capital Adequacy Ratio (CAR) regulations.
Instead of directing these funds toward lending to the real sector, the banks have chosen to utilize the CBN’s Standing Deposit Facility (SDF).
Through the SDF, DMBs and merchant banks strategically park their excess liquidity with the CBN, allowing them to earn interest on these deposits.
The move is part of a broader effort to align with regulatory guidelines, particularly as the financial sector grapples with increased liquidity resulting from recent FAAC injections.
Financial data from the CBN reveals that, in addition to the substantial deposits made through the SDF, DMBs and merchant banks have borrowed N377.71 billion from the CBN using the Standing Lending Facility (SLF) in the past 13 days.
The surge in liquidity within the banking sector can be traced back to significant injections via the FAAC, with approximately N903.48 billion in September, N1.80 trillion in August, and N1.89 trillion disbursed to the three tiers of government in July 2023.
This excess liquidity has led to a notable increase in Money Supply (M3), reaching N67.18 trillion as of September 2023, compared to N49.33 trillion in September 2022.
The current inflation rate in Nigeria surpasses the yield on Treasury bills (T-Bills), prompting financial institutions to opt for the safety and risk-free environment provided by depositing funds with the CBN through the SDF.
While the surge in deposits indicates a healthier liquidity position for the banking system, industry experts highlight concerns about the challenging business environment, citing factors such as rising insecurity, supply chain problems, and liquidity overhang as significant contributors to banks’ cautious lending approach.
The SDF policy, implemented in 2019, continues to play a pivotal role in managing risks associated with lending to the real sector.