Commercial banks’ borrowing from the Central Bank of Nigeria (CBN) surged by 204.71 percent in four months, signalling that they faced a liquidity squeeze in the period as the country’s demonetisation drive triggered chronic cash shortages.
Data from the CBN showed that deposit money banks’ (DMBs) borrowing from the central bank’s Standing Lending Facility (SLF) increased to N240.57 billion on Wednesday from N78.95 billion as of December 12, 2022, when new naira notes were launched by President Muhammadu Buhari.
When compared with the figure in October 2022, when the naira redesign programme was announced, the banks’ borrowing from the SLF rose by 7.95 percent from N222.85 billion.
Standing facilities (lending and deposit) 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 October 26, 2022, the apex bank announced that the N200, N500 and N1,000 notes would be redesigned and introduced into the economy from December 15, 2022 while commercial banks were directed to return existing denominations to the CBN.
Data obtained from the CBN’s website revealed that the prime lending rate, which is the interest rate that banks charge their most creditworthy customers, increased to 13.62 percent year-on-year in February 2023 from 13.17 percent in February 2022.
The maximum lending rate, which is the average highest amount charged by banks for lending to riskier sectors, rose to 28.75 percent from 28.14 percent.
The CBN has raised its benchmark interest rate, also known as the monetary policy rate (MPR), to 18 percent from 11.5 percent in May 2022.
Uche Uwaleke, professor of capital market at the Nasarawa State University Keffi, said the spike in banks’ borrowing from the CBN may not be unconnected with the liquidity challenges many banks faced on account of the implementation of the currency redesign.
According to him, due to the cash withdrawal limits, bank customers were compelled to keep money at home rather than take them to the banks coupled with the fact that the central bank was mopping up old notes deposited in banks.
He said: “These developments negatively affected the liquidity position of many DMBs and hence the resort to the CBN’s lending window.
“DMBs use this money to make loans. Given that the CBN’s Standing Lending Facility is high, currently at 19 percent, that is MPR plus 1 percent, it means that bank loans become more expensive since the banks can only lend to their customers at interest rates above the SLF.”
Uwaleke said this has further constrained credit to the private sector and “is partly responsible for the rise in inflation rate between December 2022 and February 2023”.
Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise, said the major factor responsible for banks’ regular visits to the CBN lending window was the tight monetary policy environment, especially high cash reserve ratio (CRR), which he described as the highest in the world.
In September 2022, the central bank raised the CRR to 32.5 percent from 27.5 percent.
He said some banks may be having some challenges with the quality of their loan assets, adding that the challenging general operating environment in the economy was affecting banks’ assets.
“When things are not going particularly well, if their books are not so healthy, then they can fall back on the CBN. Some of them may have short-term liquidity challenges; they can also fall back to the CBN but I don’t think it is something to worry so much about, ” Yusuf said.
Godwin Emefiele, governor of the CBN, said at the last Monetary Policy Committee (MPC) that money market rates reflected the tight liquidity conditions in the banking system. Consequently, the monthly weighted average Open Buyback and Inter-bank Call rates increased to 12.74 and 12.54 percent in February 2023 from 10.14 and 10.35 per cent in January, respectively.
MPC members noted the continued stability in the banking system, which they said was reflected by the performance of the financial soundness indicators.
Banks’ capital adequacy ratio stood at 13.7 per cent; non-performing loans ratio, 4.2 percent; and liquidity ratio, 43.1 percent, as of February 2023.
Data from the CBN revealed that Nigerian banks’ net domestic credit (NDC), consisting of loans to the private sector and the government, has maintained a steady increase, rising to an all-time high of N70.18 trillion in February 2023, compared to N50.70 trillion in February 2022, despite the monetary policy tightening by the central bank.
On a monthly basis, the NDC increased by 2.93 percent from N68.18 trillion in January 2023, the CBN’s data indicated.