Nigerian Banks Turn to Central Bank for N3 Trillion Lifeline Amid Liquidity Pressures

Nigerian banks and discount houses borrowed a staggering N3 trillion from the Central Bank of Nigeria (CBN) through the Standing Lending Facility (SLF) in a single week, according to a report by Afrinvest Research. This sharp increase in borrowing coincided with deposits of N493.6 billion into the Standing Deposit Facility (SDF) during the same period, underscoring the growing liquidity challenges within the banking sector.

The surge in SLF borrowing led to a 4.7 per cent rise in system liquidity, now standing at N712.3 billion. The SLF and SDF are critical tools employed by the CBN to regulate liquidity and manage money supply in the financial system. This uptick comes in the wake of a new directive aimed at boosting lending to the real sector, signalling a shift towards a more contractionary monetary policy.

The CBN recently lifted the suspension on the SLF for authorised dealers, following a decision by the Monetary Policy Committee to adjust the upper corridor of the standing facilities to five per cent, up from one per cent, around the Monetary Policy Rate. This has prompted banks to increasingly turn to the central bank to meet short-term liquidity needs, reflecting the pressures within the system.

Despite the liquidity injection, inter-bank lending rates showed mixed movements. The Open Purchase Rate (OPR) dropped by five basis points to 31.2 per cent, while the Overnight Rate edged up by three basis points to 31.7 per cent. In response to these developments, the Debt Management Office (DMO) last week reduced interest rates to create more favourable borrowing conditions.

Meanwhile, Nigeria’s first dollar-denominated bond issuance, aimed at raising $500 million to plug the 2024 fiscal deficit, was met with robust demand. The bond was oversubscribed by $400 million, a sign of growing investor confidence in the country’s financial markets, according to Afrinvest analysts.

However, not everyone is convinced that the surge in borrowing from the CBN is a sign of economic health. Segun Ogundare, an economist at Ajayi Crowther University, warned that frequent reliance on the central bank as a lender of last resort could indicate more significant underlying issues. “Central banks typically lend at high rates because the loans are short-term. If banks are frequently borrowing from the CBN, it might be a sign that they are struggling with liquidity,” he said, citing the case of Heritage Bank, which collapsed due to persistent liquidity shortfalls.

David Adonri, a broker and board member at HighcapSecurities, echoed this caution. “The CBN acts as a lender of last resort to banks facing temporary liquidity shortfalls. But when banks borrow heavily through the SLF, it can harm their treasury if the interest obligations from those borrowings aren’t covered by on-lending,” Adonri explained. He added that while the injection of large sums of money into the banking system can provide short-term relief, it risks undermining the CBN’s broader monetary policy goals, such as raising the Cash Reserve Ratio.

Indeed, liquidity pressures have been a recurring theme in the Nigerian banking sector. The PUNCH recently reported that commercial and merchant banks relied on the CBN for N19.81 trillion in borrowings in 2023, a 32 per cent increase from N15 trillion in 2022. As banks navigate these financial headwinds, the question remains whether the central bank’s efforts to stabilise liquidity will offer lasting relief—or simply delay a broader reckoning for the country’s financial system.