Growing Reliance on Central Bank Lending Signals Banking Liquidity Strain in 2023

There is mounting evidence suggesting that commercial banks and merchant banks in Nigeria have increasingly turned to the Central Bank of Nigeria (CBN) for liquidity, with their borrowing from the apex bank surging over the past eight months of 2023.

As of the end of August 2023, commercial banks and merchant banks have collectively borrowed a substantial sum of N12.46 trillion from the CBN.

Comparatively, during the first eight months of 2022, these financial institutions borrowed N6.96 trillion from the central bank, reflecting a remarkable increase of 79 per cent.

Commercial banks and merchant banks typically utilize the Standing Lending Facility (SLF) window to access loans from the apex bank, while they also deposit funds with the CBN through the Standing Deposit Facility window (SDF).

The surge in borrowing during the first eight months of 2023 can be attributed to the backdrop of the CBN’s tightening monetary policy stance. The CBN, the regulatory body overseeing the banking sector, provides the SLF as a short-term lending facility for commercial and merchant banks to secure liquidity for their daily operations.

CBN data obtained reveals that between January and June this year, commercial banks and merchant banks borrowed N10.25 trillion from the CBN via the SLF window, marking a staggering increase of 138 per cent Year-on-Year (YoY) compared to the N4.3 trillion borrowed during the corresponding period in H1 2022.

The data also highlights that the borrowing figures for the first quarter, particularly the N4.95 trillion recorded, surpass the half-year data for 2022.

A detailed monthly breakdown reveals that in January, commercial banks and merchant banks borrowed N528.16 billion from the CBN, with this figure decreasing to N453.7 billion in February 2023.

However, in March, borrowing skyrocketed by 776.22 per cent to N3.98 trillion, the second-highest figure after the N4.47 trillion recorded in April 2023.

Meanwhile, May and June 2023 saw borrowing figures of N590.29 billion and N235.06 billion, respectively.

Furthermore, the SLF borrowing amounted to N908.43 billion in July and peaked at N1.3 trillion in August.

Commenting on this trend, Dr. Muda Yusuf, a former Director-General of the Lagos Chamber of Commerce and Industry, said, “This is a reflection of liquidity pressure some of the banks are going through. The facility is typically short-term. This may not necessarily indicate that the banks are stressed or unstable. Meanwhile, the recapitalization of banks is long overdue. The minimum capital requirements of N25 billion are no longer adequate, if discounted for inflation.”

Tajudeen Ibrahim, a financial expert at Chapel Hill Denham, added, “The development points to a lack of liquidity on the part of banks. Monetary policy has been tightening, and this has led to low liquidity. It is cheaper for banks to borrow from the CBN. This development is not positive but negative. We cannot continue to tighten because it will reflect on economic growth.”