Nigerian Deposit Money Banks (DMBs) have borrowed over N9 trillion from the Central Bank of Nigeria (CBN) to maintain their operations amid a significant liquidity crunch in the financial system. The shortage of funds has led banks to rely heavily on the CBN’s Standing Lending Facility (SLF) to meet their short-term obligations.
The liquidity challenges intensified following a series of outflows, including substantial Open Market Operation (OMO) bills auctions and Treasury bills offers. These activities drained cash from the system, causing the liquidity balance to drop significantly. As a result, money market rates have remained high, with the Nigerian interbank borrowing rate closing at 32.90%, reflecting the persistent liquidity strain.
Throughout the week, the financial system experienced minimal inflows compared to the substantial funding requirements. Notably, there was an inflow of N254.8 billion from Federal Government of Nigeria (FGN) coupon payments. However, this was offset by the settlement of Nigerian Treasury Bills (NTB) auctions amounting to N503.92 billion, exacerbating the liquidity deficit. By the end of the week, the banking system’s deficit had expanded to approximately N1.96 trillion.
In response to the liquidity shortfall, DMBs accessed a total of N9.15 trillion through the CBN’s SLF window. This borrowing underscores the severity of the liquidity constraints faced by banks and their dependence on the central bank for short-term funding.
The liquidity crunch has also impacted market dynamics, with cash-rich banks demanding higher rates for available funds. The open repo rate peaked at 32.50% midweek before settling at 32.40%, while the overnight lending rate climbed steadily, closing at 32.90%. These elevated rates highlight the tightening of financial conditions within the banking sector.
Analysts anticipate that liquidity conditions may remain tight in the coming week, with expected inflows from FGN bond coupon disbursements of N202 billion potentially being outweighed by debits from FGN bond Primary Market Auctions (PMA) totaling N300 billion. This scenario suggests that the liquidity challenges could persist, necessitating continued reliance on the CBN’s intervention facilities.
The current situation highlights the delicate balance within Nigeria’s financial system and the critical role of the CBN in providing liquidity support to banks. It also underscores the need for effective liquidity management strategies to ensure the stability and resilience of the banking sector.
