Banks borrow N27.95trn from CBN in Q3 2024 amid liquidity constraints

The Central Bank of Nigeria’s (CBN) latest economic report has revealed that Nigerian banks borrowed an unprecedented ?27.95 trillion through the Standing Lending Facility (SLF) in the third quarter of 2024, highlighting the intensifying liquidity pressures within the banking sector. This figure marks an increase from ?26.44 trillion recorded in the previous quarter, with daily averages dropping slightly from ?0.51 trillion in Q2 to ?0.43 trillion in Q3.

The CBN’s report pointed to a significant decline in average banking system liquidity, which fell by 40.63% to ?0.16 trillion in Q3 2024, compared to ?0.27 trillion in the previous quarter. This decline was attributed to several factors, including withdrawals from the system through SLF repayments, cash reserve ratio (CRR) debits, open market operations (OMO) sales, and Nigerian Treasury Bills (NTBs) issuance. Settlements for foreign exchange (FX) OMO swaps also played a role in reducing liquidity levels.

The increased SLF utilization reflects banks’ heightened dependence on the apex bank’s short-term lending facility to meet immediate funding needs and sustain their operations amid tight liquidity conditions.

In addition to the rise in SLF transactions, the Standing Deposit Facility (SDF) window also saw increased activity. Banks deposited ?15.07 trillion at the SDF in Q3 2024, up significantly from ?6.39 trillion in the preceding quarter. The daily average deposit rose to ?0.23 trillion from ?0.11 trillion in Q2, suggesting cautious liquidity management by financial institutions amid the challenging economic environment.

The surge in borrowing occurred in a period marked by tightening monetary policy. The Monetary Policy Committee (MPC) of the CBN raised the Monetary Policy Rate (MPR) to 27.50 percent in December 2024, with an asymmetric corridor of +500/-100 basis points. Consequently, the effective interest rate for borrowing through the SLF climbed to 32.50 percent, making it costlier for banks to access emergency funds.

This represents a continuation of the upward trend, as banks had borrowed at 32.25 percent in November 2024 when the MPR stood at 27.25%. The rising costs further underscore the challenges financial institutions face in maintaining liquidity while grappling with elevated borrowing costs.

Year-to-date borrowing figures provide further insight into the liquidity dynamics. Between January and November 2024, banks and merchant banks borrowed a total of ?114.6 trillion from the CBN, representing a staggering 579 percent year-on-year increase from ?16.87 trillion in the same period of 2023. This surge underscores the critical role of the SLF in addressing the banking sector’s liquidity gaps amid heightened economic uncertainties.

The report also highlighted rising lending rates in Q3 2024, with average prime and maximum lending rates increasing by 0.91 percentage points (pp) and 0.59 pp to 16.55% and 29.68 percent, respectively. The weighted average term deposit rate climbed by 0.45 pp to 11.08 percent, narrowing the spread between deposit and lending rates to 18.60 pp.

As Nigerian banks navigate persistent liquidity pressures, the reliance on the CBN’s SLF is expected to remain high. However, the rising cost of borrowing may challenge profitability and lending activities, posing further risks to economic recovery efforts. Stakeholders will be watching for policy adjustments and systemic reforms to address underlying liquidity challenges in the banking sector.

Chima Nwokoji