The study claims that the increase in borrowing caused the system’s liquidity, which is currently at N712.3 billion, to rise by 4.7%.
The Central Bank uses the Standing Lending Facility and Standing Deposit Facility as tools to control the amount of money in circulation and liquidity in the financial system.
In April, the central bank signaled a change towards a contractionary monetary policy strategy by issuing a new mandate to increase lending to the real sector.
Following a decision by the Monetary Policy Committee to change the top corridor of the standing facilities from 1% to 5% around the Monetary Policy Rate, the Central Bank recently lifted the suspension on the Standing Lending Facility for Authorized Dealers.
According to Afrinvest, the spike in borrowing was caused by banks and discount stores’ increasing need for short-term liquidity.
Nigeria’s interbank lending rates have seen mixed results, with the open purchase rate decreasing and the overnight rate increasing. The Debt Management Office reduced interest rates to create favorable borrowing conditions. Afrinvest Research reported Nigeria’s first dollar-denominated bond successfully launched, raising $500 million to address the fiscal deficit. These developments indicate growing investor confidence in Nigeria’s financial markets.
Frequent borrowing from the central bank can indicate deeper issues, leading to persistent liquidity shortages that could lead to serious financial challenges for banks, including potential liquidation. Central banks typically lend at high rates due to short-term loans. Banks may approach the CBN for various reasons, such as running low on liquidity, overtrading, or taking advantage of money market opportunities. Banks often resort to borrowing from the CBN’s Standing Lending Facility to address temporary liquidity shortages or seize short-term financial opportunities.
Temitope Adonri, the central bank’s chief economist, has warned that an increase in borrowing through the Standing Lending Facility could boost banking system liquidity in the short term, but it could also harm banks’ treasury and contradict the Central Bank’s policy goals. He also highlighted the importance of the CBN’s control over bank liquidity, stating that as bank assets increase, so does liquidity.
