CBN loans to banks hit 5-year high on liquidity squeeze

The Central Bank of Nigeria (CBN)’s loans to banks surged to a historic high of N1.2 trillion in the first seven days of 2025, indicating a liquidity squeeze in the sector.

The N1.2 trillion CBN loan to banks represents the highest in five years and a 961.3 percent jump from N114.2 billion loan reported in the first seven days of 2021, according to data from the CBN.

Analysts attributed the rising demand for the loans, also known the standing lending facility (SLF), to liquidity constraints, monetary policy tightening, economic challenges and regulatory pressures. But it also shows the extent of naira depreciation over the period. The naira has depreciated by over 74 percent, with the loans jumping more than 10 times over the period.

“We need to recall the steep naira depreciation over the last few years. Thus, the funding needs of businesses, including banks, has been on an increase,” Ayokunle Olubunmi, head of financial institution ratings at Agusto Consulting, said.

He argued that the contractionary measures of the CBN have increased the borrowings of banks from the apex bank.

SLF is a mechanism provided by central banks to enable commercial banks and other financial institutions to borrow short-term funds. It is part of the central bank’s monetary policy tools designed to ensure liquidity in the banking system and maintain financial stability.

On an annual basis, banks borrowed N1.2 trillion from CBN in the first week of 2025, rising by 700.9 percent from N151.3 billion in the first week of 2024.

A breakdown of banks borrowing from the CBN window in the first seven days of the past five years showed that the figure stood at N1.2 trillion in 2025, N151.3 billion in 2024, N329.2 billion in 2023, N48.1 billion in 2022 and N114.2 billion in 2021.

Bismarck Rewane, managing director/CEO of Financial Derivatives Company Limited, said in July 2024 that banks had been borrowing from the CBN to purchase foreign exchange (FX), a practice that had intensified inflation and piled pressure on the naira.

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Rewane had highlighted that the CBN’s decision at that time to adjust the asymmetric corridor around the Monetary Policy Rate (MPR) to +500/-100 basis points after a two-day Monetary Policy Committee (MPC) meeting would significantly impact borrowing costs.

“Before now, banks were borrowing at about 26 percent. As of today, they will be borrowing at almost 32 percent,” Rewane explained. “That difference of almost 5 to 6 percent means that the cost of borrowing from the CBN to buy FX has gone up astronomically. This increase acts as a deterrent to borrowing from the central bank to buy FX and should reduce the pressure on the naira. It’s all meant to make things much easier.”

The CBN has been implementing a contractionary monetary policy to combat high inflation, which reached 34.6 percent as of November 2024. The policy includes raising the Monetary Policy Rate (MPR), which stood at 27.50 percent as of November 2024. Higher MPR leads to increased borrowing costs, prompting banks to rely more on the SLF to meet short-term liquidity needs, analysts say.

The banking system experienced a liquidity deficit of N207.6 billion, a significant shift from a surplus of N253.6 billion in the previous month. The shortage has driven banks to seek funds from the CBN to maintain operational stability.

The CBN has mandated banks to bolster their capital bases, requiring international banks to have at least N500 billion in capital by March 2026. The directive has led banks to explore the capital market, adjust balance sheets and liquidity positions, increasing reliance on the SLF.

With the MPR at elevated levels, banks’ borrowing from the SLF faces interest rates exceeding 30 percent. These higher costs can erode profit margins and may be passed on to consumers through increased lending rates, analysts say.

Analysts argue that to manage higher funding costs, banks might be more cautious in their lending practices, potentially leading to reduced credit availability for businesses and consumers, which could hinder economic growth.