The liquidity position of the Nigerian Deposit Money Banks (DMBs) declined by 67.74 percent in one year following consistent sterilising of excess deposits by the Central Bank of Nigeria (CBN).
Data from the monthly report of the CBN shows that banks’ liquidity position stood at N146.59 billion in April 2021 from N440.78 billion in April 2020.
“It is largely the impact of the aggressive CRR implementation by the CBN. Most banks are now cautious of raising deposits as such may be extracted and held sterile by the CBN”, said Ayokunle Olubunmi, head, financial institutions ratings, Agusto and Co Limited.
In January 2021 alone, the CBN debited 24 banks a whopping N1.2 trillion, threatening banks’ ability to lend to the economy. Official CRR is 22.7 percent but effective CRR is way above that.
A banker from one of the tier two banks noted that there has been consistent deduction of Cash Reserve Ratio (CRR) by the banking and financial sector regulator, which has led to a reduction in the liquidity position of lenders.
“This year there has been consistent CRR debit to discourage banks from participating in foreign exchange and to control liquidity. The implication is that it might affect the liquidity of banks but the CBN gave banks special bills. If banks lend the CBN will not touch their CRR,” the banker said.
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On December 2, 2020, the regulator introduced a special 90 days tenor bill with zero-coupon as part of efforts to deepen the financial markets.
Subsequently, on December 11, 2020, the CBN conducted the first Special Bill, offering N4.1 trillion for an 81-day tenor to banks from the excess CRR.
According to the CBN’s economic report for the month of April 2021, banking system liquidity took a downward turn and caused an upsurge in money market rates in April 2021.
The decline in the banking system liquidity the CBN noted was as a result of provisioning and settlement of foreign exchange and CBN bills purchases, as well as CRR debits.
“Nevertheless, repayment of matured securities and fiscal disbursements to the three tiers of government moderated the liquidity condition in the banking system. Consequently, the average net industry liquidity position in April 2021 declined by 43.3 percent to N146.59 billion, compared with the N258.71 billion recorded in the preceding month,” the CBN report stated.
Both the short-term and long-term lending rates rose at the end of April 2021 against the background of decreasing banking system liquidity. Average OBB rate was 15.9 percent in April 2021, compared with the 12.6 percent recorded in March 2021. Other rates, such as the 7-day and 30-day NIBOR traded at averages of 13.9 percent and 6.5 percent, respectively, compared with 12.8 percent and 3.4 percent in the preceding month.
Average prime lending rate rose by 0.11 percentage point to 11.24 percent, relative to its level in the preceding month, while the average maximum lending rate fell by 0.1 percentage point to 28.64 percent at end-April 2021.
The average term-deposit rate rose by 0.37 percentage point to 4.10 percent, leading to a narrowed spread of 24.81 percentage points, when compared with the average maximum lending rates.
Abiodun Keripe, head investment research, Afrinvest West Africa, said early in the year that “We are all looking at the CBN easing liquidity within the banking system and broader economy but when they do another round of debit in connection with CRR, what they are doing is threatening liquidity and making it difficult and more complex for banks to support the economy via the creation of credit at a decent pricing”.
