In the most recent week, local deposit money banks (DMBs) accelerated their borrowing at the Central Bank of Nigeria’s (CBN) standing lending facility (SLF) at a comparatively high rate due to ongoing liquidity strain, according to an investment business.
Due to mounting pressure from the financial system’s tight liquidity conditions, which were further reinforced by the withdrawal of cash reserves, the local lenders increased their borrowing. Local lenders were debited by the central bank last week in order to maintain the cash reserve. Due to this, banks had less cash flow available to them last week even with the high daily demand.
At the close of business on Friday, total borrowings climbed to about N5.4 trillion as Nigerian lenders sought to augment liquidity positions. This represents a significant surge when compared with N1.6 trillion accessed from the standing lending facility in the previous week, suggesting that banks are facing short term pressure.
Consequently, funding rates climbed in the money market, reflecting pressure on the amount of liquidity in the financial system. Short term benchmark interest rates climbed due to the absence of significant inflows to upturn a weak funding profile.
System liquidity stayed short throughout the week, impacted by FX settlement, cash reserves ratio (CRR) debits and other outflows, AIICO Capital Limited said in a note. Analysts reported that Nigerian interbank offered rate increased marginally by 0.03% to reach 32.43%, as banks with liquidity sought for higher rates on Friday.
Data from the FMDQ platform showed that the overnight lending rate expanded significantly by 753 basis points week on week to 32.53%. Thus, the Open Repo Rate (OPR) also climbed by 789 basis points to N32.06%.
The rates surge occurred following dual impact of last Friday’s late OMO auction worth N264.33 billion and Tuesday’s CRR maintenance debit of about N500 billion, said Cordros Capital Limited.
Analysts at the firm said consequently, deposit money banks borrowing from the CBN’s SLF window surged to N5.38 trillion, causing the week’s average liquidity to close at a net long position
“We expect the system liquidity to remain relatively subdued, more so as we do not expect any significant inflows to saturate the financial system”, the investment firm projected.
Analysts said they expect the overnight lending rate to rise further amid a possible net issuance at next Wednesday’s Nigerian Treasury bills auction exerting more pressure on liquidity levels.
During the week, the peg on the Interbank funding rate cap and floor was lifted. In the near term, the market expects rates to remain depressed while the overall liquidity condition is projected to adjust.
