High Demand for Naira: Banks Borrowing From CBN Increases to N4.7 Trillions as Deposits Crash

• There appears to be a change in trends as banks are now borrowing more from the CBN to meet liquidity demands for the naira
• Banks have borrowed N4.7 trillion from the Central Bank of Nigeria in the last week, almost five times up from the previous week
• In the same period, bank deposits have declined sharply by almost 60%, suggesting that the banks require more cash to meet naira demands

Legit.ng journalist Ruth Okwumbu-Imafidon has over a decade of experience in business reporting across digital and mainstream media.

A liquidity crisis might be brewing, as banks borrowing from the Central Bank of Nigeria (CBN) have risen almost 400% in one week in a bid to meet the liquidity demands.

Data from the CBN shows that banks borrowed N4.72 trillion last week, compared to N953.11 billion the preceding week.

This is almost five times the previous amount, marking 395% week-on-week growth.

Read also

No more free withdrawals as CBN introduces N100 minimum charges on ATM transactions

The loans were taken in two categories – the Standing Lending Facility (SLF) and the Repurchase (repo) agreement – both of which banks resort to to bridge liquidity gaps.

Banks borrow from CBN to bridge liquidity gaps

The apex bank has two lending facilities which other banks could take advantage of to bridge their cashflow gaps, but this comes at a cost – interests.

The Standing Lending Facility (SLF) may be accessed by the banks at an interest rate that is 500 basis points above the MPR benchmark rate.

The Repurchase (repo) arrangement involves CBN buying the bank securities with an agreement to sell back for cash at a later date. The resell price is often higher than the purchase price.

Bank deposits with CBN crash WoW

In the same period, bank deposits with the apex bank have declined sharply, notwithstanding the increase in interest rates, the VANGUARD reports.

Read also

Cash crunch: Nigerian banks borrow record N1.2 trillion from CBN in a single day

From depositing N2.69 trillion the previous, banks only deposited N1.16 trillion with the CBN last week.

This marks a 56.8% drop in deposits, even though interest rates were increased to 25.75% in August 2024, and again to 26.5% in November 2024 after the 298th Monetary Policy Committee (MPC) meeting.

This means that banks deposited less even though the interest rates were attractive enough to have encouraged more deposits. What does this mean?

There are suggestions that the CBN’s tightening measures to curtail inflation may also have triggered the increase in banks’ borrowing.

Demand for the naira is high

Economic Analyst Olumide Adesina, who spoke to Legit.ng, said that the data does not necessarily translate to a liquidity crisis.

He observed that there had been a demand for the naira recently, especially following the naira appreciation in the last couple of weeks, and this could also have influenced the situation.

Read also

PoS terminal transaction increases as Nigerians seek alternative to traditional banks

Adesina noted that investors have also been injecting more funds into the money market and the stock market, and this could translate to less supply to the banks and high demand for the naira.

Banks borrow N1.2 trillion in one day

In related news, Legit.ng reported that Nigerian banks borrowed over N1.2 trillion from the Central Bank of Nigeria (CBN) in one day to meet their financial needs.

The banks took the loan to ease the cash shortage in the financial system and support lending to various sectors.

Reports indicate that banks had low cash reserves at the time because customers had made large withdrawals for spending and other purposes.

Source: Legit.ng