Nigerian banks’ borrowing from the Central Bank of Nigeria’s (CBN) discount window, known as the Standing Lending Facility (SLF), is rising following a liquidity squeeze in the financial market.
Standing facilities (deposit and lending) are instruments of liquidity management, according to the CBN. They serve as avenues to invest surplus funds overnight and to square up whenever the system is short at the end of each business day.
On August 8, 2022, banks borrowed N117.0 billion, highest since the beginning of the year. In 10 days of August 2022, banks have borrowed the sum of N299.44 billion, data from the CBN showed.
For a full month in January 2022, SLF stood at N339.59 billion, decreasing by 24.69 per cent to N255.75 billion in February 2022, a report by the CBN stated.
“The increase in banks borrowing may be linked to the tight system liquidity which has led to higher interbank interest rates,” Ayodeji Ebo, managing director/chief business officer, Optimus by Afrinvest, said.
He said with higher interbank interest rates, borrowing from CBN may be a good alternative. Based on the SLF rate of 15 percent, it is cheaper relative to borrowing at the interbank bank.
“Inter-bank rates have been rising following a liquidity squeeze in the money market. Interbank money market rates already surging, will test 18 per annum – 20 percent per annum,” said Bismarck Rewane, managing director of Financial Derivatives Company.
He said total outstanding at the CBN discount window would reach N1.5 trillion in August 2022.
The overnight policy rate, the rate at which banks lend and borrow from each other and the Open Buy Back, a money market instrument used to raise short term capital, remained elevated to an average of 15 percent, the highest rate since June 2021, according to the data obtained from the CBN’s website.
Primary Treasury bills for 365 days will rise to 9 percent per annum, 91 days to 3.5 percent per annum, Rewane said in his presentation during the Lagos Business School breakfast meeting early this month.
Nigeria’s treasury bills yield has increased to 7 percent from about 3 percent in less than two months of a hike in the Monetary Policy Rate by 150 basis points to 13 percent and subsequently by 100 basis points to 14 percent by the CBN, financial market reports showed.
The CBN’s monetary tightening was the highest rate hike since July 27, 2016 and it was targeted at curtailing inflation.
While banks’ patronage on the CBN’s SLF is rising, their deposits with the regulator are shrinking. Within 10 days in August 2022 banks’ Standing Deposit Facility stood at N54.45 billion. Banks deposited a total of N293.79 billion in January 2022.
Uche Uwaleke, professor of Capital Market at the Nasarawa State University Keffi, said increasing rate of borrowing by commercial banks from the CBN is against the backdrop of gradual expansion in economic activities. “But it is equally fuelling inflationary and exchange rates pressures,” he said.
“In order to encourage commercial banks to patronise the Standing Deposit Window of the CBN, the MPC may consider narrowing the asymmetric corridor around the MPR from the current +1-7 to +2 5. Doing so will increase the Standing Lending Rate which discourages borrowing and increase the Standing Deposit Rate, which encourages deposits at the CBN,” he said.
The CBN, on April 16, 2021, issued a guideline with terms and conditions on how Deposit Money Banks and eligible institutions can access its window, known as Standing Lending Facility and Term Repurchase Facility (TRF).
The objective of the facilities is to provide naira liquidity to eligible institutions that are unable to access funds at the inter-bank market. The rates on the facilities are set at margins above expected market rates, so as to provide sufficient incentives for banks to explore the interbank market, before seeking resources to the CBN for funds.
“These guidelines contain the terms and conditions for the operation of the SLF and the TRF and should be read in conjunction with the Nigerian Master Repurchase Agreement,” Angela Sere-Ejembi, director financial markets department at CBN said when the guidelines were issued.