Why Nigerian banks liquidity position declined by 23.3% in August

The banking industry average net liquidity position declined by 23.3 per cent to N146.15 billion in August 2021 from N190.62 billion in July 2021, according to the Central Bank of Nigeria (CBN).

This was due to the provisioning and settlements of foreign exchange and CBN bills purchases, as well as Cash Reserve Ratio (CRR) debits.

Consequently, the trend at the standing facility window of the CBN indicated more patronage by banks at the lending window than the deposit window. As a result, applicable rates for the Standing Lending Facility (SLF) and Standing Deposit Facility (SDF) remained at 12.5 per cent and 4.5 per cent, respectively.

The CBN’s latest monthly economic report shows that total request for the SLF in August was N453.92 billion (made up of N198.68 billion direct SLF and N255.23 billion Intra-day Liquidity Facility (ILF) converted to overnight SLF).

Daily request ranged from N0.41 billion to N99.69 billion and averaged N28.37 billion in the 16 transaction days, with total interest earned at N0.22 billion.

On the other hand, the total SDF granted during the review period was N177.88 billion, with a daily average of N8.89 billion in 20 transaction days. The cost incurred on SDF in the review month stood at N0.27 billion.

According to the report, investment in CBN bills in August increased owing to the attractive yield. Consequently, a total of N60.00 billion CBN bills were offered in August compared to N4.00 billion in July 2021.

In the same vein, N152.07 billion CBN bills were subscribed in the month under review, as against N104.20 billion in July, while bills worth N60.00 billion were allotted in August 2021 from N37.00 billion recorded in July.

Read also: Nigerian banks increasingly tap CBN for cash as liquidity shrinks

The banking system liquidity fluctuated and ended low in August, reflecting the provisioning and settlement for foreign exchange and CBN bills’ purchases vis-à-vis varied liquidity injection through Federation Account Allocation Committee (FAAC) and CBN bills repayment.

Hence, key money market and lending rates rose above their trend levels. Daily inter-bank call and Open-Buy-Back rates averaged 13.45 per cent (±4.06) and 13.19 per cent (±8.15), respectively. Other rates such as the 7-, 30- and 90-day NIBOR, averaged 14.01 per cent, 11.86 per cent, and 12.94 per cent, respectively, compared with 13.39 per cent, 12.30 per cent and 13.50 per cent in the preceding month.

Relative to their levels in the preceding month, average term deposit rate rose 0.04 percentage point to 4.28 per cent. Similarly, average prime and maximum lending rates increased by 0.05 percentage point and 0.01 percentage point to 11.62 per cent and 28.00 per cent, respectively. Consequently, the spread between the average term-deposit, and average maximum lending rates narrowed by 0.02 percentage point to 24.39 percent at the end of August.

The tenors of CBN bills used in conducting Open Market Operations (OMO) auctions in the review month ranged from 89 to 355 days, with bid rates averaging 8.45 (±1.65) per cent, while the stop rates averaged 8.55 (±1.55) per cent. Repayment of matured CBN bills was N401.24 billion, translating to a net injection of N341.24 billion through this medium.

During the review period, the banking system remains safe and sound, as the financial soundness indicators reveal general stability, despite marginal declines in August.

The Capital Adequacy Ratio (CAR) fell by 0.01 percentage point to 15.21 per cent at end-August, relative to end-July. This decline was due to an increase in credit, resulting in the rise of total risk-weighted assets. CAR exceeded the regulatory benchmark of 10.0 per cent for banks with national authorisations and 15.0 per cent for banks with international authorisations.

Liquidity ratio, at 63.4 per cent in August, rose by 0.4 percentage point over the level in July and was also above the 30.0 per cent benchmark. The development was due to an increase in the stock of liquid assets held by banks, the report noted.