Explainer: Why banks with credit crunch avoid CBN

Nigerian commercial banks are shying away from borrowing from the Central Bank of Nigeria (CBN), their last resort, despite the liquidity squeeze in the banking system.

Data from the CBN showed that banks borrowing from the apex bank’s lending window, known as the Standing Lending Facility (SLF) declined by 44 percent month-on-month to N12.17 trillion in April 2024 from N21.74 trillion recorded in March 2024.

Commercial banks’ credit to the government has witnessed a one-year decline of 28.84 percent, following the liquidity tightening of the CBN.

Data obtained from the CBN showed that credit to the government declined to N19.59 trillion in April 2024, down from N27.53 trillion recorded in the corresponding period of March 2023.

The decline in credit to the government is in line with the decline in credit to the whole economy by banks during the period under review. The decline is largely on account of the contractionary stance of the CBN as reflected in the increase in the cash Reserve Ratio (CRR) and the Monetary Policy Rate (MPR), analysts said.

Ayokunle Olubunmi, head of financial institutions ratings at Agusto Consulting, shed light on recent banking trends, noting that banks’ reduced borrowing from the CBN aligns with the current economic strategy. “If rates are high, the obligor will pay high rates,” Olubunmi explained, “and banks are increasing their lending rates. The lending rates of banks are actually in the 30s now. The number of those taking those loans will reduce.”

Olubunmi emphasised that banks have become more cautious, recognising that the ability of borrowers to repay loans diminishes under strained economic conditions. “Banks have realised that the ability of people taking the loans to pay back will reduce because of what is happening in the economy,” he said. “What you see now is that most banks are reducing their activities. So, if the banks are not lending, that means they also need less money because what they are doing is practically financial intermediation. If they are not lending, that means they do not need to get money from different sources also.”

He also highlighted the shift from last year’s arbitrary Cash Reserve Ratio (CRR) policy implemented by the CBN, which often resulted in unexpected debits from banks’ reserves. “Remember that last year, what the CBN was implementing was an arbitrary CRR policy,” Olubunmi noted. “You could wake up to find they have debited all your positions, but with what we have now, banks can plan. Those days, banks had a lot of shocks; you could wake up one morning and realise that you need a lot of money to fill your position. But now, with this year’s CRR, the CBN is adhering to it. It is easier for banks to plan.”

Olubunmi pointed out that the reduction in emergency borrowing from the CBN is primarily due to the apex bank’s Central contractionary measures. “All those emergency funds, most banks do not like to go to that CBN window because it is always like the last resort as a way of shoring up their position,” he explained. “If you can plan your liquidity on time, you realise that the number of banks that will be going to the CBN window for their liquidity needs will reduce. Primarily, it is mainly because of the contractionary measures of the CBN.”

Supporting his analysis, Olubunmi added, “If you look at the data, you will notice that credit to the private sector also declined as part of the contractionary measures of the CBN.”

The loan granted by commercial banks to the private sector declined by 11.93 percent in March 2024, following the liquidity tightening of the CBN.

Data from the CBN showed that credit to the private sector dropped to N71.21 trillion at the end of March 2024 compared to the level of N80.86 trillion in February 2024.

On a quarter-on-quarter basis, banks’ private sector credit also decreased by 6.66 percent from N76.29 trillion in January 2024.

As part of its tightening measures to rein in inflation, the CBN, in one month raised its benchmark interest rate, known as the MPR by 600 basis points to 24.75 percent in March 2024 from 18.75 percent in July 2023.

Nigeria’s inflation rate increased to 33.69 percent in April 2024 from 33.2 percent in March 2024, according to the latest data from the National Bureau of Statistics (NBS).

The CBN also increased the CRR from 32.5 percent to 45 percent, adjusting the asymmetric corridor around the MPR to +100/-700 from +100/-300 basis points, and retained the liquidity ratio (LR) at 30 percent.

Marvelous Adiele, senior associate, Parthian Partners, said in March 2024, system liquidity experienced more strains than was recorded in April 2024.

“Despite the c. N700bn bond maturity, we recorded oversale (about 1300%) in 2/3 of the NTB auction held in the month. This also occurred in the mop-up by the apex bank where we saw c.180 percent oversale at the OMO auction. Coupled with this, we also witnessed the sale of new short-end bond tenors of about c. N2.3trn. All these, in addition to the statutory debits, led to the liquidity crunch experienced in March that gave rise to the N21.74 trillion SLF recorded in the month. Month-on-month, Mar-24 recorded about 1.8x illiquidity Apr-24 recorded, hence the decline in banks accessing SLF,” she said.

Why do banks borrow from the CBN?

Banks borrow from the central bank for various reasons, including meeting short-term liquidity needs, fulfilling reserve requirements, and managing fluctuations in their cash positions. It’s a way for them to ensure they have enough funds on hand to cover their obligations and maintain stability in the financial system.

What interest rate does the CBN charge banks for borrowing from it?

It’s usually one percent above the Monetary Policy Rate (MPR), said a Lagos-based investment banker. This rate serves as a benchmark for the interest rates that banks use to lend to each other and customers. The MPR is usually set by the CBN’s Monetary Policy Committee (MPC) and adjusted periodically to manage inflation and stimulate economic growth.

Why is the CBN the last resort for banks?

The CBN being the last resort lender means that banks turn to it only when they can’t obtain funds elsewhere. This typically happens when banks are unable to meet their liquidity requirements through interbank borrowing or other means. CBN acts as a lender of last resort to stabilise the financial system and prevent liquidity crises.

Why have the banks reduced their borrowing from the CBN?

Following the liquidity tightening of the CBN, banks have reduced their lending to the economy and the government and might not need additional loans from the CBN window.