August Report Shows Substantial Decline of 76.4% in Funds Borrowed from CBN

In response to the increase in the Standing Lending Facility (SLF) rate to 31.75 percent, there was a substantial decrease of 76.4 percent in bank borrowing from the Central Bank of Nigeria (CBN) during August 2024. The amount borrowed by banks declined from N17.12 trillion in July 2024 to N4.04 trillion in August 2024.

As per the financial data published by the Central Bank of Nigeria (CBN), the N4.04 trillion recorded borrowing level signifies the third lowest in 2024. This cautious approach adopted by Nigerian banks reflects a prudent strategy in their borrowing practices from the central bank.

With the Monetary Policy Rate (MPR) set at 26.75 percent, financial institutions that utilize the CBN's services must now pay an annual rate of 31.75 percent to access the SLF.

Recently, the CBN made adjustments to the Asymmetric Corridor surrounding the MPR, changing it from +100/-300 basis points to +500/-100 basis points. This notable change is intended to deter banks from maintaining excessive liquidity at the central bank and to encourage more lending activities.

In a circular issued by Dr. Omolara Duke, Director of the Financial Markets Department at the CBN, banks have been authorized to borrow at the rate of 31.75 percent.

The CBN stated, “Banks can access the SLF via the Scripless Securities Settlement System (S4) during the designated operating hours of 5:00 pm to 6:30 pm. Furthermore, authorized dealers can utilize the Intraday Lending Facility (ILF) at no charge, provided it is repaid on the same day. During its 296th meeting, the Monetary Policy Committee (MPC) raised the upper corridor of the standing facilities to 5.00 percent from 1.00 percent around the MPR.

“As a result, the suspension of the Standing Lending Facility (SLF) has been lifted, and Authorized Dealers are encouraged to submit their SLF requests through the Scripless Securities Settlement System (S4) within the operating hours of 5:00 pm to 6:30 pm. Authorized Dealers are allowed to access the SLF at 31.75 percent and can also utilize the Intraday Lending Facility (ILF) at no cost to prevent system congestion, provided repayment occurs on the same day.

The 5.00 percent penalty, as outlined in the S4 business rules, will be enforced for participants who fail to settle their ILF, which will subsequently be converted to SLF at a rate of 36.75 percent. Additionally, collateral execution, which involves the rediscounting of instruments pledged by participants at the penal rate by the CBN, has been reinstated in accordance with the approved repo guidelines. This circular is effective immediately.

A senior executive at a Tier-2 bank indicated that lending rates for critical sectors are expected to remain elevated, warning that this could adversely affect the real sector of the nation’s economy.

Meanwhile, Mr. David Adnori, Vice President of Highcap Securities Limited, noted that the decrease in banks’ borrowing from the CBN is a direct result of rising rates, emphasizing the significant impact on key businesses within the economy.

Professor Uche Uwaleke, a Finance and Capital Market expert at Nasarawa State University, commented that the increase in the MPR to 26.75 percent aims to further tighten liquidity in the banking system and raise credit costs, which could have negative effects on economic output.

He remarked, "After a 750 basis point increase from February to May this year, I anticipated a minimum increase of 50 basis points or a maximum of 100 basis points in July. I am pleased to see they opted for the lower end, suggesting a potential pause in their next meeting scheduled for September 2024. However, the adjustment to the asymmetric corridor around the MPR raises significant concerns for me.

“Consequently, with an MPR of 26.75 percent, banks will now borrow from the CBN at 31.75 percent, while they will receive 25.75 percent for their excess deposits. This will further tighten liquidity in the banking system and increase credit costs, leading to adverse effects on both output and the equities market.”

He stated that addressing the current high inflation in Nigeria, particularly given its significant non-monetary factors, relies heavily on fiscal measures.

The amount of funds accessed by banks through the Standing Lending Facility (SLF) peaked at approximately N21.74 trillion in March 2024, coinciding with the Central Bank of Nigeria’s (CBN) liquidity tightening strategies.

Financial institutions utilize the SLF to borrow from the CBN while also depositing funds through the Standing Deposit Facility (SDF).

The CBN offers the SLF as a short-term lending option for banks and merchant banks to secure liquidity necessary for their daily operations.

Conversely, the SDF rose to N8.12 trillion in August 2024, marking a 269.3 percent increase from N2.2 trillion in July 2024.

This reported SDF figure of N8.12 trillion is the highest recorded in 2024 and follows the implementation of the CBN’s new policy.

The CBN has established a revised interest rate framework that permits financial institutions to earn between 19 percent and 25.75 percent on deposits held with the central bank.

According to a CBN circular, commercial and merchant banks can now earn up to 25.75 percent on deposits of up to N3 billion.

It further indicated that deposits exceeding N3 billion will incur a reduced rate of 19 percent. Additionally, Payment Service Banks (PSBs) will receive 25.75 percent interest on deposits up to N1.5 billion, with deposits above this amount also earning 19 percent.

Adnori linked the increase in the SDF rate to the Central Bank of Nigeria’s efforts to absorb excess liquidity within the financial sector while addressing inflation concerns.

Furthermore, analysts from Afrinvest Research noted that the Monetary Policy Committee’s adjustments to the asymmetric corridor aimed at tightening liquidity conditions are likely to increase funding costs for banks. This impact will be felt both directly, as banks utilize the lending window, and indirectly, through the repricing of rates in the money market.

They emphasized the critical role of the Standing Lending Facility (SLF) as a support mechanism for banks during periods of liquidity challenges caused by restrictive interest rate policies. Meanwhile, businesses may continue to struggle with high borrowing costs, which are deemed necessary to combat inflation at its highest levels in decades. However, they believe that the Monetary Policy Rate (MPR) has its limitations in addressing deeper structural issues, such as insecurity and inadequate infrastructure that hinder productivity.

The analysts emphasized the necessity of fiscal policy reforms to address the challenges at hand, as monetary policy has its limitations. They contend that continuous rate hikes without substantial fiscal measures may increase the burden on businesses without effectively controlling inflation. Nonetheless, the decision to moderate the pace of tightening demonstrates an understanding of these intricate underlying issues.

Concerning the anticipated effects, the increase in the MPR is projected to lead to higher pricing for fixed income instruments, especially short-term assets such as treasury bills and commercial papers, making these investments more attractive to investors compared to equities.