Businesses May Source Alternative Funding as Banks Face Liquidity Issues Amid High Deficit
- Nigerian companies may pay more to borrow since the liquidity of the banking system is becoming increasingly tightened
- The crunch is expected to raise interbank loan rates in the coming days, according to financial analysts
- This came after rates ended the previous week on a mixed note as the liquidity of the banking sector continued to deteriorate
Legit.ng journalist Zainab Iwayemi has 5-year-experience covering the Economy, Technology, and Capital Market.
Nigerian businesses are likely to have to pay more for borrowing given that the banking system's liquidity is getting tighter and the deficit has recently increased to N1.7 trillion, meaning banks have even less money to work with.
Source: Getty Images
Financial analysts are already predicting that the crunch will drive up interbank lending rates in the days ahead, Daily Sun reported.
This followed rates closing on a mixed note last week as the financial system's liquidity worsened further, surpassing N1.7 trillion, as a result of the lack of large inflows to alleviate the prolonged liquidity shortage. This has caused market dynamics to continue being impacted by this pressure.
As a result, the Over-night Nigerian Interbank Offered Rate (NIBOR) rose marginally by 0.07 percentage points to close at 32.90 per cent, reflecting the persistent thinning of system liquidity.
Overnight NIBOR means the interest rate at which banks lend money to each other in Nigeria’s interbank market and the overnight clause means the loan is just for one day. It must be paid back the next working day.
Meanwhile, the 1-month, 3-month, and 6-month NIBOR rates declined as banks renegotiated funding obligations.
Although, the Nigerian Interbank Treasury Bills True Yield (NITTY) trended upwards as investors sought higher returns on their investments. Market sentiment remained strong following robust demand and high subscription levels at this week’s Nigerian Treasury Bills (NTB) auction.
According to analysts, this was accompanied by an upward movement in stop rates and expectations for the forthcoming Primary Market Auction (PMA) by the Central Bank of Nigeria (CBN) next week.
However, the secondary market for T-bills closed in bearish territory, as selling pressure across the mid-and long-term segments of the curve pushed the average market yield up by 21 basis points to 19.38 per cent.
Economic experts responded to this development by stating that rising interbank rates and the continued liquidity shortage will probably result in greater borrowing costs for firms.
According to Victor Chiazor, head of research at FSL Securities, this could restrict businesses' access to credit, particularly small and medium-sized businesses, raise the cost of funding operations and expansion, and, if it persists for an extended length of time, slow down economic growth.
Businesses may source alternative loan
He emphasized the need for careful liquidity management in this challenging environment.
“Given the tight liquidity conditions, financial institutions need to optimize their reserve management to ensure they can meet their obligations without excessive reliance on expensive interbank borrowing.
“Businesses may need to explore alternative funding options beyond traditional bank loans to mitigate the impact of higher borrowing costs”, he said.
Source: Getty Images
On their part, analysts at Cowry Research said,
“Next week, we expect the still tight interbank liquidity to cause yields to slightly rise further in the secondary treasury bills market. Additionally, CBN is scheduled to conduct an NTB PMA next Wednesday (March 26), with N700.00 billion worth of maturing bills on offer”.
65% of Nigerians want CBN to reduce interest rates
Legit.ng reported that Two-thirds of Nigerian households want the Central Bank of Nigeria to reduce interest rates, as they believe it would help speed up economic recovery.
This is one of the findings contained in the new CBN Household Expectations Survey conducted in February 2025.
The survey covered public perception about key economic issues like interest rates, inflation, exchange rates and economic confidence over the next six months.
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Source: Legit.ng
