Nigerian Banks Increase Borrowing from Central Bank Amidst Tightening Monetary Policy

Recent data from the Central Bank of Nigeria (CBN) suggests that both commercial banks and merchant banks in the country have ramped up their borrowing from the central bank, relying on it for liquidity as their borrowing from other sources intensifies. Over the first eight months of 2023, the two types of financial institutions collectively borrowed a substantial N12.46 trillion from the CBN. This figure marks a stark increase from the N6.96 trillion borrowed during the same period in the previous year, reflecting a significant 79 percent rise.

The borrowing from the CBN predominantly takes place through the Standing Lending Facility (SLF) window, a short-term lending mechanism that commercial and merchant banks use to access liquidity for their daily operational activities. It should be noted that these institutions also deposit funds with the central bank using the Standing Deposit Facility window (SDF).

This increase in borrowing seems to align with the CBN’s ongoing tightening monetary policy stance. During the first half of this year, the commercial and merchant banks borrowed a total of N10.25 trillion through the SLF window, reflecting a YoY increase of 138 percent compared to the N4.3 trillion borrowed in the corresponding period of 2022.

A breakdown of the data reveals varying borrowing patterns. In March 2023, borrowing surged by 776.22 percent to N3.98 trillion, marking the second-highest amount borrowed after the N4.47 trillion recorded in April 2023. However, borrowing decreased in the subsequent months, with figures of N590.29 billion and N235.06 billion in May and June 2023, respectively.

The central bank data indicated that in July and August 2023, borrowing via the SLF window increased to N908.43 billion and N1.3 trillion, respectively.

Experts have weighed in on the situation. Dr. Muda Yusuf, a former Director-General of the Lagos Chamber of Commerce and Industry, explained that the increased borrowing reflects liquidity pressure some banks are experiencing. He noted that while this doesn’t necessarily mean the banks are in distress, the recapitalization of banks is overdue given inflation-adjusted factors.

Tajudeen Ibrahim, a financial expert at Chapel Hill Denham, emphasized that this trend suggests a lack of liquidity among banks. He also highlighted that the tightening monetary policy has led to lower liquidity and stated that such developments, while potentially cheaper in the short term, could have negative implications for economic growth if not managed effectively.