Nigerian banks increasingly tap CBN for cash as liquidity shrinks

Banks’ borrowings from the Central Bank of Nigeria (CBN) have jumped by more than three folds in the last six years as the lenders’ ability to meet liquidity obligations shrinks.

Nigeria’s deposit money banks borrowed N2.3 trillion from the apex bank’s Standing Lending Facility (SLF), a line of short-term credit available for commercial banks, in April 2021. This is a 737 percent increase when compared with the N274.65 billion reported in the corresponding period of 2020.

“Activities at the standing facility windows showed predominance of the lending window over the deposit window due to tight liquidity in the banking system,” the apex noted in its monthly economic report.

Year-on-year, analysis of the CBN’s report for April revealed that the amount the banks borrowed in the fourth month of 2021 was the highest since the CBN started publishing the data in 2015.

“Banks have to cover their positions to cover any gap left by the CRR debits,” Ayo Ebo, senior economist/head, Research and Strategy, Greenwich Merchant Bank, said, linking the increase in banks’ borrowings to the “frequent CRR debits by the CBN in recent times.”

In a quest to moderate inflation amid efforts to maintain a stable exchange rate, the Monetary Policy Committee (MPC) of the CBN increased cash reserve requirement (CRR) to 27.5 percent for both merchant and commercial banks in January 2020. The standardised CRR was implemented alongside discretionary deductions.

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Banks have had to suffer severe liquidity constraints in 2021 as CBN’s mop-up activities via CRR debits that have weighed on financial system liquidity, a research analyst at United Capital, Ayorinde Akinloye, said.

“In addition, Federal Government’s borrowing activities have been fairly aggressive with the sovereign debt managers typically overselling debt instrument auctions, leaving a net deficit impact on system liquidity,” Akinloye said.

The Lagos-based analyst believes the aforementioned forced banks to heavily rely on CBN’s Standing Lending Facility window as they are able to borrow at accommodative interest rates to ease liquidity pressures.

The CRR is the amount the CBN debits from banks’ accounts in compliance with its monetary policy objective of mandatorily keeping cash on behalf of banks. The amount is not available for banks to use.

The record-high cash reserve requirement of 27.5 percent by the CBN is cribbing the lenders’ profitability, according to market analysts.

It is noteworthy that Nigeria has the highest reserve requirement in sub-Saharan Africa. South Africa, Kenya and Ghana all have CRR’s of below 10 percent.

According to Agusto & Co.’s flagship 2021 Banking Industry Report, the industry’s restricted cash reserves exceeded N9.5 trillion in 2020 and translated to an effective CRR of 37 percent.

“We believe the elevated CRR level moderated the industry’s performance and liquidity position during the year under review,” research analysts at the Lagos-based credit rating agency said.

Explaining how the CRR policy is affecting the banks’ profitability, Agusto & Co. said the banks could have earned as much as N482 billion if the lenders had invested the cash they kept with CBN in a fixed income instrument.

“Assuming the sterile CRR was invested in treasury securities at 5 percent, N482 billion would have been added to the industry’s profit before taxation. This would have increased the industry’s return on average equity (ROE) by 11% to 31.6% in the financial year ended 31 December 2020.”

Among other factors, the policy by the central bank that requires banks to keep the cash they could have used to grow their bottom line with the regulator may have also affected investors’ appetite for the stocks of the Nigerian banks.

A recent report by Bloomberg revealed that Nigerian banks were some of the cheapest stocks in Africa.

Four of the five African stocks with the lowest price-earnings ratios among companies valued at $500 million or more are Nigerian lenders, data compiled by Bloomberg show: United Bank for Africa, Access Bank, FBN Holdings and Zenith Bank. Johannesburg-traded steelmaker, ArcelorMittal South Africa Limited completes the quintet.

Despite the limited resources at the disposal of Nigerian deposit money banks, the lenders have continued to remain resilient as they reported a profit in the first half of 2021.

Nigeria’s five tier-one banks, the country’s biggest lenders, reported a combined 113.18 percent growth in their half-year profit to N371.1 billion in June 2021, from N174.08 billion in 2014.

The profit reported by the lenders in the first six months of this year is 5.12 percent higher when compared with the N353.02 billion recorded in the corresponding period of 2020.

The performance was largely driven by a 15.4 percent increase in net interest income. The five lenders reported a net interest income of N757 billion in 2021, N101 billion more than the N656 billion reported in the corresponding period of 2020.

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