Nigeria’s Banking Sector Experiences Sharp Decline in Borrowing Amidst Central Bank’s Hawkish Policy

Deposit Money Banks (DMBs) in Nigeria have seen an 82.15 percent decline in borrowing from the Central Bank of Nigeria (CBN) under the Standing Lending Facility (SLF).

This sharp decrease from N4.11 trillion in April 2023 to N714.10 billion in May 2023 has left financial analysts intrigued.

According to the CBN’s monthly economic report, the decline in banks’ borrowing is attributed to an increased liquidity position within the banking system.

This liquidity boost was influenced by injections via the Federation Account Allocation Committee (FAAC), totaling N655.93 billion as well as Nigerian Treasury Bills (NTBs) and CBN bills maturities amounting to N324.43 billion and N85.00 billion, respectively.

Simultaneously, deposits within the banking system increased substantially to N450.25 billion, with an average daily placement of N21.44 billion.

This marked a significant rise from N224.29 billion with an average daily placement of N14.02 billion in the preceding month.

The CBN’s decision to raise the applicable rates for the standing deposit facility and standing lending facility by 50 basis points to 11.50 and 19.50 percent, respectively, in May played a pivotal role in these developments. This followed the central bank’s hawkish monetary policy stance initiated in May 2022 to combat inflation.

In the most recent Monetary Policy Committee (MPC) meeting held in July 2023, the CBN raised its benchmark interest rate to 18.75 percent.

Despite this, the report highlighted that there were no Open Market Operation (OMO) auctions conducted in May. However, maturing bills totaling N85.00 billion were redeemed.

The NTBs and FGN Bonds market remained active, with investors showing a preference for longer-term securities (364 days), which constituted 92.0 percent of total subscriptions.

In the bond market, FGN Bonds with 10-, 20-, and 30-year tranches saw increased activity, with total amounts offered, subscribed, and allotted surpassing the previous month’s figures.

As the banking system grapples with shifting borrowing and deposit trends, Nigeria’s financial landscape continues to evolve under the influence of the CBN’s monetary policy decisions.

The direction of lending rates remains mixed, reflecting the dynamic nature of the country’s economic conditions.