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Sunday, February 25, 2024

Commercial banks’ reliance on central bank liquidity surges by 32% to N19.81tn in 2023

Increasing borrowings against CBN's tightening monetary policy spark concerns about liquidity pressures and inflation control.

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In the fiscal landscape of 2023, commercial and merchant banks leaned heavily on liquidity injections from the Central Bank of Nigeria (CBN), with their borrowings witnessing a substantial surge of 32.07% to reach N19.81tn. This noteworthy increase from the N15tn borrowed in the previous year, as reported by CBN data, raises questions about the implications of growing dependence on the apex bank.

The borrowing dynamics involve commercial and merchant banks utilizing the Standing Lending Facility (SLF) window, a short-term lending avenue offering liquidity for their business operations. Borrowing from the CBN through the SLF incurs an interest rate set at 100 basis points above the Monetary Policy Rate.

The CBN’s standing facilities, encompassing deposit and lending, play a pivotal role in liquidity management, providing opportunities for overnight investment of surplus funds and addressing market shortages. The concept aims to stabilize interbank rates and prevent volatility within the money market.

This surge in borrowings occurs amidst the backdrop of the CBN’s firm monetary policy stance. The data reveals that banks borrowed N12.64tn from January to August, with a subsequent increase to N7.17tn between September and December.

Unverified reports suggest that this intensified borrowing trend may be a response to the CBN’s strategic move to mop up excess cash circulation, a measure aimed at curbing inflation. CBN Governor Olayemi Cardoso acknowledged the importance of controlling money supply, emphasizing the central bank’s commitment to defending its targeted levels.

Dr. Muda Yusuf, former Director-General of the Lagos Chamber of Commerce and Industry, noted that the surge in borrowing reflects liquidity pressures faced by some banks. While highlighting that these facilities are typically short-term and may not indicate financial instability, Yusuf emphasized the overdue need for bank recapitalization, suggesting that the minimum capital requirement of N25bn is inadequate, especially when adjusted for inflation.

Adding insight to the situation, Tajudeen Ibrahim, a financial expert at Chapel Hill Denham, expressed concern about the negative implications of tightening monetary policies leading to low liquidity. He stressed the importance of striking a balance, cautioning against a continuous tightening approach that could impede economic growth.

As the banking sector navigates these challenges, the delicate balance between liquidity management, inflation control, and economic growth remains a central concern for financial experts and market observers.

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