As the banking system continued to struggle with liquidity, Deposit Money Banks (DMBs) in Nigeria took out a total of N3.6 trillion from the Central Bank of Nigeria’s (CBN) Standing Lending Facility (SLF).
Investment analysts estimate that the banking system’s liquidity deficit at the end of the week was N237 billion, which was a minor improvement above the initial shortfall of N269.7 billion.
Liquidity Pressures Drive Increased Borrowing
Persistently tight liquidity forced banks to increase borrowing from the SLF to address short-term funding needs, particularly after recent investments in government securities. The liquidity crunch was compounded by the CBN’s decision in November to raise the Monetary Policy Rate (MPR) to 27.5% while maintaining an asymmetric corridor. As a result, the SLF borrowing rate rose to 32.25%, while the Standing Deposit Facility (SDF) rate reached 26.25%.
Market Trends Amid Negative Liquidity
Throughout the week, liquidity remained negative, exacerbated by significant outflows with minimal inflows to offset the deficit. At its peak, the liquidity shortfall reached N438 billion before stabilizing due to moderate inflows from Federal Government of Nigeria (FGN) coupon payments and other sources. However, these inflows, including N300 billion from FAAC allocations and N5.66 billion from FGN bond coupon payments, were insufficient to offset the overall liquidity deficit.
The liquidity strain also stemmed from CBN debits related to loan-to-deposit ratio compliance and the 50% cash reserve ratio, which tightened the financial system further. Consequently, short-term interest rates soared above 30% during the week.
Interbank Market Adjustments
The Nigerian Interbank Offered Rate (NIBOR) saw declines across maturities by the end of the week, reflecting slight easing in liquidity conditions. Despite this, liquidity remained constrained, with cash-rich banks demanding higher interbank rates to lend their excess funds. The overnight lending rate fell by 59 basis points to 29.91%, while the open repo rate dropped 56 basis points to 29.25%, according to FMDQ data.
Outlook and Analysts’ Views
Analysts noted that the financial system’s average liquidity position closed at a net shortfall of N325.66 billion, a significant reversal from the previous week’s net long position of N121.25 billion. Excessive borrowing from the CBN, amounting to N3.6 trillion, underscored the severity of liquidity pressures.
Analysts predict that until there are significant inflows into the financial sector, interbank rates will continue to be high. In order to combat inflationary pressures and preserve stability in the banking industry, the CBN is continuing to concentrate on liquidity management.
