Illiquidity: Banks’ Borrowing from CBN Rises by 315% to N24.53trn in 11 Months

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The scarcity of liquidity has forced banks and merchant banks to aggressively depend more on the Central Bank of Nigeria (CBN) for short-term liquidity needs, leading to N24.53 trillion borrowing from the apex bank between January and November 2021.

This represents a 315 per cent increase when compared to N5.91trillion borrowed in the previous year.

The acentral bank has two short-term lending windows for banks and merchant banks, namely the Standing Lending Facility (SLF) and Repo lending.
While the CBN lends money to banks through the SLF at interest rate of 100 basis points (bpts) above the Monetary Policy Rate (MPR) of 13 per cent, 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 higher price.

Data from the CBN official website showed that banks’ and merchant banks borrowing through the SLF rose by 315.2per cent to N12.23trillion from N5.17trillion, while borrowing through Repo arrangement moved to N5.15trillion from N735.14billion the previous 11 months.

On the heels of aggressive borrowing, the Nigeria’s real Gross Domestic Product (GDP) grew by 4.03 per cent (year-on -year) in the third quarter (q3) of 2021, compared with 5.01 and -3.62 per cent in Q2 2021 and Q3 2020, respectively.

The growth trajectory has thus, been positive in the last four quarters following the exit from the recession in 2020.

The Governor, CBN, Godwin Emefiele at the last Monetary Policy Meeting (MPC) in Abuja said money market rates oscillated within the standing facilities corridor, reflecting the prevailing liquidity conditions in the banking system.

Meanwhile, analysts have attributed the increase in banks’ borrowing from CBN to improved economic activities in the country.

According to analyst at PAC Holdings, Mr. Wole Adeyeye “Last year, the COVID-19 pandemic resulted in lockdown of economic activities and restriction of movements in many States.

“Most businesses were adversely affected as the country witnessed economic recession in 2020. However, the increase 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 there was no opportunity in the economy to finance a project needed for them to access liquidity from the SLF of the CBN.”
Some analysts believe liquidity crunch in the country is responsible for increasing DBMs and merchant banks borrowing from the apex bank in the first four months of 2021.

The Managing Director, Highcap Securities Limited, Mr. David Adnori expressed that growing demands to support economy growth forced banks and merchant banks to increase borrowing from CBN.

He was quick to add that liquidity crunch is another major factor banks and merchant banks borrowed funds from CBN to meet their daily business activities demands from customers.

Specifically, he said, “There are two reasons why banks may borrow heavily from the CBN. The first has to do with booming economy as opportunities are increasing in the banks. There are always demands on banks fir credits as borrowers go to banks to access funds. The banks’ balance might not be enough to meet customers’ borrowers, forcing them to borrow from CBN to lend to customers demanding for credit.

“The CBN itself may not have such money and it might issue new money and borrow it to 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 explained further that, “The second reason why banks visit CBN to access money is when there is liquidity crunch in the system. Depositors as you likely know always give money to banks. The bank will try and access funds through the inter-bank market and if they cannot, they try CBN as the lender of last resort to borrow money as a move to boost their liquidity position.”

He explained that hike in 2021 borrowing by DMBs and merchant banks is due to stability in nation’s economy.

In his words, “Why the 2021 doubled when compared to last year was that economy was depressed last year because of COVID-19 lockdown. Remember also, that the interest from banks was low.

“This year, that economy is getting back, interest rates have increased and banks are lending to borrowers. They can now visit CBN and borrow money at a cheaper rate and make profit on the borrowing.”

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