The Central Bank of Nigeria’s efforts to mop up liquidity have led to a significant increase in borrowing by deposit money banks and merchant banks, totaling N8.7 trillion in the first two months of 2024. This surge in borrowing reflects challenges faced by financial institutions amid tightening monetary policy and economic conditions.
Following the Central Bank of Nigeria’s (CBN) sustained drive to mop up liquidity, deposit money banks and merchant banks in the country have borrowed a staggering N8.7 trillion from the apex bank in the first two months of 2024. This represents a remarkable 787 percent year-on-year increase from the N982 billion borrowed in the corresponding period of 2023.
The borrowing surge is attributed to financial institutions’ need to meet their daily business obligations amidst tightening monetary conditions, including double-digit inflation rates, scarcity of foreign exchange, and liquidity mop-up initiatives by the CBN.
Data released by the CBN revealed a substantial increase in banks’ borrowing through the Standing Lending Facility (SLF) in February 2024. The SLF serves as a short-term lending window for banks and merchant banks to access liquidity for their day-to-day operations.
In January 2024, banks and merchant banks borrowed N2.75 trillion, marking a 419.95 percent year-on-year increase from N528.2 billion borrowed in January 2023. Furthermore, borrowing surged to N5.97 trillion in February 2024, representing a staggering 1,215 percent year-on-year increase from N453.7 billion in February 2023.
Commenting on the situation, Vice President of Highcap Securities, Mr. David Adnori, expressed concerns about the lack of liquidity in banks, emphasizing that monetary policy tightening has exacerbated the situation. He noted that borrowing from the CBN has become a cheaper option for banks, though this trend may negatively impact economic growth in the long run.
Dr. Muda Yusuf, Chief Executive Officer of the Centre for Promotion of Private Enterprises (CPPE), highlighted that the increase in borrowing reflects liquidity pressures faced by some banks. He emphasized the need for banks to recapitalize, as the current minimum capital requirements are inadequate when adjusted for inflation.
The CBN has implemented several measures to tighten liquidity in the financial system, including raising the Monetary Policy Rate (MPR) by 400 basis points to 22.75 percent at its February 2024 meeting. Additionally, the Cash Reserve Requirement (CRR) was increased to 45.0 percent, and the liquidity ratio was retained at 30 percent.
Analysts attribute the rising borrowing by banks to various factors, including the depreciation of the Naira in the foreign exchange market, rising inflation rates, and the CBN’s efforts to mop up excess liquidity from the banking system.
Despite these challenges, analysts remain cautious about the outlook, emphasizing the need for sustained efforts to stabilize the economy and ensure price stability. They anticipate continued pressure on banks, with adverse macroeconomic conditions likely to increase the risk of non-performing loans in the coming months.
