Analysts say liquidity crunch, more economic activities drove borrowing rate
The high rate of illiquidity in the banking system has forced Nigerian retail and merchant banks to become dependent on the Central Bank of Nigeria to cover their short-term liquidity positions, and this has led to an aggressive 315 percent rise to N24.53 trillion in their borrowings from the apex bank in just 11 months of 2021 (January and November). For the same period last year, the banks borrowed just N5.91 trillion, data from the CBN show.
According to the CBN data accessed by Business A.M., commercial and merchant banks’ borrowing through the Standing Lending Facility (SLF) rose by 315.2 percent to N12.23 trillion from N5.17 trillion, while borrowing through the Repo arrangement moved to N5.15 trillion from N735.14 billion, respectively, in the previous 11 months.
Analysts are attributing the development to the improved economic activities in the country. CBN governor, Godwin Emefiele, at the final MPC meeting for the year, had disclosed that money market rates oscillated within the standing facilities corridor, reflecting the prevailing liquidity conditions in the banking system.
The apex bank has two short-term windows, the Standing Lending Facility and Repo Lending, for lending to the banks. While the CBN lends money to banks through the SLF at an interest rate of 100 basis points above the Monetary Policy Rate (MPR) of 13 percent, it also lends money to the banks through Repurchase (Repo) arrangement, which involves the purchase of banks’ securities with the agreement to sell back at a specific date and at a higher price.
Responding to the increase in the rate of borrowing from the CBN by the deposit money banks, David Adnori, managing director, HighCap Securities Limited, said, “The reasons why banks borrow from the CBN has to do with the booming economy as opportunities are increasing in the banks. There are always demands on banks for credits as borrowers go to banks to access funds. The banks’ balance might not be enough to meet customers’ [demands], forcing them to borrow from CBN to lend to customers demanding credit. The CBN itself may not have much money and it might issue new money and borrow it from the banks, which the bank will lend to customers. That is the method in which money is printed by CBN in a normal economy. These are routes through which new money enters the economy.”
He further explained that when there is a liquidity crunch in the system, depositors always give money to banks, adding that the bank will try to access funds through the inter-bank market and if they cannot, they try CBN as the lender of last resort to borrow money in order to boost their liquidity position.
Wole Adeyeye, an analyst at PAC Securities also asserted that, “Last year, the COVID-19 pandemic resulted in a lockdown of economic activities and restriction of movements in many states. Most businesses were adversely affected as the country witnessed an economic recession in 2020. However, the increase in vaccination in 2021 resulted in improved economic activities.
“Most companies in the real sector increased their borrowing during this period to meet the rising demand. Consequently, the GDP maintained positive growth in 2021. It could be that there was no opportunity in the economy to finance a project needed for them to access liquidity from the SLF of the CBN,” he further stated.
To this end, many analysts have noted that liquidity crunch has become a major driving factor causing Nigerian banks and merchant banks in the same vein to cry to the Central Bank for liquidity aid in times of short-term and long term liquidity needs over the years.