The Central Bank of Nigeria (CBN) has lifted the suspension on banks borrowing from its window, known as the Standing Lending Facility (SLF), pegging the lending rate at 31.75 percent in response to the decisions made at the 296th meeting of the Monetary Policy Committee (MPC).
Consequently, the apex bank called on the authorised dealers to send their request for SLF through the Scripless Securities Settlement System (S4) within the operating hours of 5.00 pm to 6.30 pm.
This is contained in a circular signed by Omolara O. Duke, director of the financial markets department, which takes immediate effect.
Additionally, dealers may access the Intraday Liquidity Facility (ILF) at no cost if repaid on the same day. Tilewa Adebajo, Chief Executive Officer (CEO) of The CFG Advisory, said the development would lead to improved liquidity in the interbank markets.
Read also: CBN plans N2.20trn treasury bills issuance in Q4 to control liquidity
However, unsettled ILF will incur a 5.00 percent penalty, and the system will automatically convert such cases to SLF at a rate of 36.75 percent. The CBN has also reintroduced collateral execution, rediscounting instruments pledged by participants at a penal rate, as specified in the approved repo guidelines.
Implications: The rise in the SLF rate to 31.75 percent reflects the CBN’s intent to reduce excess liquidity in the market. As banks face higher borrowing costs, interest rates on loans and credit facilities may increase. This could dampen borrowing by businesses and consumers, potentially slowing economic growth. For households, the impact may be felt through higher loan costs, which could reduce disposable income and consumer spending.
Standing Deposit Facility (SDF): The MPC also adjusted the Asymmetric Corridor to +500/-100 basis points from the previous +100/-300 basis points around the MPR. Consequently, the SDF rate is set at 25.75 percent. For Commercial and Merchant Banks, this rate applies to deposits up to N3.00 billion, with a reduced rate of 19.00 percent for excess deposits. Payment Service Banks will receive the same SDF rate for deposits up to N1.50 billion, with a 19.00 percent rate for any amounts above this threshold.
What this means is that the new SDF rates encourage banks to deposit surplus funds with the CBN, thereby reducing excess liquidity in the economy. While this measure helps in curbing inflation, it may also limit the funds available for lending, impacting credit availability for businesses and consumers. For households, this could translate into fewer credit options and higher interest rates, which may constrain spending and overall economic activity.
These measures are part of the CBN’s broader strategy to manage liquidity effectively while maintaining a balance between economic growth and inflation control. The adjustments take immediate effect, reinforcing the CBN’s commitment to ensuring financial stability in the face of evolving economic challenges.
Read also: CBN says adjusted Standing Facilities for banks now effective
Ayodele Akinwunmi, senior relationship manager, Corporate Banking Group, FSDH Merchant Bank, explained that the Central Bank acts as the bank of last resort. “This means that when banks need to cover short positions after borrowing money from each other or from the public, they can turn to the interbank market, which is very active. If necessary, banks are permitted to borrow from the Central Bank of Nigeria This practice is standard worldwide, including in the US, UK, and other developed countries, where banks borrow from their central banks to provide discounting facilities. Such lending is always secured and is typically short-term, often overnight, to cover immediate needs. There is no cause for alarm in this process.
At the last MPC meeting in July 2024, Olayemi Cardoso, governor of the CBN, voted to adjust the asymmetric corridor to -100/+500 basis points around the MPR from -300/+500.
Murtala Sabo Sagagi, a member of the MPC, also voted to adjust the Asymmetric Corridor around the MPR to +500-100 basis points, as seen in his personal statement.
Before the MPC decision in July 2024, which saw an increase in the monetary policy to 26. 25 percent, Deposit Money Banks (DMBs) borrowing from the Central Bank window, hit an all-time high of N5.38 trillion in five trading days as liquidity tightening intensified.
The data from the CBN showed that banks borrowed N1,53 trillion on July 4, 2024, which was more than 100 percent compared to N11.13 billion borrowed in the corresponding period of July 4, 2023.
“Since the start of 2024, the financial sector has faced notable challenges, including foreign exchange shortages and multiple policies implemented by the Central Bank of Nigeria to address escalating inflation rates, among other issues,” Tomi Bayode, an analyst at Parthian Partners Limited said.
She said “This has contributed to merchant banks and banks’ consistent borrowing from the CBN to meet their daily financial obligations. On Thursday, July 4, 2024, the lending figure by banks reached an all-time high of N1.5 trillion in a single day which can be attributed to the removal of the cap on remunerable Standing Deposit Facility, the liquidity pressure faced by most banks along with the Central Bank of Nigeria’s efforts to reduce excess liquidity in the financial sector. With over 1.5 trillion issued in Open Market Operation (OMO) bills and the persistent liquidity strain, it is evident that the CBN is committed to combat inflation by mopping up excess cash in the economy.”
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