Deposit Money Banks (DBMs) and commercial banks’ loans from the Central Bank of Nigeria (CBN) surged to N7.5 trillion in the first five months of 2023, up 276 percent from the N1.99 trillion reported in the first five months of 2022 due to a shortage of liquidity in the banking industry.
According to data from the CBN, merchant banks and DMBs borrowed much more money through the Standing Lending Facility (SLF) as banks struggled with the effects of the new naira notes policy that will take effect in 2022, among other things.
Due to the country’s demonetisation program, which led to chronic cash shortages, DMBs and merchant banks’ borrowings from the CBN increased by 276 percent Year on Year (YoY), according to an analysis of CBN data.
This was made by a senior manager at a prominent tier-2 bank about the CBN’s aggressive liquidity mop-up strategy using the Cash Reserve Ratio (CRR).
Through the SLF, the CBN extends loans to merchant banks and DMBs at an interest rate that is 100 basis points higher than the MPR.
The CBN considers standing facilities (deposit and lending) to be tools for managing liquidity. They provide a way to invest extra money overnight and to settle any discrepancies at the close of each working day.
SLF, a short-term lending window provided by the top banking regulatory authority, allows merchant banks and DMBs to access cash for their ongoing business operations.
On October 26, 2022, the CBN announced that the N200, N500, and N1,000 notes will be redesigned and brought into circulation starting on December 15, 2022, and that DMBs were instructed to return the CBN’s current denominations of those notes.
The CBN Governor, Godwin Emefiele, stated at the first Monetary Policy Committee (MPC) in 2023 that money market rates fluctuated below and within the standing facilities window’s asymmetric corridor due to shifting liquidity conditions in the banking system.
He stated that the CBN had been vigorous in its involvement during the first two months of 2023. When compared to last year, the CBN’s CRR debits have climbed dramatically this year. When CBN debits its CRR every two weeks, DMBs always stop at the SLF window.
Analysts point out that DMBs and merchant banks were no longer benefiting from the customary cash deposits that often come from firms and individuals that create substantial amounts of cash through relationships with various third parties, and they relate the rise in SLF to the lack of available cash.
“The issue brought about by CBN’s poor management of the currency redesign initiative and purposeful cash constraint has severely hurt the economy. “The Chief Executive Officer of Wyoming Capital and Partners, Mr. Tajudeen Olayinka, remarked that a program that was anticipated to be positive abruptly became negative because CBN did not comprehend the dynamics of deliberate cash scarcity as an uncommon monetary management instrument.
“The most significant factor is the increasing level of threat in the business environment in Nigeria, resulting from: insecurity, supply chain problems, rising inflation, and poor purchasing power, low level of productivity, rising unemployment, liquidity overhang, and a scarcity of risk-free financial instruments,” says Olayinka.
He continued, “As a result, most banks prefer to be penalized by CBN for exceeding the LDR limit rather than providing credit to companies that are struggling to survive. It all comes down to controlling risk.
“DMBs would initially turn to the intervention when the CBN mop-ups liquidity before they create capacity once more. The CRR debit is a way to limit banks’ ability to extend access to cash into the system and regulate the amount of money in circulation as a result of the rising rate of inflation.
Another analyst who did not want his name published added, “In the short term, this policy reduces the amount of profits DMBs can make from excessive credit extension and ensures DMBs will always have the right amount of cash and not run out of funds when depositors require funds for their personal needs.
For his part, Mr. David Adnori, Vice President of Highcap Securities Limited, attributed rising DMBS borrowing from CBN to customer demand.
He stated, “It’s possible that some DMBs are overworked and needed money to fulfill existing obligations. These two factors might have been the main drivers of DMBs’ increased borrowing from the CBN.
According to Adnori, a rise in MPR and the naira design strategy forced merchant banks and DMBs to deposit money with the CBN at a competitive interest rate.
In the meantime, a research found that merchant banks’ and DMBs’ deposits with the CBN increased throughout the time due to the nation’s political unrest.
Deposits with the CBN were N2.1 trillion in the reviewed period, up 5.4% YoY from N1.99 trillion in the similar period of 2022.
