The Central Bank of Nigeria (CBN) has continued its efforts to mop up liquidity in the financial system, leading to a significant increase in borrowing by deposit money banks (DMBs) and merchant banks( MBs).
In the first two months of 2024, these financial institutions borrowed a total of N8.7 trillion from the CBN, a staggering 787 percent increase from the same period in 2023.
The borrowing was driven by the banks’ need to meet their daily business obligations amid double-digit inflation, foreign exchange scarcity, and the liquidity tightening measures implemented by the CBN. The banks accessed liquidity through the Standing Lending Facility (SLF), a short-term lending window provided by the CBN.
In January 2024, banks and merchant banks borrowed N2.75 trillion, representing a 419.95 percent increase year-on-year. In February 2024, borrowing surged to N5.97 trillion, a growth of 1,215 percent compared to the same period in 2023.
Experts have expressed concerns about the impact of the liquidity tightening measures on economic growth, noting that the continuous tightening could have negative consequences. They also highlighted the need for banks to recapitalise given the current economic challenges.
The CBN’s recent monetary policy decisions, including a 400 basis points increase in the Monetary Policy Rate (MPR) to 22.75 percent, have further tightened liquidity in the financial system. The CBN also raised the cash reserve requirement (CRR) to 45 percent and retained the liquidity ratio at 30 percent.
Overall, the current economic environment poses challenges for banks, with rising interest rates likely to impact their interest income and potentially increase non-performing loans. Despite these challenges, there are opportunities for banks to generate income through dividends and other means in the near term.
